Book of proceedings 2013 m sphere dubrovnik by Tihomir Vranesevic

2ND INTERNATIONAL M-SPHERE CONFERENCE FOR MULTIDISCIPLINARITY IN SCIENCE AND BUSINESS

Book of Proceedings Dubrovnik, Croatia 10th-12th October 2013

2ND INTERNATIONAL M-SPHERE CONFERENCE FOR MULTIDISCIPLINARITY IN SCIENCE AND BUSINESS

Book of Proceedings Dubrovnik, Croatia 10th-12th October 2013

2nd M-Sphere Conference, Book of Proceedings. Copyright 2014. All rights reserved. The author is responsible for all of the content that has been published. Printed in Croatia. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in crtitical articles or reviews. COMMITTEE MEMBERS (Alphabetical Order) SCIENTIFIC COMMITTEE MEMBERS FOR THE CONFERENCE: Professor Ivo Ban University of Dubrovnik, Croatia Professor Vesna Babić Hodović University of Sarajevo, Bosnia and Herzegovina Professor Antoni Serra Cantallops Universidad de les Illes Balears, Spain Professor Stjepan Dvorski University of Zagreb, Croatia Professor Felicite Fairer-Wessels University of Pretoria, South Africa Professor Leopoldo Gutiérrez Gutiérrez Universidad de Granada, Spain Professor Pablo Gutiérrez Rodríguez Universidad de León, Spain Professor Rainer Hasenauer Vienna University of Economics and Business, Austria Professor Božo Mihailović University of Montenegro, Montenegro Professor Žarko S. Pavić University Singidunum Belgrade, Serbia Professor Dušan Radonjič University of Maribor, Slovenia Professor Drago Ružić University of Osijek, Croatia Professor Ivona Vrdoljak Raguž University of Dubrovnik, Croatia Professor Vesna Vrtiprah University of Dubrovnik, Croatia ORGANIZING COMMITTEE MEMBERS FOR THE CONFERENCE: Boris Hudina, prof.pscyh. HDPRO, Croatia Miroslav Mandić, PhD University of Zagreb, Croatia Professor Ivana Pavlić University of Dubrovnik, Croatia Professor Doris Peručić University of Dubrovnik, Croatia Professor Diana Plantić Tadić VERN University of Applied Sciences, Croatia Professor Tihomir Vranešević University of Zagreb, Croatia CORRESPONDENCE: Professor Tihomir Vranešević

Organized by: M-Sphere (www.m-sphere.com.hr) Publisher: Accent For Publisher: Tihomir Vranešević Editors: Tihomir Vranešević Doris Peručić Miroslav Mandić Boris Hudina Diana Plantić Tadić Graphic design and layout: Deseto selo d.o.o.

ISBN 978-953-7930-03-5

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M-SPHERE ASSOCIATION FOR PROMOTION OF MULTIDISCIPLINARITY IN SCIENCE AND BUSINESS

MISSION

Promote multidisciplinary approach by encouraging and providing the circumstances to exchange of experiences and ideas from different disciplines, in order to further encourage scientific curiosity in research and practical work, with the aim of achieving positive change in all spheres of science and business – respecting multidisciplinarity.

OBJECTIVES

Acquiring of conditions for achieving a permanent mission of the organization of annual conferences, publishing journals and various forms of education.

VISION

Become a focal point of advocacy for multidisciplinary approach science and business.

GUIDING PRINCIPLE

IDEAS WORTH TO SPREAD – RESULTS WORTH TO DISSEMENATE

TABLE OF CONTENTS THE PRINCIPLES OF VALUATION OF BANKS, INSURANCE COMPANIES, PENSION FUNDS AND INVESTMENT FUNDS . . . 1 MILAN HRDÝ THE IMPORTANCE OF EASTERN EUROPEAN THIRD COUNTRIES FOR THE EUROPEAN UNION TRADE POLICY IN THE POST CRISIS PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 KRISTÍNA DRIENIKOVÁ , ELENA KAŠŤÁKOVÁ CROSS-BORDER MOBILITY OF COMPANIES IN EUROPEAN UNION AS THE PRECONDITION FOR SUCCESS IN BUSINESS . . . . 13 JERNEJA PROSTOR MINIMUM WAGES AND YOUTH EMPLOYMENT IN THE EUROPEAN UNION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SUZANA LAPORŠEK NEW ECONOMY VERSUS OLD ONE, ALTERNATIVE INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 RADISLAV JOVOVIC, SANDA SENIĆ THE PROBABLE FUTURE OF EU’S FINANCIAL DEVIATIONS AND THE FINANCIAL POSITION OF TURKEY IN EU’S PROCESS . . 35 A. NIYAZI ÖZKER HOW TO TEACH OKUN’S LAW USING MATHEMATICAL METHODS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 PETRA MEDVEĎOVÁ, MARIANA POVAŽANOVÁ FORMATTING SYSTEMS OF EXCELLENCE TOWARDS THE AIM OF DEVELOPING THE QUALITY OF EDUCATION . . . . . . . 54 RENATA MARINKOVIĆ FORMING COMMUNITIES OF PRACTICE IN HIGHER EDUCATION: A COMPARATIVE ANALYSIS . . . . . . . . . . . . . . . . . . . . 62 SHERYL BUCKLEY, MARIA JAKOVLJEVIC, MELANIE BUSHNEY, GRZEGORZ MAJEWSKI PEDAGOGY OF E-LEARNING: CASE OF MARKETING MODULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SANDRA HORVAT, IRENA PANDŽA BAJS, DINO GOSPIĆ THE EFFECT OF MINDFULNESS TRAINING ON EMPLOYEES IN A DYNAMIC ORGANIZATIONAL SETTING . . . . . . . . . . . . 80 INGUNN MYRTVEIT, VEDRANA JEZ, VIGGO JOHANSEN PROGRESSIVE METHODS OF TEACHING AT THE FACULTY OF COMMERCE OF THE UNIVERSITY OF ECONOMICS IN BRATISLAVA . . . 88 PETER DRABIK , PAULINA KRNACOVA, ROBERT REHAK, MARIA VASILOVA UNIVERSITY LIBRARY AS A LIVING LAB: INNOVATING WITH STUDENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 ANDREA ALESSANDRO GASPARINI, ALMA LEORA CULÉN MULTIDISCIPLINARY APPROACH BETWEEN HEALTH MANAGEMENT EDUCATION AND HEALTH POLICY . . . . . . . . . . . 107 ŽARKO PAVIĆ, ZORAN KALINIĆ CONTROLLING AND QUALITY MANAGEMENT SYSTEM AS SME SUCCESSFUL BUSINESS PERFORMANCE FACTORS . . 114 DEŠA RATHMAN, KATARINA VAREZ COMBINATION OF PROCESS MANAGEMENT AND SIX SIGMA METHODOLOGY IN THE ECONOMY OF VOJVODINA . . . 125 ZORAN CIRIC, IVANA CIRIC, JELENA BIROVLJEV QUALITY CONTROL IMPROVEMENT USING THE SIX SIGMA METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 ZORAN STANKO, ROBERT OBRAZ, MIRNA VARLANDY SUPEK RISK ATTITUDE ASSESSMENT STUDY: CROATIAN CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 JOSIP KERETA, KATARINA LUKETA, MIRNA VARLANDY SUPEK KNOWLEDGE MANAGEMENT IN KNOWLEDGE SERVICE NETWORKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 DAGMAR LESAKOVA SYSTEMS CONCEPT OF EXPERIENCE IN TOURISM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 ROMANA LEKIĆ, MARTINA MAJIĆ, NATAŠA MANCE GENDER AS A SIGNIFICANT BUT PROHIBITED RISK FACTOR IN LIFE INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 JANA ŠPIRKOVÁ, MÁRIA SPIŠIAKOVÁ ECONOMIC AND PSYCHOLOGICAL APPROACH TO THE STUDY OF HUMAN RATIONALITY . . . . . . . . . . . . . . . . . . . . . . . 174 ALEKSANDAR MOJAŠEVIĆ INTERGENERATIONAL CONNECTEDNESS AND SOLIDARITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 MAJA MEŠKO, ZLATKA MEŠKO ŠTOK

ESTIMATION OF UNPAID WORK VALUE IN THE SLOVAK HOUSEHOLDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 ALENA KAŠČÁKOVÁ, ĽUBA KUBIŠOVÁ, GABRIELA NEDELOVÁ THE EFFECT OF EXCHANGE RATE ON ECONOMIC GROWTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 SUNA KORKMAZ TOURISTS’ PERCEPTION OF AUTHENTICITY IN WORLD HERITAGE HISTORIC CENTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 204 ODETE PAIVA, JOSÉ LUÍS ABRANTES, CLÁUDIA SEABRA, FERNANDA CRAVIDÃO TOURISM AND TERRORISM: STRANGE COMPANIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 CLÁUDIA SEABRA, MARIA JOSÉ NOGUEIRA, ODETE PAIVA, MARGARIDA VICENTE, JOSÉ LUÍS ABRANTES MOTIVATION AND INVOLVEMENT IN INTERNATIONAL TOURISM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 CLÁUDIA SEABRA, MARGARIDA VICENTE, CARLA SILVA, JOSÉ LUÍS ABRANTES SUSTAINABLE TOURISM FOR BETTER LIFE: REVITALIZATION OF ABANDONED VILLAGES IN CROATIAN ISLANDS . . . . 231 SANJA ROCCO, NIKO BARBIĆ RUNNING FOR LIFE: EXPLORING DISTANCE RUNNERS’ MOTIVATIONS AT SPORT TOURISM EVENTS . . . . . . . . . . . . . . 241 FELICITE A FAIRER-WESSELS CATEGORY MANAGEMENT PLANNING: DEFINITION OF TACTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 MILAN GASOVIC, DARKO VASELIC CROATIAN T&C INDUSTRY AND STUDENTS CUSTOMER SATISFACTION WITH CLOTHING PRODUCTS PRODUCED IN DOMESTIC COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 RUŽICA BREČIĆ, MAJA STRACENSKI KALAUZ, ALICA GRILEC KAURIĆ CHARACTERISTICS OF BENEFICIARIES SERVED BY NONPROFIT ORGANIZATIONS IN ALBANIA . . . . . . . . . . . . . . . . . . . 271 XHILIOLA AGARAJ (SHEHU) DRIVER QUALIFICATION IN THE TRANSPORT INDUSTRY – EMPIRICAL STUDY IN AUSTRIA . . . . . . . . . . . . . . . . . . . . . . 276 MARIA DIEPLINGER, SEBASTIAN KUMMER, KATHRIN LENZ DEVELOPMENT OF A HEURISTIC RATING MODEL FOR THE CLASSIFICATION OF KNOW-HOW-INTENSIVE AND TECHNOLOGY-ORIENTED START-UPS (KITSS) IN AUSTRIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 SABINE JUNG USABILITY AND FUNCTIONALITY EVALUATION OF THE MOST PROFITABLE CROATIAN COMPANIES’ WEB SITES . . . . 290 ANTUN BILOŠ, IVAN RUŽIĆ, IVAN KELIĆ IT-FACILITATED INDUSTRIES AND COMPETITIVE SPACES: THE DANCE OF THE ELEPHANTS . . . . . . . . . . . . . . . . . . . . . . 302 MARK KRIGER, ALMA LEORA CULÉN A MULTIPLE-FARE MULTI-PERIOD AIRLINE REVENUE MANAGEMENT MODEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308 SANG-WON KIM QUALITY COST MANAGEMENT SYSTEM AT CROATIAN AIRPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 GABRIJELA ŠPOLJAR, MIROSLAV DRLJAČA, DIANA PLANTIĆ TADIĆ MARKETING DECISION MAKING UNDER CONDITIONS OF UNCERTAINTY AND RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 OTILIJA SEDLAK, MARIJA CILEG, TIBOR KIS, IVANA CIRIC MARKETING OF ECOLOGICAL PRODUCTS IN OSIJEK-BARANJA COUNTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 MARIJA TOLUŠIĆ, ZRINKA TOLUŠIĆ, ZDRAVKO TOLUŠIĆ MAKING AND CONSUMING CHARACTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 MASAE KANAI, YORITOSHI HARA, HAJIME KOBAYASHI, MASAAKI TAKEMURA EATING HABITS OF YOUNG PEOPLE AS THE BASIS FOR NEW PRODUCT DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . 353 JADRANKA IVANKOVIĆ, MAJA DAWIDOWSKY MAMIĆ, MARTINA MAJIĆ PREFERENCE-BASED FUNCTIONAL FOOD MARKET SEGMENTATION USING CONJOINT AND CLUSTER ANALYSIS . . . . 358 NENAD DJOKIC, INES MESAROS, SUZANA SALAI IMPULSIVE CONSUMER BEHAVIOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 RUŽICA KOVAČ ŽNIDERŠIĆ, DRAŽEN MARIĆ, ALEKSANDAR GRUBOR ANALYSIS OF SPORTS CLUBS’ MARKETING STRATEGIES WITH SPECIAL REFERENCE TO ONLINE MARKETING . . . . . . . 375 RINO MEDIĆ, MARIJO STRAHONJA, BRANKA ŠUPUT ANALYSIS OF MARKETING COMMUNICATIONS ON CROATIAN MARKET OF CARD BUSINESS . . . . . . . . . . . . . . . . . . . . 380 MATEJA ČOP, BORIS JURIČ, KARMEN PRELEC

ANALYSIS OF CONSUMERS' ATTITUDES TOWARDS HOMEMADE AND INDUSTRIAL BRANDS: CASE OF OLIVE OILS ON CROATIAN MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389 IVANA STANEKOVIĆ, DAVORIN ŠIMUNIĆ, KATARINA LUKETA MODERN TRENDS OF MARKETING DEVELOPMENT IN BANKING INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 RATIMIR JOVICEVIC ANALYSIS OF IMAGE RESEARCH IN CROATIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404 MAJA DAWIDOWSKY MAMIĆ, DIANA PLANTIĆ TADIĆ, MIRJANA BAUTOVIĆ KEY FACTORS, BENEFITS AND LIMITATIONS OF APPLYING SUSTAINABILITY MARKETING . . . . . . . . . . . . . . . . . . . . . . . 408 SILVIJE JERČINOVIĆ, AUGUST SLIVAR, VALENTINA PAPIĆ BOGADI PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . 420 MERICA PLETIKOSIĆ WORKSPACE AND ERGONOMICS OF A SECONDARY TECHNICAL SCHOOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432 DAVOR ŽILIĆ, OLIVER HIP, ROBERT IDLBEK NEW CONCEPTS OF BRAND MANAGEMENT – PRIVATE LABELS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 STJEPAN DVORSKI, DOMAGOJ KOPREK BRANDS AND BRAND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 PAVAO VRANEŠEVIĆ LOCAL AND REGIONAL GOVERNMENT IN PROCESS OF THE REFORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 ZVONKO NOVOSEL – DOLNJAK

ABSTRACTS OF PRESENTED WORK WITHOUT FULL PAPERS ECONOMIC GROWTH PATHS IN EUROPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 JANOS RECHNITZER, TAMAS TOTH HOW DID THE BULGARIAN BANKING SYSTEM COPE WITH THE GLOBAL FINANCIAL CRISIS DURING 2008-2012? A PANEL STUDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461 DIDAR ERDINÇ DIFFUSION OF INNOVATION: ADOPTION OF INNOVATIVE TOOLS FOR COMMUNICATING AND PRESENTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 DINKO SVETIĆ, ALEN DELIĆ, IVA GREGUREC VALUES ORIENTATION IN LOGISTICS MANAGEMENT IN RUSSIA AND THE UKRAINE AND ITS IMPACT ON CORPORATE PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463 SAMO O. KOTNIK, ELMAR WILHELM M. FÜRST PRIVACY ISSUES OF SOCIAL MEDIA: A MARKETING PERSPECTIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464 CĂLIN VEGHEȘ, MIHAI ORZAN, CARMEN ACATRINEI, DIANA DUGULAN HUMAN CAPITAL AND LABOUR MARKET: THE CASE OF THE VISEGRAD GROUP COUNTRIES . . . . . . . . . . . . . . . . . . . . 465 SILVIE CHUDÁRKOVÁ “EASY-TO-READ” INFORMATION IN PUBLIC TRANSPORT - ITS PERCEPTION, IMPACT AND APPLICATION . . . . . . . . . . 466 CHRISTIAN VOGELAUER, ELMAR W.M. FÜRST MOBILITY BARRIERS AND SOLUTIONS IN PUBLIC TRANSPORT FOR SIGHT IMPAIRED IN RURAL AREAS IMPACT AND APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 CHRISTIAN VOGELAUER, ELMAR W.M. FÜRST REDEFINING STOCK OPTIONS − TOWARDS BETTER SUSTAINABILITY FOR COMPANIES AND THE SOCIETY . . . . . . . . . 468 NATAŠA SAMEC SATISFACTION WITH CRM IMPLEMENTATION IN CROATIAN COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 MIROSLAV MANDIĆ THE IMPORTANCE OF MUSIC FESTIVALS FOR DEVELOPING YOUTH TOURISM, THE CASE OF CROATIA . . . . . . . . . . . . 470 DORIS PERUČIĆ, BLANKA BRADVICA QUALITATIVE RESEARCH DESIGN IN BUSSINES MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471 TIHOMIR VRANEŠEVIĆ AUTHORS INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472

I N T E R N AT I O N A L CO N F E R E N C E FO R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N ES S

2013 M-SPHERE

THE PRINCIPLES OF VALUATION OF BANKS, INSURANCE COMPANIES, PENSION FUNDS AND INVESTMENT FUNDS MILAN HRDÝ

ABSTRACT

The aim of this article is to analyze the methodology of the valuation of banks, insurance companies, pension funds and investment funds. This methodology is prepared by respecting the basic principles of the valuation of enterprises with the projection of the specifics of single financial institutions. The result is then presented as the recommended procedure of valuation of appropriate financial institution. In case of commercial banks the income approach based on dividend potential and obligation prices model are the most suitable approaches. The income approach is based on two phase method supposing the ability to identify the future plan of single income activities and the ability to manage the risk management of banks. The discount rate is derived from the CAPM model. The similar public company method or recent acquisition method is used in practice in case of the existence of the comparable bank or comparable transaction. Also in case of pension funds and investment societies the income approach based on dividend potential is used whereas in case of investments funds the asset-based approach is the best. The methodology of valuation of insurance companies is composed of the income valuation, the market comparison method, and the obligation pricing model. Each of these fundamental procedures will be used to the same degree. Income valuation will be based upon removable net income and the dividend-paying potential principle, which will based on the insurance company’s income with technical reserves being one of the key items planned. Also important will be the determining of the discounted interest rate for the discounting of the future removable net income and with the β coefficient based on statistics data from the past pertaining to this value in the field of life and non-life insurance. As for the market comparison method, finding a comparable insurance company by using the ratio of market value and the book value as a multiplier will be of key importance. KEYWORDS: Valuation, Methods, Analysis, Financial Institutions Note: This paper was prepared with the help of the institutional support of the Faculty of Finance and Accounting, University of Economics Prague IP 100040

1. INTRODUCTION The aim of this article is to analyze the methodology of valuation of banks, insurance companies, pension funds and investment funds. This methodology is not unified and the process of the valuation is realized ad hoc according to the concrete approaches of the single valuation institutions. The preparation of some valuation standards must be realized by projecting some specifics of the concrete financial institutions into the valuation approaches known for the purpose of the traditional enterprises. The specifics of the financial institutions are representing mainly by the management of finance concerning the process of obtaining money from the savers and of providing loans to the debtors. The most important role plays also the investment activity where the financial institutions usually not only increase the value of their own money invested, but also money of their clients. The great difference lies also in the capital structure of this financial institutions where for example in case of the commercial banks the indebtedness in on the level more than 90 %. For that reason it is not possible for the purpose of the identification of the discount rate of the financial institutions to use the method of the average cost of capital and only the cost of equity is necessary to use. Three most important approaches are known for the purpose of the valuation of the enterprises, the income valuation, the market comparison valuation and the property valuation. Are these methods suitable also for the financial institutions? The property valuation is only the subsidiary method of valuation, but it could be easier than in case of the traditional enterprises because most items of the property of the financial institutions are valued in real (fair) values and it is not necessary to adjust their values for their real equivalent. But this method is suitable only for the purpose of the valuation for accounting and tax purposes and not for the valuation of the financial institutions as whole companies. But the value of the financial institution´s assets could be useful also for the methods of so called obligation pricing model which will be analyzed later. The market comparison method can be use in a similar way as in case of the traditional enterprises if it is found some comparable financial institution or some comparable transaction. Also it is necessary to find some suitable so called multipliers as for example P/E ratio or M/B (Market/Book Value) or their combination. If there is real possibility to find above mentioned comparable institutions this method could more precise and easier as for example the income valuation. The income approach is the most important approach to the valuation of the enterprises and in case of the financial institutions the situation is the same. The income valuation in fact is the only valuation which takes into account the future potential of the institution being valued. But the great difference in valuation of the financial

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D U B R O V N I K , C R O AT I A

BOOK OF PROCEEDINGS

2013 M-SPHERE

I N T E R N AT I O N A L CO N F E R E N C E FO R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N ES S

institution and the traditional enterprise lies in the chosen method. The traditional enterprises are usually valued by the free cash flow method which is not suitable for the financial institutions which administer also money of their clients and have above mentioned great indebtedness. The value of the equity is only necessary to identify and for that reason it is useful to use the income valuation based on the removable net income or the dividend potential which is represented by the amount of the capital that could be obtained from the financial institution by their shareholders or owners. Besides the three basic methods, the income method, the market comparison method and the property method, there is also the method called the obligation pricing model which is represented by the combination of the income and property method. It is based on the following equation1:

H= R x U C Where

H R C U

– – – –

market value of the financial institution (bank) , return on equity, cost of equity, adjusted net value of assets (market value of assets – liabilities)

This model is mainly suitable for the commercial banks valuation. The advantage of this method lies in a relatively easy way to identify the entry data, but this method in comparison with the traditional income approach does not take into account the future potential of the commercial bank being valued and so the results by using of this methods are lesser than in case of using the income method. If there some common information concerning the valuation principles of the financial institutions, it is possible to identify some concrete approaches to the valuation of concrete financial institutions.

2. VALUATION OF THE CONCRETE FINANCIAL INSTITUTIONS In the following text the basic approaches to the valuation of the commercial banks, insurance companies, pension funds and investment funds will be analyzed.

2.1. Valuation of Commercial banks Only common and basic information are stated in the professional literature2 and for that reason it is necessary to prepare some basic approach how to cope with the problem of the valuation of the commercial banks. If there is the comparable commercial bank or the known comparable transaction, the market comparison method could be used with the multiplier on the basis of the P/E ratio or M/B ratio or the share of incomes of the commercial bank being valued and the comparable commercial bank. In other cases the combination of the income method and the obligation pricing model must be used. The income method is based on so called two phase method based on the removable net profit or the dividend potential. The final valuation is derived from the following equation3:

where H – market value of the commercial bank, Dn – dividend potential in nth year, N – number of years of the financial plan, n – single years of the financial plan, i – discounted interest rate, g – requested increase in dividend payments. The dividend potential = net removable income is derived from the following equation4:

Hrdý, M. (2011.) The Valuation Standards for Banks and Other Financial Institutions. Valuation, 4(3), pp. 21-36 Miller, W.D. (1995.) Commercial Banks Valuation. John and Sons, Inc., USA, 263 p. and Rezaee, Z., (2001.). Financial Institutions, Valuations, Mergers and Acquisition. Wiley John and Sons, USA, 2001, 434 p. 3 Hrdý, M. (2011.) The Valuation Standards for Banks and Other Financial Institutions. Valuation, 4(3), pp. 21-36 1 2

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where Dp – dividend potential = removable net income, ČP – net income = adjusted profit for the valuation purpose, Kp – capital requirements on the basis of the indicator of the capital adequacy, In – the necessary investments for the purpose of the requested growth, Pf – the law and statutory profit funds , Op – limited conditions for dividend payments according to the Commercial Code Besides the two phase income methods also the above mentioned obligation pricing model could be used and then the final valuation could be the average of both values or the appraisal could choose the higher or lesser value according to the results of the strategic and financial analysis which are used also in case of the valuation of the enterprises.

2.2. Valuation of Insurance Companies The valuation of the insurance companies will be realized on the same basis as the valuation of the commercial banks, but there are some differences. The methodology of the valuation of insurance companies is composed of the income valuation, the market comparison method, and the obligation pricing model. Also the plan of so called technical reserves is the most important part of the financial plan of the insurance company because these items are important for the future liabilities of the insurance company for its persons insured. The equation for the two phase method will be the same as it is case of the commercial banks, but the derivation of the dividend potential or the removable net income would be a bit different. It could be derived from the following equation5:

DPP = VTN + VTŽ + VFI - NFI +(-) PÚ + OV – ON – DP – PZ - OFP Where

DPP – dividend potential = removable net income, VTN – the result of the technical account for the non life insurance, VTŽ – the result of the technical account for the life insurance, VFI – the incomes from the financial investments, NFI – the costs of the financial investments, PÚ – transfer accounts from the financial investments at the life and non life non life insurance, OV – the other incomes, ON – the other costs, DP – tax of incomes, PZ the law and statutory profit funds, OFP - limited conditions for dividend payments according to the Commercial Code

The obligation pricing model is used in the same way as it is used in case of the valuation of the commercial banks. The advantage for the market comparable method is a relatively developed market of insurance companies in Europe and so the comparable insurance company or the comparable transaction to find is relatively easier than in case of the commercial banks. If the three values, from income approach, from the market comparable method and from obligation pricing model are known, the final result will be the average of these three values.

2.3. Valuation of the Pension Funds The valuation of the pension funds would be derived from the income approach based on the dividend potential or removable net income. The final value is composed of the two parts. The first part is represented by the value identified from the voluntary pension insurance and the second part then from the second pillar of the pension system based on an obligatory pension insurance. The value from the voluntary pension insurance could be derived from the following equation6:

Hrdý, M. (2011.) The Valuation Standards for Banks and Other Financial Institutions. Valuation, 4(3), pp. 21-36 Hrdý, M., Ducháčková, E. (2011.) The Introduction into Valuation Standards of Insurance Companies. Valuation 4 (4), pp. 3-18. 6 Hrdý, M. (2013.). The Introduction into Valuation Standards for the Investment Funds, Investment Societies and Pension Societies. Valuation 6(2), pp. 4 5

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where THDPS – the value of the pension fund from the voluntary pension insurance, OCVDPS – removable net income in nth year from the voluntary pension insurance, N – the number of the years of the financial plan, n – the single years of the financial plan, i – discount interest rate, g – expected annual growth of dividend. The value from the obligatory pension insurance is derived from the following equation7:

where THDS – the value of the pension fund from the voluntary pension insurance, OCVDS – removable net income in nth year from the obligatory pension insurance , N – the number of the years of the financial plan, n – the single years of the financial plan, i – discount interest rate, g – expected annual growth of dividend. The final value (FV) of the pension fund will be then: FV = THDPS + THDS The most important item in the previous equations is represented by the removable net income in nth year from the obligatory pension insurance or from the voluntary pension insurance. These data would be mainly derived from the different types of charges for the administration of the savings of the participants of the pension insurance.

2.4. Valuation of the Investment Funds The valuation of the investment funds would not be very easy thing because the planning of the investment activity is very complicated. Unlike the previous types of financial institutions, the property valuation would play an important role. The increase of the property value leads to the increase of the value of the investment fund. So the value of the property and also the incomes from this property would make up the value for the shareholders or the owners. So the final value of the investment fund would be the combination of the property value and the income value. The final value could be derived from the following equation8:

Where THIF – market value of the investment fund, THMIF – market value of the investment fund on the date of the valuation, Dn – dividend potential or removable net income for the owners, n – the single years of the financial plan, i – the discounted interest rate, g – expected dividend growth.

7 8

Hrdý, M. (2013.) The Introduction into Valuation Standards for the Investment Funds, Investment Societies and Pension Societies. Valuation 6(2), pp. Hrdý, M. (2013.) The Introduction into Valuation Standards for the Investment Funds, Investment Societies and Pension Societies. Valuation 6(2), pp.

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2.5. The Discount Interest Rate in Case of the Income Valuation of the Financial Institutions. The discount interest rate (IR) for the purpose of the valuation of the financial institutions could be derived from the cost of equity as it was mentioned already in previous text. The cost of equity could be calculated in three ways. The first way is based on so called dividend growth model which suppose the estimation of the future dividend. The final sample is the following: (Dividends×100) IR= + Expected rate of growth (Market Value of Shares-Issuing Costs) The second possibility is to derive the cost of equity from Capital Assets Pricing Model (CAPM) or so called Security Market Line (SML). SML works with the cost of equity on the basis of the requested return in dependency on the risk of the individual share in comparison to the market portfolio. The interest rate is than derived from the following equation: IR=Cost of Equity=Risk Free Rate+β×Market Risk Premium The key problem in this case should be the identification of the coefficient β which express the sensitivity of the change of the return of the concrete share in dependency of the change of the return of the market portfolio. In β=1 this change is the same and for that reason the risk is the same as it is on the market portfolio and so the cost of equity and the required return could be the same as the return of the market portfolio. In case of the valuation of the commercial banks the reality was identified that in case of the relatively stabilized banks coefficient β oscillate according to the value equalled 1. So the process of the identification of the coefficient β comes out from the value of 1 and is then adjusted according to the area where the bank is situated and according to the share of the investment and non investment activities because the investment activities are more risky. The final equation is the following9: where β = final coefficient beta, βI = the basic coefficient beta for the investment activity , βK = the basic coefficient beta for the commercial activity, RR = the risk surcharge concerning the expected growth of the bank, RO = the risk surcharge concerning the area, P = the share of commercial activities on the whole incomes of the bank. In case of the valuation of the insurance companies must be identified individually the share of the life insurance and the share of non life insurance (P) if the insurance company offers both types of insurances and also the risk of the area must be take into consideration. The final equation would be the following10:

The values 0,9 and 1,1 are derived from the following table: Table 1. Coefficients beta of the chosen types of financial institutions Type of Financial Institution

USA

Evropa

Developing Markets

Great Banks

0,71

0,90

0,9

Small Regional Banks

0,91

0,88

1,05

Investment Banks

1,50

1,55

1,9

Brokerage Investment Firms

0,66

0,75

0,85

Non Life Insurance Companies

1,37

1,25

1,5

Assessment the level of usage of sales promotion

1,17

1,20

1,1

Non Life Insurance Companies

0,91

0,95

0,9

Source: Damodaran, A. (2009.). Valuing Financial Service Firms. New York, Damodaran, c 2009, WWW dostupné z <http://pages.stern.nyu.edu/~adamodar/>.

Hrdý, M. (2012.) Problems of Discount Interest Rate in Case of Valuation of Banks and the Other Financial Institutions. Valuation, 5(3), pp.14-26. Hrdý, M. (2012.) Problems of Discount Interest Rate in Case of Valuation of Banks and the Other Financial Institutions. Valuation, 5(3), pp. 14-26

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The last possibility how to cope with the problem of the identification of the discount interest rate for the purpose of the valuation of the financial institutional is to use so called building-up method. This method is based on the basic risk free rate which is step by step increased by the risk surcharges form the different types of risks. In case of the commercial banks there are for example the risk surcharges for the credit risk, interest risk, liquidity risk, exchange rate risk, share risk and operational risk.

CONCLUSIONS The aim of this article is to analyze the methodology of valuation of banks, insurance companies, pension funds and investment funds. The preparation of some valuation standards was realized by projecting some specifics of the concrete financial institutions into the valuation approaches known for the purpose of the traditional enterprises. The information obtained from the analysis was final synthesised into the recommendations how to act in case of the process of the valuation of the concrete financial institutions. The valuation of the commercial bank could be realized by the method of the market comparison if the value of the comparable commercial bank is known. Otherwise the income method based on the dividend potential and the obligation pricing model is used. The final valuation is then the average of both values or the appraisal could choose the higher or lesser value according to the results of the strategic or financial analysis. In case of the valuation of insurance companies the three methods, the market comparison, the income valuation and obligation pricing model, are used and then the final valuation equals the average of these three methods results. The valuation of the pension fund is realized by using the two phase income method based on the removable net income or dividend potential where the net incomes in single years are calculated from the fees paid by the participants in the system of the pension savings on a voluntary or on an obligatory basis. The results of the valuation of the investment funds would be the combination of the valuation of the fund´s property and the income valuation of the expected incomes from this property. The most important part in the process of the income valuation of all financial institutions plays the identification of the discount interest rates. This rate must be derived from the cost of equity and there are three possibilities how to do it. The first is based on the dividend growth model, the second on the building-up method and the third on the market security line. In the third case the process of the identification of the coefficient beta plays a very important role.

LITERATURE 1.

Damodaran, A. (2009.) Valuing Financial Service Firms. New York, Damodaran, c 2009, www. pages, accessible from <http://pages.stern.nyu. edu/~adamodar/>.

Hrdý, M. (2013.) The Introduction into Valuation Standards for the Investment Funds, Investment Societies and Pension Societies. Valuation 6(2), pp.

Hrdý, M. (2012.) Problems of Discount Interest Rate in Case of Valuation of Banks and the Other Financial Institutions. Valuation, 5( ), pp. 14-26

Hrdý, M. (2011.) The Valuation Standards for Banks and Other Financial Institutions. Valuation, 4(3), pp. 21-36

Hrdý, M., Ducháčková, E. (2011.) The Introduction into Valuation Standards of Insurance Companies. Valuation 4 (4), pp. 3-18.

Miller, W.D. (1995.) Commercial Banks Valuation. John and Sons, Inc., USA, 263 p.

Rezaee, Z., (2001.) Financial Institutions, Valuations, Mergers and Acquisition. Wiley John and Sons, USA, 2001, 434 p.

DETAILS ABOUT AUTHOR: MILAN HRDÝ ASSISTENT PROFESSOR FACULTY OF FINANCE AND ACCOUNTING, UNIVERSITY OF ECONOMICS IN PRAGUE PRAGUE, CZECH REPUBLIC hrdy@svse.cz

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THE IMPORTANCE OF EASTERN EUROPEAN THIRD COUNTRIES FOR THE EUROPEAN UNION TRADE POLICY IN THE POST CRISIS PERIOD KRISTÍNA DRIENIKOVÁ ELENA KAŠŤÁKOVÁ

ABSTRACT

The development of the world economy under long-term globalization pressures and mainly during the economic crisis gets to a bad situation reflected in the national economies´ economic performance decline. The EU can respond by deepening its own efficiency and better internal reserves exploitation. In the sphere of external relations the EU needs to increase its competitiveness mainly through mutual relations towards a group of so called third countries. The authors see relatively a space in the creation of partnerships especially with a group of countries with which the EU has strong complementary links. The growing dependence on imports of all energy inputs predestines to this position especially Russia or other CIS countries. By deepening mutual economic and trade ties with these countries the EU can pursue its trade policy objectives within the framework of trade liberalization through the conclusion of deeper and more comprehensive free trade agreements. The strategic partnership with Russia is expected to be further developed and deepened followed by the latest initiative through the Partnership for modernization. Efforts to modernizing the Russian economy promise new opportunities for EU businesses. Russia’s accession to WTO will affect the negotiations on a new partnership agreement. The EU seeks to strengthen its economic relations with other promising CIS countries, for example by offering the possibility of concluding free trade agreements in exchange for political and economic reforms. KEYWORDS: European Union, Trade Policy, Russia, CIS countries Note: The paper is a part of scientific project VEGA No. 1/0391/13 The importance of third countries for the strategic development objectives of the EU in the post-crisis period (with implications for the Slovak economy).

1. INTRODUCTION The development of the world economy under long-term globalization pressures and particularly during the economic crisis gets to a bad situation reflected in the national economies´ economic performance decline. One of the ways how to counteract these facts is deeper international trade involvement of national economies, increase of their openness to international trade and strengthening efforts to develop mutual cooperation and liberalized access to new markets. The European Union can respond by deepening its own efficiency by better exploitation of its internal reserves. In the external relations sphere the EU needs to increase its competitiveness predominantly through mutual relations towards a group of so called third countries. The trade policy of the EU is based on the EU common commercial policy, through which the European Commission adopts trade strategies with the common denominator of deepening relations with third countries efforts, develops broader options for mutual cooperation or deeper economic integrations development. A relatively large space for deepening or creating partnership for the EU is embodied in the Eastern European region, a group of the countries with which the EU has strong complementary links. The growing dependence on imports of all energy inputs predestines to this position especially Russia or other Commonwealth of Independence (CIS) countries. The aim of the paper is to demonstrate the foreign trade links between the EU and the Eastern European third countries and to emphasize the strategic potential for mutual trade cooperation and possible deepening of economic integration. The development in the CIS in the last decade shows stagnation as for deepening of mutual economic integration of the Commonwealth member countries, which in many cases is based on lack of interest of individual countries politicians and different ideas of national governments. Several proposals on deepening the integration of the CIS countries in former times stayed abreast of declarations. As a positive step in the integration process’s deepening can be considered the creation of a Customs Union between Russia, Belarus and Kazakhstan in 2010 and efforts to further deepen the integration within the Eurasian Economic Community (EurAsEC), perhaps the most advanced integration association within the CIS. Formation of the Customs Union and the Common Economic Space within the EurAsEC (which formally came into force on 1st January 2012) between these countries represents sufficiently dynamic process that takes into account the experience of the EU and other regional groupings. The knowledge of their strengths and weaknesses creates a significant advantage, which helps to avoid mistakes, to prevent repeating of various bureaucratic shortcomings. At the same time Russia is the main supporter of the so-called Eurasian Economic Union, which aims to create a single economic, political, customs, military and cultural space. The finalization of this process and conclusion of the treaty are

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foreseen for 2015. However, some of the Eastern European countries see their future in closer engagement (economic integration) with the EU, rather than with Russia. It is in the EU´s interest as well.

2. THE TRADE RELATIONS BETWEEN THE EU AND CIS The relations between the EU and individual CIS countries (besides Belarus) are conducted through the Partnership and cooperation agreements (PCAs) concluded during the nineties of 20th century. The aim of the agreements is the consolidation of democracy and economic development; PCAs provide political dialogue, cooperation in the legislative, economic, social, financial, scientific, technological and cultural fields. PCAs are primarily concerned with promoting trade, investment and harmonious economic relations. The CIS countries have become a significant trading partner for the European Union in recent years with growing trade turnover which rose from 172,2 billion euro in 2004 to 380,4 billion in 2008 up to 446,1 billions of euro in 2012.1 Almost three quarters of imports from the CIS consist of energy resources, mineral fuels, whereas EU exports to the CIS territory are more diversified, even though from almost a half consist of machinery and transport equipment. However, CIS countries can be divided into two groups: the exporters of mineral fuels and countries dependent on their imports (Armenia, Kyrgyzstan,2Tajikistan and Moldova). During the global economic crisis the foreign trades of individual CIS countries were focused more on foreign markets in comparison to the intra-Community (CIS) trade, with the exception of Belarus an Kyrgyzstan whose share of exports to the CIS markets in 2012 were high (48% in the case of Belarus and 46% in the case of Kyrgyzstan). The European Union was the most significant market for the CIS countries foreign trade, in 2011 accounting for 45% of total exports and 35% of total imports of the CIS.3 Bilateral trade development in goods between the EU and CIS countries was very dynamic in recent years, as it is detailed in Table 1. Table 1 EU´s trade development with the CIS for the years 2008 – 2012

(millions of euro)

2008

2009

2010

2011

2012

Import

230 456

148 575

202 152

257 570

273 696

Export

149 394

96 115

123 235

152 602

172 430

Trade turnover

379 853

244 690

325 387

410 172

446 127

Balance

-81 066

-52 460

-78 917

-104 968

-101 266

Source: own elaboration according to EUROSTAT data available at: http://epp.eurostat.ec.europa.eu/portal/page/portal/international_trade/data/ database (accessed 20.06.2013)

EU’s imports from the CIS countries have risen more rapidly (8.9% on average) than the EU’s exports to that territory (4.3%). Mineral fuels (mainly oil and natural gas) were the most important import commodity with its share 76.3% of total EU imports from the CIS countries in 2011. As for the structure of EU exports to CIS countries, the most significant export items in 2011 were machinery and transport vehicles with their 46.5 % share and chemicals (16.5%). The EU’s trade deficit with the CIS arises mainly from mineral fuels imports, predominantly with Russia, Kazakhstan and Azerbaijan (although it is compensated to some degree by trade surpluses with the other CIS counties). The EU main trades in goods partners from the CIS territory are Russia accounting for 72% of EU exports to the CIS and 77% of EU imports from the CIS, Ukraine, Kazakhstan and Azerbaijan. As far as foreign direct investments, the investment relations between the EU and CIS countries show substantial unbalances in favour of the EU. In the investment structure prevails the inflow of the EU investment to the CIS territory. The largest share of the European foreign direct investment is located in Russia, especially in the energy sector (oil and gas). The EU accounts for about 70% of all foreign investments into the Russian economy. Russia is an interesting partner in terms of market size and capital absorption.

Eurostat, (2013). [online]. (accessed 20.06.2013). Available at: <http://epp.eurostat.ec.europa.eu/portal/page/portal/international_trade/data/database>. Cisstat, (2013). Share of the CIS and other countries of the world in total imports of individual countries of the Commonwealth [online]. (accessed 20.07.2013). Available at: <http://www.cisstat.com/eng/> 3 Eurostat, (2013). [online]. (accessed 20.06.2013). Available at: <http://epp.eurostat.ec.europa.eu/portal/page/portal/international_trade/data/database>. 1 2

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3. STRATEGIC PARTNERSHIPS WITH RUSSIA Through its decisions Russia significantly affects not only international political scene, but the world economy and international economic relations as well. The position of the country in the world economy is based on abundant reserves of energy resources; hereby Russia is a major player in world markets. With its geographical location, overall importance in terms of energy resources´ supply, the size and potential of consumer market it represents one of the most important partners of the European Union. The EU trade policy towards Russia is based on the main premise that the EU and Russia are strategic partners depending on each other in wide range of fields (especially economy, trade, energy, security). In spite of their different views of foreign policy, or the form of cooperation, joint interest of both partners lies in deeper mutual cooperation and economic integration. Foreign trade links between the EU and Russia are a key element in their economic and political relations´ development. Long-term relations stretching back to the Soviet Union and European Communities´ era turned into a strategic partnership in the 21st century and have become an indicator of both national economies´ developments, of deepening their interdependence, therefore directly encourage the development of strategic partnership. Russia is the most important single supplier of energy products to the EU, accounts for nearly one third of oil and gas consumption of the EU countries, while the EU is the most important destination for the Russian energy products and the Russian economy still remains highly dependent on oil and gas exports). For the EU Russia is the third most important trade partner after the USA and China. It accounts for 7% of EU exports and 12% of imports to the EU countries.) Exports to Russia have risen continuously following a fall in crisis period of 2009 – from 66 billion euro to a record level of 123 billion euro in 2012. And imports from Russia followed the same pattern - from 118 billion in 2009 to 213 euro in 2012. On the other hand, the EU is the most important trade and investment partner for Russia, accounting for roughly half of Russian exports and 43% imports to Russia.4 The strategic aspect of the partnership is evident also in the cooperation on foreign policy issues, global security, in many areas of the economy. The partnership is based on the cooperation developing in the framework of the so-called four common spaces, which aim is to create an open and integrated market. In this regard, the most important element of the cooperation is the formation of the Common Economic Space (CES). The importance of the strategic partnership between the EU and Russia derives from the mutual historical and cultural ties, geographical proximity - through direct border Russia is the biggest EU neighbour, together with its location connects Europe with Asia, from economic complementarity of both units and at the same time from the common interests to develop, extend and deepen cooperation and relations with the aim to create the CES. Since 2010 a new joint initiative for mutual relations development has been implemented in form of flexible and pragmatic framework of Partnership for modernisation (PfM). This initiative builds on efforts to modernise, to diversify and innovate the Russian economy. Russia strives to attract major foreign investors into its economy through various reform practices in taxation, business law and investment policy which would positively affect economic development in the post-crisis period. These aims promise new investment and business opportunities for EU companies. This linkage would create optimal option for ensuring EU energy security as well. PfM is a shared agenda for reforming in the socio-economic development area, with due respect for democracy and the rule of law. The five priority ideas of the PfM according to its work plan include:5 1. Creation of diversified, competitive and sustainable low-carbon economy. 2. Facilitating and liberalising trade in the global economy, enhancing and deepening bilateral trade and economic relations. 3. Enhancing cooperation in innovation and research and development, including space and nuclear research. 4. Rule of law, strengthening the legal environment, improving investment and the social climate. 5. Promoting people-to-people links and enhancing dialogue with civil society. Partnership for modernization provides additional impulse to mutual relations between the EU and Russia. The framework is also accompanied with bilateral modernization partnerships between Russia and already 25 EU member states.6 Perhaps Germany is the most significant modernization partner for Russia based on long-term positive trade relations (Germany is Russia’s most important trade partner), positive development of political, business, cultural relations and long-term cooperation in energetic that results from mutual energy interdependence (German energy companies are e.g. significant partners for Russia’s Gazprom). The German-Russian modernization partnership started in 2008 with the aim to provide the Europa.eu. (2013). [online]. (accessed 20.07.2013). Available at: <http://europa.eu/rapid/press-release_STAT-12-188_en.htm> ForModernisation.com. (2013). [online]. (accessed 22.08.2013). Available at: <http://formodernisation.com/en/info/progress_report_2012.php>. 6 Consilium.Europa.eu. (2013). [online]. (accessed 25.08.2013). Available at: <http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/ foraff/137354.pdf>. 4 5

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most optimal conditions for German businesses on Russian market in exchange for Russia’s access to modern technologies. Russia’s entry to the WTO (22 July 2012) provides an important impetus for EU external trade policy towards Russia expressed in new opportunities to deepen mutual trade cooperation, strengthen the position of European exporters and investors in the Russian market. Russia has committed to reduce tariffs and remove barriers to free trade, and thus the EU can profit from opening up new business opportunities predominantly in form of exports increase. As for the gains for the EU trade policy towards Russia, these should become evident in facts as:

• Reduction of the average tariffs for all products (from 10% to 7.8%) – the EU exporters profit especially from lower import duties on vehicles (reduced from 30% to 25%). To some agriculture products would be applied tariff rate quotas;

• the potential for investments increase into the Russian market in connection with the removal of barriers to foreign investors;

• new opportunities for EU services suppliers in connection with the liberalization of services (e.g. telecommunications, • • • •

financial sector); WTO membership should ensure better intellectual property rights protection in the Russian market; by joining the WTO Russia has undertaken to comply with its rules; Russia’s membership gives a new impetus to progress the ongoing negotiations on a new partnership agreement; The WTO membership is one of the EU conditions for the establishment of free trade zone7.

In general, it is expected that Russia’s WTO membership will improve relations between the EU and Russia, will deepen mutual cooperation in science, technology, innovations, and will increase mutual investment flows. Moreover it should encourage reforms in the Russian economy, strengthen the rule of law and encourage entrepreneurship. However, during the first year of WTO membership the EU took steps against Russia by requesting consultations at the organisation because of Russia’s so-called “recycling fee“ on imported vehicles. On 9th July 2013 EU launched a challenge towards the fee Russia introduced on 1st September 2012, just 9 days after joining the WTO. Japan responded in the same way by filing a dispute against Russia (on 24th July 2013). Both the EU and Japan argue that the fee which is levied on cars, trucks, buses and other motor vehicles, is incompatible with the WTO most basic non-discrimination rule and hampers international trade in key European industry sector. The European vehicle exports to Russia in 2012 were worth 10 billion euro. Russia is becoming more significant export market for the EU in connection with the crisis in euro zone, especially regarding vehicle exports – after Germany it is the second most important export destination (e.g. for Slovakia as well). However the imposed fee nullifies the effect of import tariff reduction agreed to in the WTO accession terms. Moreover, vehicles produced in Russia-Belarus-Kazakhstan customs union are exempted from the fee. The biggest challenge in the areas of political, economic and foreign trade relations between the EU and Russia into the future is the conclusion of a new partnership agreement, which will replace the current and still valid Partnership and Cooperation Agreement (PCA). The PCA no longer reflects the reality of mutual relations which were significantly different in the nineties of the 20th century, when the agreement was signed (1994). The negotiations of the new agreement started in 2008 and till today some progress has been made. The agreement would provide a new solid legal basis and would be a key instrument for deepening the relations. Both sides reiterated that they would like to develop deeper cooperation and economic integration, however the EU and Russia have their own, and different ideas about the agreement’s binding force and its scope.

4. THE EU AND THE EASTERN PARTNERSHIP The Eastern Partnership (EaP) is a specific EU initiative in the framework of the European Neighbourhood Policy (ENP) towards Ukraine, Belarus, Moldova, Georgia, Armenia and Azerbaijan. It is an important instrument of EU political, legal and economic rapprochement to the partner countries. The EU offered them long-term support in market and democratic reforms implementation. The EU relation with these six countries was in 2009 promoted to an ambitious partnership based on respect for fundamental values, including democracy, the rule of law, respect for human rights, international law rules, good governance, respect for the principles of market economy and sustainable development. As for the EU trade policy the main objective of the Eastern Partnership defined in Joint Declaration from 2009 is to create conditions to promote and accelerate political association and strengthen economic integration of the six neighbouring countries and EU internal market. This intention appears from the specific position of the partner countries – the former Soviet Union countries, share common history, cultural and linguistic affinity, and the problems typical for the countries However a new obstacle for establishing a FTA between the EU and Russia is the Russia’s membership in the Customs Union with Belarus and Kazakhstan. 7

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undergoing the period of systematic political and economic transformation as well (whereby this process is still not fully completed). The EaP countries´ common feature is the persistent economic dependence on Russia, although all (except Belarus) see their future in deeper cooperation with the EU. Therefore, the EU decided to respond to particular needs of neighbouring countries, and supports their transition to democracy and market economy. The Eastern Partnership is committed to political and socio-economic reforms in the partner countries and their approximation in relation to the EU. The concept of EaP does not directly offer the possibility of full EU membership. Nevertheless, it does not exclude this as well. In particular it aims at strengthening of bilateral relations beyond the scope of existing cooperation within the European Neighbourhood Policy, whereby is based on its principles. The priority of EU foreign trade policy towards the EaP lies primarily in a topic of trade liberalization and economic integration, which is materialized in free trade agreements, or so called Deep and Comprehensive Free Trade Agreements (DCFTAs) aiming to be an ambitious upgrade of the current trade relations between the EU and EaP partners. The DCFTA agreements will be included in the new legal frameworks (replacements for the PCAs) in form of the Association Agreements reflecting the second aim of the EaP. The Association Agreements are based on political association between the EU and EaP countries, and are unprecedented in number of areas covered and the commitments for both parts (the depth of the agreements).The DCFTAs will go further than classic free trade agreements, as these will both open up markets but also address competitiveness issues and the steps needed to meet EU standards and trade on EU markets. The negotiations on the DCFTAs started with all partner countries except for Belarus and Azerbaijan as non-WTO members. In 2013 EU concluded DCFTA negotiations with Moldova, Armenia and Georgia. As for Ukraine, the Association Agreement was initialled in March 2012 and the DCFTA as its integral part in July 2012 as well. However, nor the Association Agreement nor the DCFTA have not been signed yet because of political events and situation in Ukraine. Ukraine is expected to sign the Association Agreement including the DCFTA at the third Eastern Partnership summit on 28 and 29 November 2013 in Vilnius, Lithuania, but it depends on its progress on a number of outstanding issues. Moreover, the EU is prepared to initial the Association Agreements with Moldova and Georgia as well. Armenia, however, announced by President Serzh Sarkisian its decision to join the Russia-led customs union. The EaP position in EU foreign trade policy is important, it leads up to deepen and facilitate trade and economic cooperation with relevant neighbouring countries. The focus of EU´s trade policy in this regard lies primarily in bilateral approach, aiming to conclude comprehensive free trade agreements. The EaP objectives, however, depend primarily on the efforts of partner countries themselves. The prospects of the EaP initiative are very ambitious, but feasible and for the EU external trade policy represent a challenge how to deal with neighbouring countries´ cooperation, to improve and facilitate access to their markets, mutual trade liberalization and economic integration

CONCLUSIONS In the EU external trade relations sphere there is a huge space for improvement and increase of the EU´s competitiveness in the post crisis period through strengthening its partnerships with the Eastern European third countries, through deepening mutual relations, cooperation and economic integration. The strategic partnership with Russia is expected to be further developed and deepened followed by the latest initiative through the Partnership for modernization, where both partners jointly implement innovative, research and technological projects. Efforts to modernize the Russian economy promise new opportunities for the EU businesses. Russia’s accession to WTO will affect the negotiations on a new partnership agreement. The EU seeks to strengthen its economic relations with other promising CIS countries, especially the Eastern Partnership countries, above all by offering the possibility of concluding deep and comprehensive free trade agreements in exchange for political and economic reforms in these countries. This will strengthen the EU´s position and improve its access to new markets in the Eastern European territory, which is of high importance for Russia as well. Therefore it is not clear how will be the mutual EU-Russia relations affected if Ukraine or other EaP country signs the free trade agreement with the EU.

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LITERATURE 1.

Cisstat, (2013). Share of the CIS and other countries of the world in total imports of individual countries of the Commonwealth [online]. (accessed 20.07.2013). Available at: <http://www.cisstat.com/eng/>.

Consilium.Europa.eu. (2013). [online]. (accessed 25.08.2013). Available at: <http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/foraff/137354.pdf>.

Drieniková, K. – Zubaľová, Ľ. (2013) Zahraničnoobchodná politika EÚ v meniacich sa podmienkach globálneho hospodárskeho prostredia. Bratislava: Vydavateľstvo EKONÓM, 2013, pp. 264. ISBN 978-80-225-3622-6.

Drieniková, K. – Zubaľová, Ľ. (2012) Zahraničnoobchodná politika EÚ voči Rusku - vybrané faktory ovplyvňujúce nové perspektívy spolupráce. Studia commercialia Bratislavensia, 20(5), pp. 545-557. ISSN 1337-7493.

Euractiv. (2013). EU loses Armenia to Russia’s Customs Union. [online], 4. 9. 2013. (accessed 17.10.2013). Available at: <http://www.euractiv. com/europes-east/eu-loses-armenia-russia-customs-news-530224>.

Europa.eu. (2013). [online]. (accessed 20.07.2013). Available at: <http://europa.eu/rapid/press-release_STAT-12-188_en.htm>.

Europa.eu. (2013). [online]. (accessed 22.08.2013). Available at: <http://europa.eu/rapid/press-release_IP-13-665_en.htm>.

Eurostat, (2013). [online]. (accessed 20.06.2013). Available at: <http://epp.eurostat.ec.europa.eu/portal/page/portal/international_trade/data/ database>.

ForModernisation.com. (2013). [online]. (accessed 22.08.2013). Available at: <http://formodernisation.com/en/info/progress_report_2012. php>.

10. Kašťáková, E. (et al). (2010). Zahraničnoobchodné vzťahy EÚ s vybranými tretími krajinami II (USA, Kanada, Japonsko, krajiny SNŠ a západného Balkánu). Bratislava: Ekonóm, 2010, ISBN 978-80-225-2986-0. 11. Kurmanalieva, E. (2012). CIS Macromonitor, 2012. [online]. (accessed 21.06.2013). Available at: <http://www.eabr.org/general//upload/docs/ AU/Macromonitor_Mar_2012-eng.pdf>. 12. Sandler, I. (2012). Russia accession to the WTO: Benefits and risks. [online]. (accessed 21.06.2013). Available at: <http://www.jdsupra.com/legalnews/russias-accession-to-the-wto-benefits-34072/>. 13. ec.trade.europa.eu DETAILS ABOUT AUTHORS: KRISTÍNA DRIENIKOVÁ ASSISTANT PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA DEPARTMENT OF INTERNATIONAL BUSINESS BRATISLAVA, SLOVAKIA kristina.drienikova@euba.sk ELENA KAŠŤÁKOVÁ ASSOCIATE PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA DEPARTMENT OF INTERNATIONAL BUSINESS BRATISLAVA, SLOVAKIA kastakova@euba.sk

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CROSS-BORDER MOBILITY OF COMPANIES IN EUROPEAN UNION AS THE PRECONDITION FOR SUCCESS IN BUSINESS JERNEJA PROSTOR

ABSTRACT

The decision, in which Member State the company will be established or will pursue its business activity, is the subject of their establishers. The company could therefore be established in the Member State of their location or in situations, where establishers favour cross-border mobility and are looking for the opportunities on the markets abroad, the decision on the location would depend upon the development of business environment. Nevertheless, the regulation of each Member State, especially regarding corporate and tax law could have a decisive influence on this decision. Those questions are of great importance when the company is improving its business position through broadening its activities to other markets as well as relating to cross-border transfer of its activities to another Member State. The freedom of establishment, provided by the Treaty on the Functioning of the EU (the Treaty), is a suitable legal basis for effective cross-border corporate restructuring of companies in EU. There are some possible methods to exercise this freedom, specially regulated with secondary acts, like cross-border mergers and the establishment and economic operation in the legal form of Societas Europaea, whereas the cross-border transfer of the company (its seat) shall be in the light of the case law of the Court of Justice of the EU admitted on the basis of the Treaty. Companies therefore in their intention for cross-border mobility do not need to reconstruct by using the general provisions on establishment and liquidation of companies and through the way of singular succession. There are possibilities, regulated on the EU level, through which companies shall emigrate or spread their business activities to other Member States much simpler and with less cost on the basis of universal succession. The regulation of procedures and the advantages of the mentioned reconstruction methods will be analysed in this article. KEYWORDS: freedom of establishment, corporate restructuring, cross-border mergers, Societas Europaea, cross-border transfer of the seat Preface The decision, in which Member State the company will be established or will pursue its business activity, is the subject of their establishers. The company could therefore be established in the Member State of their location or in situations, where establishers favour cross-border mobility and are looking for the opportunities on the markets abroad, the decision on the location would depend upon the development of business environment – it depends on the presence of trained personnel, logistic advantages,1 suitable legislation, effective judicial and administrative authorities and attained degree of legal certainty. The regulation of each Member State, especially regarding corporate and tax law, could therefore have a decisive influence on this decision. Those questions are of great importance when the company is improving its business position through broadening its activities to other markets as well as relating to cross-border transfer of its activities to another Member State. This article analyses some benefits for companies for the reason of EU membership of their Member State of origin (in comparison with the use of general provisions for corporate restructuring) and emphasizes the importance of SE-Regulation.2

1. Broadening of company’s activities to other markets

A company has a possibility to achieve the corporate restructuring by using general provisions, regulating establishment and liquidation (usually including destroy of the undertaking) of the company. One possibility is the establishment of another company (subsidiary) in another Member State that is the Member State of destination. The disadvantage is that the established company would be the subject of foreign legal system that the establisher may not be familiar with, which increases the costs of cross-border mobility of companies. A company could also pursue its activities in another Member State through its branches3 or pursuant to the Treaty on the Functioning of the EU (the Treaty)4 (for the prohibition of discrimination) even without any legal form in the Member State of destination.5

J. Cremers, E. Wolters, EU and national company law – fixation on attractiveness, Report 120, European Trade Union Institute, Brussels 2011. Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), OJ L 294, 10. 11. 2001, p. 1–21. 3 There is a difference between a subsidiary and a branch. A subsidiary has its own legal personality, while a branch is only a separate unit of the company, which is located outside the registered office of the company and does not have a legal personality. 4 Consolidated version of the Treaty on the Functioning of the European Union, OJ C 326, 26. 10. 2012, p. 47–390. 5 R. Knez in M. Kocbek (editor), Veliki komentar Zakona o gospodarskih družbah (ZGD-1), 3. knjiga, GV Založba, Ljubljana 2007, p. 946. 1 2

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A company might be interested in purchasing an already existing undertaking (business activity)6 in another Member State. Using general provisions it could offer to buy the asset from the owner – asset deal, which is achieved by singular succession (based on the principle cum titulus et modus acquirendi). When purchasing the whole undertaking, assets could only be transferred with its connected obligations. In this regard it is very important to obtain the consent of creditors of the transferred undertaking – they could be rightly concern about who their debtor is – the credit rating of their debtors. In the case of asset deal the acquiring company is then the owner of acquired assets and is entitled to exercise the entitlement of property ownership. Another possibility to broaden company’s activities to other markets, based on general provisions, is an acquisition of an existing undertaking in another Member State by acquiring (take over) shares of the (target) company that owns that undertaking – that is by way of share deal having regard to the provisions of (Thirteenth) Directive on takeover bids7 (for example the way that the Croatian company Agrokor is trying to acquire the Slovenian company Mercator). The acquiring company should obtain enough voting shares in the acquired company to be entitled to have some influence on decisions regarding the acquired undertaking. In this regard it is very important to note that in case of a share deal the acquiring company is not the owner of acquired assets – the management of the acquiring company by executing company’s voting rights could have some indirect influence on the management of acquired undertaking. It should be mentioned that in this case there could also be a problem with the acquiring company not being familiar with the corporate law that the acquired company is subject to. The freedom of establishment, provided by the Treaty (Articles 49 and 54), is a suitable legal basis for another, maybe more effective cross-border corporate restructuring of companies in EU. There are some possible methods to facilitate the exercise of this freedom, specially regulated with secondary acts, like cross-border mergers and the establishment and economic operation in the legal form of European company (Societas Europaea – SE). It should be noted that the SE-Regulation, more precisely the regulation of the cross-border merger as one of the SEs establishing forms significantly contributed to the adoption of the (Tenth) Directive on cross-border mergers of limited liabilities companies (the Directive on cross-border mergers).8 A company might acquire an existing undertaking (business activity) in another Member State by acquiring the owner company by way of cross-border merger. Member States were obliged to implement the Directive on cross-border mergers into their national legislations. A company intending to acquire an undertaking in the Member State of destination, therefore has the right to obtain it by pursuing a cross-border merger, where the acquired company is being dissolved without going into liquidation, transferring all of its assets and liabilities to the acquiring company. This transaction is being executed without the consent of the acquired company’s creditors, since the transfer of the assets and liabilities is made through the universal succession9 which makes the corporate restructuring much easier and faster, with less cost. Acquiring company remains to be governed by the law of its origin. For the reason a liquidation of the acquired company is not required, the important advantage is also the possibility of the continuous operation of the acquired undertaking. In the case of a merger the acquiring company is then the owner of the acquired assets and is entitled to exercise the entitlement of property ownership.

2. Cross-border transfer of the company’s activities to another Member State A company has a possibility to achieve the cross-border transfer of its activities to another Member State by using general provisions, regulating establishment and liquidation of a company, nevertheless EU membership provides some more effective ways of corporate restructuring. By way of above mentioned cross-border merger a company could also transfer its activities to the Member State of destination. A company could in the first step establish a subsidiary in another Member State and afterwards that company could acquire its establisher by pursuing a cross-border merger. Alternative possibility is when meeting the conditions to establish SE by numerous clausus of its establishing forms,10 regulated in the SE-Regulation, to transfer the registered office of the SE to another Member State.

There is a difference between a company and an undertaking. A company is the subject of law and usually has a legal personality, while an undertaking is the object of law. A company can own an undertaking. 7 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, OJ L 142, 30. 4. 2004, p. 12–23. 8 This transfer is made in exchange for the issue to the acquired company’s members of securities or shares representing the capital of the acquiring company and (if applicable) a cash payment not exceeding 10 % of the nominal value or of the accounting par value of those securities or shares (Article 2(2) of the Directive on cross-border mergers). 9 Cross-border merger, formation of a holding SE, formation of a subsidiary SE, transformation into a SE (Article 2 of the SE-Regulation). 10 With its real seat. 6

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A company, pursuing its business activities in any other legal form of company, should be in the light of the case law of the Court of Justice of the EU (the Court) as well permitted to transfer the company’s registered office11 to the host Member State (of destination). As the Court held in (the obiter dictum of) the Cartesio12 case the freedom of establishment on the basis of the Treaty includes the performance of moving the registered office to another Member State with the change as regards the applicable national law. In the latter situation the company is without prior liquidation converted into a form of company which is governed by the law of the Member State of destination. It should be mentioned that this operation does not include the change of legal form as known in Member States for national transformations (which are not harmonised on EU level). In other words the cross-border transfer of registered office means for instance the transfer of a joint stock company of Member State of origin to a host Member State (of destination), where it pursues its business activities as a joint stock company, governed by the law of the host Member State. The requirement for prior liquidation would be a barrier to the actual conversion and would constitute a prohibited restriction on the freedom of establishment of the company, unless it serves overriding requirements in the public interest (paragraph 111-113). The Court of Justice concluded the SE-Regulation providing the transfer of SEs registered office should be mutatis mutandis applicable for such situations (paragraph 120). There have been some initiatives to increase the predictability of the company intending to transfer its registered office to the Member State of destination with the conversion into a comparable legal form, governed by its national law by the adoption of the (Fourteenth) Directive on cross-border transfer of the registered office. Nevertheless it has not been adopted yet, but the Court in its recent VALE13 case confirmed its decision in Cartesio case. In addition it held that, although the explicit regulation would facilitate the exercise of the freedom of establishment by transferring the company’s registered office, in the absence of rules laid down in secondary EU law companies can invoke the Treaty provisions to exercise that fundamental freedom. Referring to decision in SEVIC14 case it held that even though such rules are useful for facilitating cross-border conversions, their existence cannot be made a precondition for the implementation of the freedom of establishment laid down in Articles 49 and 54 of the Treaty (paragraph 38). It is important to notice that the transfer of SEs registered office, as regulated in the SE-Regulation, is based on the principle of maintaining the same identity of the company: (1) (2) (3)

company’s assets and liabilities are still the object of the same legal person (identical company); the company is entitled to continue with its business activities – there is no requirement for liquidating the company in the Member State of origin and to re-establish it in a Member State of destination; it causes the company to be governed by another legal system – for that reason creditors and shareholders are prior to validity of transfer protected by the law of the Member State of origin.

The requirement for liquidation and a new establishment would cause a lot of difficulties, since all of the company’s assets have to be realised and all the obligations paid. The undertaking would have to be destroyed in the Member State of origin and a new one created in a host Member State. However these procedures take some time and causes additional expenses, not to mention the loss of business opportunities on the market in the meantime. In commercial practice there are some ideas for companies not only to transfer their registered office to another Member State but to change its legal form as well, for instance the transfer of a joint stock company from the Member State of origin to a host Member State, where it pursues its business activities as a limited liability company, governed by the law of a host Member State. Considering the above mentioned case law of the Court, in the absence of rules, provided by the EU secondary legislation, in my opinion such corporate restructuring is also permitted directly on the basis of the Treaty. The procedure would have to be based on the principle of maintaining the same identity of the company, whereby the provisions, regulating the establishment of the SE by the transformation into a SE could be mutatis mutandis applicable. That would be in line with the principle of functional equivalence, ensuring similar treatment for similar cross-border transactions. Despite the absence of initiatives to harmonise the transfer of company’s registered office with the change of company’s legal form the requirements of business practice give rise to rethink the possibilities of regulating such transactions on EU level as well.

Case C-210/06, Judgment of the Court (Grand Chamber) of 16 December 2008, CARTESIO Oktató és Szolgáltató bt, European Court Reports 2008, p. I–09641. Case C-210/06, Judgment of the Court (Grand Chamber) of 16 December 2008, CARTESIO Oktató és Szolgáltató bt, European Court Reports 2008, p. I–09641. 13 Case C-378/10, Judgment of the Court (Third Chamber) of 12 July 2012, VALE Építési kft, European Court Reports 2012. 14 Case C-411/03, Judgment of the Court (Grand Chamber) of 13 December 2005, SEVIC Systems AG, European Court Reports 2005, p. I–10805. 15 M. Kocbek, Sprejetje direktive o čezmejnih združitvah – Deseta direktiva EU s področja prava družb – 2005/56/ES, Podjetje in delo, št. 1/2006, p. 219. 11 12

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CONCLUSIONS Companies in EU in their intention for cross-border mobility do not need to reconstruct by using the general provisions on establishment and liquidation of companies and through the way of singular succession. There are possibilities, regulated on the EU level, through which companies shall emigrate or spread their business activities to other Member States much easier, faster and with less cost on the basis of universal succession or by maintaining the same identity of the emigrating company. The SE-Regulation is a very important legal source, since it explicitly regulates the transfer of the registered office of the SE and also the cross-border merger and the procedure of the transformation into SE as its establishing forms. Therefore its importance should not be measured through numbers of actually established SEs or their business success, rather by its influence on the adoption of the Directive on cross-border mergers and eventual Directive on cross-border transfer of the registered office. While monitoring the needs of business practices it may one day contribute also to the regulation on company transformation into another legal form on the basis of the principle of maintaining the same identity of the transforming company. DETAILS ABOUT AUTHOR: JERNEJA PROSTOR ASSISTANT UNIVERSITY OF MARIBOR FACULTY OF LAW MLADINSKA ULICA 9, SI-2000 MARIBOR, SLOVENIA jerneja.prostor@um.si

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MINIMUM WAGES AND YOUTH EMPLOYMENT IN THE EUROPEAN UNION SUZANA LAPORŠEK

ABSTRACT

The purpose of this paper is to analyze minimum wage systems in the EU and to estimate minimum wage effects on youth employment in the European Union. The analysis of minimum wage systems across EU Member States is based on the overview of literature and descriptive statistics. To estimate the minimum wage effects on employment of youth between 15 and 24 years of age, paper uses panel regression method with fixed effects. The panel regression analysis includes data for 18 EU Member States with statutory minimum wage for the period 1996–2011. The study finds a negative, statistically significant association between minimum wage and employment rate of young workers. The association remains negative and statistically significant also when controlling for other labor market institutions. KEYWORDS: minimum wage, youth employment, labor market, economic policy, European Union.

1. INTRODUCTION Minimum wage, its role, objectives and functions have been a subject of academic and political debate and controversy for already more than a century. At first minimum wage presented a tool to prevent exploitation of workers (Starr, 1981). Over time, the focus changed to assuring people a decent living and to helping them to become more self-sufficient (Neumark & Wascher, 2010). Still, minimum wage remains a subject of a controversy, as each of the social partners attaches to it a different role. From the viewpoint of employees and unions, minimum wage reduces wage inequality and poverty, and protects vulnerable groups of workers (Freeman, 1996; Saget, 2002), whereas from the viewpoint of employers minimum wage increases labor costs per unit and harms firms’ competitiveness. The effect of minimum wage on employment has been one of the most debated topics in the economics. Majority of empirical studies confirm negative employment effects of minimum wage, especially for young and less skilled workers. Early studies or so called “old minimum wage research”, which were mostly based on time series data for the US, showed that a 10 % increase in the minimum wage reduces teenage employment by 1 or 3 % (Brown et al., 1982). These findings were weakened by the “new minimum wage research”, which exploited experimental methods and micro data. Especially important are findings of Card and Krueger (1995), who reported about positive minimum wage effects on employment. Nevertheless, based on an overview of more than 100 new minimum wage studies Neumark and Wascher (2007) showed that almost three quarter of studies find a consistent, although not always statistical significant negative effect, by which the effect is stronger for less skilled workers. The objective of this paper is to analyze minimum wage systems in the EU and to study minimum wage effects on employment of young European workers. The empirical analysis focuses on young workers, as they are at most affected by changes in minimum wage legislation. The analysis is based on the panel of 18 Member States of the European Union (EU) for the period 1996–2011, focusing on the EU countries with statutory minimum wage with different dynamics of changes in minimum wage over time and with different minimum wage levels. Although the issue of minimum wage effects has been a subject of several studies, there is a lack of panel studies that would focus on the EU countries and use recent data. In this way this study adds to the existing literature. The rest of the paper is organized as follows. Section 2 overviews minimum wage systems and minimum wage level statistics across the EU Member States. Section 3 presents data and methodology. Section 4 provides results of the panel regression analysis on the association between minimum wage and youth employment. The last section concludes.

2. MINIMUM WAGE IN THE EUROPEAN UNION 2.1 Overview of the minimum wage systems Each of the EU Member States has some form of a minimum wage. Nevertheless, minimum wage systems differ significantly between EU countries, also due to differences in institutional arrangements and historical development of their labor markets. Minimum wage systems can therefore be divided into two groups (see Table 1). Majority of the EU countries, that

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is 20, has a national minimum wage. In most of these countries, minimum wage is regulated by law. Only in six countries national minimum wage is determined by a national bipartite or tripartite collective agreement. The second group includes countries, which set their minimum wages at the sectoral or occupational level by collective agreements. The only exception in this group is Cyprus, which regulates minimum wage by law, however only for nine different occupations. As noticed in Table 1, minimum wage is set on sectoral and occupational level mainly in Scandinavian and continental EU countries, i. e. countries with highly developed system of collective bargaining and high coverage with collective agreements. (Grimshaw & Rubery, 2010; Schulten, 2012a). Majority of the EU Member States with national minimum wage has a non-discriminatory minimum wage, implying that all workers are eligible to minimum wage. Exceptions from this rule are Belgium, Luxembourg and Spain (in these countries minimum wage is provided only to workers in the private sector; there are also some other minor exceptions), and Greece, where minimum wage is not mandatory for domestic workers. In countries with minimum wage set by collective agreements, minimum wage coverage reflects coverage with collective bargaining. In Scandinavian countries, Austria and Italy minimum wage therefore covers 80 % or more workers, while in Germany and Cyprus only 60 to 70 % of workers (Carley, 2006; Schulten, 2012a). Table 1: Overview of minimum wage system types in the EU Member States Minimum wage Statutory regulation system National minimum wage

Western countries: France, Ireland, Luxembourg, the Netherlands, United Kingdom Southern countries: Malta, Portugal, Spain

Collective agreement Tripartite agreement: Belgium, Estonia, Greece Bipartite agreement: Bulgaria, Poland, Slovakia

Central and Eastern countries: Czech Republic, Hungary, Latvia, Lithuania, Romania, Slovenia Sectoral and Cyprusa occupational minimum wage

Scandinavian countries: Denmark, Finland, Sweden Continental countries: Austria, Germany, Italy

Note: a Cyprus sets statutory minimum wage for nine occupations, including shop assistants; clerks; nursing aids (employees offering personal care); child-care workers (assistant baby and child minders); security guards; and care takers (ILO, 2013). Sources: Vaughan-Whitehead, 2010; ILO, 2013; Rycx & Kampelmann, 2012; Schulten, 2012a.

Minimum wage systems do not differ only in their legal regulation, but also in the wage setting mechanisms. About half of the EU Member States with national minimum wage sets a lower minimum wage for younger workers to avoid negative minimum wage impact on their employment. Though, practices between countries are different. Some countries use proportional minimum wage, implying that the level of minimum wage increases with age (for example, Belgium, Czech Republic, France, Greece, Ireland, Luxembourg, Malta, the Netherlands, and the United Kingdom), whereas other link minimum wage level to employment duration. For example, first time entrants to the labor market in Poland are entitled to 80 % of minimum wage during the first year and to 90 % of minimum wage during the second year of employment. A similar regulation can be also found in Ireland and Luxembourg (see ILO, 2013). The only EU country where minimum wage is higher for younger workers is Latvia. Namely, young Latvian workers are entitled to the adult minimum wage, but, as their working week is shorter, they receive higher minimum wage measured per hour than adult workers (EIRO, 2012). The EU countries set also lower minimum wage based on the qualification level and status of workers (for example, for less experienced workers and trainees, disabled). A single national wage floor is used only in the transition EU countries that became EU members in 2004 or 2007, with exception of Bulgaria, probably due to lack of strong collective bargaining institutions. The EU Member States also differ in the method of setting and adjusting minimum wage. Most countries with national minimum wage adjust minimum wage at regular intervals, usually once a year (minimum wage adjustment is possible twice a year in Greece, the Netherlands, Poland and Spain). On the other hand, Ireland, Latvia and Luxembourg adjust

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minimum wage occasionally. In most cases, the level of adjustment is defined by the government in co-operation with social partners. Only in Belgium, Luxembourg and Malta minimum wage automatically adjusts with the consumer price index (Carley, 2006; EIRO, 2012).

2.2. Levels of minimum wage in the European Union There are tremendous differences in the level of minimum wage among the EU Member States. Figure 1 shows minimum wage per hour in EUR and in the Purchasing Power Standards (PPS) and the ratio between gross minimum and average wage. Minimum wage exceeds EUR 10 per hour in Luxembourg, while workers in Bulgaria receive less than EUR 1 per hour. Differences between countries are smaller when comparing real values of minimum wages. Measured in EUR PPS, the ratio between the lowest (EUR 1.6 in Bulgaria) and the highest (EUR 8.6 in Luxembourg) minimum wage decreases from 1:13 to 1:5. Figure 1: Gross minimum wage in EUR and EUR PPS per hour (April 2012) and ratio between gross minimum and average wage in % (2011)

Source: WSI Minimum Wage Database (Schulten, 2012a, b); Eurostat, 2013; OECD.Stat., 2013.

As regards the ratio between minimum and average wage, it is the highest in France (48 %), Malta (47.4 %) and in Slovenia (47.2 %). The ratio in these countries is about 9 percentage points higher than the average of all 20 EU Member States with national minimum wage. In most of the countries the ratio between minimum and average wage varies between 30 and 40 %, and is the lowest in Czech Republic, where the minimum wage accounts for 28.7 % of average wage. Although there is no fully comparable data on the minimum wage levels in countries with minimum wages set by collective agreements, studies show that Scandinavian countries have higher minimum wages than most of the EU countries with the statutory minimum wage – in these countries minimum wage presents around 60 % of the average wage. Minimum wages are lower in Germany (on average ranging between EUR 7 and EUR 13 per hour, in some sectors between EUR 5 and EUR 6 per hour), in Austria (on average EUR 6 per hour) and in Cyprus (on average EUR 5 per hour) (Carley, 2006; Schulten, 2012a). Figure 2 presents changes in minimum-average wage ratio over the period 2001–2011 (Bulgaria and Romania are not included in the analysis due to lack of data). On average, minimum wages were increasing faster than average wages – relative value of the minimum wage increased between 2001 and 2011 by approximately 4 %. The dynamics is more pronounced in the new EU Member States – the ratio between minimum and average wage decreased after 2004, however it started to increase after 2007. In southern EU countries the ratio increased slowly, whereas in western EU countries stayed more or less the same.

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Figure 2: The ratio between minimum and average wage by groups of EU countries, 2001–2011

Note: Classification of countries in groups follows the division in Table 1. Source: OECD.Stat, 2013; Eurostat, 2013.

Minimum wage dynamics is nowadays under a great influence of crisis in a number of EU countries. Minimum wage policy is particularly restrictive in the Member States that were at most exposed to the economic and financial crisis. For example, in February 2012 Greece reduced minimum wage by 22 % for adult workers and for 32 % for workers under the age of 25 at the request of the European Commission, the European Central Bank and the International Monetary Fund (i.e., Troika) (Georgiadou, 2012). Likewise, a year before Ireland reduced minimum wage for EUR 1 per hour (to EUR 7.65 per hour) or for 11.5 % (Farrelly, 2011). The Portuguese government has agreed as part of its arrangements with the Troika to increase minimum wage only if justified by economic conditions (Schulten, 2012a). Countries also differ in the share of minimum-wage earners. Although there is no uniform data on the proportion of employees receiving the minimum wage at the EU level, the literature shows that in more than half of the EU countries the share of minimum wage earners is lower than 5 %. On the other hand, the share of minimum wage earners exceeds 15 % in Latvia, Greece and Romania. Based on the sample of nine EU Member States, Rycx and Kampelmann (2012) showed that compared to the rest of the population, minimum wage earners are, on average, younger and less educated, higher is also the proportion of women. Furthermore, using the logistic regression, authors showed that changing job increases the probability of receiving minimum wage, whereas by increasing work experience the likelihood of receiving minimum wage decreases.

3. METHODOLOGY AND DATA In the continuation of the paper we empirically examine the association between youth employment and minimum wage in the EU. The analysis is divided in two parts. Firstly, a basic panel data model similar to the model used by Zavodny (2000) and Neumark and Wascher (2004) is applied, using data for 18 EU countries with statutory wage over the 1996–2011 period.1 The model estimates the association between minimum wage and employment rate of young workers between 15 and 24 years of age. The basic regression function has the following specification: (1) where ERit denotes employment rate for workers between 15 and 24 years of age in country i in time t, MWit is the ratio between minimum and average wage, AURit presents unemployment rate of adults between 25 and 54 years of age to control business cycle effects and POPit presents the proportion of young aged 15 to 24 in the total population aged 15 to 64 and serves as a supply-side control. Parameter εit refers to random error.

Decision on the length of studied period was motivated by two facts: i) availability of data; ii) going further back in the past would not bring clear results in most of the NMS due to changed political and economic situation. For the United Kingdom and Ireland we include data from the introduction of minimum wage afterwards, i.e., from 1999 and 2000, respectivelly. 1

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Following the strategy of Bertola et al. (2001), the above basic regression function is re-estimated with inclusion of year dummies (vector Λ). In this way we control for effects that may influence all countries in a given year in the same way (for example, world-wide shocks):

(2)

In the second part of the analysis, the above panel regression models are extended by including data on other labor market institutions. The following regression function is applied:

(3)

where EPLit refers to overall Employment Protection Legislation index (according to the OECD Version 1) to control for rigidity of contractual arrangements, ALMPit refers to expenditures for active employment programs as % of gross domestic product, GRRit is gross replacement rate for unemployed, TUDit denotes trade union density as a measure of trade union’s presence and TWit is tax wedge for single person without children earning average wage as a control for labor taxation. Due to the lack of data the panel comprises of only 14 EU countries (without Latvia, Lithuania, Luxembourg and Romania) with statutory wage over the 1996–2008 period. The above panel regression function is again re-estimated with inclusion of year dummies (vector Λ). The panel regression models are estimated using fixed effect to control for country-specific effects.2 All regression models were controlled for heteroskedacity and autocorrelation using robust standard errors.3 Data for the analysis were obtained from the OECD.Stat and the Eurostat database. Missing estimations for EPL index for Slovenia were obtained from Vodopivec et al. (2007), whereas estimations for Estonia, Latvia and Lithuania from Muravyev (2010). Missing historical time series for expenditures for ALMPs and labor taxation of average worker were collected from the CEP-OECD institutions dataset (Nickell, 2006). Time series data for trade union density were obtained from Visser (2011).

4. EMPIRICAL ESTIMATES OF THE ASSOCIATION BETWEEN MINIMUM WAGE AND YOUTH EMPLOYMENT The panel regression estimates, on overall, are in line with previous empirical findings, as they confirm a significant negative effect of minimum wages on youth employment. The first three columns in Table 2 (models 1, 2 and 3) show estimates of the basic model specification. In all three models coefficients on the minimum wage variable are negative and statistically significant, ranging from –0.22 to –0.48. When including other labor market institution (models 4 and 5), the relation remains negative, yet weaker – the estimates range from –0.16 to –0.22. As regards other labor market institutions, associations are not statistically significant for EPL index variable, expenditures for ALMP variable and gross replacement rate variable, therefore not allowing us to draw firm conclusions. Nevertheless, there is a statistically significant positive association between trade union density and youth employment, implying that countries with higher union coverage record higher employment rates. On the other hand, the association between tax wedge on labor and youth employment is negative, showing that high labor taxation reduces employment.

Although the estimates of Hausman test showed that fixed effects are appropriate for the analysis, we estimated all panel regression functions also by random effects to avoid potential biases. The panel regression estimates using random effects were similar to fixed effects, confirming our results. The random effect results are available by the author. 3 The presence of heteroskedacity and autocorrelation was confirmed by likelihood-ratio test and Wooldrige test, respectively. Statistics can be ob tained from the authors. 2

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Table 2: Estimation results of the panel regression analysis, dependent variable: youth employment rate, 18 EU countries over 1996–2011 Models

(1)

(2)

(3)

(4)

(5)

–0.476** (0.178)

–0.300** (0.130)

–0.224*** (0.065)

–0.221* (0.103)

–0.163** (0.078)

–0.864*** (0.219)

–0.955*** (0.090)

–1.120*** (0.201)

–1.090*** (0.118)

0.864 (0.515)

–0.223 (0.226)

0.231 (0.609)

0.250 (0.302)

EPL index

–1.461 (2.207)

–0.637 (0.976)

Expenditures for ALMP

–2.443 (3.457)

–3.390 (2.302)

Gross replacement rate

0.0271 (0.099)

0.0267 (0.061)

Trade union density

0.262** (0.121)

0.391*** (0.084)

Tax wedge

(0.264)

–0.312

–0.387*** (0.136)

Minimum wage ratio Adult unemployment rate Share in population

Constant Year effects Observations Adjusted R2

50.17*** (6.459)

38.75*** (8.044)

54.73*** (4.467)

58.91*** (17.75)

52.01*** (8.956)

NO 281 0.108

NO 281 0.408

YES 281 0.484

NO 173 0.533

YES 173 0.500

Notes: The sample period is from 1996 to 2011, except for Ireland (2000–2011) and the United Kingdom (1999–2011). For more details see section ‘Methodology and data’. Standard errors are shown in parentheses. Statistical significance: *** p<0.01, ** p<0.05, * p<0.1

CONCLUSIONS Minimum wage is an important element of labor market regulation and is in some form used by all EU Member States. This paper examines minimum wage systems across EU countries and, most importantly, studies the association between minimum wage and youth employment. The empirical estimates based on the panel of 18 EU countries with statutory wage over the 1996–2011 period are in line with empirical findings on individual countries. Panel regression estimates show a negative, statistically significant association between minimum wage and employment rate of young workers. The association remains negative and statistically significant also when controlling for additional labor market institutions. Minimum wage presents an important element in the EU policy. This can be also noticed from the increasing number of policy discussion on the possibility of common minimum wage policy at the EU level. However, common EU policy opens a set of new questions, especially because of great differences in economic and labor market environments and situations among EU Member States and possible negative effects of minimum wage on labor market outcomes, especially in times of crises. Therefore, implementation of common minimum wage policy is not, at least on short term, a real option in the EU (Vaughan-Whitehead, 2010). Taking into account empirical results of this study, the EU countries should be more cautious when setting up minimum wages for youth, as the disemployment effects may have been downplayed.

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LITERATURE 1.

Bertola, G., Blau, F. D. and Kahn, L. M. (2001). Comparative Analysis of Labor Market Outcomes: Lessons for the US from International Long-run Evidence (NBER Working Paper 8526). Cambridge MA: The National Bureau of Economic Research.

Brown, C., Gilroy, C. and Kohen, A. (1982). The Effect of the Minimum Wage on Employment and Unemployment. Journal of Economic Literature, 20, 487–528.

Card, D. and Krueger, A. B. (1995). Myth and Measurement: The New Economics of the Minimum Wage. Princeton: Princeton University Press.

Carley, M. (2006). Key Themes in Global Industrial Relations: Minimum Wages and Relocation of Production. Luxembourg: Office for Official Publications of the European Communities.

EIRO (2012). Pay Developments 2011. Dublin: European Foundation for the Improvement of Living and Working Conditions.

Eurostat (2013). Statistical Database, available at http://stats.oecd.org/Index.aspx (accessed 5 June, 2013).

Farrelly, R. (2011). Impact of Government’s Four-year Plan on Minimum Wage and Sectoral Wage Agreements, available at http://www.eurofound.europa.eu/eiro/2012/12/articles (accessed 20 June, 2013).

Freeman, R. B. (1996). The Minimum Wage as a Redistributive Tool. The Economic Journal, 106(436), 639–649.

Georgiadou, P. (2012). Troika approves New Set of Changes in Jobs and Pay, available at http://www.eurofound.europa.eu/eiro/2012/03/articles/ gr1203019i.htm (accessed 20 June, 2013).

10. Grimshaw, D. and Rubery, J. (2010). Minimum Wage Systems and Changing Industrial Relations in Europe: Comparative Report. Manchester: European Work and Employment Research Centre, University of Manchester. 11. ILO (2013). Minimum Wages Database, available at http://www.ilo.org/travaildatabase/servlet/minimumwages (accessed 20 June, 2013). 12. Muravyev, A. (2010). Evolution of Employment Protection Legislation in the USSR, CIS and Baltic States, 1985–2009 (IZA Discussion Paper 5365). Bonn: Institute for the Study of Labor. 13. Neumark, D. and Wascher, W. L. (2004). Minimum Wages, Labor Market Institutions, and Youth Employment: A Cross-National Analysis. Industrial and Labor Relations Review, 57(2), 223–248. 14. Neumark, D. and Wascher, W. L. (2007). Minimum Wages and Employment (IZA Discussion Paper 2570). Bonn: Institute for the Study of Labor. 15. Neumark, D. and Wascher, W. L. (2010). Minimum Wages. Cambridge: The MIT Press. 16. Nickell, W. (2006). The CEP-OECD Institutions Data Set (1960–2004), available at http://hdl.handle.net/1902.1/13555UNF:3:A8ghQ3fq7k4yYPdF Inkfkw (accessed 28 June, 2013). 17. OECD.Stat (2013). OECD Statistics, available at http://stats.oecd.org/Index.aspx (accessed 20 July, 2013). 18. Rycx, F. and Kampelmann, S. (2012). Who earns Minimum Wages in Europe? (ETUI Working Paper 124). Brussels: European Trade Union Institute. 19. Saget, C. (2002). How to get the Maximum out of the Minimum Wage, in ILO (Ed.), Paying Attention to Wages, ILO Labour Education Report, 3(128), 67–73. 20. Schulten, T. (2012a). European Minimum Wage Policy: A Concept for Wage-led Growth and Fair Wages in Europe. International Journal of Labour Research, 4(1), 85–103. 21. Schulten, T. (2012b). Minimum Wages in Europe under Austerity (WSI Minimum Wage Report 5/12). Vienna: WSI. 22. Starr, G. F. (1981). Minimum Wage Fixing: An International Review of Practices and Problems. Geneva: International Labour Office. 23. Vaughan-Whitehead, D. (2010). The Minimum Wage revisited in the Enlarged EU. Geneva: International Labour Office. 24. Visser, J. (2011). ICTWSS: Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts in 34 countries between 1960 and 2007, available at http://www.uva-aias.net/208 (accessed 28 May, 2013). 25. Vodopivec, M., Dolenc, P., Vodopivec, M. and Balde, A. (2007). Mobilnosti dela in fleksibilnost sistema plač (Labour Mobility and Wage Flexibility). Koper: Faculty of Management. 26. Zavodny, M. (2000). The Effect of the Minimum Wage on Employment and Hours. Labour Economics, 7(6), 729–750.

DETAILS ABOUT AUTHOR: SUZANA LAPORŠEK UNIVERSITY OF PRIMORSKA FACULTY OF MANAGEMENT CANKARJEVA 5, P.P. 345, 6104 KOPER, SLOVENIA suzana.laporsek@fm-kp.si

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NEW ECONOMY VERSUS OLD ONE, ALTERNATIVE INTERPRETATION RADISLAV JOVOVIC SANDA SENIĆ

ABSTRACT

In this paper, we decided to take a closer look at the relationship among old and new economy. The economic and social reality is changing and becoming more complex very quickly. Those changes are adding up. They establish and develop new connections between individuals, companies, organizations and states. A complexity, uncertainty and variability of the environment are the only constant components in the life of organization. Research of phenomena of new economy, has lead authors to realized a complexity of the real economic life, and need that suggest this approach, which has lead to the conclusion that modern economy is a virtual-informational game and computer magic. Additionally, new economy is dominantly global, with no bottoms or boundaries. What are the desirable directions of change driven by new economy? Authors try, and suggest alternative interpretation and establishing greater interdisciplinary approach in the future research of these issues. KEYWORDS: economics, social sciences, new economy, interdisciplinary, economics

1. INTRODUCTION OF PARADIGMATIC OF NEW ECONOMY Challenges, consequences, possibilities and limits of new economy (n.e.) are large and numerous. They deserve scientific attention and a phenomenological approach, especially in explaining its paradigmatic character. This paper explains some of the theoretical and practical aspects of n.e. as a metaphor that reflects the spirit of the post-industrial-information era, through the prism of valuation and phenomenology of its paradigmatic. In terms of theory, our analysis shows that the n.e. paradigm is highly questionable, because there are no objective elements that prove its existence. Traditional laws, principles and categorical apparatus of economic science are still valid and active. Basically, n.e. has not changed. Therefore, it can not hold the title of paradigmatic theory, knowing that it significantly reduces the choice as the essence of the economy, creating top competence of individual economic subjects (monopolists), forcing intracorporate exchange and network partnerships, representing the modern sophisticated “naturalization” of goods and money relations and restricting competition. In practice, IT, telecommunications, innovation, organization, globalization and other developments and events undoubtedly make the economy “new”, even in the paradigmatic sense. The latest technological revolution (especially in the field of communications and transport, which use micro-processors, fiber optics, databases, computers, digital networks, lasers, etc.) has great economic implications. The most important is creating the basic infrastructural requirements for the so-called post-industrial (post-Fordist) era, that relativizes the number of differences (spatial, temporal, cultural, ethical, political, ideological and others) and verifies the theory of convergence, but not the economic convergence. Through the knowledge and information, waves of globalization are persistently surging. By the end of last century, the service sector has become globally dominant with 61% in the value- added GDP (World Bank, 1999), with a tendency of accelerated expansion. Innovations in the field of IT, computer networks, telecommunications, and transportation systems, have contributed to connecting markets at all distances and boom international capital movement, goods, services, people, ideas and cultural values. In such conditions, the economy is nowadays called weightless, informative, networking, digital, technotronic, E-conomy, etc.. It is believed that F. Machlup was the creator of the information society concept. In his study “The production and distribution of knowledge in the United States” (1962), he noted that “knowledge industry represents 29% of the total national output,” (according to Clark, 2004). The term n.e. is the synergic unity consisting of knowledge (intellectual property), digitalized communication and information, the Internet, online business networking with the very permeable boundaries, innovation, virtual and dynamic connecting, intra-corporate exchange with reduction by eliminating intermediaries and markets, global competition, Web electronic business, flexible manufacturing systems and organizational structure, ownership and partnership, etc.. (Kotlica, 2000, pp. 197-199). In addition to these, the new trends are forming new economic sectors, modifying classical forms of work, eliminating and/or relativizing the traditional vertical hierarchy and horizontal structure of organization, changing the structure of employment and moving towards the service sector, multiplying human knowledge by accessing, processing and distributing the information, automatising business transactions, experiencing a real boom of e-commerce, online banking services and electronic media. The effect on the economy is variable, but here are some positives: less time to conduct business transactions, reduced operating costs and prices, increased revenue and profit, reduced engaging of the business assets, increased productivity, more efficient inventory, better and faster handling customers and so on. (Bjelic, 2001, p. 29).

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Paradigm of n.e. is reflected in the practical sense and the fact that the high-tech has directly influenced the economic environment and has changed some common laws, primarily the market. Since the network goods cannot be practically manufactured at zero marginal costs and since they manufacture external network effects for users, it leads to a nontraditional behavior of supply and demand. It is well known that the standard (neoclassical) economic theory exhibited behavior of manufacturers and customers across the supply and demand curves. The supply curve has a positive slope (because of rising marginal costs that are in its basis), and the demand curve has a negative slope (because of diminishing marginal utility of goods). In the situation of network goods, supply and demand curves are changing their traditional places. The supply curve S0 has a negative slope because of the marginal costs tending to zero in significant intervals, while the demand curve D0 has a positive slope, because the marginal utility of network resources increases the extent of growth in the amount of users. If the process is to be developed with the current pace in the long run, the curve will tend to the equal coordinating point that represents decreasing price and increasing amounts.

Figure 1 â&#x20AC;&#x201C; Market equilibrium for network goods (Source: Draskovic, Jovovic, Draskovic, 2013. P. 27) Figure 1 shows that the equilibrium market price decreases from p0 to p1 and the equilibrium quantity from q0 to q1. Market equilibrium is moving from the point E0 to the point E1. This way, the network good increases its value in proportion to the growth of its quantity, and thereby its price declines in proportion to the growth of its value for the customers. So, the highest value in terms of the knowledge society has the goods to be provided free of cost! It is a paradoxical conclusion, but only at first, because we are not talking of any goods, but the network goods, which are essential to the knowledge society. Above mentioned cases already exist in practice: Microsoft, Netscape and other provide their browsers for free. Not to mention piracy in the area of software products and their free copying. There is another phenomenon, important for the knowledge society, linked to the creation of new monopolies, such as Microsoft, based on knowledge and innovation. C. Shapiro (1999, p. 352) has shown that a combination of the volume effects on the side of supply and demand reinforces monopolistic tendencies. In addition, there is another paradox: monopoly in the market for information products increase production volumes and reduce costs! The first 5Mb hard drive in 1956 costed $50.000 (which means that the 1Mb costed $10,000). From early 1980â&#x20AC;&#x2122;s to today, the price of hard disk capacity of 0.1 GB was reduced from $20,000 to $300 (1000 GB). So, in 30 years (1980-2010) 1Mb price was reduced from $200 to $0.0003 or 666,666 times! And in the period of 1956-2010 as much as 33.3 million times! It seems unlikely, but it is true.

2. THE CHARACTERISTICS OF THE NEW ECONOMY The term n.e. has appeared in the mid 1980s articles relating to the information economy and the knowledge economy. D. Bell has created the concept of post-industrial information age, later renamed to Information Society. It involves the society transition from manufacturing to services economy where theoretical knowledge, technology and information would become the main product. Apart from expensive manufacture, its advantage is the cheap reproduction. However, it is believed (Ilic, 2004) that it formed in the late 20th century. This period coincides with the transition from Third to Fourth scientific and technological revolution, ie. from the industrial to the information economy. The term n.e. is used in the same sense as the term knowledge economy. In this context, the modern society is called information (due to the domination of information as a new factor of production), the knowledge society, the mega-society, communication society, tehno-society, digital society, etc.. The basic characteristics of n.e. are:

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information production basis (information becomes the most important factor of production), fast-changing products and services, flexible production systems, network organization of production, integration, services followed by the products, knowledge, skills generalization, and skills education, knowledge and talent, as the most important factors for socio-economic growth and development.

Many authors agree that n.e. represents the set of industries characterized by high technological achievements and dominant production of services in the globalized business environment. According to Ilic (Ibid.), n.e. is founded on three principles: • complexity (emergence, influence, system components, non-linear process, dynamic structure), • chaos (as an offset of “creative destruction” - J. Shumpeter), and • synergy (no internal system conflicts; the whole is stronger than the sum of its mechanical parts). The importance of information in n.e. system is explained by the perception of the organization as a quality of the relationship (not the physical distribution of functions and responsibilities), ie. the ways of establishing links within it. These connections are better if the flow of information between the organization elements, which are faster. Some characteristic manifestations of n.e. are: • material production requires fewer people employed, • new and better global communication infrastructure, • the new products, intelligent work and production tools, applicable in a humane workplace, • free capital is plentiful and circulates in the world, and • entrepreneurial spirit. According to P. Drucker, characteristics of n.e. are classified into three groups: • industrial production in terms of cost becomes independent of the raw materials and gets associated mainly with the services (continued decline in raw prices and increasing the share of the service costs in the price of the product since 1977), • industrial production is realized and increases with continued reduction in the number of production workers which are directly employed (employment focus is shifted from material production to a service sphere), and • the transformation of global economy from real do symbolic (the amount of capital substantially exceeds the value of total trade). Competitive advantage depends primarily on the knowledge, skills and skills of employees. Therefore, the education system is one of the key assumptions in transition to n.e. It must respond to the changing and demanding needs of the ICT industry. A. Toffler in his book The Third Wave (1980) announces a new culture and civilization, founded on the information. The basic idea of his book is a possibility to divide the complex and contradictory human history according to certain patterns of behavior and characteristics of society. He devised it in metaphorical waves, carrying a certain civilization changes in the technological and social sense. The first wave started when the man left nomadic way of life and began to engage in agriculture. The second wave started with the industrial revolution in the 18th century. The third wave marks the transition to the information society (knowledge era). In his book, “New Rules for the New Economy ...” K. Kelly (1998) cited three basic features of n.e.: • global character of the changes, • operating the intangible resources: ideas and information and • overlapping and mutual influence of individual n.e. segments. According to Hawken (1983), the mass economy has been characterized by industrial age since 1880. The term “mass” has emerged as an economic category, meaning the economy which paradigm was based of two dominant categories: in production, on the economies of scale and mass exploitation of energy sources (oil, coal, gas, etc..) and in consumption, on the mass consumption of material goods and the accumulation of material wealth, capital (property, money, luxury goods, etc.). The difference between mass and information in the economy is reflected in the implementation of the relationship that is built into the product (Hawken, Ibid., p. 35). Mass economy still exists due to the mass consumption of material goods, which are indispensable for human survival. Information economy and the knowledge economy is built on other grounds. It becomes the dominant paradigm of the social growth, all over the world. In addition, the knowledge economy will not replace the mass economy, but will only absorb it to the extent which is necessary and sufficient, and include it in its own evolution. In the economy, there is no clear distinction dividing the mass from the information. That line is defined by the amount of information embedded in the product (Ibid., p. 37). The products of information economy use intelligent solutions (information and knowledge) and consume much less energy per unit of product.

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M. Castells distinguishes five characteristics of n.e.: • production increasingly depends on the use of scientific methods and quality of information and management, • in developed countries, there is a shift of attention from manufacturers and users of material production to information, • a profound transformation of productive organization (from standardized mass production to atomized and from vertically integrated organization an horizontal network of mutual relations between the parts), • the global nature of the economy, where capital, production, management, market, labor, information and technology are organized across national borders, and • revolutionary character of technological change based on IT. The IT “shortens” time and space, creating more opportunities for rapid communication between distant businesses. Distance is no longer an obstacle to cooperation, because it enables new communication and direct contact between buyer and seller, simultaneously. Internet provides great opportunities for researching supply, demand and prices. It dramatically reduces transaction costs. Kelly writes that “communication is no longer a sector of the economy, it is the very economy.” D. Tapskott (1999) points out that the new type of society is characterized by the following 12 features: orientation to knowledge, numerical form of expression, virtual nature, molecular structure, integration and network connectivity, eliminating and/or reducing agents, convergence, innovative nature, transformation of manufacturer-consumer relationship, great dynamics, global scale and the existence of contradictions.

3. OLD AND NEW ECONOMY IT leads to rapid and radical changes. They change human relationships in time, space, economy and society. With computer and communication technologies (Internet, etc.) establishment of networks and virtual elements is enabled. That way, information as a non-material factor gains a significant and often a leading role in the production. N.e. conditions the new communications and convergence, which leads to connecting the world and its unification in many areas. Globalization has generated all the major changes in one strong paradox: people are getting closer in space and time, but they are estranged due to the growing economic and social inequalities. The rise of the information economy is marked by the development of a new organizational logic, associated with a current process of technological change. Interaction between the new technological paradigms and new organizational logic is not a historic backbone of n.e. The dominant knowledge economy feature is the use of information resources, which are significantly different from the traditional ones. Creating the knowledge economy must precede a national security of the social freedom, good educational system, quality institutional environment, guaranteed rules of running the business, and a reasonable balance between state control and market freedom. The absence of these conditions shows only a simple slogan. These conditions can serve as a good criteria for valuating the real development possibilities of knowledge economy. The economy is characterized by steady share growth of the scientific research in the national cost and private companies, as well as steady capitalization growth of the scientific companies. The research can prove a steady value growth of intellectual capital (registered patents, methods and organizational structure, etc..). Identifying the new ideas and categories, contained in the n.e., we can see the differences related to the classical economics. The common thread of these differences is the increasing role of knowledge, information and technology. To understand the difference, between “new” and “old” economy, we must go back to the very beginning, or to the economy offspring (simplification) - transaction. Today, in a complex economy, transactions require different activities that generate costs. Transaction costs depend on: • the legal system (a system of property rights, the application of property rights, the ability to predict judicial decisions), and • the political, educational, social and cultural systems. This means that the economic system can not be explained only by the economy. It takes knowledge and other (legal, social, political, psychological, technical, technological, institutional) knowledge to understand the real functioning of economic system. The level of transaction costs is also influenced by IT. The largest component of transaction costs is the cost of obtaining information. Knowing that IT, in fact, reduces the cost of obtaining information, it reduces the transaction costs. As a result of technological change, IT made significant changes in the economy through the reduction of transaction costs. This topic was analysed by H. Varian (1999, p. 42): “The new economic concepts have never emerged parallely with the new economic phenomena. There was a lot of discussion about the growing restitution, the effects of networking, the input costs, etc... These are hardly the new concepts, these as just been parts of the economic literature for decades. These are very important ideas, but not great ideas. They explain certain phenomena, but their range is limited. I think the great ideas (when it comes to economic literature) can be found only if we go back and study the work of ‘The nature of the firm’ (1937)”. R. Coase (1997, p. 4) disagreed. He found it interesting that this study has become part of the Internet literature. “Transaction

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costs are reduced: what are the effects?” he asked. According to Varian, representatives of n.e. found this idea (category of transaction costs –author’s note) very attractive. One of the Internet’s advantages is the cheaper communication. This, in turn, reduces transaction costs and changes the company limits. The company would move and reduce the functions that are not necessary and would be carried out more transactions using Internet, rather than sending internal memos. Varian reviewed this observation. He said, “even though Internet reduces the cost of transactions between companies, it also reduces the cost of communication within the company and thus facilitates organizing and functioning of large companies.” According to Coase, this was not the end of analysis. Reducing the transaction costs allows the companies to reduce the cost of their essential activities, which can lead to a greater activity, higher production and expending the companies. The essence of the firm and understanding of the market is significantly altered in the n.e. In the era of knowledge economy, economic policy must be based on the following fundamental principles: • developing the science and technology as the propulsive factor of economic growth, • creating a favorable investment climate and stimulating the investments in hight-tech production, • creating a flexible institutional environment in all economic segments (institutional pluralism), particularly in the area of national regulation, which must be able to react to market failure, especially in science and education, • supporting the conditions of competitiveness in part of stimulating innovation and labor productivity, • training of the working resources for managing the changes, risks and crisis, and • implementing the stimulative economic, legal, and organizational solutions. There are two context of the knowledge economy. The first is scientific, which analyze empirical hypothesis, ie. generalization of the trends and characteristics of modern society (knowledge, information, etc..). The second is political, where economy knowledge is viewed as a program goal and a vision of the future. Those contexts are in some way connected to each other through the daily practice through phenomenological elaboration in the literature. However, they seem to operate according to different rules: in the scientific context they function as a hypothesis, and in the political as a statement. For example, scientifically, the knowledge economy is generally interpreted for its growing role of knowledge and information, and politically, focus is on the production and use of information and communication technologies, in the spirit of technological determinism. The effects of the knowledge economy are amazing. The good example is a case of Russian programmer A. Pajitnov, who earned $15,000 for creating the popular computer game “Tetris”. The Computing Centre of the Russian Academy of Sciences earned four million dollars from it. The transnational corporation “Nintendo” which bought the patent, earned more than one billion dollars. Today, Pajitnov works for “Microsoft”, whose main funds are worth 10 billion dollars and the market value of the company is 350-400 billion dollars, with the annual profit of 70 billion dollars. The production of knowledge in the world is very localized. Its consumption is widely and uniformly globalized. Another paradox related to the knowledge economy is this: knowledge is virtually unlimited resources, but the expertly human resource is extremely rare (limited), absolutely and relatively.

3.4. Analysis of the differences between the old and new economy Below are some key points to the differences between “old” and classical, modern economy through analyzing the relationship between local and global, change and continuity of the change, turbulence and stability, specialization and diversity, heterogeneity and homogeneity, motivation and control, market exchange and transaction, competition and cooperation (as complement and substitute), flexibility and economy of scale, stimulation and regulation, target inputs and target outputs. Localization vs. globalization. Economists attach different importance of geographic space in the old and new economy. Standardization of products and production in the old economy reduces the importance of specific regional characteristics. As presented by neoclassical production function, the old economy production is the result of inputs: land, labor and capital (Romer, 1992). While these traditional inputs are playing a role in the n.e., the knowledge emerged as the most important factor of production. The recent texts point out that knowledge is fundamentally different from the traditional factors of production. It can not be transferred without cost through geographic space (Lucas, 1993). That is why geography plays an important role in the n.e. Because the knowledge is developing in the context of local networks, known as innovation clusters. Empirical data clearly show that research and development (R&D) and other sources of knowledge not only create externalities; also, spreading of such knowledge tends to be geographically link within a region, where the new economic knowledge has been generated (Audretsch and Feldman, 1996). The new economic knowledge can be spread, but it is geographically limited. In fact, the geographical dimension of knowledge remain a local phenomenon, in most cases unaffected by globalization, which allowed free transmission of specific information through geographic space. In the old economy, the traditional factors of production (land, labor and capital) have been the predominant source of competitive advantage, while in the n.e. comparative advantage is based on innovative activities. An important source of innovative activity is the awareness of the knowledge spillover, which can not easily spread through the geographic space.

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Change vs. continuity. There is an inherent difference between change and continuity. The old economy depends on continuity (Chandler, 1977), the n.e. provokes changes and is based on them. Innovation is present with the changes and continuity. The difference determines a distinction between radical and incremental innovation. Innovations can be considered as incremental when compatible with the general competence and technological trajectory of the company (Teece et all., 1994). Implementation of incremental innovation does not require significant changes in the company. In contrast, radical innovation can be defined as an expansion beyond the limits of competence and technological trajectory of the company. Theoretical studies and empirical data support the thesis that the company is characterized by technological closure. The old economy is shaped so it can absorb the changes within a given technological paradigm. Threrefore, the tipical company is characterized by incremental innovation. Conversely, the capacity of the n.e. is strengthened to it overcomes the technological closure within the existing paradigm. Turbulence vs. stability. The old economy was characterized by a remarkable stability in terms of homogeneity and durability of the product demand, resulting the constant immobility of the workers. This stability is useful for mass production. Taylorism actually provided marginal mechanism for ensuring the stability and reliability of workers in the production process, since the competition was focused on prices and not necessarily on product differentiation (Chlander, 1977). The n.e. is characterized by high turbulence. It is constantly moving, increasing the number of new companies. Variety vs. specialization. A specialization is a precondition to the neoclassical economics. Diversity has been recommended in the n.e. Recent studies have provided evidence by testing the influence of diversity versus specialization on the regional performance, as measured in terms of development and innovative activity (Feldman and Audretsch, 1999). These studies provide systematic empirical proof that diversity is better for spreading the knowledge and innovation activity than specialization. Heterogeneity vs. homogeneity. There are two dimensions that shape the degree of homogeneity/heterogeneity. The first dimension refers to the genetic characteristics of individuals and their personal experience (Nooteboom, 1999). The second dimension refers to the information. The old economy is based on homogeneity and the n.e. is based on heterogeneity. The world of homogenous economy promotes diffusion, rather than innovation. In the heterogeneous population, each individual has a unique set of information (Olson, 1982). New ideas will likely arise from communication in a heterogeneous, not homogeneous world. Motivation vs. controls. In the industrial era, the work was considered to be unnoticeable in comparison to other inputs. That is why the work input in the production process was reduced to a routine (Chandler, 1990). However, given that the comparative advantage of industrialized countries is based on the new knowledge, access of command and control of the work becomes less effective. It is important to motivate employees to facilitate the discovery and implementation of new ideas. The main feature of today’s life and work is dealing with uncertainty, and workers who are ready to handle it are “more valuable” in the n.e. It motivates them to participate in creating and commercializing the new ideas, not only in controlling and regulating its behavior. Market exchange vs. company transactions. In the era of great uncertainty and imperfect information, market exchange is more limited than in the intra-corporate transactions in relation to the market exchange. In the old economy, dominated by a high degree of certainty and information predictability, transactions within the company were more efficient than market exchange. This was elaborated in the works of R. Coasea (1937) and O. Williamson (1975), underlining an analytical dinstinction between exchange markets and transactions within company. Company size is defined by the response to the Coasea’s (1937, p. 30) question: “How much are the transaction within the company?” Coase and Williamson proved that uncertainty and imperfect information increase the cost of transactions in the company. Competition and cooperation as a complement vs. competition and cooperation as substitutes. Models of competition assume that companies behave autonomously and models of cooperation include links between companies. This requires various forms, like joint ventures, strategic alliances, formal and informal networks (Gomes-Casseres, 1996, 1997). In the old economy, competition and cooperation are seen as substitutes, because the companies were vertical integrated and competed primarily in the product markets. Cooperation between companies decreases the number of competitors and the degree mitigate your competition. In the n.e. companies are vertically independent and specialized for the product market. Greater degree of vertical disintegration in the new economy means that collaboration among independent firms changes the internal transactions within a large vertically integrated cooperation. At the same time, there is a greater number of companies, resulting in increased competitiveness and cooperative interface. The likelihood that the company will compete and/or cooperate with another company is higher in the n.e. A new and improved formula leads independent companies together on the new and unexpected paths.

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Flexibility vs volume. The classic way to reduce the cost per unit of production in the old economy was through expanding the production volume. Large companies had more advantages. This led to concentrated industrial structure (Chandler, 1977). In the n.e., the alternate source to reduce the average cost is flexibility. Teece (1993, p. 218) stated that “... flexible specialization... and contracting can lead to greater advantage than economy of scale. Industries, in which demand for certain products is constantly changing, require flexible production system that can meet the changing demand. There are four main sources of flexibility: technology, organization, demand and quality. They result in reducing the importance of economy of scale. “ Stimulation vs. regulation. Public policies emerged after World War II, in the era of old economy, dealing with the company in the market, were limited in nature. There were three types of public policies in the business - antitrust (competition policy), regulation, and public ownership. All of these three policy approaches restricted freedom of the company contracting affairs. Although specific approaches were generally more associated with one country, more than with others, such as the U.S. antitrust or public property in France and Sweden, most countries had a common approach to intervention, in order to limit the market power of large companies. Public policies limiting the company freedom has been consistent with what was being created in the theory and empirical evidence. If not controlled, large corporation, which possess market power, will allocate the resources in a way that reduces social welfare. Through national intervention, the efficiency and the fairness ratio would resolve in a socially satisfactory way. J. K. Galbraith (1956) commented the role of government in the old economy, where national intervention involved social partnership of big business, government and labor unions. This social partnership existed in almost every western economy. The relevent political issue in the n.e. is no longer: “How the government may restrict the company from abusing the market power?”, but rather: “How the government may create an atmosphere that will lead to the success and vitality of the company?” The main issue of the n.e. has converted from the problem of excess income and abuse of market dominance to international competition, development and employment. It protects the corporations not because of their considerable success and power, but because they are not sufficiently successful. Jorde and Teece (1991) advocated the need to loosen the antitrust laws, allowing U.S. companies to collaborate and compete in as efficient manner as possible in relation to Japan and European companies. Target inputs vs target outputs. Due to the relative certainty in terms of the markets and products in a controlled economy, the appropriate policy response is targeted result and output. Specific industries and certain companies can promote themselves through government programs. Specific target companies in selected industries had represented a successful Japanese politics in the postwar period, which helped it to achieve a competitive advantage in industries such as automobiles and electronic. J. Stiglitz (1996, p. 151) in “Some lessons from the East Asian miracles” said that “the national interventions act coordinated.” They have contributed, at least in part, the postwar Japanese development miracle. The success of Japanese industrial policy in promoting the performance criteria, which expanded trade performances to economic development, documented in a series of empirical studies (Pugel, 1984; Audretsch, 1989; Noland, 1993; Okuno-Fujiwara, 1991). Local vs. national policy. An important aspect of the difference between the old and n.e. is a political location. In the old economy, the appropriate place for policy-making was at the national or federal level. While targeted recipients of the policy can be localized in one or more regions, the most important political institutions are at the national level. In the n.e., a place of national policy towards business tends to be decentralized and regional. High-risk capital cs. low-risk capital. According to the n.e. traditional funding sources are no longer appropriate. The capital investment in partly risky projects is very important. It is a form of financing of hight-risky new forms and informal capital market (Gaston, 1989; Gompers, 1999).

4 NETWARE FORMS IN NEW ECONOMY A stronger competition is the inevitability of modern economy. It imposes increased demands on companies for fast adaptation and large changes. In the last 15 years, the battle for market is on again, among others, by method of enlarging (mergers and acquisitions). It is the fifth wave of so-called strategic takeovers (from 1993 till today). So far, there were monopolies (1897-1904), oligopolies (1916-1929), conglomerates (1966-1974) and non-friendly takeovers (1981-1989). Merger and acquisition (MA) boom peaked in 2000. That wave is already significantly declining and ending. This raises the question: Is there a sixth wave of virtual connecting through business networking, which is the essence of network economy? Innovations, increasing level of knowledge and skills, modernization, continuous monitoring of market demands, know-how and maximum informativenes were imperative of modern times. But this was not enough for gaining a decisive competitive advantage. The traditional hierarchical-bureaucratic forms of organization and management, with appropriate functional elements of organizational culture, have become a serious obstacle to strategic dynamization of modern companies and organizations. It’s a natural aspiration of every business to reduce its costs and realize greater synergic effects. It turned out that, apart from taking strategies, the key knowledge, skills and other advantages valorized in the market as

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competitive, can be achieved even through networking. Modern business has already established the network economy in strategic, organizational and managerial terms. The network economy is closely linked to globalization, alternative employment and development of autonomous working forms. It is especially characteristic for global enterprises in the service area. It enabled the boom of information and communication technologies, which have contributed to the market transparency, reducing the information searching costs, deregulating and dominating the customers market. In practice, when multiplied and multivariate communication flows at a distance are enabled, the goal of communication technologies and network systems is realized quickly. Remains only its application and practice training, provided by innovative business. The network economy was conducted simultaneously on two fronts, and in two ways: • internal (intra-corporate, conducting market mechanisms within the company, developing the entrepreneurial spirit and combining the control methods) and • external (expanding the cooperative networks with sub-suppliers, customers, similar enterprises and even competitors)., The practice has proved that networking of organizational structure, business processes, scientific research and so on, produce a key knowledge, skills, and other benefits, valorized on the market as competitive. The networked partners in business processes increasingly use their key competencies for faster, cheaper, more flexible, better quality and greater results, creating a competitive advantage in the global market. The network economy is defined in various ways. Its main goal is to achieve beneficial economic and organizational effects (direct and indirect). It can be explained by its basic principles and functional specifics, consisting in tendency of organizational development and training in order to achieve the greatest success in the market. Essentially, it is a self-managed polycentric economic structure, which is target oriented to specific tasks, and is based on the following principles: • elitist connecting the competent business partners (Rajss, 1997, p. 94), • business and partnership anti-bureaucracy and anti-formalism, • decentralization of authority and responsibility (“democratic hierarchy”), • highly sophisticated communication-informational integration, • branch character of connection, • free connecting based on equality and independence, in certain time and on a consensus basis, • coordination of mutual cooperation, based on clear rules, ambitious goals, and advanced system of controlling, • vertical and horizontal communication, • applicability in the dependence of the new problem situation, • dynamisation of business and organizational strategy by introducing so-called “internal market” institutions (of compensatory character), expert knowledge, innovative combination of managing and organizational models, motivating entrepreneurial initiatives, etc.., • hybrid and non-traditional organizational structures, and • “unlimited” expansion, ie. deletion of organizational and business boundaries between the companies merged in any way. On these principles are created new forms of alliances, strategic networks and virtual enterprises, consisted of multiple organizational units with a unique goal to provide a synergistic contribution and increasing the quality of mutual organizational communication and cooperation. From an economic and organizational perspective, the main goal of network economy is to achieve beneficial effects (results). V. Rolf (2003, p. 84) has distinguished the direct and indirect network effects. He believed that direct network effect was characterized by a situation where benefits of the goods directly increased due to the greater use by many people (eg, phone, fax, internet, etc..). The phone itself does not bring any benefit to its user, if he can not communicate with other people, but expanding the circle of users increases the overall benefit for each user. B. Metcalf has expressed this in equation: VM=K2 - K, connecting the lawful value dependence of network amount VM and its users K (Ibid.). For example, if VM for the one network user is €1, applying this network value formula for 10 users is 90€, and for 100 users is €9,900. Also, there are questions of the adaptation period, the adaptation of losses and minimal number of network users. Indirect effects are characterized by daily market situation, where completed products or services (spare parts, service, programs, etc.) become cheaper and more accessible. These effects are achieved when the growth of demands for certain goods increases interchangeability of spare parts, improving service and forming the market standards that stimulate mass production, contribute increasing the quality and reducing the cost of production (Ibid.). In the economy of the industrial society dominated a law of diminishing marginal productivity with negative-feedback effect. According to the classical theory, this contributed to the stabilization and the balance of the productivity through rational use and allocation of resources. But in the economy oriented to information and network, dominate a direct network effects and positive feedback. This is reflected by the growing marginal productivity, as shown in Figure 2. This positive feedback connection has formed and intensified under the influence of four factors (the first two affect the demand, and the other two affect the offer): • direct network effect on the factor income growth under the influence of the production volume growth,

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• growing expectations that the network expansion would affect the consumer’s will to get involved and therefore increase the usefulness,

• dominance of fixed costs and low marginal cost, where manufacturer seeks maximum production volume to compensate high initial fixed costs, and

• training and accumulated experience increase the positive feedback effect (Rolf,ibid., s. 87).

Figure 2. The difference between the industry and netware economics (Source: Draskovic, Jovovic, Draskovic, 2013, p. 72) The principle of the mutual dependence, which in traditional organizational structures acts as a stabilizer, is not a typical for the complex and temporary network constructions with many newly formed connections and relationships. Similarly, the confidence between the partners is only possible after a “long run”. Usually, it is not the case with a network economy, based on the synergetic linking partners. Often mentioned virtual enterprise is difficult to restrict from conceptual design and module organization. Therefore, it represents the organizational form that has no legal basis. The virtual enterprise is a group of companies, based on common goals and supplying the market of specific goods or services. In economic relations, they are correlated, informatively networked, legally linked, independent, usually without institutionalizing the functions of top management, and with mutually trusting partners. The term “virtual” is primarily related to the creation of timely deposited situational management competencies for fast response to the changes in the environment and the realization of the market goals. It usually involves the allocation of resources, knowledge management, and marketing. The idea of virtuality is simple. It comes from a desire to reduce risk and relativize competition (by increasing the number of networked partners), to obtain competitive advantage and managerial competence. In practice, it manifests in several ways, including: • creating a foreign branches and joint companies, where large firms delegate certain competences, based on the “encounter movement” of the partners as a form of evolutionary quasi-externalizing, in which the contracts regulate the terms of cooperation, rules of conduct, strategic leader, etc.., • reverse path from the previous one, in which small and medium enterprises offer their competence to the big companies with business image, know-how, information infrastructure, leadership, etc.., and • vertical and horizontal interconnecting the small and the medium-sized enterprises.

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CONCLUSIONS It has been long since the economic science and economic reality have stepped into the new epoch of pluralistic economic synergetic. It relies on the evolution of complex, dynamic, open and virtual business systems based on the principles of flexible self organization, equal partnership cooperation and limited autonomy. Although today the state competition and economic power essentially reflect through the competition of the knowledge level, in most of the states in transition which have traditionally forced knowledge in the previous period, the long term crisis has reflected adversely to the area of knowledge as well. Transition to economy of knowledge is characterized by several significant steps: information becomes the most important resource; an information-communication technology becomes the fundamental infrastructure. Today, the key factors imposing conditions of business are customers (final customers) selecting only the most quality and innovative products having been implemented the new knowledge into. The subject of our research is the explanation of main modern development tendencies in the era Internet, and digital technologies, and distinction new economy from old one. It is about the civilization and paradigmatic step and phenomenon deserving the comprehensive consideration. The dominant distinctive characteristics of new economy are: a) growing position and importance of knowledge for creation of competitive advantages within modern conditions of fast changes and growth of uncertainty, as well as for social and economic development, b) imperative necessity of its max forcing and widest application, at all levels and all segments of society, c) the necessity of constant learning, specialization and adoption of new knowledge, d) significance and paradigm of knowledge, e) gradation connection of new economy, economy of knowledge and knowledge management.

LITERATURE-references 1.

Ackoff, R. L. (1989), “From Data to Wisdom”, Journal of Applied Systems Analysis, Vol. 16, 3-9.

Argyris, C., Schön, D. (1978) Organizational learning: A theory of action perspective, Addison Wesley, Reading, Mass.

Archibugi, D., Lundvall, B.-Å. (2001), The Globalizing Learning Economy, Oxford University Press, New York:.

Arrow, J. K. (1951), The Economics of Information, Collected pa-pers of Kenneth J. Arrow, Oxford, Basil Blackwell Limited, 41–53; 153-196; 225.

_____ (1962), “Economic Welfare and the Allocation of Resources for Invention”, in: R. R. Nelson (ed.), The Rate and Direction of Inventive Activity, Princeton University Press, Princeton, 609-626.

Audretsch, D. B. (1989), The Market and the State, New York Uni-versity Press, New York.

_____ (1995), Innovation and Industry Evolution, MIT Press, Cam-bridge.

Audretsch, D. B., Feldman, M. P. (1996), “R&D Spillovers and the Geography of Innovation and Production”, American Economic Review, 86 (3), June, 630-640.

Audretsch, D. B., Stephan, P. E. (1996), “Company-Scientist Loca-tional Links: The Case of Biotechnology”, American Economic Review, 86 (3), June, 641-652.

10. Audretsch, D. B., Elston, J. A. (1997), “Financing the German Mittelstand”, Small Business Economics, 9 (2), 97-110. 11. Audretsch, D. B., Thrik, R. A. (1998), What’s new about the new economy?, Institute for Development Strategies, US. 12. Blagovest-B.Bjelić, P. (2001), “Elektronska trgovina”, Ekonomika preduzetništva No 1-2, 27-30. 13. Coase, R.H. (1937), “The Nature of the Firm”, Economica, Vol. 4, 386-405 (objavljeno u zborniku Williamson, Masten: The Economics of Transaction Costs, Edward Elgar Publishing, 1999, USA, pp. 1-22). 14. _____ (1988), “The Nature of the Firm: Influence”, Journal of Law, Economics and Organization, Vol. 4, No. 2. (Spring), Oxford, UK. 15. ______ (1997), Interview about New Institutional Economics, Ro-nald Coase Instititut. 16. Clark, D. (1985), Post-Industrial America: a Geographical Perspec-tive, New York-London. 17. _____ (2004), Fritz Machlup — Knowledge Industr, A Brief History of Information and Knowledge, www.nwlink.com 18. Drucer, P. (1995), Managing in a Time of Great Change, Truman Tal-ley, New York. 19. ______ (1999), Management Challenges for the 21 st Century, New York: Harper Business. 20. ______ (2001), “The next society”, Economist, september, 47 -56. 21.

______ (2002), Managing in the next society, New York.

22.

Gaston, R. (1989), Finding Private Venture Capital for Your Firm: A Complete Guide, John Wiley & Sons, New York.

23. Gomes-Casseres, B. (1997), “Alliance Strategies of Small Firms”, Small Business Economics, 9 (1), 33-44. 24. Hawken, P. (1983), The Next Economy, Holt, Rinehart and Winston, New York. 25. Ilic, B. (2004), Tranzicija industrijske (tradicionane) u novu (informatičku) ekonomiju, Ekonomski anali br 162, 99-126 26. Kelly, K. (1998), New Rules for the New Economy: Ten Radical Strategies for a Connected World, Penguin Books, New York. 27. Kotlica, S. (2000), ”E-konomija”, Ekonomika preduzetništva, No 7-8, 197-201. 28. Lucas, R. E. Jr. (1993), “Making a Miracle,” Econometrica, 61 (2), 251-272. 29. Machlup, F. (1962), The Production and Distribution of Knowledge in the United States, Princeton University Press, Princeton, NJ. 30. Nooteboom B., 1994, “Innovation and Diffusion in Small Firms”, Small Business Economics, No 6, 327-347. 31.

Rajss, M. (1997), „Granici ‘bezgraničnih’ predprijatij: perspektivi setevih organizacij“, Problemi teorii i praktiki upravlenija, No 1, 92-97.

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32. Romer, P. M. (1986), „Increasing returns and long-run growth”, Jo-urnal of Political Economy, No 94, 1002-1037. 33. Roos, J. et all. (1997), Intellectual Capital: Navigating in the New Business Landscape, Macmillan Business, Houndsmills. 34. Shapiro, C., Varian, H. R. (1999), Information Rules: A Strategic Guide to the Network Economy, Harvard Business Press, Boston, MA. 35. Tapskott, D. (1999), Elektronno-cifrovoe obšćestvo, INT-press, Kiev; Relf-buk, Moskva. 36. Teece, D. J. (1981), „The market for know-how and the efficient in-ternational transfer of technology“, Annuals of the American Association of Political and Social Sciences. 37.

______ (1993), “The Dynamics of Industrial Capitalism: Perspecti-ves on Alfred Chandler’s Scale and Scope”, Journal of Economic Litera-ture, 31, 199-225.

38. Varian, H. (1999), Information Rules, Harvard Business School Press, Harvard. 39. Williamson, O. (1968), “Economies as an Antitrust Defense: The Welfare Trade-offs”, American Economic Review, Vol. 58, No 1, 18-36. 40. ______ (1975), Markets and Hierarchies: Antitrust Analysis and Im-plications, The Free Press, New York. 41. World Bank (1999), World Development Indicators, The World Bank, NY.

DETAILS ABOUT AUTHORS: RADISLAV JOVOVIC PROFESSOR radejovovic@t-com.me SANDA SENIC POSTGRADUATES STUDENT FOR BOTH AUTHORS: MONTENEGRO BUSINESS SCHOOL “MEDITERIAN” UNIVERSITY OF PODGORICA

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THE PROBABLE FUTURE OF EU’S FINANCIAL DEVIATIONS AND THE FINANCIAL POSITION OF TURKEY IN EU’S PROCESS A. NIYAZI ÖZKER

ABSTRACT

In the study, we attempt to EU’s financial future with the probable financial deviations or fragilities in the framework of candidate countries, especially like Turkey that take aim at the groundwork financial alterations as a developing country in order to constitute the associated financial ground together with the perfect member countries in EU. This phenomenon present some points connected with different financial structures, which is under debate and the concerned points make some current issues directed towards the future like the probable financial deviations. This structural reality that is attempted by these approaches and discussions bring up the other financial contradictions reality relating to financial applications integrity as well as related to the financial future of EU. The matter is to be meaningful and sharpness the whole financial relations’ future that deals with the countries’ different structural positions and ensure the more financial politics harmonious, which maintain the financial reliable position continuity in EU. Hence, the countries that want to be the perfect membership participating in EU, like Turkey, have to review and regulation criteria directed towards the entire member in the adaptations process. It appears that the financial indicators and Its’ probable evaluations is the main argument both the concerned adaptation process agreement and to give meaning to the future. Especially, the developing countries being outside of the membership in EU have generally financial fragility due to the financial points under considerations like the highly inflation rates, the loaded public deficits and the insufficient financial infrastructure. In order to resolution on the base of financial adjustments modify Turkey’s financial conditions connecting with the location in EU to suit the requirements of EU the complicated financial criteria have to be considered with each other, but comparing with the perfect member countries giving examples of financial denominations. KEYWORDS: Financial Conditions, Adaptation Process, Financial Alterations, Financial Politics, Financial Deviations.

1. INTRODUCTION Financial deviations are very complicated phenomena, which affect the level of economic balances with financial politics in the economic adaptation process for countries all over the world. Therefore, EU countries’ financial applications have been subject in the scope of different financial matters too. The current financial deviations that are occurred different criteria make a current issue as the probably financial deviations’ future and designate the aimed financial balances plan of member countries. For example like Greece, some countries could be in the paradoxical deviations because of financial fragility, which has different but meaningful financial national location in comparison with the membership countries EU. It is common asserted that the financial fragility is related to the financial location in EU and all countries have different empirical designs. This approach in the scope of economic union shapes the different fact in touch with the future, which brings up the specific measure putting something to use for each other country to the future. Therefore, the probable future comes into being as an item in a set of the several countries future affecting the EU’s probable future. In this point, the financial deviations come on the scene in the two main points being public budget balances that give shape to the financial relations with the other member countries and the national trade options’ level related to GDP. In addition, the approach includes the regressive empirical design consisting of the level of financial location for country-specific or EU-wide implementation mechanisms. Certainly, also the financial deviations come on the scene due to the financial integration fact that engages in public economic relations in themselves because of the different structural features1. The structural phenomenon is accepted the priority matter to EU’s future toward aimed at the similarity financial framework due to the member countries’ different macroeconomic financial indications. The other matter that results in the financial deviation and financial fragility directed towards to the future are macroeconomics signs and public finance indicators that state macroeconomic stability at the same time. Therefore, public budget balances, public borrowing options and its’ percent to GDP, public expenditures’ level and its’ criterion effect on the financial applications are especially considered in order to analyze the risk factors that constitute the probable financial stabilization formations aimed at the future 2.

7 2

Kamps C. (2005), “Is there a lack of public capital in the European Union?”, EIB Papers, Vol. 10, No: 1, p. 78. Filipozzi F. & Staehr K. (2013), “Covered Interest Parity and the Global Financial Crisis in Four Central and Eastern European Countries”, Eastern European Economics, Vol. 51, No: 1, January–February 2013, p. 22.

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2. THE FINANCIAL INTEGRATION MATTER AND DEVIATION DYNAMICS’ APPEARANCE The financial integration, first of all, has been in the process of structural based on the financial dynamics for a long time and these processes define a financial situation between economic agents. As money using Euro would become like the monetary deviation rates within the euro area, which has moved consistently corresponding standard deviations within domestic borders3. But, the level of financial deviations and failure monetary options have increased in the attracted attention appearances some countries that like Greece, Spain, Italy in the recent years. This is a sign that the financial markets need to monetary demand, which results in the stressed financial market conditions. On the other hand, some countries becoming stabilized Euro area are demanding an extra premium to lend to counterparties located in other countries that have not strong financial ground and institutions4. These two financial relation formations have negative impression on the financial integration process based monetary balances and options due to impair the financial power distribution aimed at Monetary Union in the scope of EU countries too.

2.1. The Financial Key Variables in Touch with The Probably Deviation Process The some financial variables are considered as key financial stabilization both the structure balance formations aimed at providing adaptation process and the probable financial decrease related to the future. On the other hand, these financial key variables express some easily offended points constituting financial stabilization dynamics subjected on both the presented financial indicators connected with the financial formations in the future and the required financial decisions that give an the desired shape to be prevented especially the probably ruined financial stabilization among EU countries via public decision making process5. Because, each country’s has different aims and these aims shape the countries’ financial transmission mechanism considering these institutionally financial stabilization options in touch with all the member countries in order to ensure that will able to come true analyses directed the probably deviations in the future. It is apparent that the probably financial deviations’ future will be established on the associated institutionally financial options due to the global finance markets in the associated economic areas feel the necessity of inevitable financial variables bring all institutional monetary transactions’ power into play with not keeping in mind to the next periods. These some important key financial variables including some their probably effects connected with the next years and locations in the financial markets are exposed as follow6: Bank assets/GDP Banking assets in the financial markets have direct and indirect effects, which affect on the macroeconomics stabilizations and the institutional financial fragility especially including public and private assets can appear due to the deviation of banking sector’s negative monetary business transaction via different optional bank assets. This phenomenon is a remarkable financial variable in touch with central bank to provide adaptation criteria directed towards European Central -or Consolidated Data- Bank Data (ECBD) and Monetary Financial Institutions (MFI). Market Capitalization/GDP Market capitalization has a direct effect on the national borrowing level, the debenture bond costs and the demanded financial valuables that assist in the formation of stock investment the property is directly related to the associated financial unity to the future. And also, the probably deviations in the financial unity is in touch with the global market capitalization aimed at the financial adaptation process. Public Loans/Market Capitalization Public loans and market capitalization in instability process are important causes, which result in the financial fragility and deviations because of the public borrowing phenomenon could obstruct the optimal financial formations and financial fragility too. The public intensify loan transactions affect on the selective credit options including private banking and the national public loans connected with international finance institutions, which bring up the probably financial deviations together with unsuitable adaptation process. Herrmann S. & Axel Jochem A. (2003), “The International Integration of Money Markets in The Central and East European Accession Countries: Deviations from Covered Interest Parity, Capital Control and Inefficiencies in The Financial Sector”, Economic Research Center of The Deutsch Bundes bank Discussion Paper 07/03, Frankfurt am Main: Economic Research Center of The Deutsch Bundesbank, March 2003, p. 2. 4 Collignon S. (2010), Propesed Reforms of Europe’s Economic Governance are Flawed, http://www.social-europe.eu/2010/09/proposed-reforms-ofeuropes-economic-governance-are-flawed/ (Accessed 25.07.2013). 5 Kamps C. (2005), “Is there a lack of public capital in the European Union?”, p. 89. 6 Herrmann S. & Jochem A. (2003), “The International Integration of Money Markets in The Central and East European Accession Countries: Deviations from Covered Interest Parity, Capital Control and Inefficiencies in The Financial Sector”, p. 3. 3

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Interbank Deposits /Transaction Balance EU countries can use Interbank deposits for ensuring the national transaction balances in order to maintain both financial balances on one’s own and monetary balances that should be to prevent financial decrease. Hence, consolidated banking data and interbank deposits / transaction balances in touch with European Central Bank has an important situation aimed the optimal financial unity. Also, Interbank deposits effect on the global interest rates that have the desired credit limits and probably transaction balance using by some countries to overcome the own financial balances directed the probably deviations in the next times. Bank Assets and All Financial Balances / European Central Bank Consolidated Data European Central and Eastern Bank Data attempt to ensure financial unity using EU countries’ banking transaction assets and monetary liquidity levels. On the other hand, European Central Bank has an important role being mediator and intermediately institution directed to deal with the probably financial deviations. All Financial Balance Limits Controlled by Associated Unity / EU Central Bank Assets Each country financial transaction capacity has on one own financial structure and EU countries’ should be controlled by associated unity being standardized via EU Central Bank Assets, which maintain the participation financial future in order to rightly analyses aimed at shareholder financial and monetary limits directed towards the probably financial deviations. Financial markets have developed growing up constantly in Central and Eastern Europe (CEE) since the early 1990’s and EU countries’ economic system have synchronized economic and financial affairs in EU. But, the main problem have gone due to growing trade and Its’ financial operations since the early same years. The form of foreign exchanges effected directly national banking system facing the other countries’ banking system and their financial transactions. European Commission’s analysis studying, put forth for consideration in the early months of 2013, on the economic forecasts of member countries aiming at the structural synchronization together with the other countries which have different macroeconomics values in EU confirm and support this financial fact.

2.2. The Location of Euro Area from The Point of view of Public Finance pertaining to The Probably Financial Deviations The Euro Area is accepted as an important financial signs’ ground based on bring monetary transactions power into the play in these countries that primary prefer using Euro because of the probably financial decreases’ occur be likely within these countries’ fragility and not much strong financial structures. This fact, on the other hand, means that these countries’ public finance process and options need to be market by debate as “Public Gross Dept”, “Total Government Balances”, “Nominal and Structural Primary Balance”, and “External Borrowing”, “Change of GDP”. Hence, these countries emplaced in the table 2 are especially selected connected with these public balance options. France and Germany are not included due to these countries express not the financial crises process in EU. Table 1. Rebalancing in Euro Area – Adjustment in The Periphery: Public Finance

Country

External Borrowing (-) / Landing (+) in 2012 (% of GDP)

Change from 2009 to 2012 (% of GDP)

Export of Goods and Services - Cumulative Growth (%) 2009-2012

Probably Financing Needs (% of GDP) Bond, Budgets Deficits and Other Deficits for 2014 EUR bn % GDP

GDP Growth Rates for Probably Forecast 2013 2014

Greece

-5.5

7.7

3.4

36.8

16.2

-4.4

-0.6

Spain

-1.5

2.8

23.4

150.4

13.3

-1.4

0.8

Ireland

2.1

5.2

14.5

19.4

11.1

1.1

2.2

Portugal

-1.2

8.4

22.2

19.8

10.9

-1.9

0.8

Italy

-0.6

1.4

20.3

135.4

8.0

-1.0

0.8

Slovenia

1.1

2.4

19.1

123.7

9.6

-2.0

0.7

Euro Area

1.5

1.4

21.5

-0.3

1.4

1046.2 billion

Source: European Commission (2013), European Commission Staff Working Papers European Economic Forecast Winter 2013 - European Economy 1/2013, European Union European Commission Directorate – General for Economic and Financial Affairs, Winter 2013, pp. 130-134.

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In spite of the monetary transactions in Euro Area have an positive primary role on the based monetary financial manipulations, the changed risks in the scope of using Euro or Its’ liquidity conditions would be occurred some financial deviations including the transaction risk as well as liquidity exposure or less foreign assets liquidity7. Also, there are the other reasons connected with the formed financial integration matters. On the other hand, it is appear that there are the remarkable methodological differences being the cause of the probably financial deviations8. Therefore, It needs in order to find meaning in the scope of financial deviations understanding Its’ probably future. It is possible to bring up in the three important points that follow9:

• First off all, it is the most important and meaningful which brings up the main financial balances with monetary trans-

•

actions between European Systemic Risk Board (ESRB) based European Central Bank Data (ECBD) -or Consolidated Bank Data (CBD)- and Monetary Financial Institutions (MFI). Because, the relevance of consolidation differs within EU countries due to not perfectly financial case connected with monetary applications for most EU countries. Hence, the defective strongly interconnected via proprietary and not perfectly controlled links causes financial adaptation matters for becoming member countries at the last period linked the integration process to EU10. The aggregated financial data became established monetary options and transactions have not been in perfectly using directed towards the macro-prudential analyses. The limited using cause the defective outcomes of analyses bring up two critical question related to probable financial integration deviations. The first question is which adjustment level of financial integration should be or how the financial adaptation case is. The other point consideration related to the aggregated Consolidated Bank Data (CBD) is whether the used some financial analyze techniques are appropriate or suitable for some another countries in EU. Because, some analyze outcomes is signify noting for some countries, which phenomenon have an negative influence on the financial adaptation process for some countries being out of this analyses. The large banking systems and Its’ the different effective levels mean that the needed financial supports and subventions cause to be not enough controlled by European Central Banking. This negative formation gets weak the intermediaries of financial system in EU making difficult the financial integration in order to catch the desired financial unity based monetary transactions in the future. On the other hand, it means that this case already bring up to take measures in order to prevent probably financial deviations. Moreover, large banks ’behavior is poor proxies of smaller banks’ behaviors because of the countries in EU interact differently having specifically systemic connections. These differences which are especially financial-monetary applications as well as banks’ trade-monetary behaviors introduce alongside domestic local banks’ trade-monetary transactions making difficult the structural based monetary integration process. In this respect, the dealing with structural financial matters need to bring into focus the importance of monitoring small and medium size finance institutions including banks and the other finance centers related, directly or indirectly, to Consolidated Bank Data (CBD) and European Central Bank11.

3. THE PROBABLE FINANCIAL DEVIATION UNITS IN THE SCOPE OF (MFI) AND (CBD) AND THE PREVENTIVE APPROACHES IThe main problems that usually appear come originally on the science from institutionally differences within EU countries related to the probably financial deviations in EU. All the associated consolidated financial data including non-banking transactions should be taken up together with Monetary Financial Institutions considered with its’ structural national effects order to meaningful analyzes that needed to catch the desired financial integration process. This approach is more meaningful in order to cope the financial deviations considered with the structural dynamics and their regional effects. Banking and the based on financial institutions’ monetary analyses have to be considered with transactional units and their monetary coverage reporting non-euro area in order to bring up the probably financial deviations. Table 1 state this case as follows:

European Central Bank (2013), Monthly Bulletin August 2013, Frankfurt am Main: European Central Bank 08/2013, p. 98. European Central Bank (2013), Monthly Bulletin August 2013, p. 106. 9 Borgioli, S. & Cláudia Gouveia A. & Labanca C. (2013), “Financial Stability Analyses – Insights Gained From Consolidated Banking Data For The EU”, Occasional Paper Series, No. 140, Frankfurt: European Central Bank, January 2013, p. 7. 10 European Commission (2008), European Union Public Finance, 4th.Ed., Luxembourg: Office for Official Publications of The European Communities, 2008, p. 265. 11 Borgioli S. & Cláudia Gouveia A. & Labanca C. (2013), “Financial Stability Analyses – Insights Gained From Consolidated Banking Data For The EU”, pp. 7-8. 7 8

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Table 2. The Structural Location of The Probably Financial Deviation Units in Touch with MFI and CBD The Probably Deviation Units MFI’s Balance Aimes in It’s Structural and Its’ Location Effects Location

The Taken Aim at Institutionally of (CBD)

Main Purpose to Prevent Probably Deviations

Monetary Analyses Aimed at Financial Integration

Banking and Based on Monetary Institutions’ Stability-Adaptations Analysis

Coverage

Euro Area Including Largely Reported Non-Euro Area EU Countries

EU Countries and Their Financial Units

Country Allocation and Population

Monetary Financial Institutions (MFI) Including Money Market Funds (MMF), Hosting (Residency)

All domestic Credit Institutions -as Defined National Laws- as well as The Branches of Foreign Banks

Sector Consolidation

Only Possible for MFI (Excluding NonFinancial Corporations)s

Domestic Banking Groups and The Consolidated Foreign Financial Branches and also The Capital Requirement Directive (2006/48/EC) Excluding All Insurers and Financial Institutions

Valuations in Financial Transactions

Currency at Nominal Value. Deposits Loans at Nominal Amount (on a gross basis) and Also, Securities at Market Value (preferred) Associated Values as Defined in The Relevant and National Accounting Standards (accepted)

International Financial Reporting Statistical Standards (IFRS) The Common Reporting (COREP) and Generally Accepted Accounting Principles (GAAP)

Counterparty Breakdown According to ESA 95 and The Structural and The Data Content Analy- Securitization Directed Towards The ses’ The Probably Fall into Ensured Monetary Options Errors

Not to be atomized Financial Institutions and Theirs’ Capital Movements, The Associated Assets Quality and Profits based Financial Units

Source: Stefano B. & Cláudia Gouveia A. & Labanca C. (2013), Financial Stability Analyses – Insights Gained From Consolidated Banking Data For The EU, Occasional Paper Series, No. 140, Frankfurt: European Central Bank, January 2013, p. 10.

As dealing with over financial declinations need to take on the monetary liabilities included in the embrace of national –or local- banking, MFI’ s extent considered with data shared with CBD have to be meaningful to comment on the integration process dynamics. And also, the institutional meaningful occurred can provide to more improvement adjusted in the associated data distribution process, which concentrate on credit transactions and those financial valuable items have to be suitable EU’s congeniality definitions to the member countries and also in themselves. The completed financial transactions should be definition in the standard deviations as a the large of institutionally applications in order to analytical analyze both the probably adaptation deviations based on monetary transaction and the pertaining to analyze approach aimed at structurally financial matters to the future.

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Figure 1. Composite Indicator of Systemic Stress (CISS), (Jan. 2007-29 Mar. 2013)

Source: Constâncio V. (2013), Fragmentation and Rebalancing in The Euro Area, Joint EC-ECB Conference on Financial Integration 25 April 2013, Brussels: European Central Bank, April 2013, p.4

Figure 1 express the financial stress based on Monetary Transaction for Euro Area in the altered recent years including the financial crisis in 2009 that it has continued until recently months in the beginning some negative effects. Since 2009, the stress index –composite indicators that express as percent deviations- have been clearly in the fall down trend in spite of undulation ground on monetary transaction bring up from 80 % to 0.10 %. These undulations coursed of financial existences are accepted as the cause of probably financial deviations in connected with EU’ financial future by some analysts. In a the realistic approach framework, Outright Monetary Transactions including borrowing procedures have been in the fall down process giving cause to hope directed towards EU’s future. The financial crisis that appear in 2009 came not to an end and even if this financial phenomenon, especially comprising monetary transactions, is seen on the markets positively. But it is possible that the EU’s financial balances which are directly influenced by international financial markets’ fragility can carry on the probably financial risks and deviations on Euro Area. Monetary transactions’ that have gone on within EU countries will able to increase monetary capacity continued in the way of searching financial balances using Euro as associated monetary unit, and this financial vicious circle can be offer more likely the financial fragility which will able to cause the probably financial deviations especially after 2014 or following years12.

4. TURKEY’S FINANCIAL BALANCE VALUES AND ITS’ FINANCIAL LOCATION CONNECTED WITH EU FINANCIAL CRITERIA Turkey’s financial balances have been in the positive evaluations for recently years in spite of Its’ more financial signals such as public budget balances, public borrowing limits and the rate of all this financial values to GDP have gone in the undesired currently levels for a long time to the future. Since EU’s financial criteria determine maintaining the member countries integrations in the scope of desired financial aims, the matter is that Turkey has lived in both financial balance matters based on not only financial fragility but socio-economic problems like national income distribution and Its’ unemployment and education level of the national population.

Tropeano D. (2013), Financial Fragility in The Current European Crisis, CITYPERC Working Paper Series No. 2013/09, London: London City University Political Economy Research Centre Department of International Politics, pp. 13-14. . 12

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4.1. Turkey’s Financial Appearance Based on Institutionally Approach The institutional structure has an important location within EU countries, which is directly accepted as an adaptation process component for the integration process because of some candidate countries have to evaluation their own financial institutionally structures. Turkey have been in the same development and evaluation period since It’s own recourses date. The matter in the point, of course, is that Turkey’s different financial system especially tax application, public expenditure and banking system. Certainly, this structural phenomenon affect on the being perfect member process due to this institutionally condition will able to cause the undesired financial adaptation matters with EU countries making financial implicationally procedures including trading transactions financial amorphous a current issue. But, following the financial crises 2001 the financial reconstructive process has gone on the positive formations along with the national macroeconomic improvement especially resulting in the banking sector’s transactions attested. On the other hand, especially the institutionally financial approach is taken up based on Turkish Central Bank observing Turkish institutionally structure, the some financial formation in Turkey is that express measures adopted as follows13:

• The adopted strategies for using foreign exchange reserves based on institutionally applications are keep in mind by • • •

•

Turkish Central Bank. But, the considered fact is not in the optimal financial framework to primarily support the foreign exchange liquidity need of the banking system in touch with the desired European Central Bank’s criteria as an institutionally approach14. The resumed Turkish Central Bank’s activities as intermediary options directed towards the aimed foreign exchange market have account deposits, which options are convertible into foreign currency. And also it is need that the determined financial process can take over these convertible monetary obligations based on institutionally structure until the removal of uncertainties in international markets15. The other positive improvement is that the rules applicable and transaction operations to catch the aimed export limits rediscount loan limit, which have to be arranged in order to render the use of these loans easier. In this point, Turkish Government introduced an institutionally restructure reform packets and this institutionally evaluations have been in the increased process continuity for a long time16. The allowed banks to restructure have reserved an important place in the institutionally adaptation process aimed at EU member for a long time in Turkey. On the other hand, this fact means that the remarkable quantity of institutionally loans will be able to restructure to ensure smooth functioning of all the national loan regulations oriented towards the associated EU financial balances in the free of financial participation process, especially between financial institutions, certainly before all else banking in Turkey, and non-financial institutions to the probable interactional deviations of EU in the future17. The expenditure taxes that are remarkable located in Turkish Tax System as especially value added tax and special tax have great rates than the income taxes in comparison with the directly taxes in the total tax revenues18. The undesired financial phenomenon is an important reason inclined towards the income distribution deviations with tax injustice in Turkey19. It is appear that the institutionally regulations that are fountain stone to maintain all the optimal financial application in touch with basically institutions20.

The financial sector became stronger putting forte financial development and evaluations that express the total assets rose from 130 billion USD (2002) to 465 billion USD (2008). This ratio is more meaningful to GDP that is positive effected as a sign economic growth because of these ratios to GDP from 57 percent to 77 percent rapidly increasing these numerically indicators of branches and staff21.

The Bank Association of Turkey (2009), The Financial System and Banking Sector in Turkey, Istanbul: The Bank Association of Turkey, October 2009, pp. 2-3. Steinherr, A., Tukel, A. & Ucer, M. (2004), “The Turkish Banking Sector Challenges and Outlook in Transition to EU Membership”, Econstor, Luxembourg: Economic and Financial Reports / European Investment Bank, No. 2004/02, p. 18. 15 Steinherr, Tukel & Ucer, M. (2004), “The Turkish Banking Sector Challenges and Outlook in Transition to EU Membership”, p. 29. 16 McLaren L. M. (2007), Explaining Opposition toTurkish Membership of The EU, European Union Politics, DOI: 10.1177/1465116507076432, Vol. 8, No: 2, 2007, p. 252. 17 McLaren, L. M. (2007), “Explaining Opposition toTurkish Membership of The EU”, p. 256. 18 Paturot, D. & Kirsti, M. & Brys B. (2013), Average Personal Income Tax Rate and Tax Wedge Progression in OECD Countries, OECD Taxation Working Papers No.15, OECD Publishing 2013, p. 14. 19 Paturot, D. & Kirsti, M. & Brys B. (2013), “Average Personal Income Tax Rate and Tax Wedge Progression in OECD Countries”, p. 16. 20 Atiyas, I. (2009), Economic Institutions and Institutional Change in Turkey during The Neoliberal Era, New Perspectives on Turkey, No. 14, Fall 2012, p. 58. 21 The Bank Association of Turkey (2009), The Financial System and Banking Sector in Turkey, p. 5. 12 14

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4.2. Turkey’s Financial Balances Going as It should be EU’s Member It is fact that the finance structurally balances is the most important matter covering unemployment and reel production levels, which cause Its’ negative foreign trade balances as public deficits together with current deficits, market failures and sectoral productive units’ negative circumstances to the wished for EU’s criteria. On the other hand, this financial phenomenon has been to get into financial stress to integration process and especially Turkey’s current deficits have been in the remarkable augmentation. Therefore, it is appear that Turkey’s membership issue is not a solitary respective issue and it is required to catch achieving economic union that express the acceptable macroeconomics balance values from EU; but also the associated formation in touch with monetary union including monetary transaction based on the participated EU’s monetary for being perfect authorized member in the same process22. The some macroeconomics sings taken into consideration from EU’s financial approach are expressed in table 3 as follow: Table 3. Turkey’s Macroeconomic and Financial Balances in The Last Two Years GDP Last Previous Average Unit

Reference

GDP Growth Rate

1.60

0.10

0.95

Percent

2013-03-31 Quarterly

GDP Annual Growth Rate

3.00

1.40

3.93

Percent

2013-03-31 Quarterly

MARKET

Last

Average

Unit

Currency

1.95

1.94

1.00

Government Bond (10Y)

8.77

9.14

8.91

Percent

2013-08-01 Monthly

Stock Market

73401.75

73377.44

21658. 31

Index Points

2013-08-01 Monthly

PRICES

Last

Average

Unit

Reference

Inflation Rate

8.30

6.51

37.84

Percent

2013-06-30 Monthly

Consumer Price Index

221.75

220.07

152.79

Index Points

2013-06-15 Monthly

Export Prices

108.13

108.35

114.49

Index Points

2013-05-15 Monthly

Import Prices

109.32

111.08

111.52

Index Points

2013-05-15 Monthly

MONEY

Last

Average

Unit

Reference

Interest Rate

4.50

60.63

Percent

2013-07-23 Monthly

Interbank Rate

3.50

3.80

46.54

Percent

2013-07-15 Monthly

Foreign Exchange Reserves

144320.5

148911.6

39964.2

USD Million

2013-05-31 Monthly

TRADE

Last

Average

Unit

Reference

Current Account

-7524.00

-8209.00

-1141.84

USD Million

2013-05-15 Monthly

Current Account to GDP

-6.10

-9.70

-2.29

Percent

2012-12-31 Yearly

Balance of Trade

-8570.42

-9947.77

-1315.99

USD Million

2013-06-15 Monthly

GOVERNMENT

Last

Average

Unit

Reference

Government Budget

-2.80

-1.80

-6.53

Percent

2012-12-31 Yearly

Government Debt to GDP

36.00

39.40

51.82

TRY THO

2013-06-15 Monthly

Government External Dept

349895.0

336863.0

149211.1

USD Million

2013-03-13 Quarterly

Reference 2013-08-02 Monthly

Source: SBERBANK (2013), Turkey Economic Indicators, http://www.tradingeconomics. com/turkey/indicators, (Accessed 02.08.2013); TCMB (2103), Temel Ekonomik Gelişmeler-02 Ağustos 2013, Ankara: Türkiye Cumhuriyet Merkez Bankası (TCMB) Araştırma ve Para Politikası Genel Müdürlüğü, Ankara 2013, pp. 39-42, pp. 52-54 & pp. 69-79; TCMB (2013), Financial Stability Report-May 2013, Vol. 6, Ankara: Central Bank of Republic of Turkey, Ankara 2013, pp. 63-70; Development Ministry (2013), Economic Improvements-June 2013, Ankara 2013, pp. 12-18 & pp. 13-15 & pp. 17-18.

It is appear that Turkish economy has been in the desired adaptation criteria process and this balanced macroeconomic situation can be taken up in the positive approached framework to get EU membership. But, it is difficulty say that this balance situation is enough to reach the perfect membership like the other initially member countries expressed that mean the first fifteen countries. Because, Turkey’s financial balances are in the structural fragility due to national politics’ instability and structural market by struggle. Hence, government budget deficits, government debts to GDP and currency 22

Atiyas, “Economic Institutions and Institutional Change in Turkey during The Neoliberal Era”, p. 16. .

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account balances being currency deficits are affected before all else as seen on table 3. As for all member countries it is important application case that joins and enters into European Monetary Union (EMU) or being the associated application for minimum two years in the European Exchange Rate Mechanism (ERM), which must be done firstly of course. For Turkey, foreign exchange rates is changeable and instability exchange options due to both the more fresh money flow to Turkey from external money markets and the not optimal variable limits of “Foreign Exchange Reserves”, which resulted in the financial instability indications. Therefore, Turkey’s location in the being perfect member process has been is a situation under debate in which candidate currencies demonstrate economic convergence by maintaining limited deviation from their target rate against the euro for a long time.

CONCLUSIONS The probably financial deviations in the scope of EU economic and financial trends to the future have different effects due to EU countries’ distinctive economic locations. Therefore, financial deviations occur and appear with different financial key variables that increase the variety of EU countries’ being different responsibility to the considered key variables. Monetary transactions with Euro Unit that is accepted the associated using in EU’s financial ground results in some intermediation manners because of Euro Area comprise not all the EU’ countries using their own market procedures. These being different cause the complex banking transactions on monetary ground and especially the less developed countries then the others having membership in the beginning of EU economic concept face to face a confidence manner in the point under stability consideration aimed. Certainly, the phenomenon causes to build up and improve the different opposite within some countries especially getting new membership in touch with the financial amicableness harmonization institutionally. This fact, before all else, has been seen as the main reason to the probably financial deviations especially regarding as banking transactions intermediary as well as institutional adaptation process to the future. The structural alterations and evaluations have given hope to enter into the perfectly member countries as a the candidate member for Turkey, but it is appear that the accomplished financial balances in touch with the perfect member countries’ balance options including the unemployment and the other different social-economic dynamics which is based on restrictive financial criteria have not been in the positive progress that is desired optimal financial values for being member of EU on the evaluation of Turkey’ financial location since the established led of EU. On the other hand, Turkey has a poor income distribution that means occurring some the other socio-politics manners and certainly this fact needs stronger financial intermediations in order to catch all the criteria of EU. In the light economic research recently, it is appear that the stronger financial ground in the intermediations framework is not only corner adaptation stone to economic growth aimed at the desired EU’s criteria, but is also a railway engine to deal with Turkey’s unstable growth to the future. Turkey’s aim into the European Union (EU) is highly contentious matter and this fact has been not completely by EU countries. The perfect being member into EU needs not only financial harmonization process, but needs the structural politics as well as the other programs containing social relations’ in themselves. Hence, it is appear that EU citizens have an important role in order to Turkey’s admission into EU supporting based on the public union mutually, regardless of what their leaders’ politic approaches that is in a biased manner. And at the last, it is possible to reach the final decision on whether Turkey allowed to join the EU that EU citizens themselves will decision making, taking into consideration all the financial and social balances, because of the high degree of citizen relevance to this particular decision voting European Constitution as a the associational democratic approaches’ required.

Atiyas, “Economic Institutions and Institutional Change in Turkey during The Neoliberal Era”, p. 16. .

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LITERATURE-REFERENCES 1.

Atiyas, I. (2009), Economic Institutions and Institutional Change in Turkey during the Neoliberal Era, New Perspectives on Turkey, No. 14, Fall 2012, pp. 45-69.

Bayoumi, T. (1992), Shockıng Aspects of European Monetary Unıfıcatıon, NBER Working Papers Series, Working Paper No. 3949, Cambridge, MA: Natıonal Bureau of Economıc Research, January 1992.

Borgioli, S. & Cláudia Gouveia A. & Labanca C. (2013), Financial Stability Analyses – Insights Gained From Consolidated Banking Data For The EU, Occasional Paper Series, No. 140, Frankfurt: European Central Bank, January 2013.

Collignon S. (2010), Propesed Reforms of Europe’s Economic Governance are Flawed, http://www.social-europe.eu/2010/09/proposed-reformsof-europes-economic-governance-are-flawed/ (Accessed 25.07.2013).

Constâncio V. (2013), Fragmentation and Rebalancing in The Euro Area, Joint EC-ECB Conference on Financial Integration 25 April 2013, Brussels: European Central Bank, April 2013.

Development Ministry (2013), Economic Improvements-June 2013, Ankara 2013.

European Commission (2008), European Union Public Finance, 4th.Ed., Luxembourg: Office for Official Publications of The European Communities, 2008.

European Central Bank (2011), “Ensuring Fiscal Sustainability In The Euro Area”, Monthly Bulletin 04/2011-Articles, Frankfurt am Main: European Central Bank 04/2011, pp. 61-77.

European Central Bank (2013), Monthly Bulletin 08/2013, Frankfurt am Main: European Central Bank 08/2013.

10. European Commission (2013), European Economic Forecast Winter 2013, European Economy 1/2013, European Economy Commission Staff Working Document, Luxembourg: European Unity, European Commission Directorate-General for Economic and Financial Affairs, Winter 2013. 11. Filipozzi F. & Staehr K. (2013), “Covered Interest Parity and the Global Financial Crisis in Four Central and Eastern European Countries”, Eastern European Economics, Vol. 51, No: 1, January–February 2013, pp. 21–35. 12. Herrmann S. & Jochem A. (2003), The International Integration of Money Markets in The Central and East European Accession Countries: Deviations from Covered Interest Parity, Capital Control and Inefficiencies in The Financial Sector, Economic Research Center of The Deutsch Bundesbank Discussion Paper 07/03, Frankfurt am Main: Economic Research Center of The Deutsch Bundesbank, March 2003. 13. Kamps C. (2005), “Is there a lack of public capital in the European Union?”, EIB Papers, Vol. 10, No: 1, 2005, pp. 73-93. 14. McLaren L. M. (2007), Explaining Opposition toTurkish Membership of The EU, European Union Politics, DOI: 10.1177/1465116507076432, Vol. 8. No: 2, 2007, pp. 251-278. 15. Paturot, D. & Kirsti, M. & Brys B. (2013), Average Personal Income Tax Rate and Tax Wedge Progression in OECD Countries, OECD Taxation Working Papers No.15, OECD Publishing 2013. 16. Pownall, G. & Wieczynska, M. (2012), Deviations from The Mandatory Adoption of IFRS in The European Union: Implementation, Enforcement, Incentives, and Compliance, September 2012, http://business.fiu.edu/soa/pdf/EU_IFRS_9_11.pdf, (Accessed 18..08.2013). 17. SBERBANK (2013), Turkey Economic Indicators, http://www.tradingeconomics. com/turkey/indicators, (Accessed 02.08.2013). 18. Steinherr, A. & Tukel, A. & Ucer, M. (2004), The Turkish Banking Sector Challenges and Outlook in Transition to EU Membership, Econstor, Luxembourg: Economic and financial reports / European Investment Bank, No. 2004/02. 19. TCMB (2103), Temel Ekonomik Gelişmeler-02 Ağustos 2013, Ankara: Türkiye Cumhuriyet Merkez Bankası (TCMB) Araştırma ve Para Politikası Genel Müdürlüğü, Ankara 2013. 20. TCMB (2013), Financial Stability Report-May 2013, Vol. 6, Ankara: Central Bank of Republic of Turkey, Ankara 2013. 21. The Bank Association of Turkey (2009), The Financial System and Banking Sector in Turkey, Istanbul: The Bank Association of Turkey, October 2009. 22. Tropeano D. (2013), Financial Fragility in The Current European Crisis, CITYPERC Working Paper Series No. 2013/09, London: London City University Political Economy Research Centre Department of International Politics. DETAILS ABOUT AUTHOR: A. NIYAZI ÖZKER ASSOC. PROF. DR. PUBLIC FINANCE DEPARTMENT BANDIRMA FACULTY OF ECONOMIC AND BUSINESS ADMINISTRATION BALIKESIR UNIVERSITY – 10200 \ TURKEY niyaziozker@yahoo.com

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HOW TO TEACH OKUN’S LAW USING MATHEMATICAL METHODS? PETRA MEDVEĎOVÁ MARIANA POVAŽANOVÁ

ABSTRACT

The article deals with incorporating mathematical methods into teaching Macroeconomics theory in the faculties of economics. It focuses onto special part of Macroeconomics – Okun’s law. This law is named after Arthur Okun, which in 1962 reported an empirical regularity: a negative short-run relationship between unemployment and output. Since many other studies confirmed this finding, this law has become a stable part of macroeconomics textbooks. There are existing alternative approaches to estimating it which are using different mathematical methods. The article examine some of those methods with the aim of choosing the most appropriate for the special group of students, while taking into consideration their knowledge of the concrete mathematical methods. KEYWORDS: Okun’s law, Changes version, Gap version, Hodrick-Prescott filter

1. INTRODUCTION Unemployment is considered to be serious problem in the economy. Unemployment can be regarded as a cause of poverty and income inequality hence it is often in the centre of the interest of many people, not only the government and the scientists. Typically in the economy, the periods of decreasing of product are accompanied by the increasing of unemployment. This negative correlation between output and the unemployment has been named Okun’s law after the economist Arthur Okun (1962) who using data from American economy showed that each percentage point of real output growth above 4 percent was associated with a fall in the unemployment rate of 0.07 percentage point. This relationship is well known for economists. Many studies confirm the above mentioned relation and Okun’s law became a fixture in many Macroeconomics textbooks (for example: Blanchard, 2010; Mankiw, 2010). When studying macroeconomics, Okun’s law is in that part of macroeconomics which aims to explain the relationship between basic macroeconomics variables. It often serves as a linking point between the Phillips curve and the short-run upward sloping aggregate supply curve. Okun’s law is also useful for explaining the demand side of the economy. It is based on the idea that when output is increasing, there is higher product in the economy. More factors of production are required to produce more goods and services in the economy. If we look at the labour as an important factor of production, then if output of the economy is increasing, demand for labour as well as employment rate are increasing and the unemployment rate is decreasing. From this point of view it seems that Okun’s law justifies those economic policies aiming at supporting the aggregate demand. In reality sometimes Okun’s law served as role of thumb (Knotek, 2007). Okun’s law is a stable part in many macroeconomics textbooks. Students should be familiar with it. We know from the experience that it is much easier for students to understand macroeconomics, and economic logic behind the economic laws, when they are explained on real data, preferably on real data from the country where they live in. From this point of view Okun’s law seems to be ideal, because Okun’s law expressed the relation between output and unemployment by simple equations. But review of the literature shows that there exist different versions of Okun’s law and different mathematical and statistical methods are used for calculating Okun’s coefficient from these expressions. Using these methods requires certain mathematical and statistical knowledge. To get the best results, it is necessary to teach this part of economic theory in that way which takes into consideration students’ knowledge of mathematics and statistics in order to choose the most appropriate version of Okun’s law and most appropriate methods how to calculate the Okun’s coefficient. The article deals with incorporating mathematical methods into teaching Okun’s law in special groups of students in the Faculty of economics at the University of Matej Bel in Banská Bystrica, Slovakia. We focus on so called “Changes version” and “Gap version” of Okun’s law. In order to calculate Okun’s coefficient through the Changes version linear regression is used. In gap version of Okun’s law when trying to express the natural rate of unemployment and the potential output we recommend to use the most obvious methods: to fit the output and unemployment rate time series with the Hodrick-Prescott (HP) filter and then estimate linear model using method of least squares (OLS). Section 2 of this article examines the changes version and the gap version of Okun’s law. The aim of this article is not to explain in details economic theory considering the Okun’s law, nor the mathematics or statistics. The aim of this article is to show, how selected mathematical and statistical methods could be useful in teaching economic theory. In this section we also

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decide which mathematical and statistical methods should be used when teaching Okun’s law to students with different mathematical and statistical knowledge. Sections 3 and 4 have a form of preparation for seminar, which could be used in teaching process. It contains questions for students with the answers for instructor. Section 3 is devoted to the teaching of changes version of Okun’s law, section 4 to the gap version of Okun’s law.

2. CHANGES VERSION AND GAP VERSION OF OKUN’S LAW Okun’s law depicts the negative relationship between output and unemployment it has been named Okun’s law after the economist Arthur Okun. In his original work Okun discussed three empirical relationships, but the third relationship is observationally equivalent to one of the others. Review of the literature shows that there are also different versions of the relationship between growth of output and unemployment rate which are collectively called Okun’s law since original relationship proposed by Okun has been subject to revisions in an ever-changing macroeconomics. Economists have expanded Okun’s original two simple equations to include elements that Okun omitted in his analysis. For example in the literature we can meet with the dynamic version of Okun’s law or with the production function version of Okun’s law just to mention some of them. A review of literature shows that many of the Okun’s coefficients estimated have been obtained for the U.S. data (for example Prachowny, 1993; Freeman, 2000, Ball, 2012). Two of the few studies undertaken with Slovakia and other Central and Eastern European countries are the cross-country studies of Gabrisch and Buscher (2006) and Izyumov and Vahaly (2002). Generally, two methods are used in the literature for estimating Okun’s coefficient: changes version and gap version. 1. Method commonly known as: “Changes version“, captures how change in the unemployment rate from one time period to the next moved with growth in real output in that time period. It took the form (1) where Δ is the change from the previous period,Yt is the output, Ut is the unemployment rate,β is the Okun’s coefficient, α is the intercept and ωt indicates a residua. This version captures the contemporaneous correlation between output growth and movement in unemployment – how output growth varies simultaneously with change in the unemployment rate. The ratio α/β gives the rate of output growth consistent with a stable unemployment rate (normal growth), it means what should be the economic growth in the country if there are no changes in the unemployment. The value of Okun’s coefficient β gives the impact on the change of the unemployment rate from the previous period caused by output growth different from normal during examined time period. The constant α expresses how much unemployment rate will rise if there is zero output growth, in the other words even if the output is constant, the unemployment increases. Using quarterly data from the second quarter of 1948 through the fourth quarter of 1960, Okun expressed this relation as follows change in the unemployment rate = 0.3 – 0.07 * real output growth. According to this estimation, if the unemployment rate remains constant from one quarter to the next, the real output increases by 4.3 percent. Zero real output growth in a given quarter was associated with an increase in the unemployment rate of 0.3 percentage point in that quarter. The value of Okun’s coefficient implies that each percentage point of real output growth above 4.3 percent was associated with a fall in the unemployment rate of 0.07 percentage point. When using changes version of Okun’s law it is necessary to make an assumption that the natural rate of unemployment is constant and potential output grows at constant rate. 2. Method commonly known as “Gap version“ (2) where β is the Okun coefficient, εt indicates a residua. In the case of „gap version“, the difficult problem is to measure the natural rate of unemployment (Ut *) and potential output (Yt *). In potential output Okun sought to identify how much the economy would produce “under conditions of full employment” (Okun, 1962). In full employment, Okun considered what he believed to be an unemployment level low enough to produce as much as possible without generating too much inflationary pressure.

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Today there are several methods how to calculate potential output and the natural rate of unemployment. According to Ball et.al (2012) the most obvious method is to smooth the output and unemployment series with the Hodrick-Prescott (HP) filter. Okun used Gross national product (GNP) in his original work. However, many authors have since produced estimates of Okun’s coefficients using real Gross domestic product (GDP) (for example Harris and Silverstone, 2001). It seems that the estimated Okun’s coefficients tend to be sensitive to the choice of real output data as well. We recommend our students to use the real GDP data. When explaining Okun’s law to students it seems to be easier to focus on changes version, because it requires only the knowledge about linear regression. But the main weakness of this approach, as mentioned above, is the fact that when calculating Okun’s coefficient it is necessary to make an assumption that the natural rate of unemployment is constant and potential output grows at constant rate. In the case of Slovakia, especially during the last worldwide recession it does not seem to be reasonable. But on the other hand, despite such a weakness of this approach, we consider to be important for students to use it, because we believe that when they “get their hands dirty with data“, they will better understand the economic logic of this Law. We are also aware of the fact that if we want to test any economic law, a lot of assumptions should be made. Finally, economics is not primarily a set of answers, but rather a method of reasoning. For above mentioned reasons we consider to be useful for students to use this method if they have only limited knowledge of mathematical and statistical methods. When using this method we recommend for Slovakia to examine time period 1999 - 2008, since in 2009 GDP of Slovakia dropped sharply, which caused also decline of potential product which is in contrary with necessary assumption. For students which have knowledge of mathematics and statistics on intermediate level, we recommend use the HP filter approach. In our faculty t here are two study programs: Bachelor study and Master study. Macroeconomics is included within faculty compulsory subjects in both programs. In the Bachelor program the aim of the study of macroeconomics is to explain principles of macroeconomics and basic macroeconomics models (Uramová, Lacová, Hronec, 2010). The Macroeconomics in Master program is on intermediate level (Uramová, Piteková, Paľa, 2009). The mathematical and statistical skills of students are different in master program, since not all of the students attend the Econometrics, because Econometrics is only voluntary subject in the faculty. To use the Hodrick-Prescott (HP) filter it is necessary to pass this subject. That is why we can divide the students of Master program into two groups: in the first group there will be students who did not attend the Econometrics course. For this first group we recommend to use the Changes version of Okun’s law. For the second group, Gap version of Okun’s law.

3. ESTIMATING OKUN’S COEFFICIENT FOR SLOVAKIA USING CHANGES VERSION OF OKUN’S LAW 3.1. Exercises for students In this exercise we estimate Okun’s coefficient using changes version of Okun’s Law and real data for Slovakia. In order to solve the exercises, Internet access (access to Eurostat database) and Excel program are necessary. Very briefly repeating, Okun’s law depicts negative relationship between changes in the unemployment and the growth of output. Typically, when output is increasing, the unemployment rate is decreasing and vice versa. In the literature there are different versions of the relationship between growth of output and unemployment which are collectively called Okun’s law. In this exercise we focus on changes version (1) where Δ is the change from the previous period, Yt is the output, Ut is the unemployment rate, β is the Okun coefficient, α is the intercept and ωt indicates a residua. Tasks for students are as follows: 1. Collect the data on output and unemployment rate for Slovakia from the Eurostat database (you will need real GDP growth rate, percentage change on previous year, the time period 1995 – 2012, although it is possible to obtain these data directly, try also to calculate them in an Excel worksheet from the data on GDP expressed in millions of euro, chain-linked volumes, reference year 2000 (at 2000 exchange rates) using formula for output growth (3)

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The data for unemployment rate in Slovakia are available only for years 1998 – 2012. In this version of Okun’s law, we need to calculate the changes in unemployment rate. Calculate them from the overall data on unemployment rate – annual average, not seasonally adjusted data using formula. (4)

3. 4. 5. 6. 7. 8. 9.

Make a table and also a graph, in which there will be Slovakia’s GDP growth as percentage and change in unemploy ment rate as percentage for time period 1999 – 2012); Look at the data and the graph from the previous task. Is it possible to recognise any relationship between output and unemployment? Is there any significant decline in GDP during the examined time period? When using the changes version of Okun’s law it is necessary to make the assumption that the natural rate of unemploy ment is constant and potential output grows at a constant rate. Is it reasonable to make this assumption for years 2009, 2010? Since in 2009 the potential output in Slovakia fell, it seems to be more reasonable to consider the data only for 1999 – 2008 when using the changes version of Okun’s law; Discuss why it is not appropriate to use the data from 1989 – 1994; Estimate a linear regression model and write the expression of the changes version of Okun’s law for years 1999 – 2008; Make a graph that shows the change in unemployment rate versus output growth in Slovakia for years 1999 – 2008; Verify, whether the selected model is appropriate, decide whether the coefficients are statistically significant; Interpret Okun’s coefficient; Find out how much unemployment rate will rise if there is a zero output growth; Determine the rate of output growth consistent with the stable unemployment rate (the normal growth).

3.2. Answers (for the instructors) The answer for Task 1 is in Table 1 and in Figure 1. Table 1. Data of GDP and unemployment rate, Slovakia Year

GDP in market prices

GDP growth (percent) Unemployment rate

Change in the unemployment rate (percent)

1995

18 651

1996

19 946

6.94

1997

20 833

4.44

1998

21 741

4.36

12.7

1999

21 749

0.04

16.5

3.8

2000

22 047

1.37

18.9

2.4

2001

22 815

3.48

19.5

0.6

2002

23 860

4.58

18.8

-0.7

2003

24 999

4.77

17.7

-1.1

2004

26 264

5.05

18.4

0.7

2005

28 012

6.66

16.4

-2

2006

30 350

8.35

13.5

-2.9

2007

33 534

10.49

11.2

-2.3

2008

35 463

5.75

9.6

-1.6

2009

33 712

-4.94

12.1

2.5

2010

35 190

4.38

14.5

2.4

2011

36 325

3.23

13.7

-0.8

2012

37 061

2.03

0.3

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Figure 1: Chart describing GDP growth and change in unemployment rate, Slovakia

Source: authors with respect to Eurostat data

Answer 2. When looking on the graph we can recognize that there is a negative relationship between the growth of output and the change in unemployment rate. A significant decline in GDP is in 2009. Answer 3. It is not appropriate to use the data from 1989 – 1994, because of a transformational recession in Slovakia, in which output fell and the rate of unemployment increased. Answer 4. The estimated of linear regression model is given by (5) Answer 5. Figure 2 shows the dependence of the change in unemployment rate on output growth in Slovakia for years 1999 – 2008. Figure 2: Slovakia – Okun’s law, 1999 – 2008 (annual data)

Source: authors with respect to Eurostat data

Answer 6. Because both p-values of individual coefficients significance tests are below 0.05, they are statistically significant and the estimated linear regression model can be considered appropriate. Answer 7. The value of Okun’s coefficient implies that each percentage point of real output growth in Slovakia above 4.6 percent is associated on average with a fall in the unemployment rate of 0.64 percentage points. Answer 8. A zero real output growth in a given year is associated with an increase in the unemployment rate by 2.94 percentage points in that year. Answer 9. According to the estimation results, the real output should grow by 4.6 percent in order to keep unemployment rate unchanged.

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4. ESTIMATING OKUN’S COEFFICIENT USING GAP VERSION OF OKUN’S LAW STUDENT INSTRUCTION SHEET 4.1. Exercises for students In this exercise we estimate Okun’s coefficient from gap version of Okun’s law using real data for Slovakia. In order to solve the exercises, Internet access (access to Eurostat database), MS Office Excel and R systems are necessary. “Gap version“ of Okun’s law is expressed by the formula (2) where ϐ is the Okun’s coefficient, εt indicates a residua. In the case of „gap version“, the difficult problem is to measure the natural rate of unemployment ( Ut*) and potential output ( Yt*). Review of the literature shows that there are different methods, how to calculate Ut* and Yt*. In this exercise we are going to use Hodrick-Prescott (HP) filter. Tasks for students are as follows: 1. Collect the data on GDP and unemployment rate for Slovakia from the Eurostat database, time period 2000 – 2012. (You will need the annual data of the real GDP in millions of euro, in constant prices and average unemployment rate); 2. Apply the HP filter on time series of GDP (Y) and unemployment rate (U) (the recommended fitting parameter for annual data is λ=100); 3. Evaluate gapY and gapU ; 4. Check stationarity of gap time series (for both the output gap and the unemployment rate gap, use Augmented DickeyFuller test (ADF) test); 5. If series gapY and gapU are stationary, estimate the linear regression model of Okun’s law; 6. Make a graph that shows the change in gapU according to gapY ; 7. Verify that the classical assumptions of the linear regression model hold; 8. Decide whether the estimated coefficient is statistically significant; 9. Interpret the coefficient of determination and Okun’s coefficient.

4.2. Answers (for the instructors) Answers for the first three tasks are in Table 2. Table 2. Data of GDP and unemployment rate (λ=100 ) Year

U (%)

Y HP

U HP

gap Y

2000

22046.9

18.9

0.189

18491.36

0.196092

0.175869

-0-03684

2001

23572.9

19.5

0.195

23018.48

0.187925

0.0238

0.036958

2002

25971.7

18.8

0.188

27581.17

0.179686

-0.06013

0.045229

2003

29489.2

17.7

0.177

32220.5

0.171377

-0.08858

0.032285

2004

33994.6

18.4

0.184

36961.5

0.163079

-0.08368

0.1207

2005

38489.1

16.4

0.164

41801.85

0.154933

-0.08257

0.056877

2006

44501.7

13.5

0.135

46709.57

0.147285

-0.04842

-0.0871

2007

54810.8

11.2

0.112

51619.57

0.140577

0.059986

-0.22726

2008

64413.5

9.6

0.096

56444.65

0.135123

0.132063

-0.34184

2009

62794.4

12.1

0.121

61129.55

0.130955

0.026871

-0.07906

2010

65869.5

14.5

0.145

65698.68

0.12771

0.002597

0.126968

2011

69108.3

13.6

0.136

70193.11

0.12493

-0.01558

0.084897

2012

71463

0.14

74655.61

0.122327

-0.04371

0.134942

Source: Eurostat and authors

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Answer on the Task 4 is illustrated by the next graphs. Stationarity can be verified by a visual examination in combination with statistical methods. The following t-plots and the ACF and PACF plots suggest that time series under analysis are stationary. This is also confirmed by ADF test. Figure 3: Chart describing the gap GDP and the gap unemployment rate. Slovakia

Source: authors with respect to Eurostat data

Figure 4: Autocorrelation function (ACF) and Partial autocorrelation function (PACF) for time series gap Y Series x

0.0

-0.5

-0.4

-0.2

0.0

ACF

Partial ACF

0.5

0.2

0.4

1.0

Series x

Lag

Figure 5: Autocorrelation function (ACF) and Partial autocorrelation function (PACF) for time series gap U

0.2 0.0 -0.4

-0.2

Partial ACF

0.4

0.6

Series x

Lag

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-0.5

0.0

ACF

0.5

1.0

Series x

Lag

Source: authors

Answer 5. Because the series gapY and gap U are stationary, we can construct the linear regression model and estimated it as follows (6) Answer 6. Figure 6 illustrates the dependence of unemployment gap on output gap. Figure 6: Slovakia – Okun’s Law. 2000 – 2012 (Annual data)

Source: authors with respect to Eurostat data

Answer 7. Residuals can easily be checked for their normality, homoscedasticity, uncorrelatedness and for absence of outliers. Answer 8. Because p-value of coefficient significance test is below 0.05, it is statistically significant and the estimated linear regression model can be considered appropriate. Answer 9. The value of coefficient of determination is 0.40. It means that 40% of variability in unemployment can be explained by variability in output of the economy. As Okun’s coefficient is –1.08, if the output gap goes up by one percentage point, the unemployment gap is expected to fall by approximately 1.08 percentage points.

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CONCLUSION Many studies confirm negative relationship between output and the unemployment rate proposed primarily by Arthur Okun. Okun’s law became a stable part in many macroeconomics textbooks. Students of macroeconomics all around the world should be familiar with it. The task for teachers of macroeconomics is to make students familiar with the covered topics and to make it interesting to them. One way how to explain economic laws in interesting way is to use the real data from the real world around them. However, review of the literature shows that majority of the Okun’s coefficients have been estimated for the U.S. data and for western European countries. For that reason it seems important when teaching macroeconomics in Slovakia to explain Okun’s law using real data for Slovakia. Since there are many different versions of Okun’s law and different mathematical and statistical methods are used for calculating Okun’s coefficient from these expressions, it is also very important to choose that version which take into consideration students’ knowledge of the concrete mathematical and statistical methods. In the conditions of Faculty of Economics, Matej Bel University, Banská Bystrica, Slovakia we found the most appropriate to use Changes version and Gap version of Okun’s law.

ACKNOWLEDGEMENTS The authors were supported by the Project: Mobility - enhancing research. science and education at the Matej Bel University. ITMS code: 26110230082. under the Operational Program Education co-financed by the European Social Fund.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Ball. L., Leigh. D., Loungani. P. (2012). Okun’s Law: Fit at 50? Paper presented at the 13th Jacques Polak Annual Research Conference Hosted by International Monetary Fund. pp. 1 – 41. (References from Proceedings and Books) http://www.imf.org/external/np/res/seminars/2012/arc/ pdf/BLL2.pdf Blanchard. O., Amighini. A., Giavazzi. F. (2010). Macroeconomics. A European Perspective. Pearson Education Limited. ISBN: 978-0-273-72800-9. pp. 205-226. (References from Proceedings and Books) Freeman. D. (2000). a Regional test of Okun’s law. International Advances In Economic Research. Vol. 6. pp. 557-570. (References from Journals) Garbrisch. H., Buscher. H. (2006). The Relationship between Unemployment and Output in Post-communist Countries. Post-Communist Economies. vol. 18. No 3 pp. 261 – 276. (References from Journals) Harris. R., Silverstone. B. (2001). Testing for asymmetry in Okun’s law: A cross−country comparison. Economics Bulletin. Vol. 5. No. 2 pp. 1−13. (References from Journals) Izyumov. A., Vahaly. J. (2002). The Unemployment-Output Tradeoff in Transition Economies: Does Okun’s Law Apply? Economics of Planning. 35: pp. 317-331. (References from Journals) Knotek. E. S. (2007). How useful is Okun’s Law? Kansas City: Federal Reserve Bank of Kansas City. pp. 73 –103. (References from Other Literature) http://www.kc.frb.org/PUBLICAT/ECONREV/PDF/4q07Knotek.pdf. Mankiw. N.G. (2010). Macroeconomics. Worth Publishers ISBN-13: 978-1-4292-1887-0.. pp. 260-262. (References from Proceedings and Books) Moosa. I. A. (1997). A Cross-Country Comparison of Okun’s Coefficient. Journal of Comparative Economics. 24. pp. 335–356. (References from Journals) Okun. A. M. (1962). Potential GNP: Its Measurement and significance. in Proceedings of the Business and Economics Statistics Section. American Statistical Association (Washinghton. D.C.:American Statistical Association. 1962): 98-103. Reprinted in Arthur M. Okun. Economics for Policymaking (Cambridge. MA: MIT Press. 1983). pp. 145-147 (References from Proceedings and Books) Prachowny. M. F. J. (1993). “Okun’s Law: Theoretical Foundations and Revised Estimates.” Review of Economics and Statistics. 75. 2. 1993. pp. 331-5. (References from Journals) Uramová. M., Lacová. Ž., Hronec. M. (2010). Makroekonómia I. Banská Bystrica: Univerzita Mateja Bela. Ekonomická fakulta. 2010. pp. 1-277. ISBN 978-80-557-0043-4. pp. 187-207. (References from Proceedings and Books) Uramová. M., Piteková. J., Paľa. J. (2009). Makroekonómia II. Banská Bystrica: Univerzita Mateja Bela. Ekonomická fakulta. 2009. pp. 1-120. ISBN 978-80-8083-728-0. (References from Proceedings and Books)

DETAILS ABOUT AUTHORS: PETRA MEDVEĎOVÁ PROFESSOR FACULTY OF ECONOMICS, MATEJ BEL UNIVERSITY BANSKÁ BYSTRICA. SLOVAKIA petra.medvedova@umb.sk MARIANA POVAŽANOVÁ PROFESSOR FACULTY OF ECONOMICS, MATEJ BEL UNIVERSITY BANSKÁ BYSTRICA. SLOVAKIA mariana.povazanova@umb.sk

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FORMATTING SYSTEMS OF EXCELLENCE TOWARDS THE AIM OF DEVELOPING THE QUALITY OF EDUCATION RENATA MARINKOVIĆ

ABSTRACT

In the light of the development of the educational process, a by this the overall system, there occurs the permanent need for its advancement. Through the realization of that aim it will be contributed to the development of the contemporary society – both regional as well as global. The quality educational process also means the achievement of quality, applicable knowledge, which is said to be power. With the thought of Francis Bacon “Knowledge is power” begins the project of the modern. René Descartes joined him as the leader of the modern with his rationalistic stance “I think, therefore I am”) which opens presumptions for the later period of the postmodern. In the new times, by applying concretization of independent constructivism, creativity, independency and working on oneself, various pedagogical models open spaces to human thinking and creation and also to interactive relations indispensable for the development of pedagogical thought and work. Then we talk about the postmodern. Readiness for quality processes can be seen in the context of formatting social competences (within the social terms), which includes educational, human potentials, strategies and structures of developing politic. What do they incline to? They aspire to the realization of the system of excellence in all fields and all levels of education. The formatting of the overall system of excellence must be accompanied quality and creative processes of managing and regulation. KEYWORDS: competencies, creativity, quality of education, standards, strategy, structure, system of excellence, managing

1. INTRODUCTION This work deals with problems and queries of realization of the more qualitative educational process in the context of social movements, possibly social development as well. The social conditioning of all processes, positive and negative, could be seen as the state of affairs in all segments of the society. This particularly relates to the “developing” trends of educational politic as part of social politic, which would have to secure more qualitative politic prosperity of the personnel, and at the same time it could strengthen its importance and role in the overall developments. There is a very discussible question posed about the interdisciplinary and multidisciplinary, and by this at the same time transdisciplinarity as deck conjointness of the cultural circle and conjunction of all activities, scientific disciplines and practical events. International contents and interactive impact will make it possible that the analysis of the state of (no)existence of the strategy of development, structure of integral and partial processes and systems of activities, and it would respond to the partially accepted co-existence of the social, humanistic, economic, technical and other professions on the way of mutual cooperation and improvement. The aim is to see how by formatting of quality of (highly) educated system we can achieve and maintain the system of excellence or at least the majority of creative processes and fields. This supposes all the educational (pedagogic), psychological, sociologic and social, politic, economic, technologic and other innovative categories. We shall see in what measure it is possible to establish a possibly quality relation between the business practice, market and specific educational contexts and personnel. In this multidisciplinary world we shall observe the systematicness of the professional development and education of teachers who transfer values and information (in qualitative and quantitative meaning), and also their impact on the development of social, mental, emotional and other competencies of individuals.

2. PRESUMPTIONS FOR THE DEVELOPMENT OF QUALITY (HIGH) EDUCATION How can we realize quality results of education at all, even with high education? Which elements in the system of values and criteria while bringing operative decisions must be satisfied so that we would realize positive motions or be able to practice their application? During such consideration we have to be conscious that the quality of every activity is conditioned by the level of education and the possible degree of its application. However, the fundamental presumption of such realization comes from a number of processing stages of feasibility, and by it also the systematical definitiveness. In the light of these determinants whose aim is to achieve the best quality interdisciplinary and multidisciplinary connections it is supposed that the realization would be efficient and whereby qualified as well. In the realization of quality there are indispensable competitive values out of which results a competitive spirit of desire for the better that in the end results with a sound competition. The sounder the competition, the better the quality of realization will be on a

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higher level. This aim of the development actually implies educational standards that can achieve that we would competently speak about every particular system (education, tourism, urbanism, health, economy and the like), the overall, integral process that has its structure, creative elements in the functional and operative meaning (organization, human factor, working phases, tools or equipment, investments, or the like), which will finally result by the strategy of carrying out of defined tasks. The strategy can be flexible, depending on practical indicators and possible new aims. The absence of strategy of the development of social, even (high) educational politic, crucially makes an impact on the quality of the system of managing of all social, educational processes, but also of activities of all possible orientations. This is when every, and particularly quality structure and construction lacks quality integral development. Its integral development means open doors to the innovations, creative ideas, foreign influence (not at any cost), numerous guest tours of experts in our country and our experts abroad. Appreciating the referent frame for eight key competences that in the framework CARDS program (2006) was brought by the European Parliament, which was proclaimed as elements of achievements of social standards, it must be emphasized some other assumptions for the achievements of standards that define personality competences. The mentioned competences relate and cover school subjects from the knowledge of mother tongue, foreign language, mathematics and natural sciences, information-communication cognition. This is only barren conclusion, well known to everybody for centuries. It can stand as a fact, however, here it should stress some other presumptions of the educational character that lie in the basis of every activity, every professional orientation and realization. They are the foundation of realization of social activities as such, but also of knowledge, ability and specific competences. Let us state some of these values that should be developed parallel to the realization of professional, expert competences. It was not perceived that any science, except the psychological, sociologic and pedagogic sciences only sporadically deals with these questions. Hence, probably, there come the practical indicators and unsatisfactory results. Therefore, such values form a net of formatting personalities, and at the same time they affect the more quality realization of posed goals. Some of them are:

• • • • • • • • •

development of communicational abilities; communication based on socialization; formatting of the system of adequate values (stimulation of intellectual, moral and working values); stimulating energy of the personality identity (awareness of reality of one’s own value, objectivity); formatting and respecting the personality’s authority but based on proved value, knowledge, competence, professional results, and not by impostrous and self-conceit enforcement – thus appreciating authority based on the personality’s quality; representation and application of argumentative criticality (positive and negative), and not flat assessment according to subjective “criteria” – depending on sympathies, ignorance, nepotism, personal interests and the like; development and stimulating courage for the emphasizing one’s stand, idea – by public action and the fight for the new and different; stimulation of responsibility to oneself and others; gradual development of the system of value, elaborate criteria and evaluation of the level and degree of quality of achieved results.

From all of this it could be resumed and emphasized the importance of certain actions on the way to realization of educational, professional and living standards, based on competencies into which there are included some European/ worldly values to which it is not necessary to attach completely, but it should be respected and, depending on the necessity, it should be applied. Thus we could conclude that:

• • • • • • • • •

competences have their developing role, on the way to professionalization and the lifelong or permanent learning; goals and methods change permanently as due to motivation and creative approach results are achieved; establishing national and institutional strategies and mutual correlation is necessary for the improvement of quality; all of it is consolidated and pervaded by the European net for the securing of quality; it is indispensable to secure the vertical and horizontal porosity of the educational system, which is not adequately valorized and established on critical bases; it is indispensable to establish. pedagogical standards for high education in all segments, orientations, particularly in the contextual, personal and strategically-structural sense; only the theoretically touched pedagogical excellence practically becomes the goal of the educational politic; the establishment of the regulations is important (contextual, instrumental, operatively) in the sense of ponderability of outcomes, the result of learning; permanent training of (university) teachers (on all educational level and academic orientation and degrees) becomes and remains a permanently present process, and also permanently enriches with contents, methods and results;

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• standardization of evaluation of educational results must contribute to the enrichment ad direct impact on the development of economic flows accompanied by security of employment – very discussible in practice;

• education must be education with a goal, expected adequate result and achieved degree of satisfaction – which renders the perspective of educational standards.

Thus the politic of education or educational politic (if it exists) should take care about some elements that would stimulate and strengthen the values of human potentials, contextual capacities and the availability of achieved results. Some of them would relate to:

• • • • • •

attractableness (of contents, methods, technologies,…); mobility (regarding teachers, students, researches – at the international level); comparability with foreign high education and qualifications; securing of the quality relations of university educations between the home and foreign scene; recognizing formal degrees of education/knowledge as well as real levels of their results; competition of knowledge on the working market.

If we were to omit any of the mentioned elements, and mostly we omit more, we should speak about the quality to which we tend, and we would speak less about the excellence that is recorded administratively and not quintessentially. If we add to it that decisions about its enforcement bring by those who are semiliterate and uninterested, and in no way academically oriented individuals, then it becomes understandable the bitterness and non-rendering, even then when we refer to “adequate results”.

3. WHAT IS MISSING - little, much or nothing Trying to answer to this question there occur passing by in opinions/judgments. This depends on the degree of criticism, the degree of cognition – home and foreign, expert knowledge, contacts, psychological-pedagogic knowledge, experience, objectivity, being interested, engaged, courage to disclose one’s stand, beware positions achieved in various ways, and the like. There is the factor that the mentioned elements do not mutually exclude. They could synchronistically “act” but in practice there are more who because of their absence cannot act at all. In the Strategic frame for the development 2006 – 2013 certain reasons are quoted that would explain how the basic role of the high education has been linked to it:

• • • • • • • • • • • • • • • •

absence of developing vision and the short time and long time developing programs; variable development of the system, whose main characteristic is concentration of institutions in the capital; insufficient investment in spatial capacities and scientistic and technological equipment of the high education; unfavourable age and sex structure of teachers; absence of evaluation of study program plans; absence of systems of quality control of instruction (polls exist but this is not an equable and trustworthy model of following the quality of the instruction; the discouraging conditions of advancement; lack of connection of educational institutions, which makes it impossible to develop interdisciplinariness; loitering in carrying even minimal changes and permanent resistance to innovations; negligible mobility of university teachers; absence of programs of lifelong learning; neglecting internacionalization, which is manifested by an extremely small number of programs in the English language (this is why they are launched by private educational institutions); instances of unethical behavior, particularly the relation towards students; longtime process of social marginalization of science; absence of strategic plan of scientific development and related priorities; overall inefficient, lack of incentive and backward system of pre-graduating and particularly post-graduate education.

Each of these points merits the elaboration which would give us anu opportunity to find other faults that daily accompany us. As this Strategy was written in the year 2006, it would be desirable to determine how many things have changed backward in all those years. Except for some improvements of certain elements, it seems that nothing crucial has changed. Certain changes are connected to individuals and individual work, but there are no systematic, institutional (re)organization and activity.

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Let us overview some other burdening factors upon which there is nothing done. Let us observe it from the stand of students, teachers, teaching programs, university institutions. It is rather difficult to mutually separate them because they are logically intertwined and by the recent situation conditioned. Students are exposed to nonfunctional high education considering the fact that no one had taught them in the earlier schooling that whatever they learn they do not learn it for their marks, diploma and to impress their teachers and parents, but that they learn for themselves, because they need their knowledge and development, as well as their advancement in life. (There is the question how much knowledge means in the current time when it is most often not criteria of efficacy. This might sound contradictorily but knowledge, though it is nit the question of the statute, it is the question of one’s own security, value and strength of a personal breakthrough). Moreover, the registration politic at the faculties is not directed to real needs of the profession but for years the same number of registered students is repeated and it is well known that when they graduate they will not have the place to work there, because that segment, either of production or academic further improvement is either made impossible or extinct. Consequently, it should be necessary to coordinate the registry politic with the needs of the market and reduce the number of registered students, but also the number of study programs, i.e. of faculty departments/sections whose teachers, using unproductive programs neglect the young people because, in no way do they follow world’s programs (at least partially) and remain on the level of the students’ dissatisfaction. The appraisal of the state of affairs would show in practice that there are an array of useless profiles that should be extinguished or reorganize and coordinate and harmonize with foreign trends, following their experience and quality of realization. Until it will begin to start thinking in that way and start promptly acting – the work market will have no opportunity to start functioning. This is why we conclude: simultaneously following the appraisal of the state that would connect the needs of the practice and the educational registry politic, and parallel with this it would influence the reorganization of the studies as such and the adaptation of the programs – and that would be the most important activities and processes which would contribute to the quality of high education. On the other hand, the realization of teachers’ time schedules are often defined by legislation and number of students is small. The salary of the teacher is the same as the salary of the teacher who has several hundred students, those who have to be examined and carry out all accompanying operations (seminars, exercises and the like). It seems that no one takes care about it. The educational programs are often doubled because under the similar or different names of the lecture courses there is the same literature, the same tasks and the same contents concealed. Who finds this useful? Simultaneously, there is almost no following of foreign contents that could enrich our educational scene and offer the students much more. Beside the fact that students are inadequately educated, there is also the permanent education of teachers unattended in terms of psychological-pedagogical and didactic-methodical and communication accessory qualification that would be intended for assistants and younger (why not also to more experienced) teachers. Such educational profiling at the Zagreb University started in the far year 1971, practically it culminated in the year 1976 – and then stealthily became silent. As a matter of fact, in the world such a need was established in the far decades with the aim that the university teachers were to be educated in practical segments of their profession, which would also apply to the educational system. This related to the teachers of the humanities and even more the non-humanity faculties which by the fact that they were economists, lawyers, engineers, physicians, they were at the same time teachers to their students and also it was a necessary enrichment to the pedagogical-didactic work in practice. Simultaneous competence – professional (e.g. architect) and pedagogic (educational) only consolidate and with more quality present contents. The experience of some other countries (e.g. England, Institute of Education University of London) speak about the necessity of refurbishment of educational licenses in (high)educational institutions. Who takes care about this in our country? There is another problematic institutional question – the problem of one large University with more than 30 faculties, which objectively cannot follow the development of the diverse corpus. Diverse in organization, in contents, orientation, personal ability of teachers, quality of the students, interests and needs. All the more as the some of the faculties very large and could be as such be universities. By allocating university autonomy to the faculties that would accomplish a homogenate structure that would realize more qualitative results because it would be turned to itself and to its goals. In the world the mentioned criteria are more esteemed, so they would easier and more qualitatively function. The current equaling of natural, social, humanistic and technical sciences, as also art academies, as well as the treatment of state and private colleges – all this acts confusing and often leaves a trace of incorrect relation from the collective universus. These were only some observations that actually were practical indicators of the earlier mentioned deficiencies from the Strategic frame for the development 2006 – 2013. However, in the same document there are also some advantages of the current system of higher education specified. Is this the result of an advised systematical action, foreign influence or individual personal activity – this is a question. This is how the current advantages of our University is listed which we should know how to exploit:

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• defined number of eminent scientists and scientific institutions; • Croatian science disposes of motivated and well educated young scientists who are characterized by the readiness for changes and entrepreneurial spirit;

• Croatian asserted scientists who are active abroad; • presence of several academic centers of excellence as well as successful research-developing institutes in economy; • presence (a smaller number) of successful highly educational programs that encompass contemporary educational •

methods, instigate active contribution of students and offer wide-range theoretical knowledge necessary for the contemporary interdisciplinary trends; entire existing infrastructure (personal, institutional and technological), despite of the fact that it lapses after world’s standards, and offers foundations for necessary changes.

4. THE EU AND THE EASTERN PARTNERSHIP Self-assuredness and one’s knowledge is shown by active engagement, interpretations of one’s own considerations, critical relation in the positive and negative ...., and finally by the practical, concrete re(actions). This is posed by those who know, but also those who at the same time desire that is better, more and qualitative. These are rare individuals and thereby exceptional. Only the exceptional regret making efforts for common benefit. These are the ones who are mentioned at the end of the abovementioned chapter (citation from the Strategic frame for the development 2006 – 2013). Only the exceptional, i.e. excellent ones, demand and choose for cooperation those who are better than them. Why? Because they are self-assured and know their own abilities, and they are conscious of the fact that no one is going to endanger them. Because two able ones can any time do more than one. By way of illustration, the best examples are the selection and estimation of young assistants at the faculties. According to the choice of assistants it is possible to realize what quality the teacher has. A quality teacher is going to choose the best, the other one is going to choose somebody who is inconspicuous, “gray”, with no perspectives, with whom it can be manipulated and directed according to one’s desire. Such perspective of high education is certainly doubtful, because the lower level of the abovementioned level of education of future students is, the lower will the scientific level be, and consequently the overall system. What about excellence here and in what correlation is it with the knowledge? On such a degree, i.e. quality, pondering and behavior, the further strategy will depend as well as the structure of the overall educational and scientific corpus. Standardization, equalization of human factor (as subjective) at the expense of knowledge and specific values – excellence (as an objective factor) will suppress everything that is valid. Such profiles dare not enter into something new, they dare not undertake something because the do not know, because they are uncertain, withdraw by itself, because they are afraid. Because of that they are unwilling to work, they expect that someone else is going to do it because why should the work for another person, when this other person could work for them instead. And so we go round in circles and thus there are no changes. So there are no (or there are very few) action programs, there are no researches, no indicators which would make comparability possible and point out quantitative data that should rise and quantitatively result in productive activities. Simultaneously, the strategic determinant of the Zagreb University (this relates to other universities) quotes its activity as researching university that develops quality high education which means graduating and doctoral studies that stimulate transdisciplinarity and interdisciplinarity as well as the nourishing cultures of innovations and transfers of knowledge and new cognitions. Let us perceive this as a statement, which is not the first, but nothing important has particularly occurred.

4.1 Entrepreneurial competences and business excellence Nourishing entrepreneurial competences, if it should appear, should be also enriched with humanistic, moral, intellectual values and knowledge and also by personal adaptation. This would be the basis for the achievement of business excellence and success. The business excellence represents overall improvement of working and activities of an organization – be it educational, economic or some other. This is the query of developing continuity. From this it results that all the participants are satisfied with the achieved, and they are motivated for further activities; this means that they are simultaneously instigators of processes who give a frame based on several criteria. Some of them encompass data about what the organization does and they are – enablers: leadership, people, politic and strategy, partnership, resources and processes. The following criteria tell us about the results which the organization achieves: human results (in business and educational meaning), results of the society and results as key indicators. The aforesaid relates both to the (high) educational institutions and the other business organizations.

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However, there are differences in defining achieved excellence in various spheres of activities. It is only the educational region that is unprofitable (in literal meaning) because it is about the achievement of quality education, and by this there is the acquirement of knowledge. Simultaneously, every other organization with the aim of achieving business excellence in the first plane has a financial benefit. And this is the difference between the acquirement of spiritual value (knowledge) and the material values. But there exist common points that present barriers in the application of any model of excellence. These are the following limitations in considering, and by this in activity:

a) expressed attitude that “our business activity is different” (we would never interfere in someone’s ideas); b) there exist numerous differences in the perception of quality and business excellence (diverse approaches); c) there exist priorities and politic that are in conflict with the already proved approach of some model; d) there exist environments where the quality and business excellence are understood as an imposed program which is detached and not integrated in the business in the way it is usually done.

Throughout all the organizational structures, whether educational or economic, there stretches the question of the human resource development, into which the least of all segments of the society are invested. This is proved by the recourses of the pre access funds from the recent times when we yet not members of the EU. Why is the relation to the basic value, person, inferior, inapprehensible, although it is expected of everybody to render an engagement, contribution, but it has no support, neither financial nor educational, even any verbal. How can we realize quality, even excellence in any activity?

4.2. Strategic commitment and educational excellence There is in operation for a certain time that European documents treating the problematic of our high educational institutions, like Green paper, that appeared in the year 2011 as a great challenge, then also Europe 2020, Horizont 2020 and Teaching 2020. The document Europe 2020 is a strategic document and represents goals of the strategy of high education development. It is based on integral, innovative and safe associations. The foundation for it should be interdisciplinariness and multidisciplinariness – which makes links among all disciplines, profession, institutions and countries. Being led by the direction from these documents, and representing Smjernice za strategiju odgoja, obrazovanja, znanosti i tehnologije/ Guidelines for the strategy of upbringing, education, science and technology (Minister MZOS - Ž. Jovanović, 9.5.2013.) was speaking about the „strategy“ that he wants to call Hrvatska 2020 (Croatia 2020), emphasizing rational usage of all resources, from the material to human, so that in our country should realize a number of faculty educated professionals for the working market, and not for employment institutions. To achieve it is necessary to apply professionalism in the overall educational system. Implying reform in educational qualification, it is supposed that there will occur the rise of the rate of the highly educated by 40 percent. However, tending to reality, the satisfactory result would be between 25 to 30 percent of highly educated persons in the actively working population. The fact that “Croatia has no economy based on knowledge, nor has the society an equal chance” (Ž.Jovanović), there is a practical question posed: How should we organize the entire (high)educational system in order for young people to be able to prepare with quality for the working market? Since we have only 18 percent of (high)educated working acting population, while there are 3,350 researches per a million of inhabitants, and for the science and research there is less than 1 percent of GDP set aside. Is it then suitable to pose the question about excellence? In doing so accept foreign materials of international conferences the emphasis is put on the linkage of social sciences, art and technology and linking of researchers, their ideas and results into the world’s collectiveness - development, researching, applications of knowledge in economy and quality results. What is interesting are the different world approaches to education, particularly on the level of high education and the lifelong learning as ways towards excellence. The American trend is learning through work, via working, where the error is corrected by further work (learning by doing). The Japanese approach is somewhat different, and it relates to the learning by experience where the corrections are performed through walking so that one should not lose time and results. This is a logical sequence for the workaholic Japanese, and it is known under the term – learning by experience. There is also the interesting view of the other eastern industrial giant to this question – Korea. They are very practical and undertaking, and accordingly ingenious because their concept of development in education, and by this the production is based on deliberation that everything is already made up, there is only important that it should be well combined, integrated and further develop offered activities and processes. By their philosophy they merge everything they can find and then they make something – new. This new then becomes qualitatively recognized and praised in the world (learning by integrating). Probably it is possible to find an array of similar conceptions and resources also in other countries, but it is definitely more important to recognize and adapt what is nearest and best in an individual country and its mentality. Being occupied with the question of acquirement of (relative) degree of excellence as a notion, the question of organizational form of excellence’s existence got imposed. Some activities and some sciences have recognized this possibility of for-

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matting and application of excellence in the activity of centers of excellence, particularly in highly educational institutions. The goals of acting of such centers would be observed through stimulating of educational excellence, through managing quality changes in the educational system, through the development of new educational programs applicable to students for later work in economy, through competition on the market relation to knowledge and skills, achieving efficacious intellectual and pedagogic potential and the like. This would achieve a quality professionalization through lifelong learning and attainment of socially responsible pedagogues. By the activity of such a pedagogic excellence center, educational activities would be, in terms of programs, specifically intended to all educational employees, advisers, mentors, directors, students, professors in the private and state sector, in agencies, ministries, at the university, in management linked to the economic development. In this way higher criteria and more quality systems of educational values would achieved as well as key competences on all the educational levels. Taking into account that the Zakon o osiguravanju kvalitete u znanosti i visokom obrazovanju /Law on securing quality in science and high education (2009), and somewhat earlier the MZOS published the goals of the Znanstvena i tehnologijska politika RH / Scietific and technologogical politic of the RH whose basis is the stimulation of excellence in science – the conception of possible center of pedagogic excellence by way of their goals could be specified in the light of:

• • • • • • • • • • •

strategy and planning of development of pedagogic theory and practice; stimulation of educational excellence – using chosen themes; managing changes in the development of the system of high education; determining existing teachers’ and other competences as further development of professional values; development of new teaching programs applicable in high education and economic organizations; common activities and development of educational and economic structures; competition the market in knowledge and skills; securing implementation of longlife education and quality professionalization; achievement of efficacy of intellectual potential – pedagogic and the like; recognizable character of the pedagogic profession and its system of values; achievement/realization of socially responsible pedagogy.

Taking into consideration the numerous educational population that is not encompassed by defined educational contents, and it should have been, the expected results were as implied:

• better knowledge and development of business activities that are dealt by (un)professional persons; • achievement of greater dignity and distinguishing of the pedagogic profession and pedagogic science in whose shelter there are all the educational activities of various orientations and commitments;

• development of awareness that pedagogy is everywhere round us ant it should be used in all segments of life – whether we are aware of it or not;

• adoption of higher criteria and quality system of values (in business / in the family / in society / in the (university) class; • recognizing the necessity for realization of longlife learning/education along with its development. • By virtue of these statements we would draft the strategy of development excellence in many educational and active segments which would be a very demanding assignment.

CONCLUSIONS Accepting all the mentioned elements, processes and activities we must affirm that they affect effectiveness, impacts, results of education as such, and particularly high education. In this way assumptions are formatted for the advancement of the integral social system which implies the development of economy, possibility of employment, stimulating cultural consciousness and national identity, and also the enculturation of the population that should be ennobled by newly obtained conditions of life and environment. In so doing one should not neglect European and world’s cognitive values but they should be followed and possibly adapted by homeland’s conditions. Understood in this way, meaning knowledge, it is thus applicable with understanding and it will be “real” knowledge that will be useful, both to the individual and to the social system as a whole. Unified human, educational-cultural and economic capital will constitute a quality platform for the realization of social-politic development.

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LITERATURE 1.

Afrić, V. i dr. (2011.) Društvene pretpostavke društva znanja, Filozofski fakultet Sveučilišta u Zagrebu, Institut društvenih znanosti Ivo Pilar, Učiteljski fakultet Sveučilišta u Zagrebu, Zagreb 2010.; Afrić, V. and others (2011) Social hypothesis of the society of knowledge

Jantti, M.H. (2002.) Minding your Own Business: Can a Business Excellence Framework Translate to the Education Sector ?(online). Dostupno na: http:// ro.uow.edu.au/asdpapers/19 (15. lipanj 2013/ June, 2013)

Keely, B. (2009.) Ljudski kapital (Od predškolskog odgoja do cjeloživotnog učenja), Educa, Zagreb 2009.; Human capital (From the pre-school education to longlife verning)

Liessman, K.P. (2009.) Teorija neobrazovanosti, zablude društva znanja, Jesenski i Turk, Zagreb 2009.; Theory of noneducation, misapprehension of the society of knowledge

Marinković, R. (2007.) Croatian Educational Space and European Influences, R. Marinković (Ed).: New Perspectives in Quality Development of Higher Education, A.Z.P. Grafis d.o.o. Zagreb 2007, pp. 25 – 48.

Marinković, R. (2007.) Quality Management and Communication in Higher Education, A.Z.P. Grafis d.o.o. Zagreb 2007.

Standards and Guidelines for Quality Assurance in the European Higher Education Area, European Association for Quality Assurance in Higher Education, Helsinki, 2007.

Strateški okvir za razvoj 2006 – 2013., Vlada Republike Hrvatske, Središnji državni ured za razvojnu strategiju i koordinaciju fondova EU, Zagreb, 2006.; (Strategic frame for development 2006 – 2013, Government of the Republic of Croatia, Central State Department for developmental strategy and coordination of funds EU, Zagreb, 2006)

DETAILS ABOUT AUTHOR: RENATA MARINKOVIC PROFESSOR FACULTY OF HUMANITIES AND SOCIAL SCIENCES, UNIVERSITY OF ZAGREB ZAGREB, CROATIA rmarinko@ffzg.hr

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FORMING COMMUNITIES OF PRACTICE IN HIGHER EDUCATION: A COMPARATIVE ANALYSIS SHERYL BUCKLEY MARIA JAKOVLJEVIC MELANIE BUSHNEY GRZEGORZ MAJEWSKI

ABSTRACT

In the light of the development of the educational process, a by this the overall system, there occurs the permanent need for its advancement. Through the realization of that aim it will be contributed to the development of the contemporary society – both regional as well as global. The quality educational process also means the achievement of quality, applicable knowledge, which is said to be power. With the thought of Francis Bacon “Knowledge is power” begins the project of the modern. René Descartes joined him as the leader of the modern with his rationalistic stance “I think, therefore I am”) which opens presumptions for the later period of the postmodern. In the new times, by applying concretization of independent constructivism, creativity, independency and working on oneself, various pedagogical models open spaces to human thinking and creation and also to interactive relations indispensable for the development of pedagogical thought and work. Then we talk about the postmodern. Readiness for quality processes can be seen in the context of formatting social competences (within the social terms), which includes educational, human potentials, strategies and structures of developing politic. What do they incline to? They aspire to the realization of the system of excellence in all fields and all levels of education. The formatting of the overall system of excellence must be accompanied quality and creative processes of managing and regulation. KEYWORDS: Communities of Practice, higher education, action research, knowledge sharing, online learning, survey.

1. INTRODUCTION Communities of Practice (CoPs) are all around us. It has been in existence for a long time. Communities can be found in schools, universities, research institutes (Nistor, Baltes, & Schustek, 2012) and business organisations. Gannon-Leary and Fontainha (2007) emphasise that in view of technological developments which gave rise to improved communication and participant interactivity, academic staff and learners (students) in higher education have been functioning in virtual Communities of Practice (VCoPs). These online environments allow participants to communicate synchronously or asynchronously (Baran, 2006). According to Bolger (cited by Gormley 2012) VCoPs can advance employee development and learning while preserving crucial organisational knowledge. However, the specific guidance to form CoPs in higher educational institutions (HEIs) does not exist. On the other hand, Nistor et al. (2012) point out that although VCoPs lead to improved academic participation and learning success, only a small number of learners and faculty participate in VCoPs on a regular basis. Participation in CoPs delivers several benefits in the form of the accumulation of experience, the stimulation of the social construction of knowledge and the development of expertise (Boylan, 2010; Nistor, Baltes, & Schustek, 2012), which makes it interesting for educational research on formal learning. Given that knowledge as a valuable asset must be managed in a knowledge-based economy and most organizational knowledge exists in tacit form within employees’ minds (Gromley, 2012), issues of knowledge management have also become more prevalent among researchers. Krishnaveni and Sujath (2012) emphasise that knowledge sharing in CoPs have not been entirely researched so far. It is noteworthy that research on the environments of online CoPs has increased (Baran, 2006). Some remaining questions still need to be answered. To establish CoPs and keep it alive is more difficult than the blink of an eye. Unfortunately, the majority of literature on CoPs originates from outside Europe although e-learning articles have been widely distributed around Europe. Gannon-Leary and Fontainha (2007) advocate further research on CoPs and virtual learning communities across European Union countries. Similarly Petersen (2007) cited by Gannon-Leary and Fontainha (2007) proposed that the concepts of learning in CoPs need to be further developed. Overall, more research is required about CoPs (Baran, 2006; Wubbels, 2007) to gain more insight about it. This study has been initiated as part of a Women in Research project about CoPs that consists of six phases: developing a theoretical framework for communities of practice; exploring students’ preliminary attitudes towards communities of

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practice; forming pilot communities of practice; evaluating pilot communities of practice groups; implementing action research to pilot communities of practice and applying the communities of practice model (CoPM) to other groups. The aim of this paper is to highlight phase two of the study namely exploring students’ preliminary attitudes towards communities of practice. The main purpose of this paper to determine to what extent are learners willing or prepared to share knowledge within learning CoPs at three institutions of higher education in order to empower learning and knowledge sharing within those institutions. The University of Johannesburg in South Africa, the University of Witwatersrand and the University of Zadar in Croatia are compared in this paper. All of them are urban universities which offer contact tuition. Furthermore, Croatia joined the European Union on 1 July 2013 (Mahony, 2013). The research questions are the following: 1. What are the perceptions of undergraduate and postgraduate students at two South African universities about CoPs in terms of their willingness to share knowledge and experiences? 2. What are the perceptions of undergraduate and postgraduate students at a European university about CoPs in terms of their willingness to share knowledge and experiences? 3. In which way does CoP influence the study methods of undergraduate and postgraduate students at all universities?

2. DEFINING COMMUNITIES OF PRACTICE Wenger and Snyder (2000: 139) define CoPs as “groups of people informally bound together by shared expertise and passion for a joint enterprise”. Lave and Wenger (1991) and Wenger (1998) view CoPs as groups of people who share “goals, activities and experiences in the frame of a given practice”. Barab, Makinster and Scheckler (2004) regard a CoP as a “persistent, sustained social network of individuals who share and develop an overlapping knowledge base, set of beliefs, values, history, and experience focused on a common practice and/or mutual enterprise”. The improvement of knowledge of the members in the community is the result of the communication. Online CoPs differ from co-located CoPs. Gannon-Leary and Fontainha (2007) describe virtual communities of practice (VCoPs) as a “network of individuals who share a domain of interest about which they communicate online”. Lai, Pratt Anderson and Stigter (2006) point out some differences. It takes longer to develop online CoPs than co-located CoPs. Technological support is crucial for online CoPs but not for co-located CoPs. Communication in online CoPs is mainly computer-mediated but in co-located CoPs communication is mainly face-to-face.

3. PARTICIPATION, TRUST AND KNOWLEDGE SHARING WITHIN COPs Wenger (1998) focuses on participation as an “encompassing process of being active participants in the practices of social communities and constructing identities in relation to these communities”. Interactions do not have to be long (Krishnaveni & Sujatha, 2012). Knowledge sharing occurs via reflection and story telling and CoP members communicate among themselves. CoPs ultimately serve as a platform to question and explore the topics of interest. In order to learn through social interactions, the members produce and reuse resources e.g. the artefacts and its memory. The resources support the tacit knowledge of CoP members and those members share their knowledge and competencies. To communicate with others in a community, creates a social presence. The social presence influences the likelihood of individuals to participate in CoPs, especially in online environments. The degree of participation in CoPs differs depending on the individual expertise of the members. Those who display more expertise become involved in more activities which include activities with a higher degree of difficulty and responsibility. In CoPs the expert status relates to the identity of the members in that community. Members can be full and peripheral community members according to Lave and Wenger (1991). Experts with their exceptional knowledge and skills are full members of CoPs and members recognise them socially as such. It follows then that expert identity results from “the interaction with and recognition of other members” in CoPs which takes place in the context of participation. The impact of “expertise participation on expert status is mediated by participation” (Nistor et al., 2012). Furthermore, Krishnaveni and Sujatha (2012) report that members address issues with the assistance of other experts within the CoPs. Gradually mentors come to the forefront in view of their long-term association and they start to assist newcomers. It is easy for new members to join if they have the particular interest. In passing of time they associate with senior members and more experts which opens the way for transfer of knowledge from the experts to the learners. After

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a while the members know which part of the knowledge can be codified and which part must be shared by means of storytelling or other means (Krishnaveni & Sujatha, 2012). The Oxford English Dictionary (2013) describes trust as a ‘firm belief in the reliability, truth, or ability of someone or something’. Members will use CoPs once they trust it to have reliable and objective information. For CoPs to be successful, the members must highly trust the integrity and competence of its members (Krishnaveni & Sujatha, 2012). If the community includes a number of known people, the CoP members will feel more comfortable, but they will also be inclined to participate in CoPs consisting of entirely new members if they have great levels of trust in the institution. Usoro, Sharratt, Tsui and Shekhar (2007) conclude that trust in VCoPs contains three elements: competence, integrity and benevolence. Usoro et al. (2007) found trust in the integrity of the community to be the most important predictor to share knowledge. Competence-based trust refers to the confidence of the members in the particular expertise of others. Integrity/benevolence-based trust involves the expectation of the trustees that others will treat them in an honest and kind manner. Ardichvili (2008) cited by Gormley (2012) further added institution-based trust, which refers to moderators who ensure the trustworthy behaviour of members through organisational structures. In an earlier study, Ardichvili (2003) identified integrity/benevolence-based trust and competence-based trust as important barriers to participation in VCoPs, due to the fear of misuse by others of information posted, for example, facing a personal attack by others. Often members of CoPs come across several barriers that hinder them to participate and exchange knowledge.

4. APPROPRIATE TECHNOLOGY FOR COPs Internet technologies enabled knowledge sharing in online CoPs. Active knowledge sharing contributes to successful VCoPs. Expert knowledge can be shared by the medium of Web 2.0 tools which include blogs and wikis. Web 1.0 and Web 2.0 deal with the ways in which technologies are used. Web 1.0 consisted of static web pages that were filled with information but users could not interact with the site except for example to download a document or an application. Web 2.0 enabled people to connect with others through the Web by using for example social networking sites like LinkedIn or Facebook (Gelin & Milusheva, 2011). It allows communication, participation, collaboration and editing of information (Gormley, 2012). Users can contribute (e.g. Wikipedia) or share content (e.g. YouTube). If anybody wanted to create CoPs, Web 2.0 would be the technology to apply. However, Web 2.0 is beneficial if members continue to use the community for knowledge sharing. Web 2.0 tools ought to decrease the time users spend to source content by improving the visibility of existing content instead of being used to offer an alternative to what exists already. On the other hand, VCoPs is able to operate successfully without the latest high-tech tools (Gelin & Milusheva, 2011). Learners may require training to use social media or to participate in blogs, wikis and forums for knowledge sharing. They need to obtain the relevant skills and competence to use them. Davis (1989) cited by Gormley (2012) postulates that the perceived usefulness and perceived ease of use of technology influence substantially on the users’ motivation to accept and use information technology. For instance Karpinski (2008) cited by Gormley (2012) reported that people may not use Web 2.0 resources if they did not have a perceived need for the resource, thereby not viewing it as useful. Interestingly, technology itself may add to the misinterpretation of messages, due to lack of face-to-face communication (Gannon-Leary & Fontainha, 2007; Gormley 2012). Management must play a supportive role to promoting the usefulness and advantages of Web 2.0 tools for knowledge-sharing and collaboration and make the technology available to employees.

5. CULTIVATING COPS WITHIN ORGANISATIONS For Wenger, McDermott and Snyder (2002) a successful CoP relies on the purpose and objective of the community as well as the interests and resources of the CoP members. Instead of reinventing the wheel and starting from scratch, Schenkel and Teigland (2008) as cited by Krishnaveni and Sujatha (2012) advise that one should look at the existing communities and networks first. In the absence of the latter, the recommendation is to form relationships among coworkers around common themes and interests followed by developing goals for CoPs in alignment with organisational objectives. In a strongly framed CoP, transmission of knowledge takes place closely between the members thereof. The opposite is true. When transmission of knowledge is less frequent, the CoP is weakly framed. The danger of disintegration occurs when the ability to communicate closely among the CoP members, is hindered (Schenkel and Teigland, 2008 cited by Krishnaveni and Sujatha, 2012).

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Top management ought to have an awareness of networks of knowledge workers and the importance of knowledge sharing. CoPs flourish when they receive active support and the necessary resources e.g. time to participate, technical infrastructure, CoP sponsors ensure the whole support for the development and expansion of CoPs. CoP sponsors serve as a support link between CoP leaders and top management. The sponsor can further play the role of a control agent and request the CoP leader to provide a number of best practices to be developed at specific time intervals. Sponsors should supervise the best proactive adoption process and provide appropriate technology to enable best practice exchange within the CoP ( Borzillo, 2009 as cited by Krishnaveni and Sujatha, 2012). Successful CoPs are able to generate sufficient excitement, relevance and value to attract and engage members, a sense of aliveness in other words. How can one design CoPs for this aliveness? Wenger, McDermott and Snyder (2002) postulate that CoPs must invite the interaction that makes them alive. Well-structured CoPs enable group discussion, one-onone conversations, observing experts tackle cutting-edge issues. Despite the voluntary nature of CoPs, well-structured community design can invite aliveness. Wenger, McDermott and Snyder (2002) identified seven principles or actions in order to cultivate CoPs so that they will become “alive“: 1. Design CoPs to evolve naturally. Since CoPs are dynamic, in the sense that the interests, goals and members may change, CoP forums need to be designed to support these shifts in focus. 2. Create opportunities for open dialogue between inside and outside perspectives. Although the CoP members and their knowledge are a valuable resource, it is to the advantage of the CoPs to look outside of the CoPs to gain understanding and insight in the different possibilities to accomplish their learning goals. 3. Invite different levels of participation. The first level is the core group that participates intensively in the community through discussions and projects. They fulfill leadership roles to guide the group. The active group, second level of participation, participate regularly but not to the same extent as the level of the leaders. The third level, the peripheral group, although being passive members in the community are still learning from their involvement. The majority members resort to this third group. 4. Develop public and private community spaces. CoP members in public spaces share and discuss ideas but private exchanges must be made possible. Different CoP members could coordinate relationships among the members and resources by adopting an individualised approach based on particular needs. 5. Focus on the value of the community. Members ought to have opportunities to discuss the value and productivity of their participation. 6. Combine familiarity and excitement. As part of the CoP structure learning opportunities must be provided to shape their learning experiences in a brainstorming session and investigating the traditional and radical wisdom with regard to their topic. 7. Create a rhythm or pace for the community. Members need to meet, reflect and evolve on a regular basis. The pace should maintain an engagement level that will sustain the vibrant CoP but at the same time not become so fastpaced that it becomes unwieldy and overwhelming.

5.1 Principles for cultivating CoPs Lai et al. (2006) argue that online CoPs or VCoPs involve more than merely transferring a CoP to an online environment. Technology infrastructures must enable the online CoPs to address barriers that are not applicable in co-located CoPs: time to meet and communicate; members may be large and involve many locations; members are dispersed across organisations and experience different organisational cultures. It is debatable whether trust can be developed online. Lai et al. (2006) provide the following design principles for online CoPs: 1. Online CoPs must be cultivated to grow naturally. Although these online CoPs “can be built in terms of the technology”, the members themselves must take rersponsibility to grow the community. Online CoPs must allow development. 2. Developing online CoPs by considering sociability (interaction of members) and usability (interaction of members with the technology). Several strategies are provided to promote sociability and participation. Allow different levels of participation; allow time to participate; ensure that there is ease of use of technologies and build social relationships and trust. 3. Attract diverse members so that a critical mass of people are members of the online CoPs. Structure the online CoPs to take into account geographical and contextual diversity. 4. Provide for different roles in the online CoPs. The types of roles are: leadership roles, core members, support persons and community members. Defined roles deliver the benefits of reassurance, continuity and structure. 5. Incorporate technology designed with functionality to support sociability and knowledge sharing. To choose appropriate technology, the following must be considered: the needs of the community, access; level to technology and the level of available funds. 6. Adopt a blended approach to development where online activities are supported by offline activities.

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5.2 Strategies for empowering CoPs Au, Reiner and Urbanowski (2009) suggest five additional strategies that can be applied in CoPs: 1. Create an equal environment. Members must be at ease to participate and intimidation should be discouraged. To develop a common understanding of the value of the community requires intensive preparation. All members must be engaged and they need to find a way to work together to accomplish goals together. 2. Keep material and activities engaging. In order to prevent boredom, excitement can be created by examining or discussing different activities that everyone will be interested which will motivate members to return for more. Wenger et al. (2002) concurs that successful CoPs supply sufficient structured activities to build a pace of participation and opportunities to share innovative ideas. 3. Establish a routine. Members of CoPs need to know what will be accomplished during each meeting and when. Since all participants have different schedules for all their commitments, a routine is necessary so that members can work around their commitments (Au, Reiner & Urbanowski, 2009; Wenger et al., 2002). 4. Support third party opinions. Apart from professional opinions, third party opinions of people who do not form part of the practice serve as a neutral opinion on what the CoP is looking for, what is lacking, what has been overdone or tried previously. For Wenger et al. (2002) insider and outsider perspectives are necessary. While insiders understand the issues and barriers to problem-solving and may possess the knowledge required to assist the CoP, outsiders who are non-experts and neutral facilitators on the issue may help open up new possibilities. 5. Design for growth and expansion. With the passing of time, new information, new ideas and techniques could be incorporated. Changes in the organisation also place new demands on the CoP and the community must prepare for the growth and expansion. 6. Adhering to the preceding will contribute to CoPs being successful. The next section deals with the empirical part of the study.

6. RESEARCH DESIGN 6.1 Research approach This research can be described as a quantitative case study as the learning experience of students is investigated relating to a specific event in a bounded context (Creswell, 1994; Yin, 1994; Merriam, 1998). The quantitative research approach allows researchers to collect quantifiable data in challenge to deliver neutral results (Creswell, 1998).

6.2 Sampling and data gathering method A non-probability sampling approach was used through convenience sampling. Participants from the three groups of students (Department of Economics, University of Zadar, Croatia, Department of Mining, University of the Witwatersrand and Department of Applied Information Systems, University of Johannesburg) presented a purposive convenient sample, as they were available and inexpensive to this study (Patton, 1980:104). A survey was undertaken with 500 students registered for undergraduate and postgraduate diplomas and degrees at three Universities. Lectures conducted an off-line questionnaire using existing database of undergraduate and postgraduate students at three universities.

6.3 Assessment of trustworthiness Participation was strictly voluntary and students were free to decline to participate in this research study, or they could withdraw their participation from the study at any time. Students were informed that anonymity will be protected in any reports, research papers, thesis documents, and presentations that result from this work. The students completed a questionnaire, which they returned to the researchers electronically. The issues of credibility and reliability in the questionnaire design were considered (Creswell, 1994,1998; Patton, 1980).

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6.4 Questionnaire design The questionnaire was divided into sections A - demographic information (gender, age, year of study, nationality) and B - 5 categories/measures, namely: willingness; team preparedness; communication modes; and perceived benefits. In total the questionnaire consisted of 20 questions and the variety of questions contributed to the richness of the preliminary data by revealing studentsâ&#x20AC;&#x2122; perceptions, opinions with respect to CoPs.

7. DATA ANALYSIS 7.1 Cross-tabulation and Chi-Square testing Inferential statistics (a cross-tabulation and Chi-Square testing) were used to analyse studentsâ&#x20AC;&#x2122; responses that are considered as variables. A cross-tabulation is a technique that is based on joint frequency distribution of cases based on two or more categorical variables. Categorical variables should contain integer value, which would indicate membership in one of several possible categories. The range of potential values for such variables is limited. Due to the low number of possible values of categorical variables it is not possible to make any assumptions regarding the distribution (e.g. whether it is normal distribution) (Crossman, 2013). Chi-Square test can be utilized in this study to investigate whether the results of the sample analysis are representative of the larger population (Crossman, 2013). The Chi-Square test of statistical significance assumes that the variables are measured at the nominal level. This means that should there be any information regarding the order of, or distances between categories, it is ignored. A critical assumption for the Chi-Square is independence of observations. Moreover large frequencies are expected (Michael, 2002). The Chi-Square test helps us to determine whether two discrete (categorical) variables are associated. The Chi-Square test computes the sum of the squares of the differences between actual and expected values of variables and assigns a probability value to that number depending on the size of the difference and the number of rows and columns of the crosstabs table. If the probability value p computed by the Chi-Square test is very small it means that the differences between actual and expected values are significantly large. This means that the assumption of the independence between variables is not met and that there is a relationship between the variables. Should the value p be large, differences between the actual and expected values are not statistically significant and therefore variables are indeed independent. The Chi-Square test is only reliable if all expected values are 5 or more. Figure 1 presents the results of the cross-tab and Chi-Square analysis for the variable measuring the willingness to share knowledge in the same field. Figure 1: Willingness to share knowledge in the same field (Cross-tab and Chi-Square test). Cross- tab Institution Strongly Disagree 5.1 Are you prepared to share your knowledge and experience with others in the same field?

Disagree Neutral Agree Strongly Agree

Total

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Total

Zadar

Wits

Count

% within Institution

0.5%

2.6%

1.3%

Count

% within Institution

0.5%

0.0%

0.2%

Count

% within Institution

6.0%

16.4%

5.6%

8.0%

Count

130

240

% within Institution

65.0%

43.1%

26.0%

43.9%

Count

155

255

% within Institution

28.0%

37.9%

67.1%

46.6%

Count

200

116

231

547

% within Institution

100.0%

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Chi-Square Tests Value

Asymp. Sig. (2-sided)

Pearson Chi-Square

91.732a

.000

Likelihood Ratio

90.299

.000

Linear-by-Linear Association

29.318

.000

N of Valid Cases

547

a: 6 cells (40.0%) have expected count less than 5. The minimum expected count is .21. In this case there are 6 cells (about 40%) that have the expected count below 5, which makes the Chi-Square test not reliable.Figure 2 presents the results of the cross-tab and Chi-Square analysis for the variable measuring the willingness to share knowledge depending on the character or the other members of CoP. Figure 2: Willingness to share knowledge depending on the character of the other members of CoP. Cross- tab Institution Strongly Disagree 5.2 Would the character of the other members play a role while sharing knowledge?

Disagree Neutral Agree Strongly Agree

Total

Zadar

Wits

Count

% within Institution

0.0%

0.9%

1.7%

0.9%

Count

% within Institution

0.5%

0.9%

2.6%

1.5%

Count

% within Institution

14.5%

20.7%

15.7%

16.3%

Count

115

264

% within Institution

57.5%

49.1%

40.2%

48.4%

Count

179

% within Institution

27.5%

28.4%

39.7%

32.8%

Count

200

116

229

545

% within Institution

100.0%

Chi-Square Tests Value

Asymp. Sig. (2-sided)

Pearson Chi-Square

21.371a

.006

Likelihood Ratio

22.782

.004

Linear-by-Linear Association

.056

.813

N of Valid Cases

545

a: 6 cells (40.0%) have expected count less than 5. The minimum expected count is 1.06.

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As with the data in Figure 1, there are 6 cells, which have the expected count below 5, which makes the Chi-Square invalid in this case. Similar situation to those two presented previously (cells with values below 5) occurs in the case of the following questions in the questionnare: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Are you a team player? Which form of communication would you most use as a participant in a CoP? By sharing knowledge, my knowledge base will increase Sharing my personal knowledge and experiences will maintain or increase my status amongst my peer Sharing my personal knowledge and experiences helps build trust among peers study methods are unique and effective like to share them with others We all possess certain tacit knowledge. Sharing with others will make us more effective I will learn more from peers about new developments in my field than from reading literature benefit from knowledge sharing My peers benefits from knowledge sharing Associating voluntarily with others to share knowledge, friendships can develop based on trust Since voluntary, I can opt out any time Sharing the same identity creates a strong bond amongst the members of a CoP CoPs are created out of passion for one’s work and they ‘die’ from lack of it Sharing my personal knowledge and experiences will not be detrimental to my own performance (e.g. detracts from doing other work ) I have personal knowledge and experiences that would be important for my peers to have Sharing my personal knowledge and experiences will increase my power to influence decisions

Therefore for these questions the analysis based on the Chi-Square test would yield unreliable results. In the case of these variables it is advisable to gather more data or reinvestigate the scales utilized.There are only two questions in the questionnaire that meet the criterion of having all of the expected frequencies above 5: 16. Do you prefer to work alone? 17. I am frustrated with my studies and would like to feel free to discuss it with others. In the case of these questions it is possible to proceed with the Chi-Square test as the results of it are likely to be reliable. Table 3 presents the Cross-tab and Chi-Square for the first questions, while table 4 presents the Cross-tab and Chi-Square for the second variable. Figure 3: Preference of working alone.

Cross- tab Institution

Strongly Disagree Disagree 5.4 Do you prefer to work alone?

Neutral Agree Strongly Agree

Total

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Zadar

Wits

Count

% within Institution

7.5%

13.8%

20.3%

14.3%

Count

157

% within Institution

34.0%

25.0%

26.0%

28.7%

Count

186

% within Institution

32.0%

34.5%

35.5%

34.0%

Count

% within Institution

23.0%

13.8%

11.7%

16.3%

Count

% within Institution

3.5%

12.9%

6.5%

6.8%

Count

200

116

231

547

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Chi-Square Tests Value

Asymp. Sig. (2-sided)

Pearson Chi-Square

34.615a

.000

Likelihood Ratio

34.203

.000

Linear-by-Linear Association

4.879

.027

N of Valid Cases

547

a: 0 cells (0.0%) have expected count less than 5. The minimum expected count is 7.85. Figure 4: Frustration and willingness to share it Cross- tab Institution Strongly Disagree 7.5 I am frustrated with my studies amd would like to feel free to discuss it with others

Disagree Neutral Agree Strongly Agree

Total

Zadar

Wits

Count

% within Institution

8.0%

9.6%

9.0%

Count

133

% within Institution

34.0%

17.4%

19.7%

24.4%

Count

157

% within Institution

34.0%

27.0%

25.3%

28.9%

Count

151

% within Institution

22.5%

35.7%

28.4%

27.8%

Count

% within Institution

1.5%

10.4%

17.0%

9.9%

Count

200

115

229

544

% within Institution

100.0%

Chi-Square Tests Value

Asymp. Sig. (2-sided)

Pearson Chi-Square

45.869a

.000

Likelihood Ratio

51.336

.000

Linear-by-Linear Association

18.845

.000

N of Valid Cases

544

a: 0 cells (0.0%) have expected count less than 5. The minimum expected count is 10.36.

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The values of p are quite high therefore it is possible to conclude with high certainty that there is no relationship between the values for these variables and the institution the study was conducted with. In other words the institution was not affecting the answers of the respondents. Although this is only a preliminary study it is possible to formulate the potential hypotheses that could be further investigated during the full empirical research with the participating institutions. H0: There is no statistically significant difference in how the Communities of Practice are utilized in the participating institutions. H1: There is a statistically significant difference in how the Communities of Practice are utilized in the participating institutions. At this point it is however difficult to evaluate, which one of these hypotheses would be valid. Given that only two of the variables (as compared with fifteen that did not meet the Chi-Square criteria) could be utilized to investigate the hypotheses presented. Based on the preliminary study data it is possible to state that the result of the analysis of the two variables supports the null hypothesis – that there is no statistically significant difference in how the CoPs are utilized in the participating institutions. This statement is not a strong statement however. It is necessary to remember that these two variables were measuring only two aspects (and not the most important ones) of the CoPs. It is recommended that this study with improved questionnaire questions is conducted with a larger group of potential respondents.

8. DISCUSSION This paper investigated the concept of Communities of Practice (CoPs) and the potential for their usage in the higher educational institutions (HEIs) environment. It first started with an in-depth literature review on the subject of CoPs. Literature review explored the problems faced by the CoPs in the business environment, factors affecting participants while they engage in knowledge-sharing processes and the technological aspects of CoPs. Data for the empirical research was obtained from three higher-education institutions (HEIs). One of them was from Europe (University of Zadar, Croatia) and two from South Africa (University of Johannesburg and University of Witwatersrand). At this point it is good to realize, that although these institutions are geographically dispersed and have a different culture, they all are in similar situation when it comes to the establishment of CoPs. Therefore it is possible to perform a comparative study on them. Moreover such a comparative study may be useful for any future studies, which would investigate concepts such as CoPs or knowledge sharing across different countries, cultures and levels of development. At later stage of the research the empirical data from the preliminary study carried out with the members of CoPs from the participating institutions was analyzed and presented. Next section will briefly describe the conclusions that can be drawn based on the secondary and primary research.

CONCLUSIONS This research is the first step in the process of investigating the potential for the use of (Virtual) Communities Practice (VCoPs) in the Higher Educational Institutions (HEIs). Due to this fact it is rooted in the existing literature on the subject. The concepts from the literature review were utilized in order to develop constructs, which formed a basis for the empirical research. The empirical research was in a form of a pilot study carried out with three HEIs: University of Zadar (Croatia, EU), University of Johannesburg and University of Witwatersrand. At this early stage it is difficult to provide decisive conclusions due to the limited scope of the underlying research. Based on the secondary research and the preliminary study it is however possible to state that the research in this area is very relevant and sought-after given the existing trends in the industry and academia. As it was described previously VCoP are an already established concept in the industrial world. Therefore their inclusion in the academia would allow students to learn this concept in advance and therefore would provide them a seamless start in the world of industrial VCoPs. This conclusion is valid both for the European countries as well as most-economically potent countries in the developing world (South Africa is one of the best examples of such countries). Another conclusion that can be drawn based on this study is that there is a possibility of using the constructs taken from the industrial CoPs and “refining” them to the educational CoPs. It is expected that any further studies involved with such constructs will yield relevant and reliable results. The empirical pilot research carried out for this study is a visible

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proof for that. Although the questionnaire items need to be further worked upon it is possible to state that they are a good tool to measure the most common concepts of CoPs in HEIs.

LITERATURE/references 1.

2. 3. 4. 5. 6. 7. 8. 9.

Au, L.; Reiner, D. & Urbanowski, D. (2009). Communities of Practice. Communities of Practice conference paper. 13-14 March 2009. Calgary, Canada. Baran, B. (2006). Knowledge Management and online Communities of Practice in teacher education. The Turkish Online Journal of Educational Technology, 5(3), pp. 12-19. Barab, S.; Makinster, J.G. & Scheckler, R. (2004). Designing system dualities. In Barab, S. A. & Gray, J. (Eds.). Designing for virtual communities in the service of learning, pp. 3-15. Cambridge, Massachusetts: Cambridge University Press. Brink, D., (2010). Essentials of Statistics. David Bring & Ventus Publishing ApS, ISBN 978-87-7681-408-3. Boylan, M. (2010). Ecologies of participation in school classrooms. Teaching and Teacher Education, 26(1), pp. 61-70. Crossman, A.(2013). Descriptive vs. Inferential Statistics. http://sociology.about.com/od/Statistics/a/Descriptive-inferential-statistics.htm Accessed 05.09.2013. Gannon-Leary, P. & Fontainha, E. (2007). Communities of Practice and virtual learning communities: benefits, barriers and success factors. eLearning Papers, 5. ISSN 1887-1542. www.elearningpaers.eu. Accessed 2 September 2013. Gelin, P. & Milusheva, M. 2011. The secrets of successful Communities of Practice: real benefits from collaboration within social networks at Schneider Electric. Global Business and Organizational Excellence, July/August, pp. 6-18. Gormley, S. (2012). Understanding Participation in Knowledge-Sharing in Virtual Communities of Practice on the HSELanD elearning Portal. Unpublished Master of Science dissertation. Trinity College, Dublin.

10. Lave, J. & Wenger, E. (1991). Situated learning: Legitimate peripheral participation. Cambridge: Cambridge University Press.

11. Lai, K.W.; Pratt, K.; Anderson, M, and Stigter, J. (2006). Literature review and synthesis: Online Communities of Practice. Executive summary. http://www.educationcounts.govt.nz/publications/curriculum/5795. Accessed 14 August 2013. 12. Mahony, H. EU Croatia becomes 28th EU member state. EUobserver.com. euobserver.com/enlargement/120688. Accessed 7 September 2013.

13. Michael, R. S. (2002). Crosstabulation & Chi Square. http://www.indiana.edu/~educy520/sec5982/week_12/chi_sq_summary011020.pdf. Accessed 05 August 2013. 14. Nistor, N.; Baltes, B. & Schustek, M. (2012). Knowledge sharing and educational technology acceptance in online academic communities of practice. Campus Wide Information Systems, 29(2), pp. 108-116. 15. Oxford English Dictionary (2013). Oxford: Oxford University Press. http://www.oed.com. Accessed 9 September 2013.

16. Petersen, K.B. (2007). E-Learning in Virtual communities of Practice – And beyond? Research findings based on interviews. mpra.ub.unimuenchen.de/8708/. Accessed 9 September 2013.

17. Usoro A., Sharratt M., Tsui E. & Shekhar S. (2007). Trust as an antecedent to knowledge sharing in virtual communities of practice. Knowledge Management Research & Practice, (5), pp. 199–212. 18. Wenger, E. (1998). Communities of Practice: Learning, meaning and identity, Cambridge: Cambridge University Press.

19. Wenger, E. & Snyder, W. (2000). Communities of practice; the organisational frontier. Harvard Business Review, Jan-Feb, pp. 139-145.

20. Wenger, E., McDermott, R., & Snyder, W.M. (2002). Seven principles for cultivating Communities of Practice. Cultivating Communities of Practice. A guide to managing knowledge, pp. 1-9. Cambridge: Harvard Business School Press. Excerpt. 21. Wubbels, T. (2007). Do we know a community of practice when we see one? Technology Pedagogy and Education, 16(2), pp. 225-233. DETAILS ABOUT AUTHORS: SHERYL BUCKLEY ASSOCIATE PROFESSOR SCHOOL OF COMPUTING, UNIVERSITY OF SOUTH AFRICA (UNISA) MUCKLENEUK CAMPUS, PRETORIA, SOUTH AFRICA bucklsb@unisa.ac.za MARIA JAKOVLJEVIC ASSOCIATE PROFESSOR SCHOOL OF COMPUTING, UNIVERSITY OF SOUTH AFRICA (UNISA) MUCKLENEUK CAMPUS, PRETORIA, SOUTH AFRICA jakovm@unisa.ac.za MELANIE BUSHNEY ASSOCIATE PROFESSOR SCHOOL OF MANAGEMENT SCIENCES, UNIVERSITY OF SOUTH AFRICA (UNISA) MUCKLENEUK CAMPUS, PRETORIA, SOUTH AFRICA E-mail: mbushney@unisa.ac.za GRZEGORZ MAJEWSKI PhD, POSTDOCTORAL STUDENT SCHOOL OF COMPUTING, UNIVERSITY OF SOUTH AFRICA (UNISA) MUCKLENEUK CAMPUS, PRETORIA, SOUTH AFRICA grzegorz.majewski@gmail.com

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PEDAGOGY OF E-LEARNING: CASE OF MARKETING MODULE SANDRA HORVAT IRENA PANDŽA BAJS DINO GOSPIĆ

ABSTRACT

Although technology plays a central role in the e-learning environment, it is important to take into account the application of pedagogical principles that will enable the effective adoption of online content by students. Successful e-learning implementation must be based on sound pedagogical grounds during all stages of the development and content management, but also in the implementation through the students support and their evaluation. This paper is based on the assumption that it is necessary to combine and apply different strategies and methods of e-learning (i.e. presentations, demonstrations, practice and repetition, tutoring systems, games, simulations, discussion groups, different ways of interaction, modeling and collaborative work) in order to achieve high level of effective adoption of online content by students. All aforementioned teaching methods and e-learning strategies are analyzed from the pedagogical aspect and their contribution to effective learning. Defined theoretical principles are further analyzed through the case of e-learning Marketing module implemented at Faculty of Economics and Business, University of Zagreb. KEYWORDS: e-learning, pedagogy, marketing module

1. INTRODUCTION E-learning represents learning based on the use of modern information and communication technologies, with particular emphasis on interactivity and customization of learning taking into consideration the needs of students (Ružićić, Nikolić & Žižović, 2010). Although in the e-learning environment technology plays a central role (Saracevic and Masovic, 2011) it is also important to consider the application of pedagogical principles that will enable students to effectively adopt the online content. Pedagogy is dimension of e-learning environment associated with the process of teaching and learning, through activities such as content analysis, goal analysis and analysis of media to be applied (Stankov, 2009). It includes teaching methods related to the presentation of experiences, engagement of students, reinforcement, motivation, organization of teaching tasks, feedback, evaluation, and curriculum integration (Meyen et al, 2002). Successful e-learning implementation must be based on sound pedagogical grounds during all stages of development and content management, but also in the implementation through the students support and their evaluation (Govindasamy, 2002). All above mentioned elements must be designed in a way to answers the question: “What must be done in order to achieve successful e-learning activities for different categories of learners?” (Khan, 2002 in Stankov, 2009). In this paper the theoretical principles of e-learning model based on pedagogical principles are analyzed through the case of e-learning Marketing module implemented at the Faculty of Economics and Business, University of Zagreb.

2. CHANGES VERSION AND GAP VERSION OF OKUN’S LAW Teaching and learning theories up to the 1990s have looked at the interaction and communication primarily through interaction between teachers and a student, while more recent theories emphasize that learning is primarily a process of group experience involving mutual collaboration and group interaction. Accordingly, Rekkedal and Qvist-Eriksen (2003) analyzes three theories of distance learning: 1. Theory of autonomy and individualism entails distance learning that requires greater autonomy and independence of students. To succeed in such distance learning programs, the learner must be able to act independently and autonomously. 2. Theory of industrialization looks at distance learning as a typical product of industrial society, where distance learning is seen as a new form of industrialized technology based education. It presumes that distance education organized through IT systems, could attract and keep highly motivated students who wish to improve their vocational and professional status. 3. Theory of interaction and communication refers to distance learning that achieves better results, greater efficiency in cooperative learning methods than individual learning. This ‘third generation’ of distance learning puts less emphasis on electronic learning materials and high emphasis on student-student and student-teacher interaction through a web portal for learning.

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Regardless of the theory applied, Conole et al. (2004) accentuate that in the context of e-learning development the following theories and models of learning can be applied: behaviorism, cognitive theory, constructivism, activity-based, socially situated learning, experiential and systems theory. Based on their research aforementioned authors have developed a learning model based on pedagogical principles which consists of 6 elements: 1. Individual – individual is the focus of learning; 2. Social – learning is explained through interaction with others (such as a tutor or fellow students), through discourse and collaboration and the wider social context within which the learning takes place; 3. Reflection – conscious reflection on experience is the basis by which experience is trans-formed into learning; 4. Non-reflection – learning is explained with reference to processes such as conditioning, preconscious learning, skills learning and memorization; 5. Information – an external body of information such as text, artifacts and bodies of knowledge form the basis of experience and the raw material for learning; 6. Experience – learning arises through direct experience, activity and practical application. The e-learning module should therefore be designed to enable an individual activity of a student, but also to provide experiential and reflective learning, learning from others through mutual dialog and learning from the information or the knowledge provided by others. According to Conole et al. (2004) better mapping of different pedagogical tools and techniques will provide a pedagogic approach that is more reflexive and consistent with practitioners’ theoretical perspective on learning and teaching.

Pedagogical Principles For Effektive E-Learning The whole learning process as well as the interaction between teachers and students in the e-learning course takes place under the auspices of software called a Learning Management System (LMS). LMS is a set of standardized components for learning, designed to connect learning with existing IT systems within a specific organization or through a web portal for learning (Saračević and Mašović, 2011), such as Moodle, WebCT etc. Educational institutions and teachers use the LMS to develop content online making it available to students at any time and place. But in doing so it is necessary to consider and to apply the pedagogical principles that will enable effective adoption of online content by the students. According to Ružičić, Nikolic and Žižović (2010), the process of learning in the school and the academic environment is not only related to individual efforts in getting the knowledge and skills, but it is also based on social interaction between students and lecturers, as well as between the students themselves. That is why, for the success of the educational process, is not enough that students only receive information from the available literature and electronic resources, but in communication with tutor, to get help and support in overcoming educational content, as well as feedback on their performance. The social aspect of the group education is especially important, because the motivation of the participants is influenced by communication and greater sense of security and satisfaction with the participation of students in group forms of teaching. Accordingly and based on the e-learning theories and models described above, principles of effective online learning and LMS support have to comply to following demands (Vrasidas, 2004):

• Learner-centered: Students organize information and knowledge, take control of their learning, act as autonomous • • • • • •

individuals who plan and execute learning tasks. An LMS should provide tools that allow students to organize information, contribute content, and engage in learning activities. Engaged and active: Students engage in interesting activities that motivate them and employ active learning principles to solve class problems. An LMS should provide tools that support active learning and problem solving. Constructive: Learning is a constructive process during which students co-construct knowledge and meaning while interacting with peers, tools, and content. An LMS should provide tools that support various kinds of student-teacher and student-student interactions. Situated and contextual: Learning is situated in real world contexts where it gets its actual meaning. An LMS should provide tools that enable students and teachers to seamlessly integrate real-world authentic activities within class schedule. Social and collaborative: Learning is a social activity and students learn best when they interact frequently with teachers and peers. An LMS should allow students to interact by providing synchronous and asynchronous communication tools. Reflective: Students engage in reflective thinking about their actions, skills, competencies, knowledge, and metalearning skills. An LMS should provide tools that scaffold and support reflection on the learning process. e.g. journal keeping, probing questions to reflect on, etc. Requires prompt feedback: Integrate feedback within the grade portfolio. An LMS can use Intelligent Agents to provide feedback to student work and help the teacher monitor student progress.

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Study conducted by Vrasidas (2004) has confirmed aforementioned principles of effective online learning development by showing that students learn the best when they are engaged in active learning, have available learning materials presented in multiple ways, when they participate in authentic activities with a real-world connections, have their work evaluated following authentic assessment and when they collaborate with peers in solving real world problems.

3. METHODS AND STRATEGIES OF E-LEARNING IMPLEMENTATION In order to comply with all the principles necessary to develop effective e-learning course within LMS, teachers have to combine and apply different methods and strategies of e-learning. These methods may include presentation, demonstration, practice and repetition, tutoring systems, games, simulations, discussion groups, different ways of interaction, modeling and collaborative work (Stankov, 2009). Accordingly, the basic forms of educational materials that create online content are: a digital textbook, digital course, a collection of tasks, a collection of examples, materials and instructions for exercises, a collection of simulations, a collection of animation, digital catalog of materials on a particular subject, the virtual tour (Sinković and Kaluđerčić, 2006). When deciding which methods to use in their e-learning course teachers have to take into account that students differ based on the preferred learning style. There are three basic styles of learning according to regular mental behaviors that individuals habitually use in the learning process (Ružicic, Nikolic and Žižović, 2010): • • •

visual (29%), auditory (34%) and kinesthetic (37%).

These different learning styles require application of different learning methods within the same e-learning course. Studies have shown that students who are using multimedia materials are achieving better results on the exams due to the fact that e-learning easily combines all learning techniques and different teaching methods. The integration of text, images and sound, may also increase the amount of material that students can absorb per unit of time (Sinković & Kaluđerčić, 2006). Besides using different types of media, advantage of e-learning implementation is reflected in the social component which means that students interact frequently with teachers and peers. Communication has to be foundation of every e-course. All communication tools can be classified into one of two e-learning systems (Stankov, 2009):

• asynchronous system in which the interaction between student and teacher takes place with a time delay, both •

sides of the communication may not be simultaneously active. Communication can be accomplished through email, forums and tutoring systems. synchronous system means that both student and teacher are active at the same time and communicate within chat rooms, videoconferencing, etc.

To adopt effective course content, students should be able to communicate using both synchronous and asynchronous communication tools. In the process of e-learning implementation based on pedagogical principles specific duties and tasks of the teacher can be specified as follows (Vrasidas, 2004):

• Design the overall structure of the course, the syllabus, and establish expectations for successful course completion. • Select the activities that students will be asked to engage in while taking the online course. Decide when it is appropriate to use individual assignments, collaborative groups, online discussions and debates, etc.

• Select the learning strategies and appropriate media that will be more likely to help students achieve the desired • • • • • •

outcomes. For example, decide when to use a visual illustration, a video clip, an audio strip, or an animation, and how it will support learning. Monitor student enrollment, maintain student records, ensure security of online information, and handle all managerial and administrative tasks that relate to the online class. Establish the rules and procedures to be followed in course activities and discussions. Prepare assessment that is in alignment with learning outcomes and the goals of the course. Maintain student records and assessment results, and monitor student progress. Provide students with constructive and immediate feedback. Make sure that the students’ work submitted as part of course requirements are authentic and the students’ own. Establish clear goals, structure, activities, and expectations for online discussions. Unless these are clear, students will not participate. Encourage participation by employing various techniques and strategies (e.g., collaborative projects, debates, small group-discussions) to stimulate the interest of students.

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4. APPLICATION OF PEDAGOGICAL PRINCIPLES: CASE OF E-LEARNING MARKETING MODULE nE-learning Marketing module is an elective course in the second year of undergraduate studies at the Faculty of Economics and Business, University of Zagreb. The course was developed on available web portal Moodle, based on opensource code and intended for developing e-education content and conducting distance learning courses. A various tools that help teachers in effective development and conduct of e-learning courses are already integrated into Moodle system. The tools also enable students to organize individually gathered knowledge in one place thus contributing prosperity of everyone involved in the e-learning course. One of the most important tool used in the process of distance learning through e-learning Marketing module are presentations that cover teaching units planned by syllabus. The presentations were made available to students in the beginning of every week. Taking into account that about 29% of students are more visual type, the teachers were trying to embed more visual elements into presentations, such as pictures, video clips, graphic displays, charts, summary in tables etc. Alongside presentations the students have been encouraged to read chapters from the designated course literature in order to acquire a better, more detail insight into all teaching units. Nonetheless, developed presentations present a great base of stored information, which is always available to students, either for preparation for midterms and exams or writing weekly assignments as one of the component of distance learning process. Weekly assignment could be considered as a crucial element of e-learning course Marketing because they allow the teachers to monitor students’ progress on a weekly basis. The assignments were developed in the way to stimulate the students to examine scheduled teaching unit in more details and broaden available knowledge by linking the theory with concrete examples from business practice. This kind of assignments enable students to frame information gathered from different sources altogether (into the whole) and as such remember, retain and use it in their midterms and exams. It has been shown that students who participate in this kind of tasks have better results overall than students who don’t engage in weekly assignments. Weekly assignments are part of the final grade and thus are subject to a regular evaluation by teachers and through their prompt feedback student can realize their mistakes and use a constructive criticism in the next assignments. Every weekly assignment is followed by a short test with multiple answers questions. These tests enable students to double check what they have learnt in that week. To stimulate the students’ critical thinking and adaptation of problem solving skills, various case studies have been used showing specific examples of the best and most interesting Croatian and foreign business practice. Apart from stimulating the skills mentioned before, the case studies have been used to provide the teachers with better insight into the way students are thinking and how they approach problem solving. Each student got a personal feedback regarding the quality of solved case study and a scope for improvement. The discussion forum has been used to induce the students’ public opinion expression in the way which is understandable, argumentative and concise. The forum was used as the alternative to classroom discussions commonly used in classical learning process. Unfortunately, the level of discussion did not approach the level of classical classroom discussion. However, the usage of forum has been more frequent with controversial subjects, such as ethics and corporate social responsibility, where there is a lot of space for elaboration and argumentation of one’s own opinion. The great value of e-learning Marketing module is in the archive of video clips collected from different sources, mostly from the internet. The video clips are linked to the teaching material mentioned before, and they present extra materials which complement and expand students’ knowledge and encourage students to further research on designated teaching units. To encourage the students to watch available video clips, the possibility of collecting extra points by participating in discussion of a video clip has been offered. Therefore, the students’ active participation and collective discussion has been increased. Also, the process of learning has been facilitated due to the usage of multimedia materials. To students the most interesting and the most demanding part of the e-learning process is, probably, the team assignment. The students have been divided into teams consisting of three or four members with a task to choose one subject among a dozen of them that had been offered by the teachers. The subjects have been partly linked to the syllabus, but some have required deeper understanding of the issue and a further desk research. Of course, everything written needed to be corroborate by an example of a company or business practice involved in particular issue being researched. Examples of the subjects that have been offered to the students to choose among are “Price wars”, “Social media marketing”, “Product placement”, “Comparative advertising” etc. The goal of this kind of assignment has been to help students to develop social skills through collaboration with other colleagues, to respect different opinions and one’s time and effort. The students have had to present their work in front of their teachers and colleagues so one of the benefits of participating in the team assignment is a chance to develop and improve presentation skills which are very much needed in students’ future career. Considering the fact that the time available for completion of team assignment was limited, the students had the chance to also improve their time management skills.

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Having in mind that every learning process should be fun and appealing to students, games “Who wants to be a millionaire?” and “Sudoku” were also available as an integral part of the e-learning Marketing course. The games were developed on the basis of the subjects/chapters covered by the syllabus. The students have been offered the chance to test their knowledge before midterms or exams but they were also used to help with breaking the routine which occurs over time and could demotivate students to continue with a learning process.

CONCLUSION E-learning as a concept represents learning based on the use of modern information and communication technologies. New technologies provide a wide range of opportunities for developing and modeling learning materials according to teacher’s wants and needs. However, mere application of technology into learning environment is not enough to ensure positive learning outcomes. These outcomes can be achieved only if teachers, in developing e-learning courses and content itself, apply pedagogical principles. In accordance with theory of interaction and communication, in this paper we refer to distance learning as learning which puts less emphasis on electronic learning materials themselves but rather focuses on student-student and student-teacher interaction through the Learning Management System (LMS). Therefore effective online learning course has to be learner-centered, engaging and active, constructive, contextual, social and collaborative, reflective and it requires prompt feedback from the teacher. When designing e-course, teachers have to keep in mind that different students have different learning styles, so some will prefer visual while others prefer auditory or kinesthetic learning materials. Modern LMS offer the teachers possibility to integrate all forms of learning materials into their course enabling students to absorb more learning materials (5)the per unit of time and simultaneously increase their results on the exams. Final learning results will also depend on amount and intensity of communication between the teacher and students as well as between students themselves. In order to facilitate the desired level of communication teachers have to include and moderate different forms of asynchronous and synchronous communication systems. E-learning Marketing module presented in this paper is an example of application of pedagogical principles into LMS. In the course we have developed different learning materials suitable for different types of students like presentations, case studies and video materials. Students progress was monitored continuously trough individual weekly assignments, case study solving, weekly tests and available games. Team work among students was enabled through participation in team assignment. Communication, stimulated and facilitated by teachers, played crucial role in e-learning Marketing module. Different communication methods were available to students but they mostly used personal e-mail communication or more public forum discussions. Finally, after analyzing the theoretical contributions concerning use of pedagogical principles in creating and implementing e-courses as well as the insight gained from the presented e-learning Marketing module, we can conclude that effective e-learning module needs to include:

• various educational multimedia materials with integration of text, images and sound; • individual student activities through individual assignments with real-world connections; • activities that require active involvement of students in creating the e-learning content and solving learning problems;

• social activities through collaborative projects with peers in solving real world problems; • asynchronous and synchronous communication and discussion with teachers and fellow students through discussion groups, e-mail, chat rooms, videoconference;

• teachers’ prompt feedback on students activities and performance.

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44. Sitzmann, T., Kraiger, K., Stewart, D., Wisher, R. (2006.) The Comparative Effectiveness Of Web-Based And Classroom Instruction: A Meta-Analysis, Personnel Psychology, 59, pp. 623–664. 45. Sloman, M. (2001.) The e-learning revolution: from proposition to action, CIPD House, London, UK 46. Solimeno, A., Mebane, M.E.,Tomai, M., Francescato, D. (2008.) The influence of students and teachers characteristics on the efficacy of face-toface and computer supported collaborative learning, Computers&Education, 51, pp.109–128. 47. Stankov, S. (2009.) E-učenje, Prirodoslovno-matematički fakultet, Split, dostupno online na: https://39ff9189-a-62cb3a1a-s-sites.googlegroups.com/site/kolegiji/home/sustavi-e-ucenja/E-ucenje_Stankov.pdf?attachauth=ANoY7cocJSLXGQPssKLkAfTUwVc1quRQCPp36Sh KGeJwtVC_9bbHkgrkdx1w2dFpJ_UAlol3Kt76dTm0gOBzcKHUP9QFHtv4nxh7GztCcXDuDR6SGozlDUvCjW2WXqwn05yZt-d4DvYHQDYuebVMBeASg6Ra98aKDJE47hzCNzni5HxD2LNYxAVr6yR4Bt8UP1E2O4vjVCJrXmPzirLYCUOYSCXYUVbsBeSTuz7XE73u-oJaUceVd7S6rbwdTz7D_ CwzYg1C8QUc&attredirects=0 48. Stankov, S., Rosić, M., Granić, A., Maleš, L., Grubišić A., Žitko, B., (2004.) Paradigma e-učenja & Inteligentni tutorski sustavi, u Zborniku radova Računala u obrazovanju, MIPRO 2004, Rijeka, str. 193-198. dostupno na: http://bib.irb.hr/datoteka/150750.Rad_MIPRO2004.pdf 49. Summers, J.J., Waigandt, A., Whittaker, T.A. (2005.) A Comparison of Student Achievement and Satisfaction in an Online Versus a Traditional Faceto-Face Statistics Class, Innovative Higher Education, 29/3, pp. 233-250. 50. Sun, P-C., Tsai, R.J., Finger, G., Chen, Y-Y., Yeh, D., (2008.) What drives a successful e-Learning? An empirical investigation of the critical factors influencing learner satisfaction, Computers & Education, 50, pp. 1183–1202. 51. Šćepanović, S. (2010.) Creating and using environment for e-learning 2.0, online dostupno na: http://www.e-drustvo.org/proceedings/YuInfo2010/html/pdf/079.pdf 52. Tsoi, M.F., Goh N.K., Chia L.S., (2005.) Multimedia Learning Design Pedagogy: A Hybrid Learning Model, US-China Education Review, 2/9, pp. 59-62. 53. Yli-Luoma, P.V.J., Naeve, A. (2006.) Towards a semantic e-learning theory by using a modeling approach, British Journal of Educational Technology, 37/3, pp. 445-459. 54. Vrasidas C., (2004.) Issues of Pedagogy and Design in e-learning Systems, Paper presented at ACM Symposium on Applied Computing, Nicosia, Cyprus, March, pp. 14-17 55. Wild, R.H., Griggs, K.A., Downing, T. (2002.) A framework for e-learning as a tool for knowledge management, International Management & Data Systems, 102/7, pp. 371-380. DETAILS ABOUT AUTHORS: SANDRA HORVAT SENIOR ASSISTANT FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF ZAGREB ZAGREB, CROATIA shorvat@efzg.hr IRENA PANDŽA BAJS SENIOR ASSISTANT FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF ZAGREB ZAGREB, CROATIA ipandza@efzg.hr DINO GOSPIĆ dino.gospi04@gmail.com

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THE EFFECT OF MINDFULNESS TRAINING ON EMPLOYEES IN A DYNAMIC ORGANIZATIONAL SETTING INGUNN MYRTVEIT VEDRANA JEZ VIGGO JOHANSEN

ABSTRACT

The access to information and multiple sources of communication has changed the way we work, and relate to our work day. The boundaries between work and home often disappear, increasing potentially employees’ stress level, diminishing cognitive capabilities, and splitting attention between numerous tasks. The consequences of multitasking have been widely studied, as well as individual differences. Based on other studies, mindfulness based stress reduction (MSBR) method appears to have a positive effect e.g. on attention, working memory, stress and empathy. Thus, this experiment introduces an intervention in the form of mindfulness training, which lasted for 12 weeks for all 110 employees, who are located in 13 countries world wide. In addition, employees attended a seminar per week during 10 weeks. These seminars were mainly based on positive psychology. In order to collect data three surveys were sent out (before the intervention, 12 weeks after the first seminar and 6 months later). Two specific measurements were used, which are Mindfulness Awareness Scale (MASS) and Perceived Stress Scale (PSS). Findings showed a significant increase in MAAS, and diminishing values in PSS, meaning that treatment, in the form of MBSR had an affect on the perceived stress in the firm. KEYWORDS: mindfulness training, mindfulness based stress reduction (MSBR), perceived stress

1. INTRODUCTION The words such as multitasking, “continuous partial attention”, “email apnea”, have become an every day representation of working demands and expectations. Throughout the history, philosophers, scholars and writers such as Socrates, Peter Drucker, and Lord Chesterfield, pointed out the importance of focusing on one thing at the time. (Drucker, 2007; Rosen, 2008) With the introduction of technology, access to massive amount of information has tempted and stimulated workers to change their working habits. According to Lindbeck and Snower, (2000) the shift occurred from “Tayloristic” organization, which emphasized focus on a single task specialization to “holistic” organization, featuring job rotation, learning new tasks and integration of tasks. The possibility to access large amounts of information and numerous possibilities to communicate with others have often moved and changed the boundaries between work and home. During working hours, employees might also be occupied by their private things e.g. checking private email and social media accounts. On the other hand, constant checking work email and the possibility to be always reached, e.g. available for an important question has created a feeling of constantly being “on”. Mark and Gonzalez (2005) observed knowledge workers, who switch every 3 minutes between single tasks, or every 11 minutes between working spheres, which Mark and Gonzalez defined as a group of related tasks. Thus, multiple projects require constant switching between tasks, which create a fragmented working day, where they often need to switch their attention. The intensity of working environment and job demands on individuals has led to a discussion on the effects of multitasking on productivity. (Appelbaum, Marchionni, & Fernandez, 2008; Freedman, 2007) However, psychology researchers mostly focus on diminishing cognitive capabilities (Ophir, Nass, & Wagner, 2009a) information technology (Czerwinski, Horvitz, & Wilhite, 2004; Spink, 2004) education (Jenkins, Clinton, Purushotma, Robinson, & Weigel, 2006) and consequences of those on learning (Poldrack, 2006), creativity (Madjar & Shalley, 2008), and other concepts. Each of these fields has framed multitasking in their own context. The most concern raise problems with concentration, diminishing cognitive capabilities, problems with learning, general consequences of split attention. However, it is important to mention individual differences related to the ability to multitask. According to Konig, Buhner and Gesine (2005) working memory is one of the predictors on how well one can multitask. Thus, it is not those who believe that are good at multitasking that perform well (Ophir, Nass, & Wagner, 2009b) but those who have better working memory. However, one of the consequences of constant switching between tasks and being available to be disrupted leads to increased stress levels. Linda Jones, the former executive at Microsoft named the condition “email apnea”, which she discusses in her article in Huffington Post, describing it as “Shallow breathing or breath holding while doing email, or while working or playing in front of a screen,” which lately has been verified in a study by Mark, Voida and Cardello (2012).

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According to Jensen et al. (2012) study, they point out the effects of mindfulness training (MT) and its potential positive effect on working memory, stress reduction and empathy. Although various studies have reported positive effects of MT on stress and empathy, most of these studies were done on either medical (Sibinga et al., 2011) and nursing students (Beddoe & Murphy, 2004), or patients, who are struggling with different stress related problems, traumatic experiences, and chronic disorders. Contrary to previous research, which aimed at testing MBSR’s effect on various stress-related disorders, this paper presents an experiment within a dynamic organizational setting, where all employees were encouraged to participate, independently of their health problems, stress level, motivation, attitude and need.

2. LITERATURE REVIEW 2.1 Multitasking The problem of multitasking has been discussed in decades by management scholars, psychologists and lately education professionals and neuroscientists. Their concerns and focus of studies are different depending on the interest of their field. Studies within management field have been mostly concerned with the effects on productivity. However, increasing number of studies shows the stress related problems due to highly demanding working environments. Brillhart (2004) went even so far to name the type of the stress caused by technology, technostress. He defines it “as the minds attempt to deal with change, malfunctions, multitasking issues and the over abundance of technology and data that keeps employees working harder and giving them less down time when away from work.” Further on, he explains for different types of stress, where multitasking madness is its own category. The consequences are increasing stress that may cause stress related problems, such as headaches etc. In their latest study, Mark, Voida and Cardello (2013), looked at the effect of email on multitasking and stress level at work. Interestingly, they found out that removing the email from a working setting decreased the level of multitasking and positively affected a focus on a task. Equally, the removal of email led to less stress. Santora and Esposito (2010)point out that it is to expect in dual-income families to struggle with stress, when trying to balance the multitasking demands with work and home life. Thus, multitasking takes a place of a major source of stress in finding a balance between work and home. Offer and Schneider (2011) suggest that for mothers, multitasking at home and in public leads to an increase in negative emotions, stress, and work-family conflict and psychological distress. Although multitasking is a more complex concept with a wide range of consequences, this paper solely focuses on stress related to multitasking. In dynamic environments, where real-time information has an impact, multitasking and continuous presence might be necessary, but also costly.

2.2. Mindfulness Mindfulness is an ancient practice belonging to the Eastern Wisdom Traditions, particularly Buddhism, and as such it goes back at least 2500 years in time. The original term for “mindfulness” is sati (Pali), or smrti (Sanskrit), which connotes “memory” or “recollection,” but as a spiritual or psychological faculty it signifies an attentive awareness of the reality of things. In the early Buddhist traditions sati/smrti signifies presence of mind, meaning the ability to be attentive to the reality of whatever unfolds. It has the characteristic of not being distracted, which implies not leaving the object one has chosen to focus upon. Essentially, there is nothing in the original teaching and practice of mindfulness suggesting that one needs to be Buddhist in order to pursue it, although it originated and was systemized in a Buddhist environment.

2.3. Mindfulness based stress reduction (MBSR) One of the most common examples of mindfulness practice is mindfulness based stress reduction (MBSR) that has been introduced by Kabat-Zinn in late 1970s, where he defines it as paying attention on purpose, in the present moment, and nonjudgmentally” (Kabat-Zinn, 2003) According to Bishop (2002) it is a clinical program, which originally was designed as a help for patients to learn to adapt to their illnesses through self-regulation approach, which would diminish stress reduction and

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emotion management. The goal of the meditation is to “foster the quality of mindfulness”, which is a self-regulatory approach to bring attention back, without being caught up in thoughts about a specific situation or emotional reaction to it. (Bishop, 2002) The researchers, especially psychologists and medical workers, have tested the effect of MBSR method on numerous patients with difficulties, such as HIV-infected youth and those at risk (Sibinga et al., 2011) posttraumatic stress disorder due to domestic violence (Smith, 2010), emotional regulation related to social anxiety(Goldin & Gross, 2010), depression, anxiety and pain (Marchand, 2012)among others. All these studies found a positive effect of MBSR on these conditions and patients well being, especially on the ability to handle attention, rumination (Campbell, Labelle, Bacon, Faris, & Carlson, 2012), interpersonal relationships, hostility (Sibinga et al., 2011)or physical manifestations such as blood pressure and blood sugar. (Campbell et al., 2012) Although MBSR method has been used mainly in patients, researchers have also looked at the benefits of the method on the ability to deal with stress and empathy in medical, premedical (Shapiro, Schwartz and Bonner 1998) students and nursing students (Beddoe & Murphy, 2004). According to Shapiro, Schwartz and Bonner (1998) the inability to deal with stress may lead to serious personal and professional consequences. Fries (2009)in his paper discuss how changing work environment, with high uncertainty and instability, affects workers and causes stress. He suggests that the five basic factors of mindfulness, such as non-reactivity, observing, awareness, labeling and non judgment (Baer, Smith, Hopkins, Krietemeyer, & Toney, 2006) an change one’s inner perceptions, regardless of external happenings, thus affecting stress level. Therefore, previous research finds that MBRS reduces stress among patients and students related to highly stressful medical environment, with high risk of fatal consequences. However, to our knowledge, the method has not been used within a business setting, although it has been suggested by Fries (2009). Due to technology driven working days, employees are often exposed to high stimuli and stress. Thus, this setting could use MBSR as a method for dealing with consequences of multitasking. Hypothesis 1. MBSR has a positive effect on stress-level of employees in a dynamic business environment. Hypothesis 2. MBSR reduces stress-related health problems in employees Hypothesis 3. MBSR increases the ability to be present in the moment.

3. METHODS The method that we used in this project was an experiment, which consisted of an intervention in the form of mindfulness training and seminars.

3.1. Mindfulness Training as an Intervention Mindfulness training consists of practice and ten seminars. During practice the participants were supposed to engage in 10 minutes of mindfulness breathing, and “paying attention in a particular way on purpose, in the present moment, and nonjudgmentally.” (Kabat-Zinn, 1994) These mindfulness practices took place every day for 12 weeks. The program contains 10 modules, which are conducted at the work place. The first seminar was a two-hour workshop on “introduction to mindfulness” and the remaining nine sessions were an hour each. The sessions were on ten different topics, which are mostly based on positive psychology. These seminars are: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Introduction to mindfulness Perception & The importance of awareness Your brain at work & Activities with mindfulness Inspiration & Dealing with hindrances Happiness & Valued living Optimism & Mindfulness and neuroscience Acceptance & Automatic thought-patterns Emotional intelligence & The good life Freedom & Letting go Mindfull Living

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The program lasted for 12 weeks, consisting of daily 10-minutes mindfulness training. TGS has an open landscape solution, where top management team sits together with everyone else. The training took place in this area every morning from 8:50 to 9:00.

3.2. Data and Sample In order to test the hypothesis, the firm that has participated in the experiment is Telenor Global Services (TGS), which consists of ca. 120 employees located mostly in Norway, but also in large number of other countries as well. Participation in mindfulness training, seminars and surveys was highly encouraged by top management in TGS but voluntary. The top management team participated visibly in all activities and general participation in training and seminars were high. The range of participants is between 20 and 67, where all age groups and both sexes are equally represented. In the survey group, 80% of employees have a bachelor or master degree.

3.3. Data Collection We distributed three surveys to all employees; the first before the intervention, the second immediately after the intervention and the third after another six months. In addition to questioning the employees about simple self-reported stress, and stress-related problems we asked them to respond to some widely used and validated psychological instruments for measuring stress “Perceived Stress Scale”, PSS, and mindfulness “Mindfulness Attention Awareness Scale”, MAAS. Perceived Stress Scale (PSS) PSS is the most widely used psychological instrument for measuring the perception of stress. (Cohen, Kamarck, & Mermelstein, 1983)L. Harris Poll have gathered information on more than 2000 respondents in the US as a reference norm. (From Cohens homepage http://www.psy.cmu.edu/~scohen/) Mindfulness Attention Awareness Scale (MAAS) MAAS measures ”a core characteristic of mindfulness, namely, a receptive state of mind in which attention….simply observes what is taking place.” Higher MAAS scores reflect higher levels of mindfulness. (Brown & Ryan, 2003) 77 responded to the first survey. However, some complained about the survey because of its length. The employees in TGS are of all ages, both sexes, and 80% have a bachelor degree or more.

3.4. Data Analysis We compared differences in means between groups by ANOVA and compared differences in 2 proportions by two sample proportion z-test.

4. RESULTS 4.1. Findings before MBSR training and seminars

85% of respondents report good or very good health. Overall, they are very happy to be working at TGS and hardly have any plans to leave the company in near future. They report high job satisfaction and organizational commitment on several indicators (not reported). However, there is a heavy work load and 30% report that stress is a problem. Further on, workrelated and family related stress is equally problematic (see Figure 1.).

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Figure 1. Where 1=difficulties sleeping, 2=Fatigue, 3=Tension, 4=Irritability, 5=Lack of memory, 6=Lack of concentration,7= Headache or pain in shoulders, neck etc., and 8= None.

We observe that 16% did not have any of the suggested problems. The main stress-related problems were “difficulties sleeping” (30%), “Lack of concentration” (36%) and “Headache or pain in shoulders, neck etc” (39%). All these stressrelated problems are likely to influence individual wellbeing and job performance. In addition to questioning the employees about simple self-reported stress, we asked them to respond to some widely used and validated psychological instruments for measuring stress “Perceived Stress Scale”, PSS, and mindfulness “Mindfulness Attention Awareness Scale”, MAAS. Table 1. *Community adults in 4 independent samples n=436, mean=4.2, SD=0.69 (Brown and Ryan 2003 and Carlson and Brown 2005) Harris poll

TGS March 2012

Mean US

Mean

12.1 13.7

5.9 6.6

14 16 15

43 34 77

5.6 6.0 5.8

14.2 13 12.6 11.9 12

6.2 6.2 6.1 6.9 6.3

16 17 13 17

13 27 32 5

7.8 5.5 5.3 3.2

SEX Male Female Tot average Age US

Age TGS

18-29

<30

30-44

31-40

45-54

40-60

55-64

>60

65 and older

Differences between age-groups are significant (p=0.08) . The numbers suggest that the employees in TGS are more stressed than average US adults , which is not disturbing as this group is presumable a selection of more competitive hardworking and ambitious people than the average population. Also, we find that women are more stressed, but not more so than reflected in the US population. Furthermore, age differences are relatively equal to what is reflected in the US population, with the exception of the oldest employees. We may speculate that older There are large differences between the departments, some score much higher on PSS than others. These large differences between the various departments triggered discussion in TGS, and is important input to the top management. The results also suggest the employees in TGS are a little more mindful than the average US adult, measured by MAAS.

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4.2. Findings after MBSR training and seminars Second Survey Findings – 12 Weeks Later The second survey was distributed in June immediately after 12 weeks of MBSR training and seminars. This time we got 60 respondents (compared to 77 on the first survey). We consider this a very good response rate as summer vacation had just started for some employees. 80% report that they have participated several days a week or more in MBSR training. 90% have participated in seminars. A vast majority claim they have got something of lasting value and 80% express that they will continue with MBSR training in the future. We observe (Table 1.) that self-reported “stress is a problem for me” is reduced to some extent, and that the stress that bothers some is less family-related. We also observe that there is a large, 16%, and significant reduction in headaches or pain in shoulders, neck etc. Also several persons report less difficulties sleeping. Actually, in open question on benefits this was reported by many. The widely used psychological instrument, PSS, shows a significant reduction in stress (p=0.01). And the Mindfulness instrument, MAAS, shows a significant increase in mindfulness in the group (p=0.02)(see table x). Third Survey Findings – 6 Months Later The third survey was distributed in December, 6 months after MBSR training and seminars to investigate lasting effects. The third survey was limited to a few related to continued practice and benefits , PSS and MAAS. Due to some technical difficulties the response rate was low, n=40. However, results are still reported. In the period between survey 2 and survey 3, TGS experienced a hard time. Thus we expected increase in stress. However, the results actually indicate the opposite. Self-reported stress is decreased. PSS and MAAS are approximately the same as right after MBSR training and seminars, which we and the top management in TGS find surprising. Table 2. Results on self reported stress levels and problems Survey 1

Survey 2

Survey 3

Statement

Yes

“Stress is a problem for me”

73%

27%

75.4%

24.6%

85%

15%

“It is mostly work-related stress that bothers me”

57%

43%

41%

59%

45%

55%

“It is mostly family-related stress that bothers me”

67%

33%

74%

26%

78%

22%

We observe that stress is less of a problem – and that in particular family-related stress is reduced. Changes in stress-related problems: Table 3. Changes in stress-related problems: *p=0.1, **p=0.05, ***p=0.01 Problem

March

June

Difference

Difficulties sleeping

29,9

-4.9

Fatigue

22.1

30.4

+8.3

Tension

24.7

19.6

-5.1

Irritability

28.6

-3.6

Lack of memory

15.6

16.1

+0.5

Lack of concentration

36.4

32.1

-4.3

23.2

-15.8 **

15.6

21.4

+5.8

Headache or pain in shoulders, neck etc None

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We observe that several stress-related problems are reduced, however, only “headache or pain in shoulders, neck etc” show a significant and large reduction. For some reason “Fatigue” has increased. We do not understand why. At closer inspection we found that 17 persons had answered “yes” to this each time, however the percentage increased in a smaller sample even if there is not a perfect overlap between the samples. PSS and MAAS are approximately the same in December as in June. Table 4. PSS and MAAS and *p=0.1, **p=0.05, ***p=0.01 TGS March

TGS June

TGS Dec

PSS score

12.5 ***

13.35

MAAS

4.4

4.7 **

4.7

In December we asked about continued practice and benefits. 75% still practice MBSR sometimes or regularly. And more than 50% claim to experience changes in colleagues and/or the working environment as a result of the mindfulness training.

5. DISCUSSION The changes in a working environment have been a topic during past decades. Working tasks have been changing from a linear and orderly to more chaotic, diverse and dynamic tasks. As mentioned earlier, Lindbeck and Snower (2000) point out technology as one of driving forces for changes in the working environment. In dynamic environments, changing between tasks, being continuously available and interrupted might lead to increased stress level, causing various stress-related issues. In our experiment, which takes place in the technology company facing heavy competition, 30% of the employees reported stress as the problem. They also report various stress-related health problems, such as headache, pain in the neck and shoulders and difficulties with sleep. Interestingly, the most stressed employees have benefited the most from MBSR training and seminar. They report having less difficulty with sleep, headaches, and pain in the neck and shoulders. Similarly, the widely used instrument for measuring perception of stress, PSS, shows a significant reduction in the whole group. Although the company is experiencing hard times and changes, the effect of MBSR method continues to have an effect after six months. New technologies and social media blur the border between work and leisure and encourage multitasking at home and in the office. We find that family-related stress is reduced with MBSR training and seminars. We speculate that employees with mindfulness training become more attentive, both at home and in office. Being able to be more” present in the moment” and not thinking about work while being with family – and visa versa. In addition to employees being “always online” we face increasing globalization, uncertainty and financial instability that characterize today’s working environment. These factors are likely to increase stress in the work force. Although this paper does not test or discuss the consequences of multitasking in general and its effect on productivity, it address the problems caused by dynamic environments, with high demand for multitasking, which might be a cause for high stress and stress-related issues in the company. However, this stress might be detrimental to individual’s wellbeing, mental health and productivity. We suggest MBSR as a low threshold and low cost tool to counteract this.

CONCLUSION This experiment took place in a dynamic organizational setting, with high demands for multitasking due to the nature of business. The results in the first survey showed that 30% suffer from stress; work related stress, as well as personal stress. By introducing the all employees of the firm to the MBSR training and seminars, there was a significant change in self-reported measures on stress and stress-related problems. According to Perceived Stress Scale (PSS) the stress level decreased as well. In addition the ability to be in the moment and focus attention, which Mindfulness Attention Awareness Scale (MAAS) measured, showed a positive improvement. Thus, we find support for all three hypotheses.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32.

Appelbaum, S. H., Marchionni, A., & Fernandez, A. 2008. The multi-tasking paradox: perceptions, problems and strategies. Management Decision, Vol. 46 (Iss: 9,): 1313 - 1325. Baer, R. A., Smith, G. T., Hopkins, J., Krietemeyer, J., & Toney, L. 2006. Using Self-Report Assessment Methods to Explore Facets of Mindfulness. Assessment, 13(1): 27-45. Beddoe, A. E., & Murphy, S. O. 2004. Does mindfulness decrease stress and foster empathy among nursing students? The Journal of nursing education, 43(7): 305-312. Bishop, S. R. 2002. What do we really know about Mindfulness-Based Stress Reduction? Psychosomatic Medicine, 64(1): 71-83. Brillhart, P. E. 2004. Technostress in the Workplace Managing Stress in the Electronic Workplace. Journal of American Academy of Business, Cambridge, 5(1/2): 302-307. Brown, K. W., & Ryan, R. M. 2003. The benefits of being present: Mindfulness and its role in psychological well-being. Journal of Personality and Social Psychology, 84(4): 822-848. Campbell, T. S., Labelle, L. E., Bacon, S. L., Faris, P., & Carlson, L. E. 2012. Impact of Mindfulness-Based Stress Reduction (MBSR) on attention, rumination and resting blood pressure in women with cancer: A waitlist-controlled study. Journal of Behavioral Medicine, 35(3): 262-271. Cohen, S., Kamarck, T., & Mermelstein, R. 1983. A global measure of perceived stress. Journal of Health and Social Behavior, 24(4): 385-396. Czerwinski, M., Horvitz, E., & Wilhite, S. 2004. A Diary Study of Task Switching and Interruptions, CHI 2004, Vol. 6. Vienna, Austria. Drucker, P. F. 2007. The effective executive. Amsterdam: Elsevier. Freedman, D. H. 2007. Why interruption, distraction, and multitasking are not such awful things after all. Inc., 29(2): 67-68. Fries, M. 2009. Mindfulness Based Stress Reduction for the Changing Work Environment. Journal of Academic & Business Ethics, 2: 1-10. Goldin, P. R., & Gross, J. J. 2010. Effects of mindfulness-based stress reduction (MBSR) on emotion regulation in social anxiety disorder. Emotion, 10(1): 83-91. Jenkins, H., Clinton, K., Purushotma, R., Robinson, A. J., & Weigel, M. 2006. Confrontin the Challenges of Participatory Culture: Media Education for the 21st. Century: MacArthur Foundation. Jensen, C. G., Vangkilde, S., Frokjaer, V., & Hasselbalch, S. G. 2012. Mindfulness training affects attention—Or is it attentional effort? Journal of Experimental Psychology: General, 141(1): 106-123. Kabat-Zinn, J. 1994. Wherever you go, there you are: Mindfulness meditation in everyday life. New York, NY: Hyperion. Kabat-Zinn, J. 2003. Mindfulness-Based Interventions in Context: Past, Present, and Future. Clinical Psychology: Science and Practice, 10(2): 144-156. König, C. J., Bühner, M., & Mürling, G. 2005. Working Memory, Fluid Intelligence, and Attention Are Predictors of Multitasking Performance, but Polychronicity and Extraversion Are Not. Human Performance, 18(3): 243-266. Lindbeck, A., & Snower, D. J. 2000. Multitask learning and the reorganization of work: From Tayloristic to holistic organization. Journal of Labor Economics, 18(3): 353-376. Madjar, N., & Shalley, C. E. 2008. Multiple tasks’ and multiple goals’ effect on creativity: Forced incubation or just a distraction? Journal of Management, 34(4): 786-805. Marchand, W. R. 2012. Mindfulness-based stress reduction, mindfulness-based cognitive therapy, and Zen mediation for depression, anxiety, pain, and psychological distress. Journal of Psychiatric Practice, 18(4): 233-252. Mark, G., Voida, S., & Cardello, A. 2012. “A pace not dictated by electrons”: an empirical study of work without email, Proceedings of the SIGCHI Conference on Human Factors in Computing Systems: 555-564. Austin, Texas, USA: ACM. Offer, S., & Schneider, B. 2011. Revisiting the gender gap in time-use patterns: Multitasking and well-being among mothers and fathers in dualearner families. American Sociological Review, 76(6): 809-833. Ophir, E., Nass, C., & Wagner, A. D. 2009a. Cognitive control in media multitaskers. PNAS Proceedings of the National Academy of Sciences of the United States of America, 106(37): 15583-15587. Ophir, E., Nass, C., & Wagner, A. D. 2009b. Cognitive control in media multitaskers. Proceedings of the National Academy of Sciences of the United States of America, 106(37): 15583-15587. Poldrack, R. 2006. Multi-Tasking Adversly Affects the Brain’s Learning Systems: UCLA Department of Psychology. Rosen, C. 2008. The Myth of Multitasking. The New Atlantis - A journal of Technology and Society. Santora, J. C., & Esposito, M. 2010. Dual Family Earners: Do Role Overload and Stress Treat Them as Equals? Academy of Management Perspectives, 24(4): 92-93. Shapiro, S., Schwartz, G., & Bonner, G. 1998. Effects of mindfulness-based stress reduction on medical and premedical students. Journal of Behavioral Medicine, Vol. 21, (No.6). Sibinga, E. M. S., Kerrigan, D., Stewart, M., Johnson, K., Magyari, T., & Ellen, J. M. 2011. Mindfulness-based stress reduction for urban youth. The Journal of Alternative and Complementary Medicine, 17(3): 213-218. Smith, J. D. 2010. Mindfulness-based stress reduction (MBSR) for women with PTSD surviving domestic violence. ProQuest Information & Learning, US. Spink, A. 2004. Multitasking information behavior and information task switching: an exploratory study. Journal of Documentation, 60(4): 15.

DETAILS ABOUT AUTHORS: SANDRA HORVAT INGUNN MYRTVEIT PROFESSOR BI NORWEGIAN BUSINESS SCHOOL; DEPARTMENT OF ACCOUNTING – AUDING AND LAW HANDELSHØYSKOLEN BI; 0442 OSLO; NORWAY ingunn.myrtveit@bi.no VEDRANA JEZ PHD CANDIDATE BI NORWEGIAN BUSINESS SCHOOL; DEPARTMENT OF STRATEGY AND LOGISTICS HANDELSHØYSKOLEN BI; 0442 OSLO; NORWAY vedrana.jez@bi.no VIGGO JOHANSEN COGNITIVE COACH viggo.johansen@intui.no

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PROGRESSIVE METHODS OF TEACHING AT THE FACULTY OF COMMERCE OF THE UNIVERSITY OF ECONOMICS IN BRATISLAVA PETER DRABIK PAULINA KRNACOVA ROBERT REHAK MARIA VASILOVA

ABSTRACT

The presented paper deals with the progressive methods of teaching in the conditions of the Slovak Republic. The following methods are introduced by the Faculty of Commerce of the University of Economics in Bratislava in order to create space for multidisciplinary teaching. The key share of participation with economic practice in the learning process, combined with modern and progressive methods of teaching, the significant space is created, especially for faster and better targeted application of graduates in the labour market. The main objective of these methods is to adapt the undergraduate education to the new challenges and labour market requirements. This paper is prepared in the Cross Border Cooperation Programme SR-AUT 2007-2012 in the project Cross-border in hi-tech centre, code N00092. KEYWORDS: Interdisciplinarity, Multidisciplinary Learning, Innovation in Higher Education, Employability, Cross Border Cooperation.

1. INTRODUCTION The growing attention within higher education to enhancing students’ employability responds to student motivations as well as to actual policy concerns in the EU – a high rate of unemployment of young people. Employability has become one of the strategic directions of national education departments all over Europe. Universities are facing many challenges and have to make the necessary reforms to fully participate in the global market place in the fields of teaching, research and innovation. In addition, European Commission emphasizes the need for cooperation between universities and business which has currently been transformed into one of the incentives within the EC modernization agenda for universities (Communication of 10 May 2006 from the Commission to the Council and the European Parliament). Building partnerships with enterprises often leads to interdisciplinarity and multidisciplinarity. Universities therefore have to redefine their education and research priorities in order to adapt to these new challenges. The Faculty of Commerce of the University of Economics in Bratislava is an educational and research institution that provides education in trade-related scientific disciplines and is well rooted among other higher education institutions in Slovakia. One of the primary ambitions of the faculty is to provide students with skills, understandings and personal attributes that make them more likely to gain employment and be successful in their chosen occupations. Therefore first pilot interdisciplinary modules have been developed to bring together students with their potential employers. The purpose of this paper is to discuss main points, where cooperation between technology–oriented professionals, producers, small entrepreneurs on one side, and business management and marketing management students on the other side, may be suitable to prepare them effectively for future careers development or activities in their own start-up projects. First, we review the research dealing with interdisciplinarity, university-business cooperation and alternative approaches to teaching in trade-related scientific disciplines. Secondly, we report on a multi-disciplinary module with a special focus on two case studies, through which several interdisciplinary connections between faculty and enterprises have been established. Presented case studies result from two years interdisciplinary cross-border project called High-tech Center. The innovative experience has been carried out by a group of lecturers from the Faculty of Commerce with aim to test alternative teaching strategies to facilitate students´ critic learning and provide skills that will increase their employability in future. This paper is prepared under the project “N00092 ETC Cross Border Cooperation Programme SR-AUT 2007-2012 hi-tech center in der grenzüberschreitenden Region”.

2. THEORETICAL PRINCIPLES AND THE BACKGROUND OF STUDY Slovak universities, especially in the domain of business sciences, are still characterized by the top-down educational model – the simple dissemination of knowledge from teachers to students through lectures and seminars, which does not pro-

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mote the development of expertise in the complicated information society. A general change in methodological approach is needed, that would center on learning and meaningful activities based on real life problems and would stimulate the development of skills of future experts. Research on innovative methods of learning in higher education is currently focusing on the effects of business-university alliances on the quality of output and scientific performance of universities. Furthermore, innovation in higher education is strongly connected to the change of approach towards interdisciplinarity. According to Jacobs (1989), interdisciplinary approach in teaching applies methodology and language from more than one discipline to examine a central theme, problem or discipline. The current literature (Woods, 2007; Holley, 2009) also distinguishes (1) multidisciplinary learning, when disciplinary knowledge from several domains is connected by a simple additive approach and (2) cross-disciplinarity, which uses cognitive tools from one discipline to answer questions in another. However, this shift from simple memorizing facts to application of knowledge relative to theme enables students to use higher order of conceptual skills such as analyzing, applying and generalizing in order to find solutions to diverse problems across disciplines. It was found that interdisciplinary educational programs stimulate engagement of both teachers and students by supporting connections, participation, and interactive teaching and learning. Although engagement can be defined differently in different contexts, in the context of higher education, it refers to high-quality programs in which students, teachers and the faculty invest time and effort in mutually supportive teaching and learning (Haworth, Conrad, 1997). After years of teaching experience, the Faculty of Commerce realizes that it is the engagement on the two sides which is a barrier to change. According to the engagement theory, by focusing on four dimensions (Table 1) the faculty may provide students with highquality education and finally help them to succeed in their future careers. Table 1. The Four Dimensions of Engagement in Higher Education 1.

Diverse and engaged participants

Participatory cultures

Interactive teaching and learning

Adequate resources

Source: Haworth, J. G., Conrad, C. E. (1997.) Emblems of Quality in Higher Education: Developing and Sustaining High-quality Programs

We now briefly describe the four dimensions and illustrate them by examples within the interdisciplinary experience presented in part 3 of this article. 1. Diverse and engaged participants – in order to reach a high level of students´ satisfaction, it is crucial to find the right participants, both students and teachers. The level of satisfaction should be measured afterwards by course evaluations and retention rates. 2. Participatory cultures – multi-layered interactions, both formal and casual are developed between students and teachers. Students attend classes, lectures, seminars, workshops and optional activities, develop their own learning communities and begin to appreciate the value of collaborative problem-solving. 3. Interactive teaching and learning – the learning experience must not be limited to the classroom. On the contrary, students should participate in learning activities that will reflect real-life situations and where they are able to confront theoretical knowledge with actual practice. 4. Adequate resources – none of the later criteria can be met without financial and organizational support. When participants are free from worrying about how to fund their activities, they focus much better on teaching and learning. The question is, whether these four dimensions can be reached by using traditional forms of teaching and learning, such as lectures and seminars. The move from conventional direct teaching methodology to modern and innovative approach can be facilitated by integrating elements of project–based learning, especially into seminars. The project orientation is currently experiencing and enormous increase not only in business practice. Designing and developing projects, their application in practice has now become an important social tool enabling to bring to life a new idea or a vision (Orgonáš, Filo, 2012). Project-based learning is a model that organizes learning around projects by giving students the opportunity to work relatively autonomously over extended periods of time, because it involves students in design, problem-solving, decision making, or investigative activities. Moreover, empirical studies show that critical thinking, communication skills, problem solving are identified as the most important individual competencies defined by employers, closely followed by the ability to effectively work with others (Jackson, Chapman, 2012). Knowledge exchange and structured partnerships in this field are not very widespread - universities are developing their own methods and knowledge, and information on good practices is shared less frequently. Moreover, there is still little empirical evidence available about the effects of interdisciplinary teaching experiments. Therefore, in the following sections we will describe our own example with focus on progressive teaching methods that have been applied during a half year

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experimental course “Entrepreneurship in practice”. The presented interdisciplinary experience should result in a didactical proposal through which we intend to modernize traditional business and marketing courses and curricula, and establish an innovative interdisciplinary teaching module at the Faculty of Commerce.

3. DESCRIPTION OF THE INTERDISCIPLINARY EXPERIENCE 3.1. Context The experience we describe in this paper has been developed as a part of the interdisciplinary cross-border project called Hi-Tech Center supported by the European Regional Development Fund. The pilot theme clubs were set up in the summer semester 2012 at the Faculty of Commerce at the University of Economics in Bratislava1. However, one of the important issues that still need to be solved is the implementation of the interdisciplinary learning module into a very rigid structure of the existing bachelor´s and master´s programs. After the first year of experiment, a new platform Talent Way has been set up, which covered 10 specialized clubs (figure 1) operating within the module “Entrepreneurship in practice”. The module is obligatory for all students of the business and marketing management program. Since the summer semester 2013, the platform Talent Way has also provided internships and support for start-up ventures creation.

Figure 1: Clubs Organized by the Talent Way Platform

3.2. Project Characteristics and Development Mindfulness is an ancient practice belonging to the Eastern Wisdom Traditions, particularly Buddhism, and as such it goes Eight lecturers, about forty practitioners and 250 students of business and marketing management program participated in this experience. The courses involved in the experimental platform Talent Way covered several disciplines as it is shown in figure 1. The club structure that has been set up in 2012, has already offered an open meeting space where experts from the different disciplines came together and helped each other to surmount the inherited barriers for interdisciplinary teaching and learning in the diversified Slovak university landscape (Hasenauer, R., Filo, P., Störi, H., 2012). Moreover, new partnerships which have been created ensured that practitioners engaged in this experience were from different knowledge areas. Hasenauer, R., Filo, P., Störi, H. (2012.) The Marketing of High-Tech Innovation: Research and Teaching as a Multidisciplinary Communication Task. 1st international M-Sphere conference for multidisciplinarity in science and business: book of abstracts. p. 50. 1

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During the subsequent semester in summer 2013, lecturers participated in the experiment as a “critic friend” (García, Roblin, 2008) – their role was to encourage students´ reflection, critical thinking and opinion exchange. Lecturers were actively involved, especially in the final stage of the experiment – as consultants during the preparation of master´s thesis proposals. They also had to face and solve any problem that emerged during the experience. Each club produced valuable results in form of new teaching and learning experience, partnerships and a starting point for innovation in education at the Faculty of Commerce. However, we decided to further describe two cases, where outcomes were the most significant for both lecturers and students.

3.2.1. Case Study No.1 AGRO-BIO club represents the platform that aim is to connect academic and business sphere in the fields which are related to agriculture and food industry. In practice, the club is dedicated to the all parts of food chain (for example, public sector, producers of packaging materials, food services providers, etc.), food safety problems, aspects of healthy lifestyle and so on. The aim is to link up theoretical knowledge of marketing, innovation, consumer behaviour, project management, commodity science, product management and above mentioned fields that underline the club interdisciplinarity. The club activities are primarily created for the students of the Faculty of Commerce who can be concentrated on the specific field of their interest and can confront their theoretical knowledge with practical experiences of business representatives. The club activities are generally carried out in the form of workshops and team projects. Members of club can create their own thesis titles and write the chosen thesis with help of teachers or economic (business) experts. In the academic year 2012/2013, in order to reach the main objective of the club’s activity – the connection of students (theory) with practice, we chose an interactive form of education vastly different from the typical ways and forms of connecting theory with practice that our teaching staff is used to (such as developing term papers, practical examples, case studies, video projections, problem solving and so on). We decided to implement a pilot project titled STUDENTS’ MARKET with this years’ subtitle WINEFEST. The essence of STUDENTS’ MARKET lies within the possibility for students to gain a firsthand experience of working in the area of trade, merchant tactics, sales tactics, marketing skills, risks of entrepreneurship, but also in order to apply the theoretical knowledge in work experience. Our aim is making STUDENTS’ MARKET become a tradition at the Faculty of Commerce, as well as an event that is organized by students twice per year – depending on its thematic focus. This year, we concentrated the pilot project on a specific area of thematic focus of the AGRO-BIO club – viticulture and winemaking, and therefore having the subtitle WINEFEST. What preceded the organisation of the WINEFEST event? How does the innovative education in the AGRO-BIO club work? The basis of the club activities was organising workshops led by experienced specialists in cooperation with the club’s supervisor. During the term, we organised a series of workshops for students, where we gradually introduced them to all necessary knowledge for organising an event. Since the work on STUDENTS’ MARKET project is team-oriented, during the first workshop (WS1) titled “Wine marketing – successful commerce” we tested the students in order to discover their abilities and aptitude for working in a team. Then, according to The Belbin Team Roles Model, we created seven teams of five members each. Each team was represented with all groups of roles (action-oriented roles, people-oriented roles, thinking-oriented roles). Subsequently, the students were informed about the task and objectives they need to implement during the term: 1. Main objective: • To organise and market WINEFEST event. Winefest is a typical wine festival, where different wineries are represented with their portfolios, and the visitors come to taste samples of different wines. 2. Partial tasks: • PT1: Each team will find a winery to cooperate with, and therefore, during this project become sales representatives/ sommeliers of the winery that agrees to cooperate. The cooperation of the winery means that they will consent to having students represent them in the event, and at the same time supply their products, marketing materials, inventory and so on, all according to the agreement and demands of the students. • PT2: Reality game – think, you will represent the brand you are presenting. It is important to know everything about the given winery and their products, but also be aware of the general information about wine as a product itself.

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• PT 3: To prepare wine tasting from an organisation and marketing point of view (budget, inventory, propagation materials and such).

Significance and value of the given tasks for students: • PT1: developing their communication and negotiation skills, assertive communication, abilities to make deals and trading. • PT2: this task needs a real interest from students in gaining enough information about products, ways of production, packing, storage, sales tactics, but also consumer preferences directly from specialists – winemakers and vine-dressers. This also means gaining practical information and experience based on face-to-face communication, meetings or even excursions to wineries they work with, eventually taking part in wine festivals or tastings organised in the wider area. • PT 3: application of theoretical knowledge from marketing, tourism, business economics, planning etc. gained during their studies at the Faculty of Commerce. Above-mentioned objective and tasks, place and date of Winefest, participation limited for students and employees of the Faculty of Commerce were the only information that students received from us (supervisors). We allowed them to do anything on the way to achieve stated goals and tasks. We were not influencing their team work in any way. Our aim was to coordinate the meetings, to create content of workshops and to help and advise them just in the case of any complications, questions or problems. In our opinion there is a significant change that can be also obvious for students that are usually used to receive information from teachers passively - without any effort or work. In AGRO-BIO club students have become active participants that were responsible for conducting of all activities. They had to prepare event WINEFEST in 6 weeks and could communicate only among themselves, all of personal meetings with supervisors were excluded (except second workshop WS2). WS2 titled “Wine – Drink of Gods” was led by sales representative and sommelier of one the most modern winery in Europe with the aim to explain basic information and knowledge about wine (grape sorts, wine production process, packaging, storage, quality evaluation, principles of wine tasting) to students. The next workshop WS3 was held 6 weeks after workshop WS1 during which students “teams of winemakers” presented their ideas and progress in event preparation. They informed about wineries that wanted to participate and cooperate with them and discussed all necessaries concerning wine festival at the Faculty of Commerce (event promotion details – creating of posters, invitations and their distribution, renting of tasting glasses, print of tasting coupons, etc.

Figure 2. Official Invitation for Teachers and Employers of the Faculty of Commerce Organizers (students) invited employees of the Faculty of Commerce to final workshop of AGRO-BIO club – event WINEFEST by personal invitations (see figure 2). Posters (see figure 3) were published in the faculty. The important communication channel especially for students segment as potential participants was social networks and event page on Facebook.

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Figure 3: Poster Figure 4 illustrates atmosphere and organization of event.

Figure 4: Photos of event WINEFEST After WINEFEST the next workshop (WS4) focused on evaluation of the event took place. Students evaluated event in very positive way. Summary of incomes and expenditures of all teams are presented in Table 2. Team

No. of tasting coupons

Income (€)

Expenditure (€)

Profit (€)

Tokaj

387

151,10

124,00

27,10

Vinotéka Galéria

385

115,50

105,17

10,33

Elesko

340

102,00

96,00

6,00

Vinkova

290

87,00

80,80

6,20

Masaryk

279

83,70

86,80

- 3,10

Chateau Topoľčianky

222

66,60

55,00

11,60

Slováček a Gašparovič

160

48,00

12,00

36,00

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On the basis of participants feedback we can conclude that WINEFEST was successful project and will go on. Students (the club members) were very satisfied by success and positive participant´s references. Furthermore, they were really surprised by success and high level of event that was being prepared during semester. The event was also positively assessed by other participants – students, employers and representatives of the Faculty and the University of Economics in Bratislava. In our opinion students did a great job during the semester and persuaded us that they can connect their gained theoretical knowledge with practical experiences of experts. As a form of compensation, but also to motivate students to perform at their best, we prepared a tour of the ELESKO winery for all members of the AGRO-BIO club. Elesko winery uses the most modern technologies in producing wine and its storage and may become a future strategic partner of the Faculty of Commerce. A part of the excursion was a tour of the winery with an expert commentary and professional wine tasting with their experienced sommelier. Before the end of the academic year, we all met at the last workshop WS, whose aim was to evaluate the activities of the club (not just events), which is intended to help the supervisor on a quest for improvement. The evaluation results of club activities are of paramount importance to us. In addition, the student gets the opportunity to express his/hers opinion (positive or negative), which also has an impact on creating of club activities in the future. We believe that through this kind of evaluation the interest of students to actively participate in improving the club will rise. Moreover, it creates a more open relationship between teachers and students, as students may freely express their views, opinions and give suggestions for improvement. Students rated 5 aspects of the club (see table 3). Based on the results, we found that:

• The best rating mark was given to the aspects of students´ work (Winefest event and team work) – the event was •

evaluated as unexpectedly highly professional. Negative points were given to uneven workload of team members as not all members of the team worked. In the meantime, they recommended continuing in such activities in the future. The worst rating average mark of 2.85 was assigned to the “way of organising the subject” – on the other hand, they rated the creative aspect of the project, professional workout of the workshops and the workshops led by practitioners very positively. Some of the proposals for improvement were to have joint meetings more often (frequency this year was approx. 2 times a month for 3 hours) and to change the way users log into clubs that operate at the Faculty of Commerce.

Table 3. Students´ evaluation of the project Criterion

Average Mark

Event Winefest

1,25

Team Work

1,61

Attitude and supervisors´profesional qualitites

1,78

Communication

1,83

The way of organizing the workshops

2,85

Finally we would like to present opinions and statements of the students – AGRO-BIO club members that prove this form of education is interesting, challenging, creative, innovative and motivating: “I did not expect so much as it was offered. I was satisfied. “ “Very good event and many good points to the faculty and event. Super! “ “I would not change topic of the club activities... It is necessary to go on!” “The workshops - interesting, they were super!” “The event WINEFEST - excellent, could be organized on a regular basis.” “The event WINEFEST - funny, finally something practical and different.” “Absolutely great event at the faculty, creative expression of students and not memorizing of theory.”

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3.2.2. Case Study No.2 LogisticClub has been established as a platform of the Faculty of Commerce in January 2013. The aim is to link the academic sphere with the experience in the field of logistics. The primary objective is to increase the applicability of the students in the labor market and create opportunities for multidisciplinary issues of logistics.

Figure 5. The Official Logo of LogisticClub The club offers various solutions to problems in the field of distributions systems and logistics: • Basic assignments and problems are solved within “workshops” with the students under the supervision of selected experts. • More complex assignments are completed through theses under the guidance of the expert from mentioned faculty, supported by the professional from real practice. • The most difficult assignments (which may require multidisciplinary expertise) are solved by expert ‘workshops’ of the club. Their aim is to bring together the professional community with expertise on the relevant issue. LogisticClub gives opportunity to students´ active participation in “workshops”, scientific (thesis) projects and skills and knowledge development in the field of logistics. The club also offers internships, expert workshops and seminars, and the opportunity to participate in research projects concerning logistics and supply chain management. So as to teaching capacity at the Faculty of Commerce, LogisticClub covers the topics on logistics, distribution and supply chain management. Moreover, the outcome may be beneficial for the academic community – the club offers opportunity to lecturers to participate in tasks and projects specified by practitioners. However, the added value of the club is represented by the multidisciplinary solutions of various issues in the field of logistics. During the summer semester 2012/2013, five workshops have been held. Their aim was to help students to apply the theoretical knowledge they have acquired. Participants were students who have completed the module ‘Distribution systems and logistics’ in the winter semester 2012/2013. The program of the workshop, as shown in the table 4, was strongly connected to the theory covered by the mentioned module. Table 4. Thematic Workshops of the LogicticClub, summer 2012/2013 Tesco Stores (26/02/2013) – Category management - retail in terms of the retail chain Metro Cash & Carry (03/13/2013) – Category management – supply chain management BITO (03/26/2013) – Storage technology GoodYear (04/09/2013) - Retail in terms of the Premio network Mary Kay (04/16/2013) – Direct marketing & personal selling Based on the topics solved within the five workshops, the members of LogisticClub (26 students) prepared their own proposals of master´s thesis responding to their interests and orientations. There were also several proposals designed by the practitioners (about 20%). During the workshops, there also has been a pre-selection of students which will be offered the possibility to attend the dual education scheme at master´s level. As we previously mentioned, the experimental platform Talent Way results in master´s theses proposals, where about 20% of proposals are designed by practitioners. During the following semester,

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students will complete their master´s projects in cooperation with company and under the supervision of lecturer specialized in the topic. The dual approach is expressed as follows: - -

The thesis supervisor – lecturer will be engaged in the theoretical part of the project. The practical part corresponding to a specific problem will be completed by the company’s expert – practitioner.

The student is required to spend a minimum of 8 hours per week experiencing real-life situations inside the studied company. The voluntary work may result in a paid internship or a full-time agreement after finishing the master´s program. In order to facilitate the development of practical skills and interdisciplinary knowledge of students, arrangements with the Faculty Vice-dean were made, so that some obligatory duties could be reduced and students could complete their projects “in field”. This innovative approach will be tested exclusively by the LogisticClub during the two following years. The success of this experiment requires personal but also organizational support, especially in replacing or enriching the traditional teaching and learning modules by the new innovative courses. We understood that the transition process needed to be made gradually. As has been mentioned, the topics of the LogisticClub are strongly connected to the module “Distribution systems and logistics”. In addition, another module on “Distribution management” is obligatory during the next year of master´s program. The idea now is to cover both by the multidisciplinary module provided by the lecturers and practitioners of the LogisticClub. The first step has already been made by shifting the traditional courses on distribution and logistics to a more practical, interactive and participative workshops. The next step will be to link the two modules ‘Distribution systems’ and ‘Distribution management’ and focus more on workshops and cooperation with experts from practice. As the interdisciplinarity may stimulate high-quality research, an important activity of the club is to participate actively in scientific research projects. The members of Logistic Club, both academics and practitioners, have prepared a research project proposal called “Supporting the innovation of distribution processes through implementation of modern technologies and optimization of operations in logistics, with focus on the environmental burdens reduction and increase of the quality of life.” Besides the previously mentioned academic outcomes of LogisticClub, another important benefit is the possibility to gain additional financial resources in form of sponsorship. In year 2013, LogisticClub found several sponsors among its partners for renovation of classrooms, which will be used as training rooms and an interactive space for workshops. Future goals: For the following semester, LogisticClub has set up several goals and activities:

• • • •

acquisition of new partners for cooperation, development of interdisciplinary research activities, cover all educational activities related to logistics by LogisticClub, increase the quality and quantity of scientific publications.

The whole realization team of LogisticClub is convinced that our actions will improve students´ success on the labor market, link practice and the academic world and gain recognition of the Faculty of Commerce as one of the high-quality educational institution in Slovakia.

3.6. Findings and Discussion Several studies carried out in Europe (Franke, Lüthje, 2003; Lüthje, Prügl, 2006) show that business management students generally have low awareness and appreciation of interdisciplinary cooperation with technically trained people. Moreover, there have been identified several problems associated to interdisciplinary co-operation, that have to be considered. These are caused by stereotypical perceptions of members of different disciplines due to lack of information and experience, especially in highly competitive domains, and can result in important barriers to interdisciplinary projects. To understand the importance of linkages between business and universities, both sides have to appreciate the benefits of these relationships. During the past two years, several elements of interdisciplinarity have been integrated into courses at the Faculty of Commerce. We now recognise, that the co-operation between two distinct professional disciplines can be useful for both sides and for the society as a whole (table 5):

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Table 5.Potential Benefits of Interdisciplinary Alliances and Ties between Universities and Business BENEFITS FOR UNIVERSITY/FACULTY - Job creation for graduates through new venture creation - Opportunity to diversify financial resources - Increase the attractiveness of study programs and overall reputation of the institution - Better achievement of accreditation criteria BENEFITS FOR BUSINESS PROFESSIONALS - Access to cheaper specialized labour in form of graduate students - A steady stream of talented researchers - Access to knowledge and other key resources, such as market information, new ideas.. - Costs reduction BENEFITS FOR BOTH SIDES - Knowledge spillovers from university to practice and vice-versa BENEFITS FOR SOCIETY - Contribution to the growth of entrepreneurial culture in the region - Strengthening local economies Source: Authors

A promising educational approach to integrate two traditionally separate academic fields is to include interdisciplinary elements into existing course modules. Within our experiment described above, we have identified two levels of integrating interdisciplinarity into traditional learning modules: - Level 1: courses with added high tech engineering (LogisticClub, Future Vision, Eco-Vision, Online Club) and servicesoriented low-tech elements (Agro-Bio Club, Agro-tourism, CSR, Health Market) have been designed and tested; - Level 2: pure interdisciplinary course has been set up (Creative Business Club) with teams of students from different types of academic institutions: the Faculty of Commerce, University of Economics in Bratislava and the Academy of Fine Arts and Design in Bratislava. Now, we can come back to the four dimensions of engagement promising success in increasing quality in higher education (see table 1). We illustrate on examples, how the four dimensions have been reached during our experience. Diverse and Engaged Participants • Lecturers, practitioners and even students (in the Creative Business Club) were from different knowledge areas and had different teaching, presenting and learning styles. This diversity enhanced the whole experience and brought some innovative aspects into the traditional approach by the synergy of multiple viewpoints, opinions and experiences. • The level of students´ satisfaction has been measures within all 10 clubs and final evaluations are being analyzed as a part of internal university research project. Participatory Cultures • It is important to mention, that team work and collaboration among lecturers and students were essential to ensure a successful progress toward the objectives of the experiment. Regular meetings and informal communication helped us to share ideas, solve problems and make decisions in these new situations. Interactive Teaching and Learning • Interactivity was reached by giving students the opportunity to work outside the cases – they had to organize meetings with professionals in the field, participate in excursions to companies´ facilities, take part in events and PR activities. • The use of ICT was helpful especially as it allowed students to follow up the activities developed in class and keep up with the courses, but also it provided space for interactive communication and exchange of information between students and lecturers through new channels for dialogue and interaction (such as social networks, social media).

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Adequate Resources • None of the above mentioned activities would be possible without personal and administrative support from the Faculty and the University. Emotional support coming from colleagues and senior lecturers was also necessary to encourage engagement of both – students and lecturers involved in the experiment. However a less rigid organizational structure would facilitate the interdisciplinary work. • Five individual classrooms have been renovated and equipped with help of partners. Sponsorship contributions have been made through: o o o

Monetary donation – resources used for classroom renovation Equipment donation Combination of the above items.

The engagement theory showed us a path how to explore the strengths, weaknesses and main issues of an innovative interdisciplinary approach in teaching and learning. In future development, the four dimensions will serve as reflective indicators of how well the innovated master´ s program is meeting the unique needs of students.

CONCLUSION As we have moved on the experiment, several decisions needed and will need to be taken and changes made in the interdisciplinary teaching strategy introduced, as a result of the reflection processes and feedback received from students, practitioners and colleague lecturers. We have observed, that joining activities and developing common experiences not only helps to reduce negative stereotypical information about individuals outside one´s discipline, but also improves communication skills, mutual understanding, the ability to use analogies and think in extra-disciplinary perspective. We believe that the shift from traditional categories “class”, “teachers” and “students” to the creation of a diverse, interactive and participatory learning climate facilitated free expression of ideas and opinion exchange. Finally, we must notice, that taking this experience into practice has not been an easy task for lecturers involved in the project as it applies a lot of hard work, time and dedication. Even though it was a relatively small initiative, it allowed us to gain new insights into challenges of interdisciplinary approach, as well as to reflect about the processes of educational change in which we are ready to continue in future.

LITERATURE Franke, N., Lüthje, C. (2004.) Entrepreneurial Intentions of Business Students: a Benchmarking study. International Journal of Innovation and Technology Management 1(3), pp. 269–288. 2. García, L.M., Roblín, N.P (2008.) Innovation, Research and Professional Development in Higher Education: Learning from our own experience. Teaching and Teacher Education, 24 (1), pp.103-116. 3. George, G., Zahra S.A., Wood, D.R. (2002.) The Effects of Business–University Alliances on Innovative Output and Financial Performance: A Study of Publicly Traded Biotechnology Companies. Journal of Business Venturing, 17(6), pp. 577-609. 4. Haworth, J. G., Conrad, C. E. (1997.) Preface, Emblems of Quality in Higher Education: Developing and Sustaining High-quality Programs (pp. xixvii). Boston: Allyn and Bacon. 5. Holley, K. (2009.) Interdisciplinary Strategies as Transformative Change in Higher Education. Innovative Higher Education, 34(5), pp. 331-344. 6. Hasenauer, R., Filo, P., Störi, H. (2012.) The Marketing of High-Tech Innovation: Research and Teaching as a Multidisciplinary Communication Task. 1st international M-Sphere conference for multidisciplinarity in science and business: book of abstracts. p. 50. 7. Jackson, D., Chapman, E. (2012.) Empirically Derived Competency Profiles for Australian Business Graduates and Their Implications for Industry and Business Schools. The International Journal of Management Education, 10 (2), pp. 112–128. 8. Jacobs, H.H. (1989.) Interdisciplinary Curriculum: Design and Implementation. Alexandria, VA: Association for Supervision and Curriculum Development, 97p. 9. Lüthje, C., Prügl R. (2006.) Preparing Business Students for Co-Operation in Multi-Disciplinary New Venture Teams: Empirical Insights from a Business-Planning Course, Technovation, 26 (2), pp. 211-219. 10. Newswander, L.K., Borrego, M. (2009.) Engagement in Two Interdisciplinary Graduate Programs. Higher Education, 58 (1), pp. 551-562. 11. Orgonáš, J., Filo, P. (2012.) Projektový Model Vyučovania - Moderný Spôsob Seminárov a Cvičení. Vedecké state Obchodnej fakulty 2012, pp. 554-567. 12. Woods, C. E. (2007.) Researching and Developing Interdisciplinary Teaching: Towards a Conceptual Framework for Classroom Communication. Higher Education, 54 (6), pp. 853-866 1.

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DETAILS ABOUT AUTHORS: PETER DRABIK ASSISTANT PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA BRATISLAVA, SLOVAKIA pr.of@euba.sk PAULINA KRNACOVA ASSISTANT PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA BRATISLAVA, SLOVAKIA paulina.krnacova@euba.sk ROBERT REHAK ASSISTANT PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA BRATISLAVA, SLOVAKIA robert.rehak@euba.sk MARIA VASILOVA ASSISTANT PROFESSOR FACULTY OF COMMERCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA BRATISLAVA, SLOVAKIA maria.vasilova@euba.sk

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UNIVERSITY LIBRARY AS A LIVING LAB: INNOVATING WITH STUDENTS ANDREA ALESSANDRO GASPARINI ALMA LEORA CULÉN

ABSTRACT

Ubiquitous and pervasive technologies are part of everyday life, including the portion of it that has something to do with the university libraries: all students use personal mobile technology and all books have embedded sensors. This paper describes three years long experience with student-lead innovation of student-oriented university library services. Students, as library users themselves, have a potential to initiate changes in the existing practices, or offer novel technological solutions based on ubiquitous and pervasive technologies that are easy to adopt and use for this user group. Within the project described in the paper, the library was established as a living lab for a student-lead innovation. At this stage, the innovators are recruited among interaction design students. The approach shows very promising results, some of which are showcased in the paper. KEYWORDS: Innovation, Service Design, Interaction Design, Library Services

1. INTRODUCTION The university library as an institution balances a fine line between being traditional and being innovative. The acquisition and the loan of academic books are a centuries old tradition. Rapidly changing information technology strongly influences how this traditional work is being done. The question whether libraries should simply adapt to the changes dictated by technology or be innovative in their own right is an old one. Addressing the issue of innovation in libraries (Olaisen et al., 1995) say: “Even though it would be foolish to argue that all innovation is beneficial or that continual change for its own sake is desirable, there is evidence in the business literature that innovation is necessary for both development and survival. … Libraries must ask the penetrating questions: Is innovation necessary? For what can innovation theory be used in libraries?” The disruptive innovation in the book delivery system, see (Christensen & Raynor, 2010), forced by the appearance of disruptive technologies such as eBooks first and tablet later (Culén et al., 2011; Culén & Gasparini, 2011a), has practically forced the libraries to innovate. Ubiquitous and pervasive technologies are part of the library ecologies today. In terms of pervasive (sensor based) technologies in the library, paper books are all embedded with RFID tags. The use of ubiquitous, personal and mobile, technology in Norway is widespread: 97.2% of Norwegian population is using the internet, see (“Norway - New Media Trend Watch Europe,” 2013), and 63% of the whole population uses social media. For the student population, Internet access is 100%, and although we do not have data for social media use, it is significantly higher than that for the general population. Students routinely use their smart phones for access to information, social media, e-commerce, m-commerce, gaming and even TV watching. Students are a savvy group who likes cool things, and value for their time or money. It is not easy to provide services for this user group that would be widely accepted and used, see (Culén & Gasparini, 2012). For example, the results from an upcoming master thesis (Edvartsen, 2013) show that 45% of 244 users that participated in a survey around the use of library services, do not use the library web site at all. This lack of interest in library online services is also supported by a larger research done by JISC (Rowlands et al., 2008), where one of the findings is that today’s students, being digital natives, generation Y or millennial generation, rely heavily on search engines like Google, rather than specialised, curated, library search engines providing only the material that passes quality control. The low level of awareness around the quality of information is also resulting in poor search strategies, (Rowlands et al., 2008). The most numerous user group of the university library are students. Thus, it was reasonable to try to create a context in which students can contribute to service innovation, leading to increased and better use of library services. Three years ago, we offered students possibility to become innovators of library services, through academic instruction in interaction design, see (Moggridge, 2007; Saffer, 2010; Sharp et al., 2007) for an introduction to interaction design. This also implied innovation in teaching. Although the book “Creating Innovators” (Wagner & Compton, 2012), appeared on the market two years after we have set in practice similar ideas, it confirms that these are the ideas whose time has come. (Wagner & Compton, 2012) site the results of GE’s 2011 survey on innovation, stating that 77% of those interviewed considered that “the greatest innovations of the 21st century will be those that have helped to address human needs more than those that had created the most profit”, and 69% agreed that “today, innovation is more driven by people’s creativity than by high level scientific research.” The logical question that authors then pose is: can innovation skills

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be learned? The authors state: “The DNA of innovators might be considered a set of skills that are essential elements in design thinking”. Design thinking, see (Brown, 2008), is changing the innovation scene, but also education within some fields that are not traditional design fields, see (Culén et al., 2013). Thus, through the context of the course, using creativity and design thinking, students were enabled to take the lead in designing new or re-designing existing library services. The main concern of this paper is thus discussion of how to involve students in innovation and service design (Polaine et al., 2013) processes within the university library. The idea is simple: allow human-computer interaction design students to take a lead in innovating student-oriented services at the library. We will describe our methodology, the context for innovation situated in a physical location as a living lab. Further, we will present some examples of students work throughout the innovation process, from ideation, to implementation. The stage set out for this work is truly multidisciplinary and involves fields of innovation, interaction design, education, library science and service design. The paper is structured as follows: Chapter 2 presents the Living Lab as a concept used to raise awareness of innovation processes within the library. Chapter 3 gives an overview of the work done during the last three years while chapter 4 discusses in depth one specific project. Chapter 5 present findings so far, and chapter 6 discussion, followed by the conclusion in Chapter 7.

2. LIVING LAB AS FRAMEWORK FOR RESEARCH We consider a Wikipedia definition of a living lab (“Living lab - Wikipedia, the free encyclopedia,” 2013) to be a good definition, even though our scope is a bit narrower: “A living lab is a user-centred, open-innovation ecosystem,[1][2] often operating in a territorial context (e.g. city, agglomeration, region), integrating concurrent research and innovation processes within a public-private-people partnership.” The citations in the definition relate to highly relevant work of von Hippel, Cheesbrough and Bilgram et al. (Bilgram, et al., 2008; Chesbrough, 2003; von Hippel, 1986). We have used the Living Lab as a research concept and as a framework within which we could contextualize, study and understand the effects of the design of student lead innovative processes within the library. The Living Lab as a concept implies building of awareness among stakeholders around activities related to innovation. It also implies a specific context where the action happens and evolves through time (Schumacher & Feurstein, 2007). This sensibility can be used to validate and refine solutions in multiple, and similar context, but requires a very high level of observation and participation to enact new activities (see Figure 1). The Living Lab has been widely used as a research framework during the last years, even though it is quite new. Other researchers have used this framework to conduct analysis of online community activities and grasp how innovation, cooperation and voluntarism enact when the stakeholders are developing, for instance, open source software (Brandtzæg et al., 2010; Følstad, 2008a). The Living Lab framework is also used in design and deployment of welfare technology for the elderly (Thiesen et al., 2009). Figure 1: Participation and Context of Innovation

Source: (Eriksson et al., 2006)

The “context” is an interesting attribute of the Living Lab framework. In the case of Living Labs, one can operate with two different notions of context (Følstad, 2008b). The first notion, the “Familiar context”, implies that the ambient is set up to support users through the concept of familiarity. For instance, the living lab for designing with elderly may contain objects that they were familiar with in their youth and use those to build their competence with something new. The second notion, the “Real-World context”, implies that the living lab is taking place in the actual situation of practice. This approach

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of is highly discussed, pointing out the novelty of this field (Thiesen et al., 2009) and the complexity (Markopoulos, 2001). Regarding our research and use of the living lab, we have settled on the use of the Real-World context and given it a physical space, the university’s science library. Observations of several different layers of library practice are carried out in this setting. First, the interaction design students do surveys and interviews with diverse library users, getting feedback and data around changes in the use of the library. The second layer consists of a series of observations and interviews done by researchers with the students participating in the interaction design course, thus collecting data on how they work. Finally, interviews, observation, focus group with librarians and library leadership are carried out by researchers, collecting data on how the innovation is perceived and what are the effects of it in the science library.

3. PRELIMINARY WORK IN THE SCIENCE LIBRARY Three years ago the science library at the University of Oslo decided to take a deep look into its organization, operation and the meaning of technological changes on the way these operations are taking palace. As one of the consequences, several small libraries were merged into one, at a new location, in March 2012. Another change that took place was a decision to adopt the user centric view and redesign or develop new services that better serve users’ needs. Libraries have a long history of offering services to users. Preserving, keeping acquiring and lending books and other information material are very old, globe wide agreed upon practice. Usually free of economic interest for end users, libraries worldwide cooperate on keeping this practices a live (Matheson, 1995). Therefore, the introduction of new user centered services implies the necessity to align them to a strong, long-lasting main practice. In order to investigate the users’ needs and let users develop services that they are interested in, the leadership of the science library established cooperation with the institute of informatics, group for design of information systems. The class in interaction design was chosen in order to explore the idea of new service design with students, for students. The framework to achieve this innovative user centric idea was then established, and during the past 3 years, several student-lead projects have informed the library of the kind of services students see as valuable. The first year of users involvement towards informing the library started in the fall of 2010. This was the year when the iPad came out and many have seen tablets as disruptive technology that will change the education. The library was interested in finding out how it would be for students to have an entire curriculum on the iPad; is it really a game changer (Culén & Gasparini, 2011b)? They also wanted to establish a new practice around the acquisition and distribution of documents on this new platform. The role of interaction design students was to observe how a graduate level class in geoscience, equipped with iPads, and an undergraduate class in economy, equipped with an e-book reader Boox, used these devices and reading materials on them (Culén et al., 2011). The period when the project started was quite uneasy for the library since the e-book reader and the iPad represented two disruptive technologies, which could cause major changes in how the library works in the future (Culén & Gasparini, 2011a). Those technologies opened also for other possibilities, for instance an ecofriendly aspect of using these devices was the possibility to reduce the prints-out of diverse materials, including research articles, power point presentations for courses etc. The interaction design students found these side effects of the use of tablets interesting. The second year, in the fall of 2011, before the new science library building was completed, interaction students were challenged to investigate ways of organizing new services for the library. There student projects were defined, and the central tension was around whether one should use the old way of organising services in one large web-based portal, or are some things much better done using mobile phone applications. For two of the project groups, the main idea was to mirror the services offered on the web site of the library, arguing that familiarity would aid adoption. The third group used a different strategy, making a prototype of an app that would be very useful in situ, at the new library. The services included “book a librarian”, “book a study-room” or “see the map of the library”. See (Student Projects, 2011) for all three projects. The third year, in the fall of 2012, the library had opened its doors at a new location and helped provide a better context for students work. The library started a more formal project “User Driven Innovation” (BDI, 2012), and also sought external funding to support the students efforts. What happened in this period regarding innovation is the focus of the next section.

4. THE CASE STUDY In the third cycle of cooperation between the library and the department of informatics in the fall of 2012, the organized

support to facilitate students work increased substantially. Three library staff members had weekly meeting with students, again organized in three project groups, and the instructor for the interaction design course. In addition, the library organized a daylong meeting with a professional user-experience consultancy company (Netlife Research, Oslo), where stu-

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dents presented projects and get feedback. The library staff helped project groups with programming competence, library management system interface issues, as well as with simpler contextual help such as booking rooms for focus group or interviews, and some financial aid for gifts to the respondents. The projects, in turn, were really exciting. The results were, naturally, not fully developed systems or applications, but the way towards completion was clearly charted. An app that one of the project groups worked with is released and available at AppStore and Google Play, while the second application is ready for implementation. The interest with these projects was not only in novelty of ideas for services or implementation of those. It was also methodological. Two of the project groups have used Participatory Design approach (Sharp et al., 2007) as their design strategy, where selected users are participating in the entire design effort. The last project used user-centred Design (Sharp et al., 2007) where needs and interests of users are always in focus. The methods and techniques employed with all stakeholders were based on interviews, questionnaires, focus groups and workshops. The design was also supported by observation and user based testing. The three project groups have managed to engage diverse groups of participants, with diverse skills that were well used during the design process. Figure 2: App for book search and possibility to scan ISBN barcode.

Source: (Reistad et al., 2012)

The first project, “Bookworms”, developed a smartphone app, which helps users to find physical books on the shelves in the science library. If the book is also available in electronic edition, the user has an opportunity to choose this option. The students said that they were motivated to work on this project because the library was a place they often used, and they were exited about possibility to innovate “… since the library has essentially been the same for many years, without much innovation.” (Reistad et al., 2012) The students also point out that the library staff was positive and interested to help, and their involvement in the project was very crucial for their choice of project (Reistad et al., 2012). The second project, the “BibApp”, was related to the access to the knowledge resources of the library, from student’s perspective. The smartphone app they designed checks their curriculum and tells them which books and articles the library has. The BibApp also enables a user to discuss and comment on the resources. The students stated that the motivation for this project was the following: “The background for this project was …. to help the University of Oslo Library adapt to the society and the student’s demand…” (Arnesen et al., 2012). The last project, “Minesweeper”, focused on a task that combined value-based design democratizing the existing room booking system, with social aspect based in wide spread use of social media. The booking system was to work in situ, one could at glance get overview of rooms in use. For those that were in use, but had some empty seats, the users using the room could post the topic discussed and number of available seats on a feed shown on a large screen by the entrance to the library. Tweets were enabled as well, possibly attracting friends from the same class to come. For the project group the motivation was to “…increase the library’s appeal.” (Sætre et al., 2012)

5. FIRST RESULTS AND EFFECTS One of the first effects of the User Driven project was a seminar at the end of the 2012, where students presented the projects for interested guest from the University, the University library and other libraries in the country. The interest was overwhelming, and the conference room was more than full. At the end of presentations a vivid discussion started about

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the need of the library to make changes and let the users participate in the innovation processes. The results presented by the involved students, contributed to making the library leadership to commit to give economic support to a new larger research project to monitor and understand the results from these student-lead innovation projects, and finally to continue working with students. The aim of the larger research project, which started in February 2013, is to monitor and understand the effects of these efforts on the library. The first results from the data-gathering through interviews with leadership show that the leaders of the library are willing to fail with some of the student projects. They are also willing to learn from them. Further they state that some of the innovative results do not need to last. If a service is obsolete, or users point out a need for change, closing down such a project would not be seen as a failure. Faster changes would be enabled. For the science library, the awareness around users needs that students’ projects have raised is relevant. With interviews, focus groups and surveys, the students have gained a new understanding of how the library services work at present, and the possibility to influence and participate in the future of the library. The science library, by committing to student lead innovation projects, also committed itself to close cooperation with the institute for informatics, which in itself opens new possibilities for multidisciplinary cooperation. Analysis of the project reports from 2010, 2011 and 2012 shows that the results were the strongest in 2012, both in terms of how innovative ideas were and how close to being finished products the prototypes were. This, of course, can be in part due to the increased interest and support that the library has given, but may be also in part contributed to other factors such as overall increased interest in service design as a field.

6. DISCUSSION In Section 4, some of the motivation factors for projects were presented. The first results obtained from the interview analysis with involved students show that proper motivation was important for our innovators/users. This is also in accordance with the large body of literature on motivation to innovate. For example, research on what motivates workers in a high technology company like Apple, states that one factor is a very high focus on specific goals, and as another example states that company often keeps hidden some disturbing elements, such as bad economy, from their employees (Lashinsky, 2013). Describing a young innovator, Wagner states that: “... people worked incredibly hard, not because of any compensation package, but because they believed in what they were doing.” (Wagner & Compton, 2012). Analysing motivation factors of interaction design students, we find that the fact that they are designing better solutions for themselves and for future generation of students who would have seemilar needs, also had a large impact. On being given the support and encuragment to innovate, as one of the groups stated in Section 4, was an important motivation factor. In the literature, see (Hoholm & Araujo, 2011; Stevenson & Jarillo, 1990), support as motivating factor is discussed, pointing out that this also affects the innovators. In our case, the students have not shown inclination to be drastically innovative. Rather, they were trying to improve the existing services and making them easier to use. This may be the consequence of the support given and a desire to design a service that would also be valued by the library. This topic will be taken further and explored in interviews with this year’s students participating in the project. By observing students at work, we could get a close look at how they thought about innovation. We noticed that they are focused on practical issues of their student life in the library such as easy access to syllabus or a simple search interface into the library resources. Usefulness and functionality are more important to them than, for example, to make the library into a cool place to be. The course in interaction design did not mandate the focus on design of services; students could have chosen many other approaches, e.g. tangible interactions. In a different study, we have found out that the “cool” factor was important for the typical student age group (18 – 25) (Culén & Gasparini, 2012). The “cool” factor includes fun interactions with technology, joy in the process and it stimulates cool behaviors. However, no student projects so far have tried to use the “cool” technology and make it be part of some library service. Some researchers argue that the library is an institution that often tries to be innovative, see for example (von Hippel, 2005). Von Hippel points out the need for the library to develop services and systems that reach their intended user groups. In order to do so, von Hippel claims that they have to use the latest technology. The User Driven project supports this approach well. The experience the library and the leadership had with this last iteration with innovation projects from 2012, was much like that of supporting a start up company. Supporting the interaction students in their work also has the effect that, with each new generation of students, the library learns abut how students use new technology. This in turn supports and inspires the development of new practices and services built on the latest technology in the library. From the researchers point of view, this is a framework offering good conditions for research, since some attributes are constant, and some are changing,

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but the change can be observed within the context of the Living Lab. This, according to (Winthereik et al., 2009) is precisely when living labs work the best. When we revisit the discussion from the introduction around the necessity of innovation in the library, see also (Olaisen et al., 1995), our conclusion is that there really is not other alternative for the libraries but to innovate. Been passive in responding to users demands may cause the library to become obsolete, and at the end, only a museum containing old and almost valuable books.

CONCLUSION The student innovators have been quite careful, nearly conservative, in choosing what and how to innovate library services. They have, though, accomplished several positive results, resulting in positive input to the research related to this project. Making students and library employees aware of the possibility to innovate, has changed the way both students and the library look at existing services and identified opportunities for future development. The empowerment of the library users, by let them innovate for the users is quite complex, so the effect it has on the services will be interesting to monitor in future cycles of the project. Using the Living Lab as a framework will gives us the possibility to monitor what enact the users, and gives the library the possibility to prepare and support future cycles of innovation.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.

Arnesen, I., Børsting, J., Myrhstuen, M., Sun, L., Gustavsen, J. (2012.) Student Project BibApp. Retrieved from http://www.uio.no/studier/emner/ matnat/ifi/INF2260/h12/projects/library-projects/BibApp/final-report.pdf BDI. (2012.) Brukerdrevet Innovasjon ved UBO. Retrieved from http://www.ub.uio.no/om/prosjekter/brukerdrevet-innovasjon/index.html Bilgram, V., Brem, A., Voigt, K.-I. (2008.) User-Centric Innovations In New Product Development — Systematic Identification Of Lead Users Harnessing Interactive And Collaborative Online-Tools. International Journal of Innovation Management (ijim), 12(03), 419–458. Brandtzæg, P. B., Følstad, A., Obrist, M., Geerts, D., Berg, R. (2010.) Innovation in Online Communities – Towards Community-Centric Design. In P. Daras & O. M. Ibarra (Eds.), User Centric Media (pp. 50–57). Springer Berlin Heidelberg. Brown, T. (2008.) Design thinking. Harvard Business Review, 86(6), 84. Chesbrough, H. (2003.) Open innovation: the new imperative for creating and profiting from technology. Boston, Mass.: Harvard Business School Press. Christensen, C. M., Raynor, M. E. (2010.) The innovator’s solution: creating and sustaining successful growth. Boston, Mass: Harvard Business School Press. Culén, A. L., Engen, B. K., Gasparini, A., Herstad, J. (2011.) The Use of iPad in Academic Setting: Ownership Issues in Relation to Technology (Non) Adoption. Presented at the ICEM&SIIE, Aveiro, Portugal. Culén, A. L., Gasparini, A. (2011a.). E-book Reader and the Necessity of Divergence from the Legacy of Paper Book. In Proceedings of the 4th International Conference on Advances in Computer Human Interaction (pp. 267 – 273). Culén, A. L., Gasparini, A. (2011b.) iPad: a new classroom technology? A report from two pilot studies. In Information Sciences and e-Society (pp. 199–208). Presented at the INFuture 2011, University of Zagreb. Culén, A. L., Gasparini, A. (2012.) Situated Techno-Cools: factors that contribute to making technology cool in a given context of use. PsychNology Journal, 10(2), pp. 117–139. Culén, A. L., Joshi, S., & Atif, A. (2013.) HCID: Who is an interaction designer? In Proceedings of the 2nd International Conference for Design Education Researchers (Vol. 4, pp. 1924–1937.). Presented at the Proceedings of the 2nd International Conference for Design Education Researchers, Oslo, Norway: ABM Media. Edvartsen, Y. (2013.) Kan jeg låne en bok med mobiltelefonen? Master Thesis in progress, Oslo. Eriksson M., Niitamo V., Kulkki S. (2006.) State-of-the-art in utilizing Living Labs approach to user-centric ICT innovation - a European approach. Retrieved from http://www.vinnova.se/upload/dokument/verksamhet/tita/stateoftheart_livinglabs_eriksson2005.pdf Følstad, A. (2008a.) Towards a living lab for the development of online community services. Electron J Virtual Organ Network, 10(47). Følstad, A. (2008b.) Living Labs for Innovation and Development of Information and Communication Technology: A Litterature Review (No. 10). eJOV. Hoholm, T., Araujo, L. (2011.) Studying innovation processes in real-time: The promises and challenges of ethnography. Industrial Marketing Management, 40(6), pp. 933–939. doi:10.1016/j.indmarman.2011.06.036 Lashinsky, A. (2013.) Inside Apple: how America’s most admired, and secretive, company really works. New York: Business Plus. Living lab - Wikipedia, the free encyclopedia. (2013.) Retrieved August 3, 2013, from http://en.wikipedia.org/wiki/Living_lab Markopoulos, P. (2001.) Towards a Living Lab research facility and a ubiquitous computing research programme. Matheson, N. W. (1995.) The idea of the library in the twenty-first century. Bulletin of the Medical Library Association, 83(1), pp. 1–7. Moggridge, B. (2007.) Designing Interactions (1st ed.). The MIT Press. Norway - New Media Trend Watch Europe. (2013.) Retrieved August 3, 2013, from http://www.newmediatrendwatch.com/markets-bycountry/10-europe/77-norway Olaisen, J., Løvhøiden, H., Djupvik, O. A. (1995.) The Innovative Library: Innovation Theory Applied to Library Services. Libri, 45(2), pp. 79–90. Polaine, A., Løvlie, L., Reason, B. (2013.) Service design: from insight to implementation. Reistad, H. B., Choi, J., Drevsjø, L., Imtiaz, S., Slang, T. (2012.) Student Project Bookworms. Retrieved from http://www.uio.no/studier/emner/ matnat/ifi/INF2260/h12/projects/library-projects/Bookworms/ Rowlands, I., Nicholas, D., Williams, P., Huntington, P., Fieldhouse, M., Gunter, B., Tenopir, C. (2008.) The Google generation: the information behaviour of the researcher of the future. Aslib Proceedings, 60(4), pp. 290–310. Sætre, A. B., Litovchenco, E., Grina, M. G., Bjørneberg Castro, R., Jongsathitsathian, S. (2012.) Student Project Minesweiper. Retrieved from

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http://www.uio.no/studier/emner/matnat/ifi/INF2260/h12/projects/library-projects/minesweeper/final-presentation-03.12.2012.pdf 29. Saffer, D. (2010.) Designing for interaction: creating innovative applications and devices. Berkeley, CA; London: New Riders ; Pearson Education [distributor]. 30. Schumacher, J., Feurstein, K. (2007.) Living Labs – the user as co-creator (pp. 27–32). Presented at the 13th international conference on intelligent communities for Europe, Lingen. 31. Sharp, H., Rogers, Y., Preece, J. (2007.) Interaction Design: Beyond Human-Computer Interaction (2nd ed.). Wiley. 32. Stevenson, H., Jarillo, J. C. (1990.) A Paradigm of Entrepreneurship: Entrepreneurial Management (SSRN Scholarly Paper No. ID 1505897). Rochester, NY: Social Science Research Network. Retrieved from http://papers.ssrn.com/abstract=1505897 33. Student Projects. (2011.) Student Projects 2011 (in Norwegian). Retrieved from http://www.uio.no/studier/emner/matnat/ifi/INF2260/h11/ prosjekter/ 34. Thiesen Winthereik, J. C., Malmborg, L., Andersen, T. B. (2009.) Living Labs as a Methodological Approach to Universal Access in Senior Design. In Proceedings of the 5th International Conference on Universal Access in Human-Computer Interaction. Addressing Diversity. Part I: Held as Part of HCI International 2009 (pp. 174–183). Berlin, Heidelberg: Springer-Verlag. 35. Von Hippel, E. (1986.) Lead users: a source of novel product concepts. Manage. Sci., 32(7), pp. 791–805. doi:10.1287/mnsc.32.7.791 36. Von Hippel, E. (2005.) Democratizing innovation. Cambridge, Mass.: MIT Press. 37. Wagner, T., Compton, R. A. (2012.) Creating innovators: the making of young people who will change the world. New York: Scribner.

DETAILS ABOUT AUTHORS: ANDREA ALESSANDRO GASPARINI PHD RESEARCH FELLOW DEPARTEMENT OF INFORMATICS AND UNIVERISTY LIBRARY, UNIVERSITY OF OSLO OSLO, NORWAY andreg@ifi.uio.no ALMA LEORA CULÉN ASSOCIATE PROFESSOR DEPARTEMENT OF INFORMATICS, UNIVERSITY OF OSLO OSLO, NORWAY almira@ifi.uio.no

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MULTIDISCIPLINARY APPROACH BETWEEN HEALTH MANAGEMENT EDUCATION AND HEALTH POLICY ŽARKO PAVIĆ ZORAN KALINIĆ

ABSTRACT

Our development strategy of the health management education contains two interactive functions: Health Management Education System (HMES) and Health Policy Development Program (HPDP). We prepared the original undergraduate, graduate and doctoral degree proposal in the field of the health management with the three master- (Health Policy, Health Care Payment Systems and Quality Improvement Models in Health Care) and two PhD topics (Health Policy, Health Economy). Development strategy of the HMES contains of the objectives in the area of education, medical science and technology, improvement of the organization and status of the medical profession, organization and functioning of the public health and enhancement of the ethical and bioethical principles of the medical profession. HMES is a specific education subsystem within public health sector which serves to accomplish the collaboration between health professionals and community, as well as doctors and patients. Advancement of professional collaboration, formation of teams, managerial network and research activities represent the basic components of systemic approach to work of the Department for Health Management. Personalization of the health management profession in health care system and leadership of the health managers in the decision making processes are basic goals of the HPDP. Key point factors of our action plan monitoring are the time, human resources, material resources and expenses required for realization of HMES and HPDP. The implementation of this strategy implies the control and evaluation of success of accomplished goals and development guidelines. To overcome the problems the following actions are needed: to design more effective and transparent health systems, to adjust the new standards and norms, to implement new technologies, to build a health management expert network for support of strategy, to improve the effectiveness of communication, to institute the rational access to resources and to define the better system of stimulation. Fundamental mission of the HMES and HPDP in preserving the dignity of medical profession may be completed only through management of the long-term visions of the common European health care system development strategy with clear political and financial support, legality of procedure and socio-cultural consensus. KEYWORDS: health management, education, health policy, development strategy, professional collaboration, expert network.

1. INTRODUCTION Development strategy of the health management education contains two interactive functions: Health Management Education System (HMES) and Health Policy Development Program (HPDP). We suggest the following undergraduate, graduate and doctoral degree proposal in the field of the Health Management Education: Undergraduate Studies in Health Management: A. The Basic Principles of Health Management Lectures: 1.

Health Management Definition

Functions of the Health Management

Communication Systems

Monitoring, Control and Evaluation

Decision Making And Problem Solving

Conflict Management

Interpersonal Coordination in the Health System

Management and Motivation

Definition of the Successful Manager

10.

Strategic Planning and Management

11.

Management of the Science in the Health System

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Workshops: 1.

Health Care Reform

Leadership

Policy Making Analyses

Opportunity and Obstacles in the Health Development

Public Private Partnership

B. Health Policy Management Lectures: 1.

Goals and Strategy of the Health Policy

Organization of the Health System

Health Financing

Integrated Health Care

Management of the Integrated Delivery Services

Control Knobs of the Health System

Health Promotion, Prevention and Social Marketing

Management of the Profit and Non-profit Organization in the Health Sector

Criteria of the Health System Management

10.

Public Health Research and Development

11.

International Coordination, Globalization and Health

Workshops: 1.

Strategy Drafting

Development Programs and Projects

Models of the Integrated Health Care

Information Technology in the Health Sector

Disease Management

Professional, Master and PhD Studies in Health Management Professional (7 topics): •

Primary Health Care Management

•

Hospital Management

•

Public Health Management

•

Nursery Management

•

Pharmaceutical Management

•

High Technology Assessment

•

Human Resources Management

Master (3 topics): •

Health Policy

•

Health Care Payment Systems

•

Quality Improvement Models In Health

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PhD (2 topics): â&#x20AC;˘

Health Policy

â&#x20AC;˘

Health Economy

Health policy development strategy is very closed connected with the development of the HMES in each countries of the European region (Busse, R, 2000, Busse, R, Wismar, M, 2002, Kickbusch, I, 2002)). The management of our development strategy is guided by objectives, health care reform and leadership in our health care system. Development objectives of the HMES include activities that are necessary for a new and modern role of the health system which have to be accomplished by our governmental and non-governmental sector. Objectives are the following 1.

Objectives in the area of education.

Objectives in the area of medical science and technology.

Objectives in the area of improvement of organization and status of medical profession.

Objectives in the area of organization and functioning of public health.

Objectives in the area of enhancement and fostering of the ethical and bioethical principles of profession.

Strategic framework of the HMES implies the organization of the education system generally consisted of the following functionally and conceptually interconnected segments: structure, system, process, culture and human resources. HMES structure implies the next development parameters: 1.

Efficiency and functionality.

Decentralization.

Network of health and education authorities.

Geographical distribution.

Public-private-partnership.

HMES is a specific education subsystem within public health sector which serves to accomplish the collaboration between health professionals and community, as well as doctors and patients. Advancement of professional collaboration, formation of teams, managerial network and research activities represent the basic components of systemic approach to work of the Department for Health Management. The reform of public health system allows for transparency and interconnecting of all intended activities in organizations, institutions and societies. Optimal results of planned activities in the process of work of the HMES are accomplished by formal and informal connections between health and education system. Key points are feasibility of the health management study and knowledge applicability in practice. Cultural approach of the HMES depends on tradition, demographic changes and socio-economic environment (Klein, R, 1989). European Medical Societies try to take over the leading position in transformation of cultural milieu, with a special aspect not only to health but also to political, sociological and educational culture. Special phenomena of health culture development are the culture of strict values in public health, culture of selection of top-quality personnel, culture of knowledge, culture of innovation, culture of approach to health care and culture of rapport with patients. Personalization of the health management profession in health care system and leadership of the health managers in the decision making processes are basic goals of the HPDP (Ritsatakis, A, et al., 2000, Van de Water, HPA, Van Herten, LM, 1998). That assume the establishment of institutional and personnel authorities and values in the public health care at all levels. Hierarchy of values, demands and responsibilities is closely associated with the position of health authorities in relation to health care system, where knowledge and talent represent irreplaceable values of HPDP and development strategy of the health management. implementation of this strategy implies the control and evaluation of success of accomplished goals and development guidelines. Basic factors of action plan monitoring are the time, human resources, material resources and expenses required for realization of HMES and HPDP. The problems that may arise regarding the implementation of the strategy are the consequence of disproportion between HMES requirements and future prospects of the health system reform development. To overcome the problems the following actions are needed:

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•

to design more effective and transparent health systems,

•

to adjust the new standards and norms,

•

to implement new technologies,

•

to build a health management expert network for support of strategy,

•

to improve the effectiveness of communication,

•

to institute the rational access to resources,

•

to define the better system of stimulation.

Fundamental mission of the Health Management Experts in preserving the dignity of medical profession may be completed only through management of the long-term visions of the European health care system development with clear political and financial support, legality of procedure and socio-cultural consensus in the European region (Wismar, M, Busse, R, 2002).

INTEGRATION AND COLLABORATION BETWEEN HEALTH MANAGEMENT EDUCATION AND HEALTH POLICY SYSTEM Management and leadership are important for the delivery of good health services. Although the two are similar in some respects, they may involve different types of outlook, skills, and behaviours. Good managers should strive to be good leaders and good leaders, need management skills to be effective. Leaders will have a vision of what can be achieved and then communicate this to others and evolve strategies for realizing the vision. They motivate people and are able to negotiate for resources and other support to achieve their goals (Jago, A, 1982, Kotter, J, 1990, Kirkpatrick, S, Locke, E, 1991, Lenway, S, Rehbein, K, 1991). Managers ensure that the available resources are well organized and applied to produce the best results. In the resource constrained and difficult environments of many low – to middle-income countries, a manager must also be a leader to achieve optimum results. Leaders often, but not necessarily always have a sense of mission, are charismatic, are able to influence people to work together for a common cause, are decisive and use creative problem solving to promote better care and a positive working environment (Bass, BM, 1990). In most health systems, health facilities are linked to the national health system through the district and therefore are accountable to district management teams. All operational health system activities are implemented via the district including drugs and commodities procurement, human resources, infrastructure, and technical support. Local facility managers and district managers must have clear lines of communication, and ensure optimal off-site support and supervision, and that reporting to districts is accurate. Facility managers must communicate all challenges to the district level to make sure there is continued service delivery at facility level. District managers should communicate new policies and management tools to local managers to ensure compliance. A strong relationship between the two levels is key to sustained service delivery at the facility level (Abdelhak, M. et all, 2001). Health facilities exist for the sole purpose of providing health services to patients in communities. Therefore managers need to ensure that client satisfaction is of utmost importance. This is why all staff must be trained to understand patients’ rights. Staff should not be judgmental and must provide information to patients so they can make informed decisions regarding treatment options, as well as lifestyle and behavior modifications that may be required to improve their health status. Staff must also be able to assist patients to understand their responsibilities, including: 1. to live a healthy lifestyle, 2. not to participate in risky behavior, 3. to participate in their care by attending appointments, asking questions, and playing a part in their own health improvement, 4. to be open and honest about the problems they face, 5. to have the best health outcome by adhering to treatment regimes. The attitude of staff towards patients influences patients’ willingness to obtain access to and continue care, to treatments, and to accept and follow health promotion messages. Negative staff attitudes reduce patients’self esteem and motivation, reducing their will to seek services.

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Appropriate tools should be used by the health centre and district supervisors to assess patient satisfaction, or to assess how patients perceive the health establishment in general (Grant, C, 1989, Kongstvedt, PR, 1996, Preuss, KL et all, 2002). These include: 1.

Client satisfaction surveys,

Suggestion boxes,

Community consultation committees.

The concrete measures ensure patients’ voices are heard. Anonymous mechanisms for eliciting suggestions should be encouraged, such as a “suggestion box” placed in the waiting area (with paper and pen), in which patients can put anonymous messages. Successful managers/leaders use calendars and to-do lists to structure time demands and to ensure that no important tasks are forgotten. Important tasks and events are best kept on a yearly wall calendar, on which each line represents one month, with each day having one field. As a manager and/or leader, you should include the following information on this planner (De Cenzo, D., Robbins, S.P., 2010, Dessler, G., 2011):

• Important dates on which action on contractual issues is needed, absences of team members (participation in training, • • • •

vacation), a time slot for a yearly patient satisfaction survey, time for supervisory visits and community health committee meetings. Managing information: time slots for preparation of routine patient monitoring reports, due dates for progress reports, dates of important meetings with partners. Managing finances: budget preparation and reporting deadlines, financial monitoring visits. Managing hardware: hardware inspection dates, maintenance dates, ordering deadlines for supplies and hardware. Managing care: review and revision of current care and prevention routine, time slots for checks on adherence to patient and staff safety policies

Integration and collaboration in public health sector is a part of the modern multidisciplinary approach to the health management development from health care institutions to different actors in public health systems, from formal organizations to informal and virtual organizations like alliances, networks and partnerships and from organizational structures to processes of organizing within and between different organizations. Collaboration generally can be: 1. 1. 1. 1.

Inter-disciplinary: between different fields of activities and specialties. Inter-professional: between different occupational groups and professions. Inter-organizational: between different authorities and organisations. Inter-sectorial: between different sectors of the society with different orientation and different ownership.

Health sector as a very sensitive area of the human services has 4 different fields of collaboration: •

between different clinical specialties (care pathways),

•

between primary care and secondary/tertiary care,

•

in rehabilitation and

•

in care of the elderly, psychiatric care and other forms of community care.

Communication skills, good understanding of the health system management, problem solving and decision making experience and leadership capability are the basis of all integration and collaboration processes. Using collaboration advantages during health system reform we can improve implementation outputs, outcomes, the access, quality and continuity of different services, and, finally, we can counteract the fragmentation of the system due to increasing specialization and professionalization and use existing resources in a more efficient way. Collaboration is difficult and problematic, especially in the countries with political system and economy in transition. Critical points are great investments in time and energy, both to establish and to maintain collaboration, and collaboration costs before it pays off .

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There are many structural, cultural and individual barriers to collaboration: •

Different rules and regulations, responsibilities and budgets,

•

Different professional and organizational cultures, languages etc.,

•

Different attitudes, values and comitment to collaboration,

•

Territoriality: defending and fighting for non-physical territories.

We can talk about different models of collaboration like meetings for coordinated planning and exchange of information, agreements on clinical guidelines, treatment programmes, care pathways, co-operations between case managers, liaison functions, coordination groups, multidisciplinary teams, different working and expert groups and consensus meetings regarding co-location, financial coordination, common information systems etc. So, we have continuum of collaboration from autonomy till fusion of all the activities (Broesskamp-Stone, U, 2002, Schwartz, FW, 2003). For the improvement of the collaboration in public health is very important to think about the next facts: •

Health is created and maintained mainly outside the health sector.

•

There are many other sectors of the society that are important for health.

•

In order to improve public health, it is necessary to increase intersectoral collaboration.

There are many evaluations, more or less scientific, of different forms of collaboration. Most of these have evaluated the process rather than the results of collaboration.The process evaluations show positive effects on the commitment and competence of the professionals involved. Some evaluations show positive results for the patients/clients, while others show no improvements, at least in the short run. Integration in public health is a part of the on-going integrated processes in the health care systems in European region. The goals of integration in health sector are quality improvement, patient safety, better cooperation between different health care levels, rationality in the health economy, reduction of the positions in health system and establishing of the efective link between medical and nonmedical flow in the health sector. Regarding some kind of hierarchy, health market and network we can spaek about vertical and horizontal integrated processes. Vertical integration is integration through control and coordination and horizontal through voluntary collaboration. Among them we know 4 functions:

• • • •

Cooperation, Collaboration, Coordination, Contracting.

CONCLUSION In conclusion is important to emphases again the very active role of the integration and collaboration in the modern Health System Policy Development. For the future the following will be crucial: 1. The importance of a more holistic view of the patients or clients. 2. The importance of knowing the tasks and the competence of other professions and organizations involved. 3. The importance of being able to compromise and even give up parts of the professional or organizational territory for a better total result.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Busse, R. (2000), Health care systems in transition: Germany. European Observatory on Health Care Systems. WHO Copenhagen. Busse, R, Wismar M. (2002), Health target programmes and health care services-any link? A conceptual and comparative study. Health Policy. 59:209-221. Kickbusch, I. (2002), Perspective on health governance in the 21st century. In: Marinker. M. Health Targets in Europe: Polity, Progress and Promise. BMJ Books.206-229. Klein, R. (1989), The politics of the NHS. 2nd ed. London-New York: Longman. Ritsatakis, A, Barnes, R, Dekker, E, Harrington, P, Kokko, S, Makara, P.(2000) Expoliting Health Policy Development in Europe. WHO. Regional Office for Europe.Copenhagen. Van de Water, HPA, Van Herten, L.M. (1998), Health Policies on Target? Review of Health Target and Priority Setting in 18 European Countries. Leiden, TNO. Wismar, M, Busse, R. (2002), Outcome-related health targets: Political strategies for better health outcomes- A conceptual and comparative study. Health Policy.59:223-241. Jago, A. (1982), Leadership: Perspective in Theory and Research. Management Science, March, 315-336. Kotter, J. (1990), A Force for Change: How Leadership Differs from Management. Free Press. New York. Kirkpatrick, S, Locke, E. (1991), Leadership: Do Traits Matter? Academy of Management Executive. 48-60. Lenway, S, Rehbein, K. (1991),Leaders, followers and free riders: an empirical test of variation in corporate political involvement. Academy of Management Journal. November. 893-905. Bass, BM. (1990), Bass & Stogdill`s Handbook of Leadership: Theory, Research and Managerial Applications. 3rd ed. Free Press. Riverside. NewYork. Abbdelhak, M, Grostick, S, Hanken, MA, Jacobs, E. (2001), Health Information: Management of a strategic resource. Philadelphia. W.B. Saunders. Grant, C. (1989), Management Development for Health care: An International Perspective. European Health Care Association. Dublin. Kongsvedt, PR. (1996), The Managed Health Care Handbook. 3rd ed. Gaithersburg, MD: Aspen. Preuss, KJ, Raebiger, J, Sommer, J. (2002), Managed Care. Stuttgart. Schatauer Verlag. De Cenzo, D.A., Robins, S.P. (2010), Human Resource Management. John Wiley & Sons. Inc. Dessler, G. (2011), Human Resource Management,. Pearson. Broesskamp-Stone, U. (2002), Assessing inter-organizational Networks for Health Promotion. Framework and Examples. WHO. Geneve. Schwartz, FW. (2003), Gesundheit und Gesundheitswesen. Urban unfd Fischer Verlag. Muenchen-Jena. 243-268.

DETAILS ABOUT AUTHORS: PAVIĆ ŽARKO MD, PHD, FULL TIME PROFESSOR, RECTOR OF THE UNIVERSITY zarkopavic@yahoo.com KALINIĆ ZORAN PHD, FULL TIME PROFESSOR, ADVISORY BOARD PRESIDENT kaliniczoran@gmail.com FOR BOTH AUTHORS: INDEPENDENT UNIVERSITY BANJA LUKA BANJA LUKA, BOSNIA AND HERZEGOVINA

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CONTROLLING AND QUALITY MANAGEMENT SYSTEM AS SME SUCCESSFUL BUSINESS PERFORMANCE FACTORS DEŠA RATHMAN KATARINA VAREZ

ABSTRACT

Research on the successful performance of small and medium-sized enterprises, reports on the success of their business as well as regulatory acts related to small and medium-sized enterprises show that in the analysis and presenting of data and recommendations it is emphasized that business success depends greatly on the efficiency of the management system. Controlling and quality management are indispensable processes in making business decisions, therefore the assumption that there is a strong correlation between their synergy action and business performance. Value-oriented management concept has derived from modern dynamic and globalized business environment and the requirements that it imposes. Such management aims at long-term financial stability, market positioning and continuous improvement of the level of competitiveness, taking into account the parameters of sustainable development. In order for the principles of continuous improvement to be considered in practice, it is necessary to dispose of a well-organized system of business management.Controlling and quality management system are control subsystems that emphasize value-oriented management concept. These two control processes are complementary and if they are properly positioned in the enterprise, they may result in significant positive synergy. These functions are in small and medium-sized enterprises, although important, often neglected, primarily due to the wrong perception of the management regarding their purpose and contents. This is especially important if taken into account that about 95 percent of business activities are carried out in this business sector. KEYWORDS: controlling, quality management system, SMEs, business efficiency, value-oriented management concept, management process.

1. INTRODUCTION Research on the successful performance1 of small and medium-sized enterprises2, reports on the success of their business3 as well as regulatory acts related to small and medium-sized enterprises4 show that in the analysis and presenting of data and recommendations it is emphasized that business success depends greatly on the efficiency of the management system. Controlling and quality management are indispensable processes in making business decisions, therefore the assumption that there is a strong correlation between their synergy action and business performance.

Drljača, M., Sustav upravljanja kvalitetom u Hrvatskoj i europski kontekst, U SUSRET EUROPSKIM INTEGRACIJAMA Vol. 1, No 1 (2011), pp. 41–45, p. 43, Hrvatska gospodarska komora, sektor za industriju, Malo gospodarstvo, Zagreb, kolovoz, 2010., http://www2.hgk.hr/en/depts/industry/Malo_gospodarstvo_10_web.pdf,Kutnjak, G., Europska unija u funkciji poticanja i razvoja malog i srednjeg poduzetništva, Poslovna izvrsnost, 2/2010, Zagreb, 2010.,Osmanagić Bedenik, N., Uvođenje i primjena kontrolinga u malim i srednjim trgovačkim društvima, RRiF, Zagreb, 6/2005., str. 115-120.,Osmanagić Bedenik, N., Kontroling u malim poduzećima, Poslovana analiza i upravljanje, 5, 6-7/1997., str. 20.-29., 21.-28.,Osmanagić Bedenik, N., Komparativna analiza prakse kontrolinga u Hrvatskoj, Zbornik Ekonomskog fakulteta u Zagrebu, 5/2007., str. 361.-385.,Osmanagić Bedenik, N., Realnost kontrolinga u Hrvatskoj – preliminarni rezultati empirijskog istraživanja, Zbornik Ekonomskog fakulteta u Zagrebu, 1/2003., str. 178.-198.,Šestanj, Perić, T., Specifičnosti kontrolinga u malim i srednjim poduzećima, Sveučilište u Zagrebu, Zagreb, 2010., magistarski rad, Vidučić, Lj., Mala i srednja poduzeća, financijski, računovodstveni i pravni aspekti osnivanja i poslovanja, Ekonomski fakultet u Splitu, Split, 2004 2 Istraživanja, izvještaji i regulacijski akti odnose se na malo i srednje poduzetništvo. U radu se uzimaju u obzir samo društva kapitala, kao najčešći oblik trgovačkih društava, Vidučić, Lj., Mala i srednja poduzeća, Ekonomski fakultet u Splitu, Split, 2005, p. 154 3 Are EU SMEs recovering from the crisis? Annual Report on EU Small and Medium sized Enterprises 2010/2011,http://ec.europa.eu/enterprise/policies/sme/ fhttp://ec.europa.eu/enterprise/policies/sme/fhttp://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/files/supportingdocuments/2010-2011/annual-report_en.pdf (30.04.2012.), Observatory of European SMEs, 2007, Bruxelles, Europska komisija, http://ec.europa.eu/enterprise/policies/sme/files/analysis/doc/2007/02_summary_en.pdf (30.04.2012.),SMEs: Commission report notes economic climate threatens performance; SME Week 3-9 October, European Comission, Press Release, 2011, Brussels, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1149&format =HTML&aged=0&language=EN&guiLanguage=en (30.04.2012.), HUB analize, Financiranje malih i srednjih poduzeća u krizi – između želja i mogućnosti, 2010 4 Europska povelja o malim poduzećima, Poslovni forum, http://www.poslovniforum.hr/about/europska_povelja.asp (30.04.2012.), EU recommandation. 2003/361/EC, 2003, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:124:0036:0041:EN:PDF (27.04.2012.), Zelena knjiga – Poduzetništvo u Europi, Europska komisija, Bruxelles, 2003., poglavlje B/iv http://www.scribd.com/doc/29402664/Poduzetni%C5%A1tvo-Zelena-knjiga (30.04.2012.) 1

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Value-oriented management concept5, has derived from modern dynamic and globalized business environment6 and the requirements that it imposes. Such management aims at long-term financial stability, market positioning and continuous improvement of the level of competitiveness, taking into account the parameters of sustainable development. In order for the principles of continuous improvement to be considered in practice7, it is necessary to dispose of a well-organized system of business management. Modern science and management practice which are based on ISO standards consider that organisation quality8 can be valorized only with proved satisfaction of all five stakeholder partners.9

2. SMALL AND MEDIUM-SIZED ENTERPRISES Economic subjects are divided into categories according to their size and defined criteria related to number of employees, annual turnover and assets value. (Table 1)10. Additional requirement is business independence, which according to the cited law means that other physical or legal persons, which are also not small enterprises, individually or jointly, are not the owners of more than 25% of ownership share or decision right in the small-sized enterprise.11 Table 1. Categorization of economic subjects in Croatia according to size Category of economic subjects according to size

Number of employees

Annual turnover (HRK)

Value of fixed assets (HRK)

Micro

Less than 10

Up to 16 mln

Up to 8 mln

Small

Less than 50

Up to 60 mln

Up to 30 mln

Medium

Less than 250

Up to 216 mln

Up to 108 mln

Source: Processed according to the Law on the promotion of SMEs, Articles 1 and 2 (Official gazette “Narodne Novine“ 29/02, 63/07)

European Commision has defined criteria of categorization of small and medium-sized enterpreneurship in the European Union (Table 2).12 Table 2. Categorization of economic subjects in the European Union according to size Category of economic subjects according to size

Number of employees

Annual turnover (HRK)

Value of fixed assets (HRK)

Micro

Less than 10

Up to 2 mln

Up to 10 mln

Small

Less than 50

Up to 10 mln

Up to 43 mln

Medium

Less than 250

Up to 50 mln

Up to 108 mln

Source: Processed according to European Commission, Small and medium-sized enterprises (SMEs), What is an SME?, http://ec.europa.eu/enterprise/ policies/sme/facts-figures-analysis/sme-definition/index_en.html

Luković, T., Lebefromm, U., Controlling, koncepcija i slučajevi, Sveučilište u Dubrovniku, 2009., p. 52-53, Popović, Ž., Vitezić, N., Revizija i analiza, Sveučilišna tiskara d.o.o., Zagreb, 2009., p. 177, Value-Based Management: A System for Building an Ownership Culture, Presented at the ESOP Association 21st Annual Conference - May 20-22, 1998 - Washington, D.C. („VBMje poslovna filozofijai sustav upravljanjazaučinkovitofunkcioniranjena globalnom tržištu, na temelju stvarne vrijednosti, te integracije i uključivanja svakog zaposlenika,kupca idobavljača.Kao filozofija usredotočena na kupca,Value-Based Management (VBM) temelji se na zajedničkomskuputemeljnih vrijednosti. Kao sustav upravljanja, VBMnudilogičkiokvirza izradu organizacijske strukture i procesa tvrtke kojiomogućujeorganizaciji učinkovit odnos prema misiji i ciljevima“) 6 Luković, T., Lebefromm, U., Controlling, koncepcija i slučajevi, Sveučilište u Dubrovniku, 2009., Popović, Ž., Vitezić, N., Revizija i analiza, op. cit., Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, Školska knjiga, Zagreb, 1998., Drljača, M., Sustav upravljanja kvalitetom u Hrvatskoj i europski kontekst, U SUSRET EUROPSKIM INTEGRACIJAMA Vol. 1, No 1 (2011), pp. 41–45, p. 43, 7 ISO 9000:2008 - temeljna načela i terminološki rječnik, HZN, 2008., ISO 9001:2009 – zahtjevi, HZN, 2008., ISO 9004:2010 - upravljanje s ciljem održivosti poslovanja 8 ISO 9001:2009 – zahtjevi, op.cit., pog. 4., ISO 9000:2008- temeljna načela i terminološki rječnik, op.cit. 9 Zainteresirane strane: kupci, dobavljači, zaposlenici, vlasnici, društvo, ISO 9000:2008- temeljna načela i terminološki rječnik, Vidučić, Lj., Financijski menadžment, peto nadopunjeno izdanje, RRiF-plus d.o.o., Zagreb, 2004., p. 15 10 Zakon o poticanju razvoja maloga gospodarstva, NN 29/02,63/07, članak 1. i 2. 11 Ibidem 12 EU recommendation, 2003/361/EC, 2003. 5

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In dynamic globalized conditions of today’s businesses it is important to possess innovation, dynamism and flexibility, as well as the internationalization of business. Small and medium-sized enterprises are holders of development of national economies. 95 percent of business activities in the world occur within this sector.13 In Croatia, the SMEs account for about 99.5 percent of total number of registered companies and they employ about 66 percent of work force.14 In the European Union the SMEs represent share of about 99.8 percent of all companies and 60 to 70 percent of employees.15 Basic problems the sector of small and medium-sized enterprises in the European Union is facing refer to: • Limited demand, • Administrative restrictions, • Lack of skilled work force, • Problems with infrastructure, • Limited access to financing, • The application of new technologies and organizational structures. According to the European Charter on small enterprises, measures to encourage entrepreneurship relate to creation of regulatory, fiscal and administrative framework, ensuring market access, facilitating access to high-quality research and technology, improvement of access to finance sourcing and strengthening of the spirit of innovation and entrepreneurship. 16 Laws that determine the conditions for entrepreneurship and SMEs in Croatia are: • The Law on Promotion of Small Enterprise Development (NN 29/02, 63/07) • Programme for Small and Medium Enterprises (2008-2012) • Operational Plan for the Promotion of Small and Medium Enterprises (2009). Limitations on the operations of small and medium-sized companies in Croatia are accompanied by non-profitability of the sector of small and medium-sized enterprises, unequal regional development, uncoordinated policies that affect business environment, underdevelopment of financial markets and corruption.17 In addition to restrictions that are part of the business environment, organizations that belong to the small and medium enterprises are often faced with internal problems that are primarily related to management system. Focusing on pre-set goals of long-term sustainable development requires a well-organized management and all of its functions: planning, organizing, staffing, leading and controlling.18 Often mixing of the roles of owners and entrepreneurs, as well as lack of awareness of need for action at strategic level, often lead to neglecting of management system. Forms of business organization are individual ownership, partnership and corporation.19 According to the Companies Act we distinguish:

• Sole trader, a physical person who independently carries out any economic activity and • A company, a legal entity that can be set up to carry out economic or other activities.20 According to their basic features, companies are divided into company of persons and capital companies. There are two basic forms of capital companies: limited liability companies and joint stock companies.

Limited liability company Limited liability company is a form of business activity which may be established by one or more persons or legal entities investing fundamental role in the pre-agreed share capital.22 Owners are not personally liable for the company’s liabilities, but only to the extent of their shares and are entitled to receive revenue payment. This is the most common form of activity of small businesses.23 Ownership is separated from Paunović, Z., Prebežac, D., Internacionalizacija poslovanja malih i srednjih poduzeća, Tržište, Vol. XXII, 2010., br. 1., str. 57.-76., str. 62. HGK, http://www.hgk.hr/wps/portal (08.05.2012.) 15 Kutnjak, G., Europska unija u funkciji poticanja i razvoja malog i srednjeg poduzetništva, Poslovna izvrsnost, 2/2010, Zagreb, 2010., p. 82 16 Europska povelja o malim i srednjim poduzećima, http://euqualen.progetti.informest.it/hr/radne_grupe/europska_povelja_o_malom_i_srednjem_ poduzetni%C5%A1tvu.pdf 17 Kutnjak, G., Europska unija u funkciji poticanja i razvoja malog i srednjeg poduzetništva, Poslovna izvrsnost, 2/2010, Zagreb, 2010., p. 83 18 Weihrich, H., Koontz, H., Menadžment, deseto izdanje, Mate, 1994., Zagreb, p. 116 19 Vidučić, Lj., Financijski menadžment, RRif-plus d.o.o., 2004., p. 9 20 Zakon o trgovačkim društvima, NN 111/93., 34/99., 52/00, 118/03 21 Vidučić, Lj., Mala i srednja poduzeća, Ekonomski fakultet u Splitu, Split, 2005., p. 154 22 Zakon o trgovačkim društvima, NN 111/93., 34/99., 52/00, 118/03 23 Vidučić, Lj., Mala i srednja poduzeća, op. cit., p. 161 Popović, Ž., Vitezić, N., Revizija i analiza, Sveučilišna tiskara d.o.o., Zagreb, 2009., p. 186 13 14

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management, but in practice it is often the case that a member of the board is the company’s CEO. Therefore, performance objectives of this company are formed in accordance with the concept of increasing the value of invested capital, i.e. the wealth of the owner. A limited liability company is established by a declaration on founding or articles of association and the governing bodies are the management and the assembly.

Joint Stock Company Joint stock company may be established by one or more persons or legal entities involved by their stakes in the share capital divided into equal shares, stocks. Shareholders are not personally liable for the liabilities of the company, but only up to the value of shares. Ownership of shares is depersonalized, i.e. they are subject to traffic at primary and secondary markets. The basic act of the company is the document of articles of association and the governing bodies are supervision board, assembly and management. A shareholder is entitled to attend the assembly and is entitled to vote in accordance with shareholding. Ownership is separated from management and a few concepts occur in which the managers form the objective function. Specifically, the benefit for the manager is not always in line with the benefit of shareholders and the concept of increasing shareholder value is often replaced with the concept of increasing company wealth which is closer to the interests of managers because it means growth. Regardless of chosen concept within which business goals are set, modern business philosophy, formed in response to the dynamic business environment, dictates the need for taking into consideration all stakeholders: employees, customers, suppliers, owners and society. In order to meet these requirements and align business operations with sustainable development parameters, it is necessary to dispose of a well-organized management system. Quality management and controlling are functions that improve the performance of this system. From a set of small and medium-sized enterprises that are the subject of this research will exclude micro enterprises (Table 1 and Table 2).

2.1. Performance indicators of SMEs Performance (effectiveness, efficiency) of business operations is associated with business goals and profit realization as primary goal, as well as goals such as increasing in relation to base period, exceeding of the plan in terms of earnings, revenues, quantity of realized products.24 In modern market economies success of a business organization is based on basic economic principle relating to the favorable ratio of input and output. Business success, unlike production success, refers to the placement of effects and is characterized by different variants of understanding business success, as well as different criteria for its measurement. The most commonly used indicators relate to economics25, liquidity26 and profitability.27 The modern management theory, there is a departure from traditionally accepted concept of profit maximization as the basis for defining business goals. The concept of profit maximization is a short-term concept and it ignores the dynamics and risks of expected returns, financial risk, cash flow and long-term stability of business. An alternative concept would be to increase the value of invested owner’s capital or long-term-oriented concept of maximizing the owner’s wealth.28 Complete modern concept of integrated management is based on pre-management by actively preventing risks and using opportunities. In this sense, the sequence of goals is defined as: liquidity provision as a form of ongoing existence, security and optimization of profits, and the construction and creation of new resources as a form of permanent existence of enterprises.29 Long-term oriented concept of integrated management is based on the principle of continuous improvement, in addition of meeting the requirements of all stakeholders, as a necessary condition for continued business success. Socially responsible business is aimed to establishing a balance between monetary and short-term goals of the company, on one

Popović, Ž., Vitezić, N., Revizija i analiza, Sveučilišna tiskara d.o.o., Zagreb, 2009., p. 186 Ekonomičnost podrazumijeva da se iz prihoda pokrivaju svi rashodi i da se ostvaruju dobitci, Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, op.cit. p. 164 26 Ekonomičnost podrazumijeva da se iz prihoda pokrivaju svi rashodi i da se ostvaruju dobitci, Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, op.cit. p. 164 27 Ekonomičnost podrazumijeva da se iz prihoda pokrivaju svi rashodi i da se ostvaruju dobitci, Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, op.cit. p. 164 28 Vidučić, Lj., Financijski menadžment, četvrto dopunjeno izdanje, RRiF-plus d.o.o., Split., 2004., p.14 29 Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, op.cit. p. 163 24 25

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hand and social, environmental, long-term goals of the community in which it operates, on the other hand.30 In the context of modern concept of business “management based on values”, added value has become the main indicator of the quality of business process. Consequently, revenue ceases to be primary business goal for the benefit of growth in economic value, or constant value-adding to the existing and thus creating potential success. The added value is an indicator of organization success that assesses the ability of the company to ensure continuous improvement of created value. From the position of observing the development and strategy implementation, the aim is to set the assessment of increase / decrease of the value of invested capital.

2.1.1. Success of business organization and financial performance indicators Analysis using financial indicators shows that the company operated in the previous period, and how it can improve the result in the future. It is a prerequisite for rational business management. Starting from the principle of rationality as basic economic principle, the quality of business process and its effectiveness can be assessed only as a ratio between two sides of business process - performance and investment. There are three aspects of performance (output): the amount of realized products (services), revenue and financial results. Input or investment occurs in the form of using fixed and current assets, materials, labor etc. and costs. The ratio of a given visual input with a certain aspect of output makes it possible to establish a set of indicators of business performance. For the purposes of this research, for measuring the success of small and medium-sized enterprises (dependent variable), the following financial indicators will be used: • Economic Added Value (EAV) Economic Added Value (EAV) Economic added value is net profit from operations plus interest and less cost to own and others’ funds. EAV is calculated as operating income minus income tax deduction of the expenses of invested capital (own and others’). It is based on the assumption that, if the remaining net profit which is obtained from EAV budget is a positive size, investors realize higher profits than those that would be achieved from alternative investments in relatively unrisky job, i.e. higher profits than the market capital cost. If EAV calculation remaining net profit is a negative size, investors realize losses despite profits in relation to the profits they could realize from alternative investments.31

2.1.2. Business performance with respect to business management goals Comprehensive and integrated organization management system that provides successful business must be based on the function of planning as a basic management function.32 Planning involves the selection of mission and objectives, along with actions to achieve them. Goals are set for the entire organization and then for each organizational unit. Hierarchy of goals is defined from general to specific, where the overall goals must be supported by lower-level goals.33 Goals must be verifiable in order to assess the effectiveness of management at the end of a period. Therefore, the goals are the basis of management functions and business performance can be verified on the basis of goal management. Goal management refers to defining achievable measurable goals and the achievement of goals. The modern management philosophy has evolved and the “management by objectives“ 34 as a management system that integrates many key activities in management, is focused on effectively achieving organizational and individual goals. Manner of management is focused on achieving goals that are defined and established by managers and associates. The goals are set for each part of the company, from the work place, across organizational units to the company as a whole.35

Osmanagić,Bedenik,N., Kontroling između profita i održivog razvoja, M.E.P. d.o.o., Zagreb, 2010 http://www.kognosko.hr/?Nova/Alati_i_metode_kontrolinga 32 Weihrich, H., Koontz, H., Menadžment, deseto izdanje, Mate, 1994., Zagreb, p. 118 33 Weihrich, H., Koontz, H., Menadžment, op. cit., p. 143. 34 eng. Management by objectives (MBO) 35 http://www.kognosko.hr/?Nova/Alati_i_metode_kontrolinga (02.05.2012.), Weihrich, H., Koontz, H., Menadžment, deseto izdanje, Mate, 1994., Zagreb, p. 149 30 31

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3. CONTROLLING AND QUALITY MANAGEMENT SYSTEM AS SME SUCCESSFUL BUSINESS PERFORMANCE FACTORS Controlling and controlling concept, as well as quality management system and TQM (Total Quality Management) are linked and mutually conditioned, within each value-oriented business organization. These two business philosophies support each other and are complementary. Areas of their interest almost entirely overlap. Both concepts emphasize constant continuous improvement as well as early detection of threats and opportunities, and to maximize the added value for customers and achieve competitive advantage, and therefore a better economic outcome. Criteria and parameters of action thereby are the requirements of all stakeholders; customers, owners, partners, employees and society. The issue of product placement extends beyond the issue of product quality and now includes a new quality dimension that relates to the overall quality of organization and potential success. Corporate social responsibility and sustainable development imposed as a condition of market positioning and competitiveness. Dynamics and intensity of changes dictate the need for efficiency and flexibility of the organization to enable it to operate in accordance with the requirements. Demanding conditions of service formed controlling as management support in order to increase the efficiency of business processes and ensuring long-term stability. In response to these conditions business quality management develops as a set of coordinated actions for management and supervision of organization with regard to quality. The feedback system is crucial as a fundamental value and basis for creating competitive advantage.

3.1. Controlling Controlling as a contemporary function is developed to support management in business conditions described as a dynamic business environment. Accelerated processes and changes in the market, strong competition and market saturation condition the need for better efficiency of business processes. Focus on the customer as a condition of competition includes not only product design in accordance with the requirements and expectations, but also the quality and vitality of the entire business process. Such defined business philosophy is based on accepting the requirements of all stakeholders, customers, suppliers, owners, employees and the environment. It is a requirement for achieving long-term sustainable development of enterprises. The complexity of the management process grows in parallel with the complexity of its application. The flexibility and efficiency of business system are crucial in described conditions. It is testified as a possibility of quick adjustments to changed requirements and conditions for early realization of needs to adapt. In this matter the most important role is design of system elements and their synergic interaction. Management system process, which is implemented through the functions of organizing, staffing, planning, management and control in new, more and more extreme conditions should be supported in terms of formation of appropriate information bases and active approach to establishing feedback links at all levels. Why is controlling necessary for the management? • Controlling interprets economic and social elements of the environment based on which planning factors are formed • Controlling interprets existing and potential factors in the success of companies and proposes guidelines • Controlling analyzes brought plans and set goals at all levels and ensures that the values areaccurately carried out through a hierarchy of goals • Controlling aims at arranging the system elements and their interaction in a way that a change at the level of one element or system can be interpreted through changes in other elements or system levels • Controlling reduces the uncertainty in which management system exists. These are the primary tasks of the controller in the organization. Broadly understood, interest and area of operation of controlling extends to organizational foundation and understanding and adapting the totality of organisation functioning according to the principles of uniformity of communication and decision-making channels.

3.1.1.Basic principles of controlling and controlling concept Controlling is a process that occurs as a result of coordinated efforts by the management (individual and team) and the controller, in order to achieve the set target for the company. Controlling concept is a system of harmonized performance of all functions that are planned, measurable and objective-oriented.36 Sense of contemporary controlling is the perception and understanding of the totality of business process, all elements of the system and their interactions, and consequently, drafting the arguments action to improve the situation (Figure 1). 36

Luković, T., Lebefromm, U.: Controlling, koncepcija i slučajevi, Prva knjiga, Sveučilište u Dubrovniku, 2009

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Its purpose is realized by coordinating management function and ensuring the establishment of feedback: planning → executing → controlling → improving / revising the objectives. In order to improve the performance management system, controlling takes into account all the elements of business system: resources, policies, processes, partners, organisation and information system. Developing mechanisms and tools of controlling assumes compliance of the horizontal and vertical sense, between hierarchical levels, among functions within a process and between processes. Elements of the organization must be designed in such a way as to allow both the early recognition of the need for action, quick action and managing all elements of the organization. System objectives, system plans and successfully parsing and lowering targets higher order in aims, their suitability to the level of decision making, as well as feedbac , optimal communication channels and lines of decision-making in the interests of the controlling. This is a value-driven and value- oriented concept of controlling and management, the basis of which the association aims to network targets at all levels and centers of interest, which is a pyramid of increasing the value of a business entity.37 Sub-targets at the operational level must be measurable and comparable in order to serve as a managing mechanism.

3.2. Quality Management System Quality is the degree to which a set of inherent characteristics fulfills requirements.38 Quality management consists of coordinated activities (management) for directing and control of an organization in regards to quality. This term is related to Deming circle39 that defines the basic principles of management: planning, organizing and conducting planned control of what is being implemented, improving the level of quality achieved. It is the basis of implementing feedback in the function of continuous improvement. The Quality Management System is a set of interrelated and interdependent elements geared towards quality objectives. Quality objectives are measurable values pursued in the need for continuous improvement and the ongoing work to increase the ability to satisfy the requirements. Since the ability to satisfy the requirements, the condition to achieve business efficiency and effectiveness, as well as long-term financial stability, successfully set quality goals are aligned with business objectives. From this it turns out that the function of controlling and quality management functions in the organization are working in the same direction. These two functions operate at the same principles, which suggests the same hierarchical position within the organizational structure, due to their scope of activities related to all elements of the organization. Quality is achieved through the quality requirements of the organization. Quality requirements are the requirements of all stakeholders. Compliance with all stakeholders is a prerequisite for business efficiency (short-term) and financial stability (long term). Therefore, the quality management system, which has evolved into TQM condition for controlling the functionality and business philosophy that supports, encourages and emphasizes controlling concept. TQM is also: • Attitude, philosophy (as controlling concept) • The process that emphasizes personal responsibility of all employees and strives to constant, continuous improvement • The system consisting of organizational, administrative and technical processes, methods and tools TQM is associated with the controlling concept because quality objectives create the basis for success of the business. This assumption, as described , is referring to the satisfaction of all stakeholders. Process approach, as one of the primary links, means the application of processes within an organization along with their identification and interaction, as well as managing them. The process is a set of activities and / or operations that certain inputs are converted into outputs.40 The advantage of the process approach is the ongoing management which is provided through connections between the individual processes within the system processes, as well as over their combination and interaction. Process approach bridges the boundaries between processes and this is the basis for the integration and coordination of system elements, as well as to build a functional management information system. Allowing directly overlooking the relationship between input - output, process organization is the foundation of continuous operation and continuous improvement as the basic principles of controlling concepts and TQM. Research conducted in 2003 a representative sample of companies in Croatia shows the structure of enterprises by enterprise size and Implementation of International ISO standards (Table 3). According to the research of managers towards quality management system depends significantly on the size of the organization, and this system has a much higher proportion represented in medium and large than in small organizations.40 Luković, T., Lebefromm, U.: Controlling, koncepcija i slučajevi, Prva knjiga, Sveučilište u Dubrovniku, 2009 ISO 9000:2000; Sustavi upravljanja kvalitetom-Osnovni pojmovi i rječnik: ISO Geneve 2000 39 ISO 9000:2000; Sustavi upravljanja kvalitetom-Osnovni pojmovi i rječnik: ISO Geneve 2000 40 Dumčić, K., Istraživanje implementiranosti sustava kvalitete u hrvatskim poduzećima, Zbornik Ekonomskog fakulteta u Zagrebu, year 2, No. 1, 2004, p. 64 37 38

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Table 3. Structure of the companies according to size and ISO norm implementation Companies by size

Companies with certificate according to ISO norm

Companies getting consultant services for ISO implementation

Others

Number of respondents

105

370

Small companies (15 to 50 employees)

26%

38%

40%

Medium-sized companies (50 to 250 employees)

41%

33%

39%

More than 250 employees (large companies)

33%

29%

21%

Total

100%

Source: Dumčić, K., Istraživanje implementiranosti sustava kvalitete u hrvatskim poduzećima, Zbornik Ekonomskog fakulteta u Zagrebu, year 2, No. 1, 2004, p. 64

4. Synergic action of controlling and quality management as management sub-systems From the definition of controlling and controlling concept the broadness and generality of these terms is obvious. As such, they do not necessarily overlap with other economic disciplines and business philosophies. In order to identify the function of controlling, its study and implementation, it is necessary to distinguish from related functional areas. Relationship of controlling, quality management and management Characteristics

Controlling

Basic concepts

Controlling concept, Socially responsible controlling

TQM - Focus on the expectations Value-oriented manageof all stakeholders (customers, ment concept shareholders, suppliers, the community, employees)

Activity direction

Business goals and the requirements of customers and all interested parties

Business objectives and the requirements of customers and all interested parties

Business goals and the requirements of customers and all interested parties

Activity object

All system elements

Management system

Performance system

Activity mode

Creating information base and formulation of guidelines, harmonization and coordination

Creation and application of models / systems, object of activity is management and operational level

Planning Leadership Organization Control

Purpose

Increase the level of certainty Manage the business system of conditions in which the man- with regard to quality agement operates

To manage business system

Activity area

Total business process

Relation to the principle of feedback and continuous improvement

Realizes and improves

Creates a surface / builds a model for its action

Realizes and manages

Process approach

This is the basic principle upon which the system is developed.

The system built in this way best suits for the establishment of PDCA, i.e. controlling functionality

Supported by the value concept

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Characteristics

Controlling

Management

Relation to vision, mission and business goals

Responsibility for directing the contents and creating a highquality information basis

Responsibility for the preparation Responsibility for bringand application of procedures, as ing, the contents and well as compliance with quality implementation objectives

Activity type and level

Concretized activities, subject of activities is management level (alignment of all functions of management)

Creation and application of models / systems, object of activity is management and operational level

Managing activities

Relation towards expert knowledge

Need, usage and application of expert knowledge, especially in accounting, finance, business organization

Less emphasized need for expertise, but information on certain specific areas

Less emphasized need for expertise

Relation towards process definition

Advisory role in relation to the content / process flow in the context of totality of the organization

Responsibility for documentation, applicability, implementation and measurability of processes

Responsibility for the implementation of quality system, deciding on the structure and other elements of the system

Relation towards indicators formation system and reporting system

Advisory and /or managing role in relation to information system and indicators system

Responsibility for documentation, applicability and implementation

Decision-making / usage

Source: Processed for the needs of this research

The issue of demarcation of two functions is most directly related to their purpose and the object of their activity. The purpose of controlling function of the company is increasing the knowledge of management system on system performance to enable it to be more manageable. The object of controlling is the management system and coordination and harmonization of its subsystems; values, planning, organization, control, information and human resources management (Figure 2). Figure 2. Controlling as management subsystem

MANAGEMENT VALUES ORGANIZATION PLANNING CONTROLLING HUMAN RESOURCE MANAGEMENT CONTROL INFORMING

Controlling creates an organized information basis that reduces the degree of uncertainty of the environment in which the management operates. Indirectly, the interest of controlling is the quality management system because it provides necessary basis for successful implementation of this function. The role and nature of controlling is advisory. The issue of responsibility of controlling relates to providing accurate, timely and quality information and the effects relate to harmonization, coordination and integration of the management system. Unlike controlling, the object of management is performance system, the role is managing and responsibility is related to decision making. The object of quality management represents all elements of business system, organization procedures, processes, resources, policies, information systems and relationship with the partners. The purpose of quality management system is arranging the conditions for the functioning of feedback and continuous improvement, while controlling activates and enhances feedback and confirms the functionality of the quality management system. The responsibility of quality management system is very broad and refers to appropriate organizational and documentary background adapted to system functioning according to the principles of quality management.

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CONCLUSION It is undoubtful that controlling41 and quality management system42 are control subsystems of business management which contribute to the improvement of its performances. They are, however, insufficiently researched and under-recognized in small and medium-sized corporations. As control subsystems that are the basis of value-oriented concept of management derived from the needs of modern globalized business environment. They are the basis of successful and efficient operation of any business system. Every business entity that seeks long-term success faces the challenge of successful design and positioning of these functions.

LITERATURE Books and articles 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

Albert, M.: Kapitalizam protiv kapitalizma, Školska knjiga, Zagreb, 1995. Ambroz, M. (2004). Total quality system as a product of the empowered corporate culture. The TQM Magazine, Vol. 16. No. 2, p. 93-104 Avelini Holjevac, I., Vrtodušić Hrgović, A.M: Kontroling i menadžment kvalitete, 9. simpozij o kvaliteti Hrvatskog društva menadžera kvalitete: Kvaliteta i promjene, Zbornik radova, OSKAR, Centar za razvoj i kvalitetu, Zagreb, 06. – 08. 11. 2008, Plitvice Avelini Holjevac, I., Analizom do poslovne odluke – ključ poslovne uspješnosti, Računovodstvo, revizija i financije, Zagreb, svibanj, 2004. Babbar, S. and Aspelin, D. (1994). J. TQM it is as easy as ABC., The TQM magazine, Vol. 6, No. 3, p. 32-38. Black, S. And Porter, L. (1996). Identification of critical factors of TQM. Decision Sciences, Vol. 27, No. 1, pp. 1-21. Byars, L. L. - Rue, L. W. - Zahra S. A.: Strategy in Changing Environment, Irwin, Times Mirror Higher Education Group, Inc. 1996. Breyfogle, F.W. “Implementing Six Sigma”, John Wiley & Sons, 1999. Buble, M., Menadžment, Ekonomski fakultet, Split, 2000. Buble, M. i dr., Strateški menadžment, Sinergija, Zagreb, 2005. Copeland, T. - Koller, T. - Murrin, J.: Valuation – Measuring and Managing the Value of the Company, McKinsey & Company, Corporate Finance Practice, John Wiley & Sons, New York, 1990. Crosby, B.P., Kvaliteta je besplatna, Binoza press d.o.o., Zagreb, 1996. Dumčić, K., Knego, N., Melvan, P., Okruženje kao mjera kvalitete i poslovne izvrsnosti, Poslovna izvrsnost, Zagreb, god.I (2007.), br.1. Dumčić, K., Istraživanje implementiranosti sustava kvalitete u hrvatskim poduzećima, Zbornik Ekonomskog fakulteta u Zagrebu, godina 2, broj 1, 2004. Drljača, M., Kvalitete sustava upravljanja u Hrvatskoj u odnosu na Europsko okruženje, 18. savjetovanje Nedelja kvaliteta, Kvalitet, Poslovna politika, Vol. 19, Br. 1-2, Beograd, 2009, str. 44-49 i 123. Drljača, M., Sustav upravljanja kvalitetom u Hrvatskoj i europski kontekst, Zbornik radova I. naučno-stručnog skupa POLITEHNIKA - 2011, U susret evropskim integracijama u oblasti kvaliteta, zdravlja na radu i zaštite životne sredine, Visoka škola strukovnih studija Beogradska Politehnika, Beograd, 2011, str. 41-45. Drljača, M., Mala enciklopedija kvalitete, Oskar, Zagreb, 2004. Edvinson, L.: Corporate Longitude. Navigating the Knowledge Economy, Differo d.o.o., Zagreb, 2003. Elkington, J.: Cannibals with forks – The Triple Bottom Line of 21st Century Business, Capstone Publishig Ltd, Oxford, 1999. Fitzroy, P., Strategic menagement: creating valu in a turbulent world, London, Wiley, 2005. Goetsch, S.B., Davis, S.B., Quality management: Introduction to Total Quality Management for production, Processing and Services, Prentice Hall, New Jersy, 2006. Heilbroner, R. L. - Thurow, L. C., Ekonomija za svakoga - Kad tržišta nisu uspješna, Mate, Zagreb, 1995. Heinz, W., Koontz, H., Menedžment, Mate, Zagreb, 1993. Horvath, P., Controlling, Universitat Stuttgart, Munchen, 2003. Injac, N., Mala enciklopedija kvalitete, Oskar, Zagreb, 2001. Injac, N., Bešker, M,, Metodologija izgradnje poslovnih procesa u sustavu kvalitete, Oskar, Zagreb, 2001. Kotler, L.: Društveno odgovorno poslovanje, M.E.P. Consult, Zagreb, 2009, pp. 22. Kutnjak, G., Europska unija u funkciji poticanja i razvoja malog i srednjeg poduzetništva, Poslovna izvrsnost, 2/2010, Zagreb, 2010. Lazibat, T., Baković, T., Poslovna izvrsnost, Zagreb, 2007/1, 2007., str. 55.-67. Luković, T., Lebefromm, U., Controlling, koncepcija i slučajevi, Sveučilište u Dubrovniku, 2009., str. 52., 53. Mikić, M., Upravljanje troškovima u malim i srednjim proizvodnim poduzećima, Zbornik ekonomskog fakulteta u Zagrebu, godina 7, br.1., 2009., str. 161.-176. Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, Školska knjiga, Zagreb, 1998. Osmanagić,Bedenik,N., Kontroling između profita i održivog razvoja, M.E.P. d.o.o., Zagreb, 2010. Osmanagić Bedenik, N., Uvođenje i primjena kontrolinga u malim i srednjim trgovačkim društvima, RRiF, Zagreb, 6/2005., str. 115-120., Osmanagić Bedenik, N., Kontroling u malim poduzećima, Poslovana analiza i upravljanje, 5, 6-7/1997., str. 20.-29., 21.-28., Osmanagić Bedenik, N., Komparativna analiza prakse kontrolinga u Hrvatskoj, Zbornik Ekonomskog fakulteta u Zagrebu, 5/2007., str. 361.-385., Osmanagić Bedenik, N., Realnost kontrolinga u Hrvatskoj – preliminarni rezultati empirijskog istraživanja, Zbornik Ekonomskog fakulteta u Zagrebu, 1/2003., str. 178.-198. Pande, P.S., Što je Šest Sigma?, Zagreb, Mate, 2006. Paunović, Z., Prebežac, D., Internacionalizacija poslovanja malih i srednjih poduzeća, Tržište, Vol. XXII, 2010., br. 1., str. 57.-76. Porter, L.J., Assessing business excellence: a guide to business excellence and self-assessment, Amsterdam, Elsevier, 2005.

Luković, T., Lebefromm, U., Controlling, koncepcija i slučajevi, str. 10. – 29., Osmanagić,Bedenik,N., Kontroling: Abeceda poslovnog uspjeha, Školska knjiga, Zagreb, 1998., Osmanagić,Bedenik,N., Kontroling između profita i održivog razvoja, M.E.P. d.o.o., Zagreb, 2010., Avelini Holjevac I.:, Kontroling, Sveučilište u Rijeci, Hotelijerski fakultet Opatija, Opatija,1998 42 Lazibat, T., Upravljanje kvalitetom, Znanstvena knjiga d.o.o., Zagreb, 2009, Drljača, M., Sustav upravljanja kvalitetom u Hrvatskoj i europski kontekst, U SUSRET EUROPSKIM INTEGRACIJAMA Vol. 1, No 1 (2011), p. 41–45, ISO 9000:2008- temeljna načela i terminološki rječnik, pog. 2.12., 3.2.2. 41

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41. 42. 43. 44. 45. 46.

Sikavica, P., Novak, M., Poslovna organizacija, Informator, Zagreb, 1999. Šestanj, Perić, T., Specifičnosti kontrolinga u malim i srednjim poduzećima, Sveučilište u Zagrebu, Zagreb, 2010., magistarski rad Truscott, W., Butterworth, H., Six Sigma-Continual Improvement for Businesses, 2003. Vidučić, Lj., Financijski menadžment, četvrto dopunjeno izdanje, RRiF-plus d.o.o., Split., 2004., 14. Poglavlje, Mala i srednja poduzeća Vidučić, Lj., Mala i srednja poduzeća, financijski, računovodstveni i pravni aspekti osnivanja i poslovanja, Ekonomski fakultet u Splitu, Split, 2004. Vrdoljak, R.I., Specifičnosti metodoloških pristupa mjerenju uspješnosti poslovanja kvantitativnim pokazateljima, Poslovna izvrsnost, Zagreb, br. 2/2010, Zagreb, 2010. str. 107.-118. 47. Weihrich, H., Koontz, H., Menadžment, deseto izdanje, Mate, 1994., Zagreb, str. 118. DETAILS ABOUT AUTHORS: DEŠA RATHMAN, M.SC. PLOČE PORT AUTHORITY desa@port-authority-ploce.hr KATARINA VAREZ, M.SC. DUBROVNIK PORT AUTHORITY dpa.katarina@portdubrovnik.hr

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COMBINATION OF PROCESS MANAGEMENT AND SIX SIGMA METHODOLOGY IN THE ECONOMY OF VOJVODINA ZORAN CIRIC IVANA CIRIC JELENA BIROVLJEV

ABSTRACT

Business Process Management hasn’t methods for removing steps in processes which are identified in analysis as inefficient or ineffective. Tools and techniques from Six Sigma are borrowed for those tasks. Truly optimized business process initiatives start with a strong process improvement methodology, to design or re-engineer a process for eliminating, perhaps greatly reducing, steps that cause the greatest number of errors or represent the highest cost for the enterprise. The ultimate goal is to develop a process improvement solution that aligns the proven methodology of Six Sigma with the firm’s strategic goals. Six Sigma methodology is focused on defining, measuring, analyzing, improving, and controlling business processes. Six Sigma provides a tool-set to make and sustain improvements to business processes. When Business Process Management and Six Sigma are used in combination, they provide the basis for improved performance and growth, as well as a truly customer focused enterprise. Process Management tools, and the problem solving methodology of Six Sigma, have come together to increase the efficiency, effectiveness, and ongoing control of a process to levels of performance. This paper will attempt to provide answers and defining tasks: • How Six Sigma-based process improvement initiatives can be used on processes across the enterprise, not just manufacturing processes. • How Six Sigma and BPM combined offer one of the most powerful process improvement solutions possible. • Defining steps delineated below to integrate BPM and Six Sigma. • Defining the tasks for managers in Vojvodina in the future. Some of those tasks could be for example: identifying the processes from beginning till the end, give a picture about the process approach in the economy of Vojvodina, application of business concepts, apply some of the instruments of analysis, in the second phase or at the second level of business process management maturity. KEYWORDS: Business Process Management, Six Sigma Methodology, Process Improvement

1. INTRODUCTION Business Processes Management (BPM) has been applied mostly in paper intensive industries such as health care, insurance, finance, utilities and government. These businesses rely on human knowledge, information databases, and process flows to produce an end result, such as a home loan or business license. These paper-based businesses rely on forms that must be completed and information gathered to produce the expected output. Business processes exist in three forms. First are processes that are executed via computers, such as e-Business, ERP, and CRM. These are also called information workflow or system-to-system processing. Next are the more traditional human value-added processes, also called human-to-human workflow processes. These two forms of processes co-exist and interact, creating the third form, where human workflow is augmented by information workflow.[16] Business process management is a management discipline that treats business processes as assets that directly contribute to enterprise performance by driving operational excellence and business agility. As with other assets, determining the right level of investment in the resources needed, proper performance monitoring of the process, sound maintenance of the process and management of the process life cycle can drive operational excellence (Figure 1.). The most critical disciplines for BPM success are related to nontechnical issues, such as changing people’s attitudes and assumptions based on building a new frame of reference or perspective (that is, the process perspective) for evaluating business performance of government agencies. These essential elements consist of:

• • • •

Comprehending processes through business process modelling for visualization Evaluating process performance through attention to the right process metrics Generating options for performance improvements through process analysis Gaining the willingness to change the processes from the stakeholders involved.[5]

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Together, these disciplines provide a fresh approach to improving the performance of business processes. A BPM effort may be initiated from a business unit, the IT organization or an internal operational unit that may focus on innovation, transformation, organizational development, change management, enterprise architecture, government delivery services, audit/compliance and so on.[15] Figure 1. BPM -five step business process life cycle

Source: Harrison-Broninski, K. (2010)

Trends in Business Process Management. In 2000, Gartner predicted that BPM would become the next big phenomenon. The â&#x20AC;&#x153;thought leadershipâ&#x20AC;? expressed then has been reflected in the current popularity of business modelling. By 2004, Gartner has seen demand grow from 15 percent of their client base to more than 35 percent across all businesses, regardless of their cultural tendencies. Because processes are the critical paths to progressive business change, processes are coming under intense scrutiny. According to Gartner, the need for process understanding will create significant Business Process Management activity. Gartner predicts a rising tide that will drive a growing business modelling market, including such services and technologies as Business Process Analysis (BPA) and Enterprise Architecture.[5]

2. THE SIX SIGMA METHODOLOGY Six Sigma can be defined as a structured approach that recognizes problematic areas of the business, defines improvement projects, and delivers breakthrough-level solutions in a predictable and repeatable manner. A problem is generically defined as the inability of a process or business characteristic to meet its requirements. In many cases, a near intuitive or logical solution is available; these types of solutions are one of the many benefits derived from a process management activity. However, when the situation is complex, spans several process activities, and may include the interaction of several inputs, a more powerful problem solving method is required. Six Sigma uses a five phase methodology, known as DMAIC, that applies a fundamental formulaic approach that defines an output as a function of the inputs, stated as Y=f(X). In this equation, the Y is the process output that needs improvement, and the Xs are the inputs or root causes of the problem. DMAIC stands for Define, Measure, Analyze, Improve, and Control (Figure 2.).[2] Each phase is comprised of various analytical tools designed to find the root cause(s) of almost any problem. The problem solving process is augmented by software tools to handle the data, modeling, simulation and associated statistical analysis that lead to an improvement action. A hallmark of Six Sigma is its ability to institutionalize and sustain an improvement. This is the objective of the control phase. New technologies have recently become available that enable process execution management. This type of tool provides computerized monitoring, control, and management of processes that have been optimized by a Six Sigma project.

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Trends in Six Sigma. Six Sigma first appeared in 1987 when Motorola initially launched it. Motorola Chairman Bob Galvin decided that traditional process performance levels, about 3 to 4-sigma, simply were not sufficient.[13] Motorola set a new standard for excellence and began developing the means to achieve it. Enamored by Motorola’s success, other leading companies, such as Texas Instruments (now Raytheon), began a similar pursuit. But it wasn’t until 1993 that Six Sigma really began to transform business. That’s the year that Allied Signal’s Larry Bossidy adopted Six Sigma. And this time there was something different; Six Sigma began to take shape as more than just a quality system - it began to look like a management system. At Allied Signal, an entire system of leadership and support systems began to form around the statistical problem solving methods developed by Motorola.[13] Not long after Allied Signal began its pursuit of Six Sigma quality, Jack Welch, then Chairman and Chief Executive of General Electric (GE), began to study Six Sigma. After a little time and a great deal of contemplation, Welch made the decision to apply Six Sigma. GE applied Six Sigma with rigor and with enthusiasm. As a result, GE’s annual reports claim savings of billions of dollars with Six Sigma.[2] Since introduction by Motorola, Six Sigma has evolved from a product-oriented problem solving methodology into an enterprise wide approach for managing improvements. One good way to assess the adoption of a method, idea, or product is through trend analysis. In trend analysis we look at the rate of adoption over a period of time. Six Sigma trend analyses for U.S. companies with annual revenues greater than $200 million show that over 25% of US based companies in this category have adopted Six Sigma. The adoption rate is expected to exceed 80% by 2010.[19] Figure 2. DMAIC Roadmap

Source: IBM Business Process Manager

Six Sigma Provides a Method for Improving Business Processes. In its strict definition, Six Sigma is the application of statistical methods to business processes to improve operating efficiencies and return dollars to the profit of an organization. Here’s the basic theory: Sigma is a letter in the Greek alphabet used to denote the standard deviation of a process. Sigma quality level is sometimes used to describe the output of a process. A Six Sigma quality level is said to equate to 3.4 defects per million opportunities.[11] In practice today, however, the term is used to denote more than simply counting defects. In today’s businesses, Six Sigma is a methodology for pursuing continuous improvement in customer satisfaction and profit that goes beyond defect reduction to emphasize general business process improvement. This includes revenue improvement, cost reduction, cycle-time improvement, increased customer satisfaction, and any other metric important to the company. It implies an entire culture of methodologies to improve the overall health of the organization. The customers that form the base of today’s world market are demanding higher-quality products at lower costs with greater responsiveness, also in Vojvodina. Six Sigma helps an organization achieve these objectives when leveraged with other initiatives as part of a thorough business strategy. The ultimate goal is to develop a process improvement solution that aligns the proven methodology of Six Sigma with the corporation’s strategic goals.

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3. IMPROVING THE PROCESS Many companies in Vojvodina, have made extensive investments in their software systems, and have approached process improvement with automation tools that route data from one system to another, such as automated interfaces between ERP, CRM, and SCM applications. But, executing a project to improve business processes often requires more than just tying together systems to create a “lights out” automated process. Not all complex business processes can be fully automated, because:

• People are an integral part of the process. • Mistakes and exceptions occur within the process. • Complex process steps are not easily reduced to digital business rules.[17] The Six Sigma project, for example, might produce a recommendation to replace or enhance an out-of-date system, crosstrain employees, or improve the layout of a production line. The key is to implement a solution in which the ideals of Six Sigma continuous process improvement can be executed quickly and consistently, without additional expenses of retooling, recoding, or replacing the company’s existing enterprise software. BPM: The Platform for Process Improvement Solutions The TeamWorks BPM platform automates processes when possible, and includes people in the process exactly when their knowledge is required — the most efficient formula for improving business processes. In this software environment, processes can be designed, executed, monitored, and analyzed, allowing companies to take the processes they’ve reengineered using the Six Sigma methodology, and implement them in the most efficient way possible. BPM coordinates business processes between people and the data in IT systems, giving the data context and turning it into meaningful business information, rather than just automatically routing it from system to system. It delivers contextual information to participants in the process, so they can make well researched, informed decisions in the most efficient way. From a management perspective, it gathers and analyzes process metrics, such as process duration and cost savings, so that performance and value can be accurately tracked. The TeamWorks BPM platform monitors business activity across multiple software systems. When changes to normal operations occur, TeamWorks determines whether the event requires human decision, and either launches automated processes or prompts employees to respond by guiding them through their participation in the process. TeamWorks also delivers executive scoreboards that report up-to-the-second on how processes are performing, how those processes are affecting the business and how the processes can be improved further (Figure 3.). Figure 3. Monitoring and Responding to Business Events

Source: Silver, B. (2010)

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The BPM platform includes: • An authoring environment for defining business processes • A monitoring capability that watches processes for circumstances that fall outside of defined business rules, and launches sub-processes to address those circumstances • An execution environment for managing those processes so that humans are included in the process when necessary • A scoreboard that helps executives monitor and react to business events, providing a mechanism for continuous process improvement.[18]

4. APPLYING SIX SIGMA AND BPM TO ENTERPRISE BUSINESS PROCESSES The process oriented initiatives has been present for a long time. Total Quality Management (TQM) and Business Process Reengineering (BPR), for example, advocated similar philosophies as Six Sigma: Continuous process improvement is critical to long-term business success. But they have gradually fallen out of favor — not because they were necessarily misguided methodologies, but because they had no direct link to bottom-line profitability, nor any correlating technology to support the ideals of continuous process improvement across the corporation. The combination of Six Sigma and BPM is a natural pairing for making process-oriented initiatives successful. While the Six Sigma methodology is based on proven business principles that integrate corporate goals into process improvement efforts, BPM software provides a flexible technology as the sound foundation for designing and executing these ideals throughout the enterprise. Business Process Management enhances the Six Sigma methodology by providing data access, process metrics, business rules, graphical process modeling, and process automation that directly support the Six Sigma Design, Measure, Analyze, Improve, and Control (DMAIC) model for restructuring business processes. At this point, it’s important to remember that getting stuck on reaching “zero defects” or “zero errors” can be discouraging if you approach it from the myth-perspective that a Six Sigma initiative is a complex and costly undertaking. This is why this paper advocates using the right metric to drive the right activity, rather than relying on defect reduction as the only metric. The path of striving for Six Sigma and using the Six Sigma ideals when analyzing and improving processes will show quick benefits along the way because the methodology focuses on continuous, ongoing improvement. Table 1. The combination of Six Sigma and BPM provides a synergistic approach that delivers the most powerful process improvement solution possible. Six Sigma

BPM

Approach

Focus on Analysis

Focus on Automation and Optimization

Data

Analytical strategy for generating finan- Automation and optimization environment for gencial value through process improvement erating financial value through process improvement

Process

Leverages statistical analysis of key met- Accesses data from enterprise systems to enable starics to identify improvement opportuni- tistical analysis ties

Improvement

Process improvements gained through Provides visual design environment used to graphifocus on root-cause analysis. System cally define process flow and people/system interacchanges achieved through collaboration tions with IT.

Design

Document recommended changes and Improved process automated and integrated with measurement techniques existing IT investments

Process Improvement

Control charting measures continued Scoreboards measure continued trends of key protrends of key metrics cess metrics and business value impact

Execution

Measurement

Source: Rasmusson, D. (2006)

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The TeamWorks BPM platform is designed to facilitate ongoing process improvement initiatives in two ways: provide a graphical process authoring environment in which to quickly and easily define and modify processes, and provide a flexible software environment in which to execute processes.[15] The authoring environment allows even non-technical business process owners to model and configure their business processes for execution in the platform. Thus, a black belt in Six Sigma, for example, could design a Six Sigma process without extensive involvement from software technicians. In addition, TeamWorks gathers process metrics as process events happen, delivering to executives the information they need to analyze, modify, improve, and control processes in real time. Together, the Six Sigma methodology and BPM software can improve a company’s processes without huge, complex initiatives (Figure 4.). Six Sigma and BPM: Common Goals for Improving Business Processes Consider the common goals of Six Sigma and BPM software: reduced costs, increased profits, and improved customer relations through business process improvement. Now, consider the challenges facing today’s enterprises: data housed in disparate transaction-based systems throughout the organization and manual processes that lack standardization and, therefore, cannot easily be monitored or improved. Figure 4. Adding Value to Six Sigma Strategies

Source: authors

The analytical approach of Six Sigma, combined with the automation and optimization approach of BPM, provides the solution to a corporation’s process and technology challenges, while tying the solution directly with the corporation’s financial goals. Data Monitoring The typical Fortune 500 company must manage and optimize 300+ core processes and more than 2,000 related sub-processes, plus all of the corporate data that run its business. It has spent millions of dollars acquiring enterprise-wide systems aimed at planning, budgeting, forecasting, managing, and analyzing its business, and it has spent additional time and money training its employees to use these systems.[19] The challenge is that many processes and correlating data span multiple transactional systems, making metrics-gathering and analyzing cumbersome, and sometimes even impossible, despite all of the previous investments in technology. TeamWorks has “undercover agents” that monitor business conditions in any system related to a process. It looks for business events that fall inside or out of defined business rules, and launches sub-processes that respond to those business events. In addition, TeamWorks has integration components that allow it to integrate with other applications, pushing and pulling data between any application and itself. These two features allow a company to extend its Six Sigma-based processes across the enterprise, despite where the process or the associated data and people are located.

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BPM provides access and visibility into applications and data needed for Six Sigma analysis and process restructuring. In addition, it is the environment in which business rules can be defined and executed as part of automated processes. For example, analyzing a collections process to reduce day sales outstanding may require access to the order systems and customer and receivables records to determine the payment time of invoices. For statistical validity, the sample size may be every invoice and payment from the last three years. BPM application connectors provide access to the data and enable business rules to consolidate it (Figure 5.). Figure 5. Data Monitoring

Source: Rasmusson, D. (2006)

5. INCREASING THE EFFICIENCY OF PROCESSES IN SMALL AND MEDIUM ENTERPRISES IN VOJVODINA One of the challenges of increasing the efficiency of processes is that they often span multiple IT systems. As a result, increasing the efficiency of processes requires improving the multiple applications that the process spans. But, changing large applications can be prohibitive — requiring money and time piled on top of the resources already spent on initial implementations. To overcome this challenge, people tend to get heavily involved in the process with inconsistent and inefficient manual work-arounds. The opportunity for errors and process lags mount as people choose email, fax, and phone communication, and multiple, manual data entries when processes cannot properly bridge across applications. The TeamWorks BPM platform solves this problem by designing and executing processes that reach across multiple applications. It allows the process to bridge across applications, gathering data as needed, regardless of its source. In addition, TeamWorks monitors the process for any business event that falls outside of its normal execution. When one of these business events occurs, it uses defined business rules to either launch an automated sub-process, or bring a person into the process by sending that person a task. Attached to the task is an electronic “process coach” that delivers the contextual information and process steps that the person needs to keep the process on track. For example, a process coach for a deduction management process might include the following elements: • • •

General information on invoices, purchase orders, delivery verifications, customer history, value of outstanding deductions, etc. Access to research, such as the disposition of the last 10 deductions, typical customer service resolution times, etc. Recommended actions to resolve or complete the process.[9]

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This feature keeps the process moving, allowing people to make informed decisions when business events occur without needing to access multiple systems, or resorting to time consuming manual methods. It fosters the Six Sigma process improvement ideal throughout the organization by integrating the efficient execution of processes into daily business. Measurement: Scoreboards When the correct data has been located and put into the context of a business process, it must be measured and analyzed so that it becomes meaningful information that managers and executives can use to make informed decisions about the business. In addition, new data must be created about the performance of the process itself so that executives can determine where processes are lagging, and where they have been successfully improved. This is critical for continuous improvement because it gives specific information about processes to the decision-makers in an enterprise, arming them with the information they need to strategically respond to changing business conditions. TeamWorks provides a “time/date” stamp on every step related to a process, and captures this data in a table that is updated continually. This data can then be displayed for a complete picture of business processes on a regular basis. A company’s first TeamWorks solution may even be the first time certain metrics have been available to a company’s executives (such as the new information that Company A received about its shipping company not living up to its service level agreement, in the following case study), giving them insight and control that was previously impossible.[17] This capability gives executives the metrics needed to make decisions about ongoing process improvements.

CONCLUSION Six Sigma’s analytical approach to continuously increasing the efficiency of processes across the corporation — not just manufacturing processes — can be enhanced even further by using BPM software, such as Lombardi Software’s TeamWorks, to design and execute the processes. While companies often attempt process improvement by automatically routing data from system to system, TeamWorks brings a more comprehensive approach to the table:

• Monitors systems for business events, and pulls relevant data from various systems, presenting the information • •

to the appropriate person at the right time, so that processes are executed quickly and consistently, and errors are greatly reduced Provides graphical authoring environment so that Six Sigma-based processes can be quickly and easily defined or modified and deployed by non-technical business process owners Gathers metrics as process events happen, delivering to executives the information they need to analyze, modify, improve, and control processes in real time

A strategic approach that combines the proven effectiveness of the Six Sigma methodology with the power of TeamWorkscan be the most effective solution for increasing the efficiency of business processes. Together, Six Sigma and TeamWorks will enhance the speed and agility of an enterprise’s operations and improve the company’s bottom line. Small and medium enterprises are the backbone of the economy in Vojvodina. In order to be successful and have sustainable growth, they need help in continuously increasing the efficiency of processes. Knowledge and experience, supported by modern software tools should be provided through training and education. Process Management tools, and the problem solving methodology of Six Sigma, can together increase the efficiency, effectiveness, and ongoing control of a process to levels of performance.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9.

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Andersen, B. (1999) Business process improvement toolbox. ASQ Quality Press, New York Antony, J. (2006) Six Sigma for service processes. Business Process Manage Journal 12(2):234–248 Conger, S., Landry, B. (2009) Problem analysis: when established techniques don’t work. In: Proceedings of the 2nd annual IRM conference, Dubai, May 19–24, 2009 Dorgan, SJ., Dowdy, JJ. (2004) When IT lifts productivity, The McKinsey Quarterly, Boston, MA: Mckinsey Company 4, pp 9–11 Hammer, M. (2010) What is business process management? In: vom Brocke, J., Rosemann, M. (eds) Handbook on business process management, vol 1. Springer, Heidelberg Harmon, P. (2010) The scope and evolution of business process management. In: vom Brocke, J., Rosemann, M. (eds) Handbook on business process management, vol 1. Springer, Heidelberg Harrison-Broninski, K. (2010) Dealing with human-driven process. In: vom Brocke, J., Rosemann, M. (eds) Handbook on business process management, vol 2. Springer, Heidelberg http://www.google.rs/search?q=six+sigma&client=firefox-a&hs=F5i&rls=org.mozilla:en-US:official&tbm=isch&tbo=u&source=univ&sa=X&ei=W ZCGUaiNI8qS4ASHrYCgDw&ved=0CFAQsAQ&biw=1440&bih=793 Accessed 03.05.2013. IBM Business Process Manager, http://www-01.ibm.com/support/docview.wss?uid=swg21473894 Accessed 30.04.2013.

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10. iSixSigma staff, Sigma performance levels – One to Six Sigma. iSixSigma.com. http://www.isixsigma.com/library/content/c020813a.asp. Accessed 30.04.2013. 11. Johannsen, F., Leist, S. and Zellner, G. (2010) Implementing six sigma for improving business processes at an automotive bank. In: vom Brocke J, Rosemann M (eds) Handbook on business process management, vol 1. Springer, Heidelberg 12. Kaplan, RS., Norton, DP. (2001) The strategy focused organization. Harvard Business School Press, Boston 13. Motorola (2009) About Motorola University: the inventors of Six Sigma, Motorola Corporation. http://www.motorola.com/content. jsp?globalObjectId=3079 Accessed 30.04.2013. 14. Rasmusson, D. (2006) The SIPOC picture book: a visual guide to the SIPOC/DMAIC relationship. Oriel Incorporated, Madison, WI 15. Silver, B. (2010) Uniting Process Architecture and Execution, http://www.mega.com/en/c/resource/p/white-papers/a/resource-wp0007 Accessed 03.05.2013. 16. Ulrich, W. (2010) Business Architecture: From Value Proposition to Business Transformation, http://www.mega.com/en/c/resource/p/whitepapers/a/resource-wp0005 Accessed 03.05.2013. 17. vom Brocke, J., Recker, J. and Mendling, J. (2010) Value-oriented Process Modeling: Integrating Financial Perspectives into Business Process Redesign. Business Process Management Journal (BPMJ), 16(2):333–356 18. vom Brocke, J; Rosemann, M. (Eds.) (2010) Handbook on Business Process Management 1, Introduction, Methods, and Information Systems, Springer. 19. Weske, M. (2012) Business Process Management, Concepts, Languages, Architectures, Springer, 2nd ed. DETAILS ABOUT AUTHORS: ZORAN CIRIC PROFESSOR FACULTY OF ECONOMICS, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA czoran@ef.uns.ac.rs IVANA CIRIC PhD STUDENT ECONOMIC HIGH SCHOOL SUBOTICA, SERBIA civana87@hotmail.com JELENA BIROVLJEV PROFESSOR FACULTY OF ECONOMICS, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA jelenab@ef.uns.ac.rs

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QUALITY CONTROL IMPROVEMENT USING THE SIX SIGMA METHODOLOGY ZORAN STANKO ROBERT OBRAZ MIRNA VARLANDY SUPEK

ABSTRACT

Quality control is central to any manufacturing company. From the manufacturer’s point of view, quality is related to technological design and the making of the finished product the purpose of which is to meet the consumer’s needs. From the consumer’s perspective, quality is often related to value, usefulness, price or the time within which a product or service can be supplied. Each quality control process can be improved in the course of time in order to enhance its quality as well. In the global market, with all the uncertainties and fierce competition, companies need to change and adjust their business strategies very fast in order to meet the customers’ preferences. Faced with educated customers and new competitors, manufacturing companies have to continuously consider their methods of production and change them if they want to make sure they will survive in the market. A very efficient way to continuously improve business processes is the application of the Six Sigma methodology. The Six Sigma methodology is a business strategy as well as a quality control methodology, which represents the application of formalized systems with the purpose of achieving maximum customer satisfaction at minimum total cost. This paper is based on the hypothesis that the application of the Six Sigma methodology can improve the existing quality of finished products and reduce quality control costs. The hypothesis has been tested in a company competing in the highly competitive global market for motor vehicle spare parts. Due to the application of the DMADV approach, the brake discs manufacturer managed to accelerate the process of final control of finished products by 35%, and reduce quality control costs by 50%. The entire quality control process was analysed using the project approach, and in five stages of the DMADV approach a new automated plant for quality control of finished products was designed and set up. Control automation has removed the need for manual labour, and productivity has risen by 48%. The new quality control process is resistant to internal variability and is to a high degree tied to consumers’ demands. KEYWORDS: quality control, the Six Sigma methodology, quality costs

1. INTRODUCTION Quality control is central to any manufacturing company. From the manufacturer’s point of view, quality is related to technological design and the making of the finished product, the purpose of which is to meet the consumer’s needs. From the consumer’s perspective, quality is often related to value, usefulness, price or the time within which a product or service can be supplied. Each quality control process can be improved in the course of time in order to enhance its quality as well. When enhancing those processes it is a good idea to apply well-known quality management tools and methods. Most of these tools and methods are based on quality management systems, whose task is to continuously improve business processes at all levels. One of the best known tools is the Six Stigma methodology, which helps businesses regroup its strengths and resources to adjust to challenging circumstances. The aim of this paper is to prove that the application of the Six Sigma methodology can help enhance the existing quality control of finished products and reduce quality control costs. This hypothesis will be tested in a real manufacturing environment and the testing will be based on the final product quality control process for brake discs. Each motor vehicle has four such discs in its braking system and they represent the key factor of any car’s safety system. Comparative analysis and tools of the Six Sigma quality control methodology have been applied.

2. FUNDAMENTAL PRINCIPLES OF THE SIX SIGMA METHODOLOGY The Six Sigma methodology is both a business strategy and a method for continuous improvement of product or service quality.1 It represents a statistical-analytical methodology based on real data and focused on achieving a nearly perfect level of process functioning. Companies applying the Six Sigma methodology adopt a culture of continuous improvement of their operations based on teamwork. The Six Sigma initiative for business operation improvement and advance1

Lazibat, T.: Upravljanje kvalitetom, Znanstvena knjiga, Zagreb, 2009, p. 236.

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ment consists of two components: managerial and technical.2 The managerial component focuses on the selection of appropriate metrics for analysing existing business processes, the selection of the right projects and people who will implement them. The technical component of the Six Sigma methodology focuses on continuous improvement of business processes at all levels using the DMAIC and DMADV methodologies.

2.1. DMADV methodology While the DMAIC approach is favoured for the improvement of existing business processes, the DMADV approach is used for designing new processes, the aim of which is to deliver flawless products. The name DMADV is an acronym for the English terms describing individual steps of this approach: Define, Measure, Analyse, Design, Verify. The main purpose of this methodology is to allow businesses to characterise, quantify and reduce risk in all stages of product, process and service development using a number of strategies, techniques and tools. The overall objective is to design products and services to consistently meet consumer expectations.3 Further in the paper the methodology of the DMADV approach is described on a specific example from business practice. The DMADV approach has been used for designing an automated process of final quality control of finished products, which introduced a new control technology and led to sizeable cost cuts in the operation of the observed company. Before tackling the DMADV methodology itself, it is necessary to describe the existing process of final quality control of finished products as well as all the issues related to the quality control process that resulted in delayed delivery of finished products – brake discs.

3. DESCRIPTION OF THE QUALITY CONTROL PROCESS Brake discs are parts of the safety braking system in any motor vehicle, their chief function being speed reduction or bringing the vehicle to a standstill in risk situations. Brake discs are cast and then machined to the prescribed dimensions. After that the discs are subject to final quality control consisting of checking the product’s final dimensions, checking the structure of the material and labelling the finished brake disc. This process is shown in Chart 1. Chart 1 – Quality control process for brake discs

Product input

Dimension check of discs tr = 20 s

Ultrasound defectoscopy of material tr = 21 s

Additional dimension check

Recycling of brake discs

Labelling of brake discs tr =23 s

Product output

Source: IBM Business Process Manager

SChart 1 shows the process of final quality control of brake discs. The control is implemented in three workplaces by quality controllers who are trained and qualified for product quality control. In the first workplace shown in Chart 1 dimensions of brake discs are checked. Dimensions of finished products are established by measurement, and they need to be within the defined tolerance limits. Discs are placed on the table manually, the measurement sensor approaches the brake discs automatically and the measuring begins. If the dimensions lie within tolerance limits, the disc is placed on another band conveyor and is transported to the next workstation. If the dimensions exceed the tolerance limits, the disc is placed on another band conveyor and undergoes additional control. The time spent on the initial work operations is 20 seconds. In the second workplace ultrasound defectoscopy of material is performed. This is done manually – the worker places the disc in the holder and the ultrasound probe automatically approaches the disc. This check involves measuring the response time of the ultrasound signal in the brake disc and comparing the obtained signal with previously defined refer2 3

Ibidem Conti, T.,Kondo, Y.,Watson, G.H.: Quality into the 21st Century: Perspectives on Quality and Competitiveness for Sustained Performance, ASQ Quality Press, Milwaukee, USA, 2003, p. 229.

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ence signal. Motor vehicle safety requires absolute homogeneity of braking material, and each brake disc with homogeneity aberration is sent to recycling. Discs with no flaws are transported by the band conveyor to the third workstation. The time required for manual ultrasound defectoscopy of material is 21 seconds. After the dimension and ultrasound checks the brake discs are labelled. This work operation is performed in the third workplace, where standardised product identification labels are placed on the product. Brake discs labelling is conducted by rolling and imprinting the label into the disc material using special tools, and the time needed for performing this work operation is 23 seconds. A quick review of the production process suggested that it is in the final quality control of finished products where the majority of finished products dwell and that this is the production segment that needs improving. The management of the observed company was quick to address the problem. They set up a Six Sigma team who were given the task to come up with an optimal final quality control process for finished products applying continuous supervision of the quality control process and DMADV project approach.

4. DMADV PROJECT-PROCESS APPROACH The DMADV project-process approach of the Six Sigma methodology involves seeking the best solutions to specific problems. In this case, in order to find the best solutions, the Management selected three members to be the core of the Six Sigma team. The team members were supposed to have appropriate competencies, and each member of the team was assigned a specific role within the team in accordance with their level of education, position and experience. Associate members of the team were employees from various functional departments, who supported the implementation of the project in a variety of ways; most of the time their task was to collect information in workplaces. Fifteen employees were involved in the Six Sigma project, and they acted in accordance with a strict delegation chain. Delegation and information flow followed a pyramidal structure. After establishing the managerial component of the Six Sigma methodology, which was applied to select the right metrics for the analysis of the existing process and the people who will implement it, the technical component was next to be established. This component focused on the DMADV project-process approach, which will be used to advance and improve the existing process of the final control of finished products. All team members were informed about individual approach stages and were assigned tasks and activities to complete within the project. Project timeline was defined and a formal document, preliminary project plan describing the ultimate goal of the project - shorter delivery time of finished products - was adopted.

4.1. STAGES OF THE DMADV APPROACH The paper will next present the five stages of DMADV technology. For each stage tasks and activities to be performed and steps to be taken in order to move on to the next stage are described. In each stage of the project an analytical approach based on the main quality management tools is applied. The project of improving final quality control for brake disks started with the first stage – the problem definition stage.

4.1.1. PROBLEM DEFINITION In the initial stage of the DMADV approach the problem has been clearly defined. Its solution will be sought through the enhancement project. In the case of brake discs the main problem was delayed delivery of finished products. Motor vehicles manufacturer applies the „just in time“ business philosophy and its monthly delivery times have been defined in a contract. Brake discs have to be delivered on time to the transit warehouse in order to be able to assemble motor vehicles according to previously defined deadlines and agreed annual production plan. As one of its tasks, the Six Sigma team used a survey to collect accessible data on the causes of delay in the production of brake discs. All indicators suggested that it is the final quality control process that was the „bottle neck“ in the production of brake discs. The best visual proof of this was the pile-up of brake discs in the final quality control of finished products. The Six Sigma team immediately focused on the final quality control process for brake discs. All the data collected through the survey were classified and processed according to the rules of the Six Sigma methodology and are shown in Diagram 1, which is a cause and effect diagram of the quality control process for finished products.

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The cause and effect diagram has a fishbone shape and is an easily recognized quality management tool. It is also called the Ishikawa diagram after its creator, Kaoru Ishikawa4, and it allows a logical analysis of all the problems related to the final control process for finished products. Most importantly, this diagram unambiguously points to the main cause of the problem, in this case – delayed delivery. Diagram 1 – Cause and effect diagram of the existing quality control process

Source: made by authors using the StatSoft Statistica 7 software

Diagram 1 consistently presents all the problems related to the quality control process. Analysis was conducted for the five chief problems-causes. They include: the equipment, the process, the employees, the work environment and the organisation of work.5 The diagram shows that the equipment used for the final product quality control is worn out, technologically out-dated and susceptible to failure. Besides frequent glitches, problems are caused by spare parts, which are increasingly difficult to find in the market. The very quality control process is carried out manually and is physically straining for quality control people as they have to lift and lower discs weighing 2.8 kilograms. This is why it is necessary to rotate employees every 20-30 minutes during a shift in order to alleviate concentration lapses caused by fatigue. The work is repetitious and monotonous, leading to frustration and lack of motivation in the workplace. Another problem is alienation, which leads to increased staff turnover in quality control positions. Diagram 1 shows that these jobs are performed by a total of 16 employees – 4 of them work in each of the three shifts and 3 employees work in packaging and as substitutes for employees on annual or sick leaves. The total includes the head of final quality control, who is at the same time the foreman for this part of the production line. The work environment where quality control of finished products is carried out is located in the section of the plant which is exposed to flying particles of dross and dust, draught, noise, vibrations and poor lighting, which is unacceptable from the point of view of safety at work. As for the organisation of work, problems can be seen in the uneven production flow and work in three shifts. Productivity is the highest in the morning shift when the foreman is at work. In the afternoon and night shifts the workers are not supervised, and the productivity level proportionally decreases towards evening hours. Serious problems have been noticed in the organisation of the maintenance service which is, due to lack of knowledge and involvement in the maintenance of other production segments, also to be blamed to some extent for frequent glitches. The cause and effect diagram has helped the Six Sigma team to analyse and have a more in-depth and complete picture of the issue of final quality control process for brake discs and, consequently, prepare the bases for process measurement, which will be used in the next stage of the DMADV approach.

4 5

Kaoru Ishikawa (1915-1989) – Japanese quality management expert. Yang, K., El-Haik, B.: Designing for Six Sigma – A Roadmap for Product Development, McGraw-Hill, New York, USA, 2003, p. 358.

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4.1.2. PROCESS MEASUREMENT Measuring the final quality control process for finished products involved measuring the time spent working in each workplace, a list of all the work activities performed in the workplaces, developing a diagram showing the course of the final control of finished products and videotaping the process. The time of work was measured by a stop watch throughout ten working days applying the methods of the Six Sigma methodology. Measurement results were entered in the previously prepared bases, which clearly showed all the work activities by each workplace and the time spent on each. A flow chart was used to define the process boundaries (where the quality control process for finished products starts and finishes within the brake discs production process), to break the process down into activities and to define the order of activities. For each activity inputs, outputs, work operations and the logic of their interconnection as well as responsibility were identified. The flow chart defines individuals in charge of each activity as well as those who perform them. The final quality control process was videotaped for further analyses in regular meetings of the Six Sigma team. All the measurement results have been computer processed and bases for analysing measurement results in the next stage of the Six Sigma projects were prepared.

4.1.3. PROCESS ANALYSIS After measuring the final quality control process for brake discs, the Six Sigma team conducted a detailed analysis of all measurement results obtained in the previous process stage using analysis methods and tools. The most important tool was the Pareto diagram, which is one of the basic tools in quality management. It is a bar chart where the length of the bar represents the frequency of occurrence or cost.6 Pareto analysis has been applied to the recorded work time in the product quality control process, and its results are shown in Diagram 2. The x-axis shows all the work operations participating in the quality control process, and the y-axis shows their participation (percentage) in the total work time. Diagram 2 â&#x20AC;&#x201C; Pareto analysis of work time on the quality control line

Source: Made by authors using the StatSoft Statistica 7 software.

The work time by work place data in Diagram 2 show that it takes 20 seconds or 31.25% of total quality control time to perform the dimension check. The second work operation requires 21 seconds or 32.81% of total time, and the third, according to the Pareto analysis, takes 23 seconds or 35.94% of total time. Diagram 2 suggests that the most time in the final quality control is spent on labelling brake discs, and this is the work operation which, according to Diagrams 1 and 2 sets the work6

Pande, P. S., Holpp, L.: Ĺ to je Ĺ est Sigma?, Mate, Zagreb, 2006, p. 60.

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ing stroke of the line for quality control of finished products. Based on the graphs and presented results the working stroke for this process is 23 seconds. Work operations in the first and second work places are performed faster from the working stroke of the entire line by a few seconds, and the overall quality control process is well balanced from the design point of view. However, if we want to accelerate the quality control process, it is the difference between the time of the line’s working stroke and the time required for the second and third operations that reveal the unused time that can be used for the improvement and advancement of the process. In order to accelerate the quality control process the work time in each work place needs to be aligned in each work place to cancel out the 3 second difference. Such an approach would help speed up the working stroke of the line to 20 seconds and increase productivity of the overall production cycle and at the same time the agreed delivery times for finished products would be met. Another cause and effect diagram was used following the Pareto analysis. Unlike the previous diagram (Diagram 1), which listed factors causing the problem, this diagram focused on desired results – shorter delivery times for products. Whereas Diagram 1 started establishing the problems we wanted to solve, the new one, Diagram 3, starts defining the situation we want to achieve. Apart from the cause and effect diagram the brainstorming method was used, which revealed the key factors that would lead to the desired project goal, i.e. shortening the delivery time for finished products. Diagram 3 – Cause and effect diagram for the new quality control process

Source: made by authors using the StatSoft Statistica 7 software.

Diagram 3 represents a new cause and effect diagram following a detailed analysis of all causes- problems shown in Diagram 1. Another analysis was conducted of the five major causes-problems. They included the equipment, the process, the employees, the work environment and the organisation of work. Here we analysed what needed to be changed in the existing quality control process for brake discs in order to come up with an optimal quality control process that will eliminate all the existing problems shown in Diagram 1. Diagram 3 also provides guidelines that should be followed in the design of the new final quality control process in order to reach the desired goal – shorter delivery times of finished products. Diagram 3 clearly indicates that the existing equipment needs to be completely replaced with new, more modern and automated machines. Automation and new technology require IT literate staff, which is why younger employees willing to receive further education and training will be favoured. When designing the new quality control process the so-called „micro-balancing of the process“ will be carried out in order to bring the quality control process closer to 20 seconds. This, as well as a significant reduction of manual labour, would increase the overall productivity of the existing brake discs production process. The work environment will be organised to concentrate the quality control process in the smallest possible work surface

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that will be enclosed in a transparent Plexiglass booth. This booth, being made into a closed unit, will isolate the quality control process for finished products from the dust and dirt in the plant. At the same time it will prevent people from entering the robot operation zone, which could be fatal and dangerous for employees, and safety at work measures will be implemented in compliance with rules and regulations. As the existing maintenance service is not capable of maintaining the new quality control technology, the jobs of preventive and current maintenance of the automated plant will be outsourced to the production line manufacturer. All work places will be fully automated, and the existing disc labelling technology will be replaced by a new engraving technology. Upon the process analysis stage, all the obtained data were systematised and the stage of designing a more modern final quality control process for finished products began.

4.1.4. DESIGN OF THE NEW QUALITY CONTROL PROCESS In the designing stage of the new quality control process guidelines and recommendations from the previous stage were used in order to design a process in compliance with the requirements. Designing of the new quality control process involved using CAD7 computer programs, which enabled modelling a number of different variations of the final control process for brake discs. Several production processes were designed; they were first analysed in detail in blueprints and then implemented as computer simulation in the SIMUL 8 software. Computer simulations unambiguously pointed to a specific process as the optimal quality control process in compliance with the requirements set in the project. Simulation results showed that an optimal quality control process for finished products will be obtained by changing the order to the existing work operations. Thus the first work place will involve material defectoscopy, the second work place will be in charge of disc labelling and the dimension check of finished products will be performed in the third workplace. After defining the sequence of the work operations a method had to be devised for transporting and placing 2.8 kg brake discs on the measurement station without completely eliminating manual labour. One of the concepts suggested manipulating brake discs by a robot unit with six degrees of freedom of movement, which can truly simulate the movements and precision of workers performing quality control jobs. As this idea proved to be extremely interesting, the Six Sigma team brought in automation experts working for Sinel d.o.o. from Labin, who took an active part in subsequent designing of the quality control process for finished products. In a joint effort, the previously designed optimal sequence of work operations was then demonstrated in the virtual three-dimensional ABB Robot Studio environment. Simultaneous simulation of the optimal quality control process and the robot unit for manipulating brake discs yielded a computer model of the new quality control process. Simulation results showed that the new sequence of operations and replacement of the existing labelling technology with electromagnetic engraving technology will reduce the time of the product quality control process from todayâ&#x20AC;&#x2122;s 23 seconds to 20 seconds. After all the required parameters were obtained in the simulation, it was time to start engineering and the calculation of switches for the new automated plant. The entire new plant with all its parts was shown in the three-dimensional environment of the Pro/Engineer modelling tool. The final isometric representation of the three-dimensional model of the automated plant is shown in Figure 1. It shows the final version of the automated plant for the final quality control of brake discs. The input of products is on the left and the output of products that have undergone quality control is on the right. In the centre of the plant there is the robot unit, which services three work places shown in front of the operator and the control device.

engl. CAD, Computer Aided Design

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Figure 1 â&#x20AC;&#x201C; Isometric representation of the automated quality control process

Source: Authors in collaboration with Sinel d.o.o.

Figure1 shows that the entire automated plant is enclosed in a Plexiglass booth in order to isolate it from the aggressive atmosphere in the production plant. A model of a worker managing the final quality control plant is shown in front of the control device. The worker is completely free of manual labour, his job being reduced to supervising the operation of the automated plant and dealing with possible glitches during shift work. After all the necessary components and parts were provided, the automated plant was constructed following the computer model shown in Figure 1. Subsequent optimisation of the robot unit trajectory enabled the working stroke to be shortened by 3 more minutes. So, upon trial operation, the working stroke of the quality control line went down to 17 seconds. At the end of the design stage of the new quality control process, the work time of the automated plant for quality control of brake discs was measured again. The measurement results were subjected to the Pareto analysis and the obtained results were presented in Diagram 4. Diagram 4 shows the results of the Pareto analysis of the new quality control process for finished products. It clearly indicated that all the work operations shown in the x-axis require 17 seconds. Work operations are fully co-ordinated with the working stroke of the line, and all the work places are fully utilized. There is no waiting time in individual work places, i.e. each work place operates for 17 seconds and after that a new product arrives to be checked.

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Diagram 4 – Pareto analysis of the new quality control operation time

Source: Made by authors using the StatSoft Statistica 7 software.

A more even course of quality control with no wait time suggests that the quality control process for finished products has been well-balanced from the production line point of view.

4.1.5. PROJECT VERIFICATION Post-implementation project check suggests that the working stroke is down to 17 seconds after the automated quality control process has been introduced in the production process. This information is of utmost importance as it can be used to compare and verify the process before and after the implemented improvements and to rationalise all the project activities. Activity rationalisation was conducted using one of the methods of economic evaluation of projects from the group of methods evaluating individual unit profitability – the return of investment method. This traditional method is based on return time, which is defined as the period of time required for the investment income to equal capital expenditure necessary for the investment.8 Evaluation of the quality control enhancement project applying this method suggests that the return of investment will take place in 0.4 years. A shorter period to return is desirable because the sooner the amount of investment is returned the sooner it will be available for new or other needs. A short ROI period also diminishes the risk that the changed economic circumstances will prevent the return of investment.

4.2. PROJECT RESULTS The completion of the final verification stage in the DMADV approach marked the completion of the project of enhancing final quality control for bake discs. The implementation of technology and the education of the staff were successfully carried out in a short period of time. The Six Sigma team met for the last time in November of 2012 to conclude the project. To summarise, these are the most significant project results:

• • • • • • • • • 8

The working stroke of the quality control process has been brought down from 23 seconds to 17 seconds Quality control time has been reduced by 35% due to the new technology Staff has been reduced by 56% (from 16 to 7 people) Annual quantity of finished products has increased from 822,000 to 1,200,000 pieces Output has increased by 48% on an annual basis Transportation path of the products has been reduced by 80% (from 70 to 10 metres) ROI time is very short – 0.4 years Introduction of the new quality control technology and staff cutting resulted in 50% lower quality control costs per yea According to sigma measurement units the quality control process has increased from 3.2 to 5.1 Perić, T., Radačić, Ž., Šimulčik, D.: Ekonomika, Fakultet prometnih znanosti, Zagreb, 2000, p. 126

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The above stated results of the project of enhancing quality control for finished products suggest that this project is cost effective. This conclusion derives from the fact that the application of the DMADV methodology helped design a completely new, more modern final quality control process for finished products, which uses all the existing resources efficiently, ensures high returns on investment in a short period of time and complies with the Safety at Work Act. The new quality control process is resistant to variability within the process and is largely tied to consumer demands (low product price, short production time, short product delivery times).

CONCLUSION In the introduction of this paper a hypothesis was made assuming that the Six Sigma methodology can be applied to enhance the existing quality control process for finished products and reduce the quality control costs. The first part of the hypothesis has been proved by presenting the five stages of the Six Sigma project where it focused on the wants and needs of the consumers – short delivery times. Applying a consistent approach and the DMADV methodology a new process was designed, which accelerated and enhanced the existing quality control process for finished products. The new quality control process has been fully automated by the introduction of a robot unit, which completely eliminated the need for manual labour. The introduction of the new quality control technology and the change in the sequence of work operations increased the production productivity level by 48%. Due to the quality control „bottleneck“ when applying the former brake discs production process, it was possible to produce only 822,000 pieces per year. The new quality control technology allowed the production of 1,200,000 pieces per year with fewer staff. Staff reduction and the use of modern technology resulted in lower annual quality control costs by almost 50%. This also confirmed the other part of the hypothesis assuming that the application of the Six Sigma methodology may cut quality control costs. These conclusions suggest that the Six Sigma methodology, although relatively unknown in this region, may serve as a powerful instrument for correcting mistakes and dealing with „bottlenecks“ in production processes that are carried out throughout longer periods of time. Continuous application of the Six Sigma methodology empowers manufacturing companies, which at the same time develop their survival abilities in turbulent and uncertain times. Also, the Six Sigma method helps businesses achieve business excellence and competitive advantage in the global market.

LITERATURE 1. 2.

Basu, R., Wright, N. J.: Quality Beyond Six Sigma, Elsevier Science, Oxford, UK, 2003. Conti, T., Kondo, Y., Watson, G. H.: Quality into the 21st Century: Perspectives on Quality and Competitiveness for Sustained Performance, ASQ Quality Press, Milwaukee, USA, 2003. 3. Finster, M.: From continuous improvement to continuous innovation, Quality Management Journal, 2001., Vol.8, No.4., ASQ, USA. 4. Larson, A.: Demystifying Six Sigma, AMACOM, New York, USA, 2003. 5. Lazibat, T.: Upravljanje kvalitetom, Znanstvena knjiga, Zagreb, 2009. 6. Pande, P. S., Neuman, R. P., Cavanagh, R. P.: The Six Sigma Way, McGraw-Hill, New York, USA, 2000. 7. Pande, P. S., Holpp, L.: Što je Šest Sigma?, Mate, Zagreb, 2006. 8. Perić, T., Radačić, Ž., Šimulčik, D.: Ekonomika, Fakultet prometnih znanosti, Zagreb, 2000. 9. Stamatis, D. H.: Six Sigma Fundamentals – A Complete Guide to the System, Methods and Tools, Productivity Press, New York, USA, 2004. 10. Yang, K., El-Haik, B.: Design for Six Sigma – A Roadmap for Product Development, McGraw-Hill, New York, USA, 2003. DETAILS ABOUT AUTHORS: ZORAN STANKO MS, SENIOR LECTURER LIBERTAS BUSINESS SCHOOL ZAGREB ZAGREB, CROATIA zstanko@utilus.hr ROBERT OBRAZ UNIV.SPEC.OEC, MBA, QA MANAGER KLIMAOPREMA D.D. SAMOBOR, CROATIA robert.obraz@zg.t-com.hr MIRNA VARLANDY SUPEK BA, LECTURER VERN’ UNIVERSITY OF APPLIED SCIENCES ZAGREB, CROATIA mirna.varlandy-supek@vern.hr

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RISK ATTITUDE ASSESSMENT STUDY: CROATIAN CASE JOSIP KERETA KATARINA LUKETA MIRNA VARLANDY SUPEK

ABSTRACT

Contemporary business conditions are characterised by the dynamics and complexity of the environment and increasing company differentiation. Such conditions impede the transparency of future events and increase uncertainty in every segment of business operation. As a result, the target function of the company, i.e. enhancing the company’s worth, is increasingly exposed to various forms of risk. This is why the issue of risk management is getting more and more attention. The fundamental problem of any form of management, including risk management, is creating appropriate circumstances, which assumes that there is a high level of correspondence between required and available information and knowledge. This requirement suggests that risk management conditions result from the relationship between the risk as the object and the decision maker/manager as the subject of risk management. The attitude to risks assumes knowledge, understanding and application of appropriate procedures for spotting and recognizing risk. Attitude to risks can be measured and assessed indirectly, by measuring and assessing the level of current and relative success of the company’s operation, and directly, by measuring and assessing the knowledge and application of appropriate risk management procedures. In this study we have applied the following methods: survey, mathematical and statistical methods as well as methods of researching and studying available literature including analysis, synthesis, deduction and induction. We have also used theoretical and practical experience of developed Western countries that companies in countries in transition, including Croatia, should lean on in their future economic development. The results of the study conducted in a company operating in the real sector confirm that it is possible to measure and assess the attitude to risks both indirectly and directly, and that there is correlation between these two types of assessment. If managers recognize risks and are familiar with the risk management process, this will lead to successful company operation and vice versa, lack of knowledge and failure to manage risk will lead to inadequate business results. KEYWORDS: Management, Risk, Risk Management

1. INTRODUCTION Contemporary business conditions are characterised by the dynamics and complexity of the environment. Such conditions impede the transparency of future events and increase uncertainty in every segment of business operation. This is why the issue of risk management is getting more and more attention. The paper investigates assumptions on assessing the attitude to risk. Criteria and procedures for establishing attitudes as well as measurements for the assessment of attitudes to risk have been designed. They result from management dimension assumptions, risk scope assumptions and process nature assumptions. Risk attitude can be measured and assessed directly, on the basis of assessing the attitude to required information, i.e. by testing the knowledge and application of an appropriate risk management process. The attitude to risks contributes to the situation and position of the company and can therefore also be assessed through indirect measurement, by assessing the level of relative and absolute success of the company through a number of performance indicators. In order to research this topic we have applied the following methods: survey, mathematical and statistical methods as well as methods of researching and studying available literature including analysis, synthesis, deduction and induction. We have also used theoretical and practical experience of developed Western countries that companies in countries in transition, including Croatian companies, should lean on in their future economic development.

2. ANALYSIS OF THE RISK ATTITUDE STRUCTURE Risk is a word used in daily life as people frequently face risks. We may strive to minimise them but we cannot fully avoid them. One definition of risk defines it as “the chance of something happening that will have an impact upon objectives. It is measured in terms of consequences and likelihood.”1 Alternately, risk could be defined by another definition that may pertain to the company and its function and purpose of existence: Risk is the likelihood that something will not happen in the intended manner – the result may be better or worse than expected.

Strathfield, 1999.p. 2 http://www.zakon.hr/z/427/Zakon-o-ekolo%C5%A1koj-proizvodnji-i-ozna%C4%8Davanju-ekolo%C5%A1kih-proizvoda, 23.03.2013

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Risk is necessary and all efforts should not be directed towards minimising it. Risk can also be positive and desirable for shareholders if it is managed and used for making a profit, when it is perceived as an asset. The degree of risk is a combination of the likelihood and consequences of a given risk. Risks include failure to recognise and use opportunities, failure to achieve objectives, client dissatisfaction, unwanted publicity, threat to physical safety, breach of security, breach of legal and contractual accountability, fraud, flaws in financial controls and reporting.

2.1. Management and risk management The term management, originally an English word, has been used in most languages across the world. It has several meanings as it refers to both the process and the activity, to masterminds as well as executors and is multidisciplinary as it is related to economics, organisation, psychology, philosophy, history and ethics. Todayâ&#x20AC;&#x2122;s manager has to know how to motivate, co-ordinate and connect different individuals from both the core and the non-core business and other departments. This means that modern managers, having won the battle in their surroundings and with their competitors, need to "return" to their company and devote themselves to co-ordinating the relationships within the company. When classifying the diversity of managerial functions, the decision-making function seems to be taking the prominent position. Thus today the term decision-making is mostly used as a synonym for managing because it is through the decision-making process that the management fulfils its role. Making decisions and taking responsibility for them represents one of the cornerstones of managerial work. Indeed, unless managers make decisions they are not managers in the first place.2 Decision-making actually represents the core of the system and process of management and is one of its key elements. The relationship between the functions of managing and decision-making can be shown as in Figure 1.3 Figure 1: Decision-making and managerial functions MANAGEMENT Planning -----------------------------------------------Organising Decision-making Supervision ----------------------------------------------------- Leadership Source: authors' research

The managerial function is closely related to decision-making, i.e. decision-making represents its very essence. Managerial decisions are made in conditions of certainty, risk or uncertainty. Managing, i.e. decision-making takes place in favourable and/or unfavourable circumstances that may have a strong impact on the success of managing or decision-making. In favourable circumstances decision-making is, undoubtedly, safer in terms of assessing expected results.

2.2. Basic characteristics of the risk attitude Risk is part of any human activity and thus all types of business activities, be it manufacturing, providing services or developing software. Unforeseen problems often occur leading to failure to meet the agreed deadline, exceeding the budget or delivering inadequate products. These problems cannot be entirely eliminated, but some of them may be more controlled by taking appropriate preventive actions. Risk management is an area of management which deals with such hazards before they occur, i.e. risk management is discipline for work/life under risk4. Companies may avoid most of these problems if they apply systematic procedures and risk management techniques at the start of a project, a business process or any other activity. The modern way and conditions of business operation involve too many risks and thus cannot be treated with ad hoc methods, they often exceed the managerâ&#x20AC;&#x2122;s abilities and skills to deal with them intuitively, they require communication with other people and cannot be ignored on a subjective basis. The risk management system has to provide answers to questions about where the opportunities lie, how to reach them and how to avoid traps on the way to success. All projects involve risk and some risks will occur. Risk management is an investment in the future as it costs less to make an effort to avoid potential threats than to deal with them when they occur. When doing this it is important to know where the risk areas are and focus oneâ&#x20AC;&#x2122;s attention to major risks. Ritchie, D. Marshall: 1993., p. 48 J. Gordon, R.W. Mondy, A.Sharplin, S.R. Premeaux 1990., p. 173. 4 H. F. Kloman: 2000. 2 3

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Risk management is a logical and systematic process that needs to be used when making decisions on increasing the efficiency and effectiveness of business operation. It is a means to an end, and not the end itself and needs to be part of daily work. Risk management means identifying and using opportunities for improving business operation, but also avoiding or reducing the odds that something might go wrong. The question may be raised as to when there is a need for risk management. Risk has to be managed all the time as all decisions involve managing one risk or another. In conclusion, by managing risks we can avoid some, but by no means all potential risks. The participants have to see the goals and risks in a realistic way. Risk management has to be supported by top management in order to be carried out consistently and often enough to yield results. Despite the development of many risk management methods and approaches, we need to be aware of the limitations, many of which are serious. It is necessary to select risk management methods that are in accordance with oneâ&#x20AC;&#x2122;s own needs and start with simple ones that may increase profits and thus win over those who resist the introduction of a risk management system.

3. ASSESSMENT FRAMEWORK ASSUMPTIONS The ability to spot, recognise and adequately treat risk can be viewed at different levels of management. However, a basic problem occurs at all levels of management in general, and thus of risk management as well â&#x20AC;&#x201C; creation of adequate conditions for solving problems, which can be seen as the relationship between required, necessary and available information. Figure 2: Necessary, required and offered information5

2 1 3

7 5

Source: authors' research

LEGEND 1. 2. 3. 4. 5. 6. 7.

Necessary information which is neither required nor offered Necessary and offered information, but not required Necessary and required information, but not offered Required information that is neither necessary nor offered Offered and required information, but not necessary Offered information that is neither required nor offered Necessary, required and offered information

Risk attitudes can be measured directly, on the basis of assessing the attitude to required information, i.e. by testing the knowledge and application of an adequate risk management process. Attitude to risks contributes to the condition and position of the company, and may be also assessed through indirect measurement and the assessment of the level of relative and absolute company performance through a system of indicators.

J. Tintor: 2000., p.155 J. Tintor: 2000., p. 312

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3.1. Indirect assessment Risk management contributes to successful operation of a company; the management’s attitude to risks can be indirectly assessed by measuring and assessing the relative and absolute success of the company, which can be accomplished by calculating indicators: individual indicators or a system of indicators. Indicators are defined as numbers which in a concentrated form comprise quantitatively expressed conditions.6 They are used to describe a company, i.e. they serve as the starting point for diagnosing the situation in the company and thus need to be made as precise as possible, and they can be an absolute or relative number. Indicators carry information that is necessary for making decisions and managing, i.e. their formation and calculation create the information basis for decisions, which suggests their significance. Groups of indicators include the following: debt indicators, liquidity ratios, activity indicators (turnover ratio), efficiency ratios, profitability indicators, investment indicators. Investment ratios are primarily designed for potential investors in the company as they measure the success the company has achieved for its owners. This group of indicators includes the following:

• Earnings per share indicator (EPS) is calculated as the ratio between net income minus dividends on preferred stock and the number of average outstanding shares.

• Dividend per share indicator (DPS) is calculated as a part of the net income reserved for dividends and the number of outstanding shares. DPS reflects the dividend distribution policy, but may also point to future business operation.

• Dividend Yield is calculated as the ratio between annual dividend per share and the price per share.

These investment indicators are highly developed and are widely used in countries with developed market economy, where capital markets are also fully developed. However, as Croatia, as well as other countries in transition, has not sufficiently developed its capital market, these indicators cannot be applied for assessing the success of companies and thus it is not possible to assess the attitude of managers to risks on the basis of these indicators. In conclusion, if there is no strong link between successful operation, financial reports and the capital market; profitability indicators (earning power) and the investment indicators are two sides of the same coin.7 However, due to previously mentioned limitations of investment indicators in Croatian circumstances, in most companies these indicators cannot even be calculated, and in companies where they can, their applicability is questionable due to the undeveloped capital market and thus its lack of transparency. Regardless of all the deficiencies, there is, nevertheless, the need to measure the company’s performance and compare it to other companies, to the industry averages or to the averages for the entire economy. It is fair to say that for companies in transition, and thus for Croatian companies, indicators such as ROE may be the most appropriate, especially ROA as the peak indicator which reflects the company’s fundamental goal. They can prove the (in) ability of the management to use available assets appropriately and manage them in a way that allows making appropriate net profits.

3.2. Direct assessment Managerial attitude to risks can also be measured and assessed directly, on the basis of assessing the attitude to required information, i.e. by testing the knowledge, perception and application of appropriate risk management procedures and processes. The quality of management is considered to be one of the most important factors of company efficiency, particularly its decision-making style. In other words, it is the quality of decision-making as the central function of management representing the core of the management system and process that is in the focus of attention. Consequently, it is the managers who are in charge of managing business risks as they generally make decisions including those on risks. As risk is part of any decision, when making decisions, managers at the same time manage risks. Given the functions and essence of management, any research should include the following variables: planning and setting goals; organisation and communication; motivation; leadership; decision-making; control. Goals are defined as the desired future situations in the company, and planning is an activity involving setting desired goals and establishing ways of achieving them. Managers at all decision-making levels plan and set various goals applying one of 6 7

J. Tintor: 2000., p. 336 J. Tintor: 2000., p. 336

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the usual approaches: top-down, bottom-up or a combination of the two. The top-down approach to setting goals is typical of a centralised decision-making system and an autocratic leadership style, where it is difficult to ensure appropriate motivation for achieving goals. On the contrary, with the bottom-up approach, planning and setting goals starts at lower levels, everybody participates in setting goals and thus have less difficulty accepting them. This approach is appropriate for organic, decentralised organisational structures. In order to find out which approach is applied by managers of Croatian companies it is necessary to investigate how goals are set and whether people resist them. The managerâ&#x20AC;&#x2122;s attitude to risks may also be measured and assessed by investigating their knowledge of, respect for and application of risk management processes, which involves their knowledge and application of process stages in the right order, and their knowledge and application of risk management instruments and methods. Elements of the risk management process include the following: context setting, identification, analysis, assessment, risk treatment and supervision and control.

4. RESEARCH FINDINGS In accordance with the previously developed concept and method for assessing and measuring the managerial attitude to risks, research has been conducted in company "X". Indirect measurement of risk attitudes has been carried out by measuring the realisation of the profitability indicator in the period 2008-2011 on the basis of data from the Profit and Loss Account and the Balance Sheet. The following indicators have been calculated: return on assets (ROA); return on equity (ROE); gross profit margin; net profit margin; net profit. The following table shows the realisation of indicators in the monitored period: Table 1: Profitability indicators for company "X" in 2008-2011 No

Indicator

2008

2009

2010

2011

ROA %

2.98

1.00

0.53

-4.35

ROE %

3.65

1.23

0.63

-4.68

gross profit margin % 6.47

2.21

1.33

-11.55

net profit margin %

6.88

2.49

1.76

-9.95

net profit /loss

11,639

3,913

2,011

-14,920

Source: authors' research

The achieved indicators suggest continuous fall in the monitored period. As the gross profit margin indicates the efficiency and ability of the management to manage sales prices, costs, the scope of activities, and the net profit margin, apart from already mentioned, indicates managing interest (cost of financing), the table suggests that in the monitored company the managers do not manage the stated areas efficiently, which leads to the decline in net profit and thus the decline in the worth of the company. ROA indicates the ability of the management to use the available assets economically, and ROE indicates their efficiency in using available capital, thus realising the interest of the owners. The realised indicators suggest that the management failed to use the available assets economically and that they failed to use the available capital efficiently, which resulted in loss, and, consequently, a decrease in the worth of the company. Thus the management managed to achieve the opposite of the target function of any company, i.e. the increase in the companyâ&#x20AC;&#x2122;s worth. The inability of the management to manage the entire operation of the company efficiently leads to their failure to achieve expected business results, i.e. suggests relative and absolute inefficiency of operation. This is clearly shown in the following graphs.

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Graph 1: Profitability ratios in company "X" in 2008-2011

Source: authors' research

Graph 2: Net profit/loss made by company "X" in 2008-2011

Source: authors' research

Direct measuring of the managerial attitude to risks was carried out through a survey based on a structured questionnaire distributed to twenty-one managers at all levels of management in company "X". Based on their answers to individual questions, the following conclusions about management can be drawn:

• • • • •

young (71.4% aged 31-40); mostly married (76.2%); well-educated (81.0% have a bachelor’s and the others a master’s degree); slightly more women (57.1%) than men (42.9%); mostly economists (66.7%), specialising predominantly in marketing (52.4%).

Questions which measure risk attitudes directly may be grouped in the following way:

• questions focusing on recognising the management’s views on the existing organisational structure of company "X" • •

were supposed to help identify the level of objectivity in the management’s awareness and knowledge of the distribution of authority, and thus the established management functions in the company; questions focusing on the decision-making process and the process of spotting, recognizing, evaluating and analysing risks were supposed to reveal the characteristics of management in relation to the extent of risk and the nature of the risk management process; questions focusing on informal or private risk inclinations were supposed to confirm or model the parameters obtained in previous groups of questions.

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Even though, judging by the answers to the question about their position, all levels of management seemed to be equally represented, the answers to the next question about how many organisational levels they are away from the top differed a lot. Namely, as many as 57.1% believe they are three or more levels away, and none of them thinks he/she is just one level away, which suggests a complex and complicated organisational structure, where it is not quite clear who is at what level of management. Such answers suggest that authorities and responsibilities are not clear and transparent either. The respondents have been in their present position for 4.3 years on average, which indicates relatively slow recruitment change, and the majority of managers previously worked as clerks (38.1%) or heads of department (28.6%) for 6.1 years on average. When asked to define their authorities to make independent decisions, 47.6% says they are authorised for making decisions about some operational costs 28.6% say they have no authorities, which leads to the conclusion that the decision-making system is rather centralised and that there is virtually no management as we know it, as those who make no decisions can hardly be called managers. Asked about the risk level of daily decisions, 66.7% of respondents say that certain decisions are risky 33.3% claim that they are not in charge of making risky decisions, whereas none of the respondents says their decisions involve taking risk, which suggests that they lack understanding of and do not perceive risk as such because every decision some degree of risk. This conclusion is also supported by answers to the question about risk taking circumstances, where none of the managers recognizes risk as using a potential opportunity and the majority (57.1%) sees risk, as something negative, a loss to be avoided. Looking at and measuring some variables ranging from –3 to +3 it is obvious that the majority believes they are personally inclined to taking risk (average grade of +1.5), and that it is the company that is not willing to get involved in risky ventures (average grade of –0.3), which would suggest that the company is run by some other managers and not themselves. The level of necessary information is also highly rated (+1.7), and their own speed of making decisions is rated the highest (average grade of +2.0), which may also indicate making rash decisions. This claim is additionally reinforced by answers about ranking individual stages in the risk management process (which, actually, correspond to the decision-making stages), where the risk analysis, next to establishing context, received the lowest average grade of 3.0 on a scale of 1 to 5. With answers related to delegation, it is significant that a mere 19.0% of managers delegates decisions, and the others either make decisions themselves (42.9%) or cannot answer this question (38.1%), even though the majority of 90.5% say they use a combined approach to planning. The fact that 2/3 of managers are prepared to postpone decisions is also indicative. As regards the stages of the risk management process, the respondents mostly perceive them and evaluate them with grades from 2.9 to 3.95 on a scale from 1 to 5, which means that all risk management stages are highly rated, the highest grade being given to the risk assessment stage and the supervision and control stages, and the lowest to the stages of establishing context and analysing risk. Answers to the questions about private, informal inclinations to risk suggest that the managers are generally not inclined to taking risk. A majority of 71.4% have life insurance, and 81.0% of them do not take out travel insurance nor invest in securities. Additional investments are mostly reduced to real estate (85.7%), which is one further variable indicating risk awareness. The majority (66.7%) only occasionally takes bets, while others never do it, 57.1% of them sometimes play the lottery, while none of them gambles. The conducted measurements have confirmed that the attitude to risks can be recognized from the relationship/ratio between the level of necessary information resulting from the nature of risk on the one hand and required and available information on the other.

5. CONCLUSION The company operates inefficiently with a downward future trend. Based on this fact and the results of indirect measuring and assessment of the managers’ attitude to risks, we may conclude that the management does neither know nor understand, and thus cannot apply appropriate procedures for perceiving and acknowledging risk. To summarise, the management does not have risk management skills and, consequently, has no attitude to risks. Also, based on the researched sample and direct assessment of their risk attitudes we may draw the conclusion that the management in this company does not perceive risk as an opportunity but mostly as a loss, i.e. managers neither perceive nor acknowledge risk nor do they recognise the stages of the risk management process. The company’s corporate culture does not encourage entering uncertain, risky deals. This has resulted in current inefficiency, which has been proved through indirect assessment. Thus the results of the direct assessment of risk attitudes coincide with those of the indirect assessment, i.e. there is correlation between the two, which confirms the initial hypothesis that it is possible to measure and assess risk attitudes both directly and indirectly.

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REFERENCES 1. 2. 3. 4. 5. 6. 7.

J. Gordon, R.W. Mondy, A.Sharplin, S.R. Premeaux: "Management and organizational behavior", Allyn and Bacon, Boston, 1990 H. F. Kloman: "Risk Management Reports", article "Global Risk Management Standards and Definitions", September 2000 H. F. Kloman: "Risk Management Reports", article "Iconoclastic View of Risk", December 2000 H. F. Kloman: "Risk Management Reports", article “The Risk Spectrum”, March1998 B. Ritchie, D. Marshall: "Business Risk Management", Champan&Hall, London, 1993 Standards Associations of Australia, "Risk Management (AS/NZS 4360:1999)", Strathfield, 1999 J. Tintor: "Poslovna analiza: koncepcija, metodologija, metode", HIBIS, Zagreb, 2000

DETAILS ABOUT AUTHORS: M.SC. JOSIP KERETA TRIGLAV OSIGURANJE D.D., ZAGREB josip.kereta@triglav-osiguranje.hr KATARINA LUKETA, MF UNIVERSITY OF APPLIED SCIENCES VERN’ – ZAGREB katarina.luketa@vern.hr MIRNA VARLANDY SUPEK, B.A. UNIVERSITY OF APPLIED SCIENCES VERN’ – ZAGREB mirna.varlandy-supek@vern.hr

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KNOWLEDGE MANAGEMENT IN KNOWLEDGE SERVICE NETWORKS DAGMAR LESAKOVA

ABSTRACT

Complexity of knowledge services in business requires involvement of various competencies. Hence, many services are offered nowadays by networks. As a consequence, individual firms can concentrate on their distinctive competencies and by combining them with the distinctive competencies of partner firms, such a network is able to offer complex knowledge services of high quality and with acceptable prices. The success of such a network depends mainly on the effective and efficient combination and use of the distinctive competencies of the network partners. The ability to combine and to employ distinctive competencies represents the core competency of the network as a whole and can be seen as a management task in knowledge sharing. Engaging in a network brings certain problems with it, especially the leakage of knowledge that can ultimately erode the network´s core competency. Such a threat can be faced by clearly identifying the phases of the service production process and developing solutions to the particular problems during each phase. The objective of our paper is to indicate the problems evolving in the process of knowledge generation, knowledge transferring, knowledge storage and knowledge adaptation in knowledge service networks. Recommendations on how to reduce and eliminate problems arising among partners in the network have been developed in the personal, technological, organizational and cultural aspects. The research was conducted in the framework of the project VEGA 1/0612/12. KEYWORDS: knowledge services, knowledge management, knowledge service network, distinctive competence.

1. INTRODUCTION The nature of knowledge has been explored in many different disciplines, such as philosophy, sociology, psychology or business sciences. Gradually, two concepts of the nature of knowledge have emerged: a cognitivist and a constructionist concept. The cognitivist concept understands knowledge as a representation of the world that consists of a number of objects or events, which are represented in the human brain. In this concept knowledge is explicit and objective, and can therefore be stored or transferred between persons or organizations relatively easy. The constructionist concept, based on new ideas from neurobiology, cognitive science and philosophy, understands knowledge not as an act of representation, but as an act of subjective creation of reality by an individual person. Michael Polanyi, who has set fundamentals to research about knowledge and knowledge management is using a constructionist concept of knowledge. Polanyi describes knowledge as something manifestly personal, consisting of two complementary parts: „What is usually described as knowledge, as set out in written words or maps, or mathematical formula, is only one kind of knowledge; while unformulated knowledge, such as we have of something we are in the act of doing, is another form of knowledge“ (Polanyi, 2009). Polanyi later explained this distinction between explicit and tacit knowledge with his famous, often cited statement „We know more, than we can tell“, describing the tacit part of knowledge (Polanyi, 2009). It is important to note that knowledge is never completely tacit or completely explicit.In our article we use knowledge as an individual subjective construction based on information and experience in order to solve problems. The management of knowledge is often seen as a process. This process of knowledge management incorporates the phases of knowledge generation, knowledge dissemination, knowledge use and knowledge storage. Considering a network structure, this means that the knowledge of all network partners must be identified in order to combine it to a desired result. Missing parts of knowledge have to be developed internally or obtained from outside the network. Besides combining the distinctive competencies, transfer of knowledge is another crucial task for the network knowledge management. Knowledge held by individuals or by small groups of individuals within the network could be transferred, while organizational knowledge of the network partners could not be transferred. Organizational knowledge does not seem to be transferable, because it cannot be grasped as a whole by an individual.

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2. MANAGEMENT IN KNOWLEDGE SERVICE NETWORKS The core competence of the knowledge service networks consists in the ability to combine the distinctive competencies of the network partners with the external factors in order to produce unique services for the customer. It can take a form of a simultaneous combination of (asymetric) competencies of the network partners at the time when the service is produced or a transfer of knowledge that enables the network partners to execute needed tasks. Examples for knowledge services provided by networks can take a form of various councelling and advisory business services, focused on management consultancy, and provided by a network through the combination of distinct capabilities. The ability of the network to combine the distinctive competencies of the network partners in order to produce special services for the customer can be seen as the core competency of such a knowledge service network. For instance in the business merger / acquisition projects, or internationalisation projects, experts in management, law, finance and international business work together by sharing their knowledge in order to successfully execute certain tasks. Specialized knowledge (e.g. knowledge about finace and markets of the merging companies, knowledge about international relations and so on) is necessary for successfully completing the process. This knowledge is often individually provided by management consultants, financial institutions and law firms. These firms sometimes cooperate together on contract basis, but sometimes these specialized firms build a network, in which they work together with each other. An example for knowledge service network, with intensive transfer and multiplication of knowledge can be found in franchise networks. The franchisor and the franchisee are working on a long term contractual basis, providing services. The knowledge of the franchisor is multiplied, when the franchisee is providing the same service in different regions. The transfer of knowledge needed to provide these services is the major task in order to enable this service business model.

3. PROBLEMS ARISING IN KNOWLEDGE SERVICE NETWORKS Management in knowledge network is faced with several problems in its attempt to combine the distinctive competencies of participating network partners.

3.1 Knowledge generation Knowledge is a critical input that helps individuals and, on a higher level, organizations to solve problems and to be competitive. A knowledge service network intends to solve complex problems in order to provide unique services to the customers. The quality of the output depends much on the transparency of existing knowledge ownership within the service network. The optimal combination of individual knowledge and external information from the customer can only be achieved if every network partner (if possible every individual in the network, depending on the size of the network) reveals his capabilities. This revelation does not mean that knowledge has to be revealed completely. But parts of the existing knowledge should be codified explicitly in order to get a clear picture of the abilities, which an individual or a network partner has. The mere revelation is in this sense the necessary condition. The creation of transparency between partners is the condition for an effective combination, transfer and application of knowledge. The importance of the identification of knowledge resources and capabilities is the fundamental factor for effective partner selection. (Barney, 2002). Ignorance regarding the knowledge resource identification was identified as a main barrier for not transferring knowledge within the firm. On the one hand the knowledge holder did not know, that his knowledge is needed, and on the other hand, the knowledge seeker did not know, that somebody else had the particular knowledge, which he was looking for. Therefore it is an essential task for a network management to identify existing knowledge resources in the network. As a result all partners involved in the service production process must have an overview of the knowledge-base of the network. In order to achieve this task, network management has to overcome several barriers. One problem could be â&#x20AC;&#x17E;hiding of knowledgeâ&#x20AC;&#x153;, meaning that individuals or organizations do not reveal their capabilities, trying only to profit from the knowledge of other network partners. The other extreme is an overestimation of own capabilities. Organizations can declare to be capable of doing something or having some kind of knowledge resource in order to become a member of the network. If not all necessary (in order to fulfill the task) knowledge is existent within the network, the missing knowledge must be generated either by transferring knowledge from outside the network or by developing new knowledge internally. Generating knowledge requires from the network management to overcome some barriers. Typical transfer problems include motivational problems concerning the motivation of the knowledge owner (knowledge source) to make knowledge available. Additionally, the nature of the knowledge could cause problems, especially for the recipient, who must be able to learn, and to use the transferred knowledge.

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3.2 Knowledge transfer Successfull transfer of knowledge can multiply capabilities within the network, because the partner providing knowledge does not lose the transferred knowledge, while the recipient can build up a useful new capability for the network. Franchise networks rely on the simple transfer and replication of knowledge. On the other hand the transfer of specialist knowledge is demanding, expensive and time consuming, or sometimes impossible because of the tacitness of individual knowledge and organizational knowledge in particular. Additionally, the transfer of specialist individual or organizational knowledge could endanger the competiive advantage of organizations because the core competency can be imitated. As mentioned before, a fundamental condition of knowledge transfer is the knowledge holderÂ´s (an individual) willingness and motivation to share his knowledge. Secondly, the individuals must be able to reveal their knowledge (knowledge holder) on the one hand and to integrate and adapt knowledge (knowledge seeker) on the other hand. If the transfer of knowledge is not suitable, the goals could be achieved through the collaboration between individual knowledge holders. Through combination of the distinct competencies of the network partners the network can provide superior service based on a unique combination of capabilities and resources within the network. Management of knowledge service network therefore has to find the right mix between combination and transfer of knowledge within the network.

3.3 Knowledge application The duty of the management in knowledge service networks is to ensure, that the transferred knowledge is applied and the collaboration is working smoothly. Problems concerning the application can result from the distrust among partners. The distrust syndrome describes the situation, when the knowledge recipient does not trust the qualities of the network partner, believing that his own capabilities are superior. Unfortunately, there is no objective method of measurement, which could provide arguments to convince the recipient about the superiority of the knowledge delivered. Serious problems could also arise from misunderstanding and problems in the collaboration between the network partners. Collective knowledge comes from individuals working together. Through collective working, shared knowledge and understanding, the network is capable of solving problems, which an individual alone would not be able to solve. Therefore network knowledge management has to support a smooth collaboration in order to develop collective knowledge.

3.4 Knowledge storage and embodiment The main task for network management during the last output phase of the management process is to reduce or eliminate the threat of losing core competencies. On the level of the network partners, every network partner tends to acquire as much knowledge as possible from the collective knowledge and from the partners capabilities, and to give back as little knowledge as possible from its own organization. In the working process during the collaboration it is possible that network partners imitate or copy the distinctive competencies of other partners. A successful imitation could lead to the loss of competitive advantage of the particular network partner. The knowledge network management has also to deal with the knowledge â&#x20AC;&#x17E;storageâ&#x20AC;&#x153; problems. The network partners can fluctuate over time; some of them can leave the network. Therefore it is the management task to guarantee that knowledge and capabilities developed during the collaboration can be continuously used, independent from the presence of the individual partner.

4. MANAGEMENT OF KNOWLEDGE NETWORKS Positive effects of knowledge transparency could be achieved by two different approaches: signaling and screening. Signaling means that each network partner is responsible for explicating his knowledge. Positive effects of signaling are low administrative costs. However, there is no guarantee that the method alone can lead to initiating the explication of all relevant and valuable knowledge. On the other hand screening means that the manager within the network has the duty and is responsible for constantly screening the knowledge base. In spite of the fact, that this approach is more costly, knowledge screening proved to be more efficient than knowledge signaling and is therefore the preferable solution. Only a screening process can provide the complete revelation of knowledge form the partners in the network.

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The principal task of the network management is to develop routines for processes, to build and hold actual database about the competencies and abilities existing within the network. Network management has to create an environment that motivates sharing of knowledge between the network partners. Knowledge seekers must be able to get in contact with knowledge holders. The exchange of knowledge could be fostered by technology, and by technological solutions, like e-mail, intranet and appropriate search and retrieval software, which are known as facilitators of knowledge sharing. These technological solutions can help people to get in touch with each other and to exchange information. It should be the task of the network management to develop motivating situations, so that knowledge holders are willing to transfer their knowledge to knowledge seekers within the network. The motivation of a network partner could be either extrinsic motivation or intrinsic motivation. Extrinsic motivation occurs when a partner is able to satisfy his needs indirectly, through monetary compensation. (Larsson, R., Henriksson, K., Sparks, J., 1998). On the other hand, intrinsic motivation results from an activity which is satisfying the provider by itself. Intrinsic motivation is valued for its own sake. Besides the intrinsic motivation at the level of network partners, a balanced use of incentives and sanctions is beneficial. It might be useful to implement an evaluation system in which all network partners can evaluate each other. A positive assessment by other partners can function as a basis for financial benefits. Continuously negative assessment can lead to exclusion from the network. Even if the motivation and coordination problems are solved, it is possible that the knowledge transfer process will fail. The reason for this can be the inability to adapt the knowledge received. The receiver of knowledge has to modify or adapt the transferred information. This process of adaption is a learning process. A learning-friendly culture should be established and maintained by the network management in order to support the transfer of knowledge within the network. If the transfer of knowledge is too difficult because of the tacitness of knowledge, because of learning problems, or because of motivational problems from source or recipient of knowledge, the rotation of personnel as another form of knowledge combination could be an effective way of applying the knowledge within the network. The rotation of personnel can be a very effective means of facilitating pesonal knowledge. By bringing together people with different experiences and abilities, network management can foster a common understanding as well as new innovative knowledge combinations in order to develop and sustain competitive advantage for the network as a whole. Experience indicates that individual knowledge holders have a tendency to resist towards using knowledge created elsewhere (i.e. by their network partners), since they do not trust the quality of the shared knowledge. In this context the main problem facing network management is to find solutions for the syndrome of distrust.Three possible approaches to solving this problem can be identified: influencing the culture in the network, providing the right infrastructure for knowledge sharing and introducing appropriate incentives at the network level. Trust towards the quality of the knowledge provided by the network partners is the basis of overcoming this type syndrome. Culture of trust is of highest importance to knowledge networks. Since distrust often comes from not knowing the knowledge provider, it is necessary for the network management to support to know each other better. That can be done by organizing informal meetings or by job-rotation.

CONCLUSION Knowledge is the key to developing and sustaining competitive advantage, especially in knowledge service networks. The task of knowledge network management is difficult. It is even more difficult, when the object of implementation is a network instead of an individual firm. It is documented that networks have substantial advantages compared to firms, especially in the provision of knowledge services: in uncertain environment it is a necessity nowadays to cooperate between firms in a network. Such a network combines the distinctive competencies of the network partners in order to produce an outstanding network core competency. Engaging in a network brings certain problems with it, especially the leakage of knowledge that can erode the networkÂ´s core competency. Such a threat can be faced by clearly identifying the phases of the service production process and developing solutions for the particular problems during each phase. Solutions include personal aspects, technological aspects as well as organizational and cultural aspects. Personal aspects are relevant to guarantee efficient transfer and application of knowledge on the individual level. Organizational and cultural aspects are relevant to enable smooth cooperation between network partners on an organizational as well as individual level. Technological aspects have an influence in systems of sharing and use of knowledge. The role of networkÂ´s management in these processes and in ensuring an effective knowledge network functioning is essential.

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LITERATURE 1. 2. 3. 4. 5. 6. 7.

Barney, J. (2001). Resource-based theories of competitive advantage: A ten-year retrospective on the resource-based view. Journal of Management, Vol. 27, No. 6, p. 643-650. Barney, J. (2002). Gaining and sustaining competitive advantage. 2nd Ed., Upper Saddle River. Borgatti, S.P.-Cross, R. (2003). A Relational View of Information Seeking and Learning in Social Networks. Management Science, Vol. 49, No. 4, April 2003, p. 432-445. Jarillo, J.C. (1998). On strategic networks. Strategic Management Journal, Vol. 9, p. 31-41 Larsson, R. - Bengtsson, L.- Henriksson, K. - Sparks, J. (1998). The Inter- organizational Learning Dilemma: Collective Knowledge Development in Strategic Alliances. In: Organization Science, Vol. 9, No. 3, May-June 1998, p. 285-305. Lesáková, D. (2010). Rozhodovanie manažérov v procesoch internacionalizácie malých a stredných podnikov. Journal of Economics, Vol. 58, No. 10, p. 1026-1038. Polanyi, M. (2009). The tacit knowledge. The Chicago University Press, 2009, USA.

DETAILS ABOUT AUTHORS: DAGMAR LESAKOVA PROFESSOR UNIVERSITY OF ECONOMICS BRATISLAVA, DEPARTMENT OF MARKETING BRATISLAVA, SLOVAK REPUBLIK dagmar.lesakova@euba.sk

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SYSTEMS CONCEPT OF EXPERIENCE IN TOURISM ROMANA LEKIĆ MARTINA MAJIĆ NATAŠA MANCE

ABSTRACT

Customers and tourists searching fulfillment of psychological and emotional desires nowadays have an enormous freedom of choice. As a result, it is difficult to catch the eye of the consumer. New methods of communication are needed to attract and create long-lasting relations with individuals and target groups. In a world where people are increasingly driven by self-expression, rather than survival-related values, we need a novel way of engineering. We need Imagineering, engineering for imagination, to realize the challenges of the experience economy. Imagineering is about managing relations with the customer, based on an integral experiential concept that affects ‘fans’ in the heart; it is about experiences at all contact moments with the guest; it is about using experiences that can permanently reach, touch, affect, and fascinate the guest. Imagineering has three elements: story, vision, and guidance. Imagineering combines story and vision, infusing them with guidance that gives people what they need to make the story a reality - motivation and rationale, role models, compelling drama, realistic situations, appropriate value struggles, all necessary instructions and precautions, to help their beloved product of imagination blossom in the world around it. In this paper Imagineering will be presented as a model for a powerful solution for tourist destinations to create long-lasting emotional bonds with individual guests. The objective of this paper is to explain how to create an experience-based systems concept to attract new tourists and to create memorable experiences with consumers. KEYWORDS: communication, experience economy, Imagineering, integral experiential concept, tourist destination.

1. FROM MASS TOURISM, TO RESPONSIBLE AND SUSTAINABLE TOURISM The Internet expansion damaged the place and credibility status of the narrative in tourism, the division to true and false, to reality and fiction. This change is reflected in the hyperconsumer society and is prompted by taste diversification, aesthetics and the way of life. The development of tourism began in the 19th century and its leisure philosophy followed the technological development by becoming the market for more leisure. The hyperconsuming society expands in the name of happiness, which makes tourism a mass phenomenon. Although there is more production and more consumption, Lipovetsky (2008) claims that we are sinking deeper into the crisis of the materialistic culture of happiness. Environment-related fears grow, there are calls for a different type of economic development, new religious movements and new spiritual aspirations. Tourism responds to the race for production growth and material pleasures by creating new interest centres through new types of tourism and special-interest tourism. These new prospects are increasingly directed towards responsible consumption as opposed to destructive consumption of mass tourism, so that they encourage life and become the instrument of its subjective adoption. Responsible sustainable toursim is a reaction to an insane race for production and material, oriented gains, towards pleasures and immediate interests, indifferent to long-term consequences such as destructive environmental pollution, degradation of biodiversity and global warming. In responsible tourism, the tourist is marked as a subject deserving of information and education, for he is given the task of utmost importance: saving the planet by changing everyday habits. The responsibility principle is a group category and concerns the makers of tourist experience and the consumers of such events. That is a response to the macroeconomic level of tourist industry, which is in the service of big business: touroperators as travel organizers, big hotel chains and transport companies. They exert pressure and excercise their power through hypermediation and digital reality. Various actions and control mechanisms affect individual behaviour through organisation models, schemes and plans. That is a method of direct behaviour configuration: learning, modification, education, guidance and control of individuals, along with directing the flow of emotions, emotional investment and organisation of events which appeal to senses. Tourist industry, at the macroeconomic level, identifies with the macropolitical level, and they act in a united manner through social practice and social order in which such practices exist. More specifically, at the level of tourist destination, that means manipulation by engaging masses, by synchronizing tastes, moving individuals and provoking emotions. This

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new individualisation is particularly apparent in tourism, as a kind of ‘second life’ and an exhibiton. We could say that, in practice, taht is the narrative method of profiling the consumer-tourist with entertainment and tourist attraction frequently being abused and hidden under the mask of heritage in tourism. The principle of entertainment selection and attraction in tourism often replaces the principle of authenticity, excellence and professionality. Irrespective of the econmic significance of creative industries, creativity is today recognized as a tool which makes it possible to make a creative experience in order to try to influence human behaviour. Managing experiences and moods of tourists within a tourist destinaton is of extreme importance. With his baggage, the guest brings expectations, and takes away memories. Disregarding its aesthetic values, creativity based on heritage today includes the creation of different attitudes and values and establishes emotional ties to a product, which is conducive to responsible tourism. By acceeding to the EU, Croatia enters directly into the process of cultural globalisation. Expectations include the disappearance of borders between the artistic and the commercial, between the unique and the industrial, the authentic and the imported. According to Castells and Himanen (2002), globalisation brings along the establishment of new cultural borders which are conditioned by the availability of new technologies, differences between urban pop-cultures and the multidimensional transformation into information societies. Many contemporary views on the future of technology and business put the individual and his experience first. The rising affluence and growing transience of people, places, things that created the material basis for today’s global, informational and networked society, it is argued, has led to an even greater change that occurs deep inside people’s minds that is slowly affecting society and the economy at large: The existential view of life is shifting from a largely externally oriented view towards a more and more internally oriented view. It no longer affects only the outside world, but also our inner selves, our experience that is driving our decisions and therefore shaping our consumption patterns. The economy transforms into an experience economy in order to support more and more people in their need of psychological selfdetermination and wellbeing. In a creative economy there is a growing need for high-level professionals who can create and innovate value from the experience position. Nowadays, people are driven more by values of self-expression than by those of rudimentary survival. They have a deep need to make sense of their lives in ways that are unique and personal. One of the most distinct ways in which this is manifested, is the new individual’s consumption pattern - by means of their choices they create their own identity. In our society, consumption is an absolute necessity, not a luxury. Experience management is seen as the way to remain competitive in markets where global competition and the Internet technology have turned products and services into commodities, bought and sold on price alone. There is also a growing research interest in understanding the individual consumer’s experience, drawing on behavioral, sociological and ethnographical approaches. Both the managerial and consumer perspectives see the goal of extraordinary experiences as personal growth and fulfillment. It is by providing a stage or space for this to happen that a company can attract and retain its customers. The growing relation between “market share” and “heart share” forces companies to formulate a “split vision”: simultaneously focusing on information and imagination, on reason and emotion. The addition of emotional possibilities expands the scope for competition.

2. EXPERIENCE MANAGEMENT – EXPERIENCE AS A BUSINESS OPPORTUNITY Pine and Gilmore (1999) say that sustainable competitive advantage can only be gained by giving the customer a unique and memorable experience. This is done through treating ‘work as theatre and every business a stage’. As this paper will show, this draws on Schechner’s (1988) Performance Theory and the service-as-drama metaphor of Grove, Fisk and Bitner (1993). Their approach has led to a growing number of management books on how to make the customer experience the centre of the organization’s strategic planning, marketing and operations (Shaw, 2005; Smith and Wheeler, 2002). The growth of Experiential Marketing is also significant for our sectors through the increased use of corporate hospitality and events, sports and arts sponsorship to associate brands with memorable experiences involving the senses and the emotions. Some writers (Nijs, 2003; Prahalad and Ramaswamy, 2004) has criticized the emphasis on staging performances as superficial and product-centered and call for a more strategic approach based on shared values, allowing the customer to create their own experiences in a search for personal growth. In this way the management strand is converging with the consumer strand. Experience can truly constitute a business opportunity. Any well-designed, managed, organized, marketed and finally successfully sold experience is a sound business opportunity. Pine and Gilmore (1999) stress the importance of the consumer in the very creation of the experience. Whenever a company intentionally involves and engages consumers, experience occurs. Moreover, this same experience connects all involved consumers, but each can experience it in a

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different way. The reason for that is that each consumer, each individual, has his or her own interaction with that experience, which depends on his/her emotions, interpretations, relationships, and the like.

3. TOURIST DESTINATION – THE SPACE OF CREATING EXPERIENCES Tourist destination has to make it possible to tourists to be more than observers, to become the protagonists of their travel, by establishing social contact with the local population. Since the tourist conveys his spirit and culture, such exchange enhances mutual understanding. A closeness that develops in such a way can be called ‘existential tourism’ (Dimanche and Ferry, 2003: 426-429). Travel (and tourism in general) touch all and leave noone indifferent, because everyone deals with emotion, memories, intimacy. Every individual will carry with himself the emotions experienced while travelling, which enrich and determine him. When selecting a destination and visiting a place, tourists seek intimacy. They want to see and know everything and feel a true bond. This wish makes it possible for a tourist to feel less foreign, and even feel a part of a tourist destination. If centerstage is taken by people, societies and culture, they cannot be discussed without considering their very essence. The human ‘territory’ is where tourism takes place. People and their environment make up a tourist destination. One does not exist without the other (Dimanche and Ferry, 2003: 426-429). According to Iso-Ahola (1980), personal and interpersonal motivation prevail in case of travel. He thinks that meeting new people in new places is an important part of tourist experience. Crompton (1979) adds that the ‘escape from everyday surroundings’ is a relevant tourist motivation. This means that tourists seek something different and that they are prepared to accept dangers arising from it: meet new people, change own attitudes, change the self-image. Tourism is really capable of being a privileged experience in which tourists not only express their personality, but can also change it and enrich it in relations with the local population they meet in the course of their travel (Dimanche and Samdahl, 1994). A tourist destination, as can be seen in the image (Figure 1), thus becomes an open system through the interaction with the environment and collective behaviour is a sum of individual behaviours. In such tourist destination interaction and evolution move in a non-linear manner and small change can result in a cascading effect. Figure 1: A Holistic Presentation of a Tourist Destination

Source: Elba Tourism Network, R. Baggio, 2010

If we observe a tourist destination as a stage, it is necessary to emphasize a dynamic component of tourism, especially the interaction that occurs when the tourist meets the destination in which there are people who live and work there. Tourism is, actually, a group of relations and phenomena and numerous factors impact upon the formation, behavior and consumption of participants in the tourism market. The destination is the point of convergence. Not only tourists, but all who meet them and provide for their needs and own needs, meet them culturally and establish

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social relations whith tourists, are the subjects of tourism. These can be individuals, institutions, organizations, etc. The space in which the experience is consumed is the Space of experience (Lorentzen and coll., 2007). Within that space, in the network of service providers and guests, there are resources, along with products and services based on them, and enriched by experience (Bieger and Wittmer, 2006). Experiences are mostly limited to particular parts of space and destination (Zouni and Kouremenos, 2008). However, within the framework of management of values for the consumer, i.e. management of moods, in the densely knit network of attractions, products and events (Lange and coll., 2008), events reach accross the entire destination. In such a way, it is possible, as defined by Pine and Gilmore (1999), to create a continuous positive experience charged with energy, which, due to its features, surpassed the limits of the existing geographical space. Atmosphere can be defined as one of the determining elements. The quality of experience should not be measured exclusively at attraction points, but in the entire space that tourists circulate in during their stay at the destination. This space can be marked as destination miles. The true challenge is to convert the space resource into the experience resource (Lange, Herntrei and Pechlaner, 2008). Thus, the experience chain has a special effect. It indicates that the experience does not need to consist of an uninterrupted chain of emotional experiences with no negative impressions that could interrupt the chain. Based on these continuous emotional moments, the mental system will produce the so called state of the mind (Groetsch, 2001). A tourist destination will, in the process of creating the tourism environment, use all resources it has at its disposal with the purpose of shaping the environment, i.e., shaping its offer. Furthermore, after the environment has been physically shaped, it will work on creating an impression, i.e., creating prerequisites for positive emotional reaction to its tourist environment. This presuposes the enrichment of offer with elements that directly affect the emotional structure of the tourist and encourage emotions that will surely lead to satisfaction. The destination that produces the emotional structure, or the appropriate tourist environment, will enable the visiting and staying tourist to feel and express his/her own satisfaction. According to Crompton (1979), a tourist destination serves as a medium which satisfies the social and psychological needs of the tourist. The elements of the tourist space, most of all the cultural landscape of the destination, are appropriate for the improvement or maintenance of the quality of life of an individual, because of focusing on the consumption of the tourist destination. The integral experience is the element of the landscape visited by tourists as the tourist environment (Michalko and Ratz, 2006), and can bring about changes in awareness that affect the quality of life. In the context of tourist destination, emotions provide to the tourist the navigation through the tourist destination, the dynamic experience of its offer, and finally serve as criteria for its evaluation. If the destination environment proactively affects the tourist and his emotional consumption experience during his stay, the tourist’s satisfaction is ensured. A positive emotional reaction, together with a sufficient intellectual stimulus, can result in a total experience and generate a new visit and profit.

4. ‘STORYTELLING’ AND THE ‘SCHECHEREZADE STRATEGY’ IN THE IMPLEMENTATION OF HERITAGE INTO THE TOURIST PRODUCT Twitchell James (2005), the author of the Branded nation said that ‘one of the most important discoveries of modern times is the fact that human beings relate to products through stories. That is why our everyday life is impregnated by stories’. In order to sell a tourist destination and enhance its competitiveness at the global market, in the public space satiated by information, and for the tourist offer to reach the target group, almost every piece of information is presented as a story. The image of a tourist destination cannot be left to chance, it becomes the object of narrative construction. Each personal memory of a tourist, each feature of the character, each experience, becomes a particle of a coherent narrative which is reflected in the brand of a tourist destination. In that context, the ‘invention of tradition’ (Hobsbawm, 1983), heritage in tourism, becomes a means to an end, a strategy for the collective unconscious, in which, like in a mirror, fragmented narrative elements get recomposed through the offer of a tourist destination. In order for the heritage to acquire the desired status of a brand, it is not sufficient any more to pour commercials over passive viewers. One has to provide a unique experience. Commercials are watched, brands are lived. Realistically, heritage often becomes abused, as a quest for the romanesque, in which the reality show becomes a stage. On this stage, heritage gets tagged as a tourist attraction and identified as desirable, thus determining its content, making it uniform, giving it a role, aspect and ideology. The tourist is turned into a mirror-man who only reflects things, without living them, thus becoming alienated and lonely. That is how a tourist destination becomes a stylist, a directora and the narrator for itself. Through a superficial implementation of the system of tourist attractions, in practise, we reach a paradox in which a tourist destination invents itself, by glorifying its own competitive values (struggle, strength, success). The aura of the

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heritage it is reflected through gives it an aliby to act honourably. Here, we encounter the fundamental problem of the man of the consumer society: he uses things, beings, phenomena, everything around himself, because the need to have, and not to be, has been imposed upon him. Michel Faucault points to the fact that in neoliberalism man is not perceived as a consumer, but as a producer, and that the aspiration is to replace the homo economicus – the ‘partner in exchange’ be replaced by the homo economicus – the self-entrepreneur. By putting the heritage concept into the context of a tourist destination, this means more than just ‘having a story’. Through the strategy of destination management and marketing, from the very start, special plots get built and identity is given - a mirror in which various groups of tourists will recognise themselves, in search of added value and emotional experience. In such context, heritage gets the function of division of narrative, through the system of presentation of tourist attractions. Techniques such animation increasingly uses, for the deconstruction of myth, for example, are found in the sphere of pedagogical and therapeutical work. It is a fact which does not justify, but provides a broader picture, that for a tourist destination the same rule applies as for a successful company. It has become increasingly dependent on how tourists, sponsors, public opinion, investors and shareholders perceive it. The decrease in the number of overnights is just as dangerous as the fall on the stock exchange. The rating of a tourist destination is the foundation for many other climbs at the market of political values in Croatia, because the success of a tourist destination is increasingly identified with the success of a tourist board, whose president is the Lord Mayor or the County Prefect. Cosmetics thus become more important than coherence, and beauty becomes synonimous of flexibility and adaptability, establishing the system of seduction signs, with the power of visualisation of information playing the central role in the cognitive processes of recognititon. We witness heritage being used as a story, often so that it is embellished and wrapped up to be presented to tourists. For that purpose, mechanisms of ‘storytelling’ (Salmon, 2011a) and the ‘Schecherezade strategy’ (Salmon, 2011b) are used. They integrate four functions: 1. Represent the heritage through a story which should construct the narrative identity of a destination (storyline), 2. Place the story in the time of the tourist season, manage the rhythm and narrative tension in the course of the entire season (timing), 3. Frame the message of the destination (framing), i.e. indicate tourist attractions as the main feature. 4. Create a network on the Internet and in the field, a hybrid and contagious community which will attract the attention and structure the desirable market niche of tourist (networking). The story provides focus and awareness of the relationship between the place and the theme. The experience of ‘the story’ can become the focal point in the development of a place. The ‘message’ is often placed in the forefront of the intended communication. Attractions have to be based on provoking a ‘change in view and attitude’ in a visitor. The ‘story’ is far more than a mere access to information. It enables visitors to identify with a place and the story which is offered exclusively in that place. The story has its purpose or objective and is not a purpose unto itself. An attraction will be successful only if it warns of something unusual or out of the ordinary. There is a strong need for that, and if it fails to achieve it, visitors can shape their own interpretation, invent their own stories based on their ideas, expectations and concepts. History does not derive from the past in a spontaneous manner, so that we can say that stories are a key instrument for the development of interpretative strategies. A fruitful cooperation between the ‘guardians of the past’ and tourist operators, on producing a cultural-tourist product can result in a powerful concept of communicating with visitors. The use of interpretation techniques at historical locations is crucial to providing a better understanding of particular historical remains to the visitor. Interpretation determines the rate of satisfaction of the visitor. It is important to stress that themes and stories do not limit further development. They need to be observed as the instrument of coherence in the tourist or recreational offer. Apart from that, it is important to have an integrated offer of facilities and experiences for visitors, which will make the rare and fragile remains of the collective past physically and intelectually accessible. Such discourse of tourism, as a cultural process, takes into account the subjective interpretation of the significance of individual tourists and the active construction of the experience in which the tourist takes part as an interactive factor and an active participant (Ateljević and Doorne, 2005; McIntosh and Prentice, 1999; Selby, 2004). Today’s tourist wishes to get familiar with the particularities of a tourist destination he or she is visiting. The intangible heritage is a part of that, and the tourist wants to experience it, but does not wish to be presented with the artificially created identity and product, with the ‘ideally depicted population and destination’ (Jelinčić, 2006:165). He wants a direct ‘contact with the local population’ (Kušen, 2002:13) and the current, actual situation at the destination. The insistence on certain selective phenomena imposed by others than the local community is often based on the particular historical moment which gets petrified and presented devoid of new meanings. It usually represents a burden for the tourist and for the community itself, which then becomes an object of presentation. The opposite of this is the feature of intangible heritage manifested in the changeable character of the identity of the community and the destination, which

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should be taken into account when shaping the tourist destination. Due to many factors, as has already been said, like globalisation, and IT-introduction as a part of it, changes in the earning patterns and view of the world and the society, the change of taste and aesthetics related to customs and tradition, the influence of neighbouring places, regions etc., the community, and especially its intangible heritage, are prone to change. ‘Identity is constructed and incessantly changed depending on social and cultural dynamics’ (Govers and Go, 2004:173). That is why ‘careful planning is called for in order to provide an experience to tourists, an authentic experience (Kušen, 2002:13), so that they absorb the true identity of a place’ (Govers and Go, 2004:173). That is why it happens that with the change in the structure of the population of an area, especially if the new inhabitants do not feel the existing identity as their own, the identity of a tourist destination changes, because ‘everything that arrived into a culture of a nation, that is left and preserved on the territory where it lives, belongs to the culture of that nation’ (Jelinčić, 2006:167).

5. CONSUMER EXPERIENCE VS. TRANSFORMATIONAL EXPERIENCE On the consumer side, a focus on experiences has appeared in response to the limitations of seeing consumer behaviour purely in terms of cognitive information processing. As Holbrook and Hirschmann (1982) said, experiences are subjective, emotional states laden with symbolic meaning. Consumption is hedonic, not utilitarian, particularly in leisure situations. A distinction is often made between everyday and extraordinary experiences (Abrahams, 1986). Many of the products in tourism and leisure involve skilled consumption (Scitovsky, 1976), physical or intellectual challenge and the sharing of experience with a community of like-minded people (Beard and Ragheb, 1983). The desired effect is the state of absorption in the activity (Csikszentmihalyi, 1976) called Energy Flow and motivation is a complex mixture of escapism, socialization and self-actualization (Ryan, 1997). Where the managerial and consumer perspectives converge is in their view of consumer satisfaction as something that emerges over the course of the whole experience, rather than as a response to individual attributes of the service. This requires new forms of research such as Experience Mapping (Schmitt, 2003) or theatrical scripting (Harris et al., 2003) of the critical moments of truth (Carlzon, 1987). Ethnographic and narrative research (e.g. Arnould and Price, 1993) are more likely to provide insights than quantitative methods. As the ecology in biology is complicated and multidimensional, so is the ecology of producing human experiences and transformations. We need to understand the different dimensions and parameters to manage and produce successful transformational experiences. To do this we need a clear conceptualization and frameworks of both the temporal and spatial context of the transformational offerings and processes. The transformative goals must consist of emotional, cognitive and behavioral transformations towards a sustainable lifestyle and sustainable values. This transformational experience has to be based on tourist participation and involvement in the experience product development process according to the by Boswijk et al (2007) suggested co-creation and self-direction development of experience production.

6. EXPERIENCE PYRAMID - IMPLEMENTATION OF TRANSFORMATIONAL EXPERIENCE PRODUCTION (TEP) Tourism and leisure industry in general, were faced with an emotion demand at the time of their initiation. The specific set of instruments that is applied in the world of tourism to respond to the emotion demand is referred to as “imagineering” and “engineering” for “imagination”. Imagineering is the art of management to combine soul and professionalism into “inspiring” business operations. Similar to marketing, it is a set of instruments that can be used to achieve commercial and social objectives. Contrary to marketing, it is not the customer/guest who constitutes the starting and end point, but a “creative thought” or a “vision statement” (the soul) of the company or organization.

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Figure 2: Integrating Maslow’s human needs into Experience Production and Experience Pyramid

Source: Modified after Maslow (1954) and Tarssanen and Kylänen (2007)

Instead of using Maslow’s hierarchy of needs for understanding guest Experiences Gelter (2007, 2008) proposed using his concept in a production perspective. In taking account all the levels of the “Pyramid of Needs”, the Experience Producer approaches a “Total Experience” concept when incorporating not only human need dimensions but also human dream dimensions (as proposed by Jensen, 1999). Using this theoretical concept for Experience production, the producer can easily construct a check-list for each level at each dramaturgical stage of the production, a kind of TEM protocol for Experience Production. This TEM-model also gives a base for the diagnosis of aspirants for personal transformation offerings which according to this model are based both on basic needs such as security, thrust, esteem etc. as well on personal dreams, goals of learning and changing. Thus when designing a transformational offering, this TEM concept can be useful. The next model is based on synthesis of various previous writings concerning the topic (see Tarssanen and Kylänen, 2007). The Pyramid approach suggests that the product should include six elements to be experiential: individuality, authenticity, story, multi-sensory perception, contrast and interaction. Through these elements customer’s experience proceeds from motivational level to physical, intellectual and emotional, even spiritual levels. This model represents an ideal type – the ‘perfect product’ in which every element of experience is reflected on the motivational, mental and physical levels. It is an explicit tool for finding critical points, qualities or deficiencies in the product. With the model service provider can analyze one’s product and discover ways to develop it (Tarssanen and Kylänen, 2007). Experience Pyramid has been successfully applied when developing various tourist experiences in Finnish Lapland and in Norway. It is currently used as a main framework in LCEEI’s product development services.

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CONCLUSION This paper attempts at making a further effort that will assist us in celebrating the project of self-possession, self-fashioning, self-expression; a project that sees all life as a constant achievement and all agreed-upon practices as techniques for simultaneously amplifying and questioning what it is we have agreed to in our own little groups. Thus “experience” and its associated vocabulary are elevated to the realm of the new holy word and not only in tourism. In this social dispensation, individuals may find a new redemption -- or at least a validation -- in the world of the here and now, even if it is no longer attached to a divinely sanctioned plan. Experience contains ordinary acts, from the casual to the most eventful occurrences. It embodies both meanings and feelings, the flowering of individual response that continually gravitates toward typicality, so that afterward we can find words to talk about what happened. The project of all of the humanistic disciplines has been to discriminate between the real and the unreal, the genuine and the fake, the realistic and the sentimental or fantastic, the verifiable truth (all those things we call “the facts”) and illusions, the misleading, the mystified, and the mythical. Humanists seek insight into life as a means of living more fully themselves, of experiencing it more knowledgeably and more deeply, and thus being able to impart these techniques and this accrued knowledge and wisdom to others. In this paper the personal experiences cape is investigated in such a way that different guest experience dimensions are measured by different research approaches such as “Quality of Experience”, phenomenological, psychometrical and physiometrical approaches. Shown model measures the outcome of the Experience Production and the producer perspective of the Experience Economy with all the different dimensions of Experience Production Everyone has experiences that are both unique and typical, but sustainable tourism seems to have a way of organizing these doings so that they may be shared. Implementation of Transformational Experience Production (TEP) into tourism can open for new innovative business concept within the transformational economy and innovative development of sustainable tourism. This proposed theoretical framework of TEP needs, however, to be analyzed in detail for practical implementations, further theoretical verification and finally verified by empirical data. Hopefully, this paper can stimulate such development of the Experience Economy.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

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Abrahams, R.D. (1986) Ordinary and Extraordinary Experiences. In: The Anthropology of Experience ed Turner V. Chicago, University of Illinois Press pp 45-72 Arnould, E.J. and Price, L.L (1993) River Magic: Extraordinary Experience and the Extended Service Encounter. Journal of Consumer Research, 20 (June) 24-35 Ateljevic, I., and Doorne, S. (2005) Dialectics of Authentification: Performing ‘Exotic Otherness’ in a Backpacker Enclave of Dali, China. Tourism and Cultural Change 3 (1) 1-27 Baggio, R. (2010) Tourism and quality of life, Zbornik radova međunarodne konferencije Encuentros, 27.-28.9.2010. Portorož Beard, J. and M. Ragheb. (1983) Measuring Leisure Motivation. Journal of Leisure Research. Vol. 15, No. 3. pp Bieger, T. and Wittmer, A. (2006) Integrierte strategische Planung von Attraktionspunkten. In: Pechlaner H., Bieger T. i Weiermair K. (eds.), Attraktions-Management. Fuehrung und Steuerung von Attraktionspunkten, Wien, Linde Boswijk, A., Thijssen, T. and Peelen, E. (2007) The Experience Economy – a new perspective. Amsterdam: Pearson Prentice Hall Carlzon, J (1987) Moments of Truth. HarperBusiness; Reprint edition Castells, M. and Himanen, P. (2002) The Information Societ y and the Welfare State: The Finnish Model. Oxford: Oxford University Press Crompton, J.L. (1979). Motivation for Pleasure Vacation. Annals of Tourism Research, 6(4), 409-424 Csikszentmihalyi, M. (1976) Flow: the classic work on how to achieve happiness. Rider paperbacks Dimanche, F. and Ferry, M. (2003) Shaping tourism destinations: Back to the basics. Tourism Dimanche, F. and Samdahl, D. (1994) Leisure as Symbolic Consumption: A Conceptualization and Prospectus for Future Research. Leisure Sciences, 16 Gelter, H. (2007) A story of interpretative guiding and experience production. pp. 26-59. In: IGU – Internordic Guide Education Project Report. Intereg EU Regional development Project. Lappia, Tornio Finland: Vocational College. Gelter, H. (2008) Interpretation and Total Experience Management (TEM) as innovative methods for sustainable nature based tourism – A benchmarking Analysis. Conference paper for the 17th Nordic Symposium in Tourism and Hospitality Research, Lillehammer, 25-27 September 2008 Govers, R., and Go, F. M. (2004) Stvoreni, zamišljeni i doživljeni identiteti: tri problema u modelu stvaranja imidža turističke destinacije. Turizam: 52 (2), 17 Groetsch, K. (2001) Psychologische Aspekte von Erlebniswelten. U: H.H. Hinterhuber, H. Pechlaner and K. Matzler (eds.) IndustrieErlebnisWelten – Vom Stiort zur Destination (pp. 69-85). Berlin: Erich Schmidt Verlag Grove, S.J. Fisk, R.P., Bitner, M.J. (1992) Dramatizing the service experience: a managerial approach in Advances in Services Marketing and Management (Swartz, T. A. Brown, S. and Bowen, D. eds) Greenwich, CT. JAI Press Inc. [Reprinted in: Gabott, M and Hogg, G. (1997) Contemporary Services Marketing: a reader. Dryden Press] Harris, R., Harris, K. and Baron, S. (2003) Theatrical service experiences, International Journal of Service Industry Management, Vol. 14, No. 2: pp. 184-19 Hirschman, E. and Holbrook, M. (1982) Hedonic consumption: emerging concepts, methods and propositions, Journal of Marketing, vol. 46, no. 3, pp. 92-101 Hobsbawm, E. and Ranger T. (1983) (ur.). The Invention of tradition, Cambridge:Cambridge University Press Iso-Ahola, S. (1980) The social psychology of leisure and recreation, Dubuque, IA:W.C. Brown Jelinčić, D. A. (2006) Turizam vs. identitet: globalizacija i tradicija. Etnološka istraživanja, 11, 161-207. Jensen, R. (1999). The Dream Society. How the coming shift from Information to imagination will transform your business. New York: McGraw-Hill Kušen, E. (2002) Turistička atrakcijska osnova, Znanstvena edicija Instituta za turizam, Zagreb

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26. Lange, S. Herntrei, M. and Pechlaner, H. (2008) From mobility space toward experience space. Increasing the experience value in tourism destinations. Paper presented at the Consumer Behavior in Tourism Symposium 2008. Bruneck, 13.12.2008. Italy 27. Lipovetsky, G. (2008) Paradoksalna sreća – Ogled o hiperpotrošačkom društvu, Izdanja Antibarbarus, Zagreb 28. Lorentzen, A., Hansen, C.J., Lassen, C.I. (2007) Small cities in the experience economy; an evolutionary approach /International conference: Regions in Focus? In: Conference abstract volume (p. 39) April 2nd -5th, 2007. University of Lisbon, Portugal. Seaford, UK: Regional Studies Association 29. McIntosh, A. J. and Prentice, C. (1999) Affirming authenticity: Consuming cultural heritage. Annals of Tourism Research, 26, 589-612 30. Michalko, G. and Ratz, T. (2006) The Role of the Tourist Milieu in the Social Construction of the Tourist Experience. In XVI Congress of Sociology: The Quality of Social Existence in a Globalising World, CD-ROM. Madrid: International Sociological Association 31. Nijs, D (2003) Imagineering: Engineering for Imagination in the Emotion Economy. In: Creating a Fascinating World, Breda, The Netherlands, NHTV 32. Pine, B.J. and Gilmore, J.H. (1999) The experience economy: work is theatre and every business is a stage. Boston Mass: HBS Press 33. Prahalad, C.K. and Ramaswamy, V. (2004) The Future of Competition: Co-creating unique value with customers. Boston, Harvard Business School Press 34. Ryan, C (Ed.) (1997, 2002) The Tourist Experience, Thomson 35. Salmon, C. (2011a) Storytelling: ili pričam ti priču, Clio, Beograd 36. Salmon, C. (2011b) Strategija Šeherezade, Clio, Beograd 37. Schechner, R. (1988) Performance Theory. Routledge. 38. Schmitt, B (1999) Experiential Marketing: How to Get Customers to sense, feel, think, act and relate to your company and brands. Free Press 39. Scitovsky, T. (1976) The joyless economy, Oxford University Press, Oxford 40. Selby, M. (2004) Understanding Urban Tourism: Image, Culture and Experience. I.B. Tauris: London 41. Shaw, C (2005) Revolutionize Your Customer Experience Basingstoke, Palgrave Macmillan 42. Smith, S. and Wheeler, J. (2002) Managing the Customer Experience: turning customers into advocates. Harlow, FT Prentice Hall 43. Tarssanen and Kylänen (2007) A Theoretical. Model for Producing Experiences: A Touristic Perspective, Lapland University, http://www.ulapland. fi/contentparser.asp?deptid=8073 44. Twitchell, J.B. (2005) Branded Nation: The Marketing of Megachurch, College Inc., and Museumworld, Simon & Schuster DETAILS ABOUT AUTHORS: ROMANA LEKIĆ, PHD HEAD OF TOURISM DEPARTMENT romana.lekic@vern.hr MARTINA MAJIĆ, PROF. CHAIR OF TOURISM STUDIES martina.majic@vern.hr NATAŠA MANCE, M.A. LECTURER - TOURISM STUDIES natasamance@hotmail.com FOR ALL AUTHORS: VERN’ UNIVERSITY OF APPLIED SCIENCES ZAGREB, CROATIA

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GENDER AS A SIGNIFICANT BUT PROHIBITED RISK FACTOR IN LIFE INSURANCE JANA ŠPIRKOVÁ MÁRIA SPIŠIAKOVÁ

ABSTRACT

There are significant differences between females and males in their accident risk and mortality risk. The costs of providing insurance products that cover these risks, including motor insurance, private medical insurance, life insurance and pension annuities, differ between men and women. Gender is used in addition to, and in combination with other risk factors and, for some products, gender is, after age, the second most important risk factor. This paper brings analysis of the ban of the use of gender as of a risk factor in life insurance, with special stress on premiums for life insurance and pension annuities, according to the requirements of the European Court of Justice. Premiums and annuities are modeled by life tables for both genders and unisex in the conditions of the Slovak Republic. KEYWORDS: Risk Factor, Gender, Entry Age, Interest Rate, Life Expectancy.

1. INTRODUCTION According to the Official Journal of the European Union (EU) of 13 January 2012, Article 5 of Council Directive 2004/113/ EC of 13 December 2004 guarantees equal treatment between men and women in the access to and supply of goods and services, regulates the use of actuarial factors related to sex in the provision of insurance and other related financial services. It contains an exemption allowing member states to permit the use of gender in the calculation of premiums and benefits. Subsequently, Council Directive 2007/43/EC, Article 5(1) provides that for new contracts concluded after 21 December 2007, the use of sex as an actuarial factor in the calculation of premiums and benefits must not result in differences in individuals premiums and benefits (the unisex rule). Article 5(2) provides for derogation from this rule by allowing member states of the EU to maintain proportionate differences in individual premiums and benefits, where the use of sex is a determining factor in the assessment of risk based on relevant and accurate actuarial and statistical data. However, on 1 March 2011, the Court of Justice of the European Union declared Article 5(2) invalid with effect from 21 December 2012. ECJ declared Article 5(2) incompatible with Articles 21 (non-discrimination) and 23 (Equality between men and women) of the Charter of Fundamental Rights of the European Union. National governments of member states will be obliged to change their laws accordingly by this date. For more information see . Insurers will no longer be able to use a person’s sex as a factor in calculating the cost of their insurance. This paper is organized as follows: Section 2 explains the basic actuarial formulas for evaluation of net annual premiums of the basic life insurance products. Section 3 brings graphical illustrations of a dependence of net annual premiums for term life and endowment insurance according to entry age regarding gender and unisex. Moreover, this section illustrates the size of monthly annuities regarding gender and age of retirement. At the end, we give some remarks and schemes of our next investigation.

2. PRELIMINARIES Life insurance and annuities will be affected by the ruling because they are based on life expectancy, which currently takes gender into account. Women live longer than men – their life expectancy is higher, compared with men – which means that women pay higher premiums than men because the pension fund will have to last longer whereas men’s annuities generally cover a shorter time period. Women generally pay less for life insurance – in the case of death, but more for insurance in the event of survival. Women generally pay more than men for income protection insurance, because the rates of disability are higher for women than for men. We recall the main actuarial formulas for deeper understanding of our work. It can be written as follows. Below, you can find the mentioned formulas, expressed by commutation functions, for example in (Gerber, 1997; Sekerová, et al. 2007; Špirková, et al. 2012).

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At the beginning we recall the basic notations which are used on an evaluation of mentioned products. They are: i - a technical interest rate; q - an accumulated factor, q = 1 + i; w - a discounting factor, v = 1 / q; m - a number of paid, resp. paid out annuities within one year; y - a start saving age; x - a retirement age; n - a number of years of saving on personal pension account, n = y = x; A - an yearly annuity during the period of saving; l - a number of living at age x; d - a number of deaths at age x; ω - a maximum age to which a person can live to see (regarding used life tables is here ω = 100; p - a programed withdrawal from an accumulated value at the beginning of retirement time (in percent); z - a quotient of the m-thly paid out pensions within r years (in percent); r - a number of years of payment of a quotient of the certain pensions.

2.1. Insurance for the case of survivor Insurance for the case of survivor (endowment insurance) is a policy under which its face value is payable only if the insured survives to the end of the stated endowment period; no benefit is paid if the insured dies during the endowment period. The standard formula for calculating net annual premium Px,n̅ for an x-aged insured with the insured sum in the amount of | one monetary unit is given by [1]

where [2]

is a single net premium of Endowment insurance on one monetary unit of the insured sum, and

represents a net single premium of yearly annuities in the size of one monetary unit payable in advance during n years; expressed by corresponding commutation functions Dx = lx ·vx,

[3]

2.2. Insurance for the case of death Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person. Net annual premium of the term life insurance for an x-aged insured during the insured period of n years is given by [4]

where

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represents the net single premium of term life insurance.

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2.3. Insurance for pension annuities The basic formulas related to evaluation pension annuities are as follows. The net single premium of the yearly term life annuities in advance in the size of one monetary unit for an x-aged insured is given by (3). The net single premium of the yearly whole life annuities in advance in the size of one monetary unit for an x-aged insured is given by [5]

The net annual premium of whole life annuities and also other actuarial functions are usually evaluated for integer ages and terms, assuming that cash flows are payable annually. However, annuities are very often paid more frequently than annually, namely monthly, quarterly, but also semi-yearly. In various sources, we can find well known formulas for evaluating of certain and expected annuities which are paid more frequently than annually. The present value of m-thly paid annuities , and its extension influence the size of future pension annuities. In our model we evaluate the accumulated value of certain annuities in advance as a future accumulated value of funds from which pension annuities will be paid out. We introduce a model of basic formulas for determination of monthly annuities from the third pillar pension. Monthly pension annuities can be determined as follows [6]

where the accumulated value of temporary certain annuities of 1/m monetary unit ing n years is as follows

which are payable in advance dur[7]

where q = (1+i) is an accumulated factor with a technical interest rate i = 2.5 % p.a. and [8]

is the expected present value of the whole annuity of one per year, payable to the entry aged x with 1/m at the beginning of each m-thly period, where is the present value of the whole life yearly annuities in the amount of 1 monetary unit. A is a yearly payment of annuities during n years, represents a real accumulated value over duration time n, p represents the first higher pension (in percent). Remark 1. For more precise evaluation we can apply a precise formula for -thly pension annuities, which is given by [9]

where [10]

represents extended version of the formula (8), where μx as the force of mortality for an individual age x. The value δ = ln(1+i) represents the so-called force of interest. For more information see (Špirková, Spišiaková, 2012), (Špirková, Urbaníková, 2012).

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Remark 2. m-thly paid pension annuities can be modified according to the requirements of clients. For example, they can be expressed as follows

where is the coefficient of the survivorÂ´s pension arrangements during years, the value is the net single premium of the whole life insurance for an -aged client with the policy value of one monetary unit. It can be expressed by commutation functions as follows

where

and

number of deaths at age x.

. Commutation function Cx is the discounted

3. LIFE EXPECTANCY AND PREMIUMS According to the latest World Health Organization (WHO) data published in April 2011, life expectancy in Slovakia recently is 71.7 for men, 79.7 for women and total is 75.6 years, which gives Slovakia a World Life Expectancy ranking of 53. (Figure 1.) Figure 1: Life expectancy according to entry age (Slovak Republic, 2011)

Source: authors

The investigation covers three of the main products, where such a differentiation applies in the European insurance sector: endowment insurance, term life insurance, pension insurance. In our analysis, we assume an insurance on the policy sum in the amount of the 1,000 euros and insurance duration years. We calculate net annual premiums by life tables of the Slovak Republic separately for male, female and unisex tables, which were determined with respect to a technical interest rate 2.5 % p.a., (Mortality tables, 2012).

3.1. Net annual premium for the case of death Since statistically women live longer than men, life insurance in the case of death had historically been cheaper for women than the equivalent cost of a policy for men of the same age.

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With unisex pricing, there would be large differences between the expected lifetime benefits from term life insurance policies for men and women, as men have a higher mortality risk for any given ten year period than women. Figure 2 shows graphs of dependence of net annual premium for term life insurance according to entry age with respect to male, female and unisex life tables. Figure 2: Net annual premium for term life insurance (in the case of death)

Source: authors

Policies for men are now cheaper and those for women are more expensive. Based on the data available for the Slovak Republic, women (aged 20 to 40 years) could see a rise in net annual premiums of around 87.45 % on average; men could see a premiums reduction of around 32.06 % on average with respect to unisex. (Figure 3.) Figure 3: Percentual change in net annual premium for Life insurance with using unisex life tables

Source: authors

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3.2. Net annual premium for the case of survivor Statistically, women live longer than men. Figure 4 shows the dependence of the net annual premium for endowment insurance according to the entry age of the insured person. Based on the data available for the Slovak Republic women (aged 20 to 40 years) could see a reduction in net annual premiums of around 5.14 % or more on average; men could see a premiums rise of around 6.18 % or more on average in comparison with unisex. Figure 4: Net annual premium for Endowment

Source: authors

In Figure 5 we can see the rise (reduction) of net annual premium for endowment insurance with using unisex life tables according to entry age. Figure 5: Percentage changes in net annual premiums for endowment with using unisex life tables

Source: authors

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3.3. Monthly pension annuities In our model we assume that an insured person at the age of 18 saves 30 euros monthly in a pension company during the whole duration time until retirement. In Figure 6, you can see the dependence of the amount of monthly pension according to entry age separately for male, female and unisex according to (6). Based on the data available for the Slovak Republic with a technical interest rate 2.5% p.a., men (aged 55 and more) could see a reduction in pension income from pension annuities of around 12 % or more on average; women (aged 55 and more) could see pension income rise by around 8 % or more on average. Moreover, additional costs could arise from insurers applying a gender mix risk premium due to the risk of adverse selection. There could also be additional marketing costs due to a ban on the use of gender. Figure 6: Monthly annuities according to retirement age

Source: authors

4. CONCLUSION According to Van Dijk Reinder (2012) on average, insurance actuaries expect the difference in male and female life expectancy in Europe to persist in future. Thus, there will continue to be a difference in life expectancy for new customers of life products and hence with gender based pricing, premiums will better reflect the personal risk of each insured individual than in the case of a single unisex premium. Now, insurers will not be allowed to use claims data highlighting that young male drivers have considerably higher accident rates and claims costs than young women when setting premiums. A male driver under 21 is twice as likely to have an accident as a woman of the same age. This will mean that women drivers under the age of 25 will see their premiums rise, while their male counterparts should see their rates decline. There has been some speculation that insurers will maintain high premium levels for young men and raise rates for young women drivers to match these. In our next investigation we want to determine so called common unisex life tables by aggregation of male and female life tables with respect to different weights for individual sexes. All values and graphs were evaluated and constructed by VBA MS Office Excel 2010 system.

ACKNOWLEDGEMENTS The authors were supported by the Project: Mobility - enhancing research, science and education at the Matej Bel University, ITMS code: 26110230082, under the Operational Program Education co-financed by the European Social Fund.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9.

10.

In order to Gerber, Hans.U. et al. (1997). Life Insurance Mathematics. Springer-Verlag, Berlin Heidelberg New York. Mortality tables. (2012). 10 Mar. 2012. <http://portal.statistics.sk/showdoc.do?docid=2464>. Official Journal of the European Union. (2012). “Information from European Union institutions, bodies, offices and agencies.” 13 Jan. 2012. 10 Aug. 2012. <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2012:011:0001:0011:EN:PDF>. Sekerová, Viera., Bilíková, Mária. (2007). Insurance Mathematics (in Slovak). Bratislava: Ekonóm. Špirková, Jana, Spišiaková, Mária. (2012). Gender and Extended Actuarial Functions in Pension Insurance. StatistikaStatistics and Economy Journal No. 4/2012. Špirková, Jana, Urbaníková, Marta. (2012). Actuarial Mathematics-Life Insurance (in Slovak). Bratislava: Iura Edition, spol s r.o. Urbaníková, Marta. (2008). Financial mathematics (in Slovak). Nitra: Constantine The Philosopher University. Van Dijk, Reinder. (2011). ”The impact of a ban on the use of gendre in insurance on consumers.” 10 Sep. 2012. <http://www.gdv.de/wp-content/uploads/2011/12/Oxera_Praesentation_Impact_of_ban_of_gender_in_insurance_2011.pdf>. World Health Organization (2012). 10 May 2013. <http://www.worldlifeexpectancy.com/slovakia-life-expectancy>.

DETAILS ABOUT AUTHORS: JANA ŠPIRKOVÁ PROFESSOR FACULTY OF ECONOMICS, MATEJ BEL UNIVERSITY BANSKÁ BYSTRICA, SLOVAKIA jana.spirkova@umb.sk MÁRIA SPIŠIAKOVÁ PROFESSOR FACULTY OF ECONOMICS, MATEJ BEL UNIVERSITY BANSKÁ BYSTRICA, SLOVAKIA maria.spisiakova@umb.sk

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ECONOMIC AND PSYCHOLOGICAL APPROACH TO THE STUDY OF HUMAN RATIONALITY ALEKSANDAR MOJAŠEVIĆ

ABSTRACT

In this paper, the author analyzes the assumption of human rationality from the perspective of the neoclassical economic theory and the behavioral economics theory, with specific reference to the rationality of litigants. In particular, the author focuses on exploring whether the assumption of human rational behavior, which has been used for developing the standard models of neoclassical economic theory, is realistic, and whether the findings stemming from these models are accurate and reliable. Seeking answers to these questions, the author focuses on the empirical findings of Behavioral Economics, a new theory developed primarily by cognitive psychologists. The comparison of these two theories has opened new perspectives in understanding human rationality and raised the issue of future development of Economics, as a science of rational economic choice, and the Economic Analysis of Law, as a discipline that uses economic methodology to study certain legal phenomena, such as rational behavior of litigants. Hence, the author discusses whether the impact of psychological research leads to redefining the methodology of neoclassical economics and the standard economic analysis of law. KEYWORDS: psychology, economics, law, rationality, litigants

1. INTRODUCTION The general public as well as experts from various scientific fields (lawyers, economists, psychologists or members of other social disciplines) may be baffled by the name of the scientific discipline called Behavioral Law and Economics. The perplexity stems from the established habits and practice in the domestic academic community to draw conclusions about the subject matter and the method of a scientific discipline from the name of the scientific discipline. Considering that the first term (behaviorism) is commonly encountered in psychological literature whereas the remaining two terms (law and economics) are used in legal or economic literature (respectively), there is a dilemma: why are the three distinctive terms contained in the name of a single discipline? In order to address this question, there is a need to determine the method and the subject matter of the discipline which has been given such an elaborate name: Behavioral Law and Economics (BLE). This question is particularly significant given the fact that the BLE is not a widely recognized discipline in the local academic community, particularly in the legal community which the author of this work belongs to. In standard dictionaries of psychology,1 the term behaviorism (derived from the English word behavior) is defined as an approach in the contemporary American psychology. The main proponent of this approach was a well-known behaviorist J. B. Watson who explicitly defines psychology as a scientific study of [human and animal] behavior. Yet, the underlying question is: is there any connection between human behavior and the subject matter of legal science or economics? First, there is an obvious correlation between human behavior and the subject matter of economics (or economic analysis) since economics is defined2 as the scientific study of human behavior, providing that: 1) the resources for satisfying various human needs are scarce; 2) human needs are indefinite and individuals face different choices; and 3) individuals demonstrate rational behavior, i.e. their behavior is determined by maximizing (or minimizing) a certain value. In this standard definition of economics (or economic analysis), there are some terms which are commonly encountered in the psychological literature: (human) behavior, human needs, rationality, etc. The correspondence of these standard terms in two different sciences (psychology and economics) reflects certain correlation between them. But, the focal point of interest in this paper is the rationality of human behavior. As previously noted, the assumption of rationality (rational human behavior) requires precise definition because it is the necessary requirement for ensuring the “full legitimacy” of the economic science.3 In that context, it is inevitable to address a number of questions. What kind of

See: Trebješanin, Ž. (2001.) Rečnik psihologije, Stubovi kulture, Beograd, p. 50. The definition of economics taken from: Begović, B. (et al.). (2008.) Ekonomija za pravnike, Pravni fakultet Univerziteta u Beogradu, Izdavački centar, Beograd, p. 36. A similar definition can be found in: Nikolić, Lj. (2011.) Osnovi ekonomije, Centar za publikacije Pravnog fakulteta u Nišu, Niš, p. 16. 3 The rational behavior is a methodological assumption, and economics is defined as the science of rational choice. Any other kind of (irrational) behavior would be the subject matter of other disciplines. See: Begović, B. (et al.). (2008.) op. cit., pp. 37-38. Obviously, rationality (rational behavior) is the conditio sine qua non of the economic science. On the one hand, it is a sustainable behavior which guarantees human existence and, on the other hand, it is a dominant behavior of economic entities (individuals and companies alike). See: ibid., p. 38, fn. no. 18, and p. 41, fn. no. 21. 1 2

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human behavior does the notion of rational behavior imply, and is such methodological assumption sustainable? How does the science of psychology define human rationality, and does it cast a different light on this notion which is the “cornerstone” of neoclassical economics?

2. NOTION OF RATIONALITY LIn foreign literature on economic analysis of law,4 rationality is basically defined as a purposeful choice of an individual. In domestic literature,5 rational behavior is defined as maximizing behavior, i.e. the behavior which maximizes some value (such as, utility enjoyed by individuals), which subsequently generates other maximizations (e.g. the maximization of profit). In domestic theory of economic analysis of law,6 rational behavior is defined as behavior that maximizes some goals for the given costs or behavior that minimizes costs for the given goals. Therefore, these definitions indicate that the notion of rationality is primary associated with the notion of maximization, which implies7 that, given a set of available alternatives, an individual will prefer the one that generates the highest utility value. The notions of rationality and maximization are always associated with the individual who chooses or the individual who makes a decision. This assumption, which is primary used in economic science, is known as methodological individualism; it implies that an individual and his/her preferences are the subject matter of analysis and observation rather than the collectivity (state, society). Yet, it implies a specific theoretical construct of perceiving an individual as homo economicus, an abstract human being characterized by a set of distinctive features. First of all, homo economicus has stable and well-organized preferences, as well as an ability to make rational decisions by taking into account alternative actions (options). Second, for any given goal, homo economicus uses the available resources in a manner that ensures their minimum wastage. This kind of use has an instrumental value, for which reason rationality is reduced to instrumental rationality.8 Instrumental rationality is the most efficient and effective way of achieving a specific goal and, as such, it is the axiom of maximizing behavior.9 Third, the goal of a rational agent need not necessary be egoistic and focused on self-satisfaction (although it is usually such10); this theoretical construct may also refer to an individual who may wish to pursue some interests other than one’s own. Last but not least, the concept of homo economicus is based on the following premises: more is better than less; the law of diminishing marginal value; and the demand for goods drops as costs rise. 11 Despite the appeal of elaborating on the concept of homo economicus in more detail, the presented characteristics will be sufficient for the purposes of this article; hereinafter, homo economicus will be regarded as a rational utility maximizer. Yet, this concept gives rise to a couple of questions: what is the significance of behaviorism (as a psychological discipline) in explaining rational behavior, and what are the implications of that explanation to the current status of economic science? Furthermore, how are behaviorism and economics related to the legal science? In the author’s opinion, these general issues can best be observed by exploring modern psychological research findings that question the rationality of litigants. In the course of addressing these issues, the author will critically reflect on the rationality assumption and deviations from rational behavior in certain social situations, with specific reference to the litigation proceedings and the rational choice between a trial and a settlement.

This definition is taken from: Schäfer, H., Ott, C. (2004.) The Economic Analysis of Civil Law, Edward Elgar Publishing, Cheltenham, UK, Northampton, MA, USA, p. 51. 5 It is textbook literature. See: Begović, B. (et al.). (2008.) op. cit., p. 37. 6 See: Jovanović, A. (1998.) Uvod u ekonomsku analizu prava, Savet projekta Konstituisanje Srbije kao moderne pravne države, Centar za publikacije Pravnog fakulteta u Beogradu, Beograd, p. 18. 7 See: Schäfer, H., Ott, C. (2004.) op. cit., p. 52. 8 Apart from the opinions where rationality is interpreted in terms of efficiency, there is the subjective meaning of instrumental rationality. For critical standpoints on both concepts, see in: Gaus, Dž. (2012.) O filozofiji, politici i ekonomiji, Službeni glasnik, Beograd, pp. 19-24. For the purposes of this paper, we will stick to the meaning of rationality interpreted in terms of efficiency. 9 According to Robert Nozick, the theory of instrumental rationality is the basic theory of rationality, i.e. “the basic state“, which is not required to prove, unlike other theories of rationality which must be proven. See: Nozick, R. (1993.) The Nature of Rationality, Princeton University Press, Princeton, New Jersey, p. 133. 10 The theory recognizes the so-called weak and strong form of egoism. The strong form of egoism usually refers to the homo economicus who is incapable of feeling either simpathy or antipathy to others, and who is interested only in maximizing his/her own utility. This form of egoism comes down to the maximization of wealth. 11 See: Gaus, Dž. (2012.) op. cit., pp. 31-39. 4

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3. CRITICISM ON THE RATIONALITY ASSUMPTION At this point, it may be worth noting that the rationality assumption has been criticized not only by the theorists originally belonging to non-economic scientific disciplines (such as psychology) but also by those belonging to the body of Economic Analysis of Law (hereinafter: EAL).12 For example, Ronald Coase, one of the founders of EAL, called into question the basic assumption of rational behavior which has been the cornerstone of subsequent experimental research of certain (cognitive) psychologists.13 This indicates that EAL theorists do not share the same theoretical position14 and that the concept of rationality assumption is one of the basic points of contention.15 In this part of the paper, the author draws attention to the fundamental criticism on the model of rational behavior.16 At the same time, it is essential to make a clear distinction between the critique on the rationality assumption and the critique concerning the rational behavior of an individual in specific circumstances. The first form of criticism questions the basic assumptions of neoclassical economics and calls for its modification; the second form of criticism draws upon a series of experimental studies in order to point out to the presence of behavioral anomalies. The criticism on the model of rational behavior may be traced back to the mid-20th century and linked to the work of the Nobel prize-winning economist Herbert A. Simon. 17 Simon shook the foundations of the neoclassical economic theory, based on the model of rational maximizing behavior or homo economicus (whom Simon designated as an economic man or administrative man), by introducing the concept of bounded rationality.18 In that way, he promoted the idea that individuals, as decision-makers, have limited cognitive abilities, insufficient mental capacity, as well as a lack of knowledge and information to maximize their utility. Instead of maximization, in pursuit of the best possible choice, this author recommends the concept of a satisfactory choice or a good-enough choice.19 But, today, there is a theoretical debate20 over the question whether the concept of a satisfactory choice is an alternative to the concept of maximizing (i.e. the concept of the best choice), and whether the concept of a good-enough choice is only a strategy of maximization. Arthur Leff21 also pointed out to the unrealistic feature of the rationality assumption, which is the basic feature of the standard economic models. His idea is governed by the fact that it is necessary for a further development and promotion of the neoclassical EAL to redefine its methodological assumptions by looking for support in other social disciplines, such as psychology and sociology.22

In the author’s opinion, Economic Analysis of Law or Law and Economics is no longer an unknown teaching discipline in Serbian law schools because it has been included in the law school curricula; however, as a scientific discipline, it has not been sufficiently promoted and presented to the academic audiences. For the purposes of this work, it will suffice to say that the EAL is a scientific discipline which, roughly speaking, correlates two different disciplines (Law and Economics) by “borrowing” the methodology of the economic science and the subject of the legal science. As these two scientific fields are indisputably intertwined, the objective of this paper is inter alia to highlight and promote the interdisciplinary approach to the study of social phenomena. 13 More information on the importance of Coase’s scientific work for the development of the EAL and criticism on his theoretical position, in: Jovanović, A. (2004.) Ronald Kouz. Ekonomski anali, No. 161, pp. 233-242. 14 It can be said that the EAL scientific body is very democratic, given the fact that there are different EAL schools and approaches. This discrepancy of opinions may shake the foundations of the existing EAL as a theoretical discipline (which is actually underway), and may have a considerable impact on its future methodological profile. In fact, the explanation of the subject matter and methodology of the BLE, as one of the numerous approaches within the EAL, is aimed at elaborating on the future course of development of the EAL. More information on different schools and approaches within the EAL in: Jovanović, A. (2008.) Teorijske osnove ekonomske analize prava, Pravni fakultet Univerziteta u Beogradu, Izdavački centar, Beograd. 15 The neoclassical theory of EAL recognizes the rationality assumption, which is used for modeling the rational behavior of individuals in different social contexts. For example, there are well-known economic models of litigation used for testing the rational behavior of litigants and other participants in the civil procedure. That behavior depends on the incentives created by different legal rules. See, for example, Miceli, T. (2004.) The Economic Approach to Law, Stanford University Press, Stanford California. 16 Here, we do not wish to undermine the findings of neoclassical economic models derived from the assumption of human rationality but to point out to the tendency in the EAL theory aimed at modifying this basic assumption. The author’s opinion on this controversial issue will be provided later on in this paper. 17 The scientific opus of Herbert Simon speaks for itself. He is a scholar who has pushed the boundaries in various scientific fields: economics, psychology, computer science, etc. His most prominent scientific contribution is the development of the theory of decision making in business organizations, for which he received the Nobel Prize. See: Aleksić, A. (2007.) Herbert Sajmon – inovator u oblasti poslovnog upravljanja i organizacije. Ekonomski anali, No. 172, pp. 128-138. 18 See: Simon, H. (1955.) A Behavioral Model of Rational Choice. Quarterly Journal of Economics, Vol. 69, Issue 1, pp. 99-118. 19 The introduction of the concept (model) of satisfactory choice is based on the psychological premise, i.e. the degree of aspiration which an individual adjusts based on his/her experience in order to satisfy some desire which is the driving force of individual actions. In analogy, an individual reaches a certain degree of satisfaction of utility, just as the company achieves a certain level of profits, a certain share in the market or in the sale of goods. See: Simon, H. (1959.) Theories of Decision Making in Economics and Behavioral Science. The American Economic Review, Vol. 49, No. 3, pp. 262-265. 20 See: Gaus, Dž. (2012.) op. cit., pp. 39-40. 21 For his extensive criticism on the premises of the neoclassical economic analysis of law which are contained in the famous book of Richard Posner Economic Analysis of Law, see in: Leff, A. (1974.) Economic Analysis of Law: Some Realism about Nominalism. Virginia Law Review, Vol. 60, pp. 451-482. 22 Ibid., pp. 469-474. 12

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The concepts of bounded rationality and opportunistic behavior23 have been accepted by the New Institutional Economics (NIE), as a new school of EAL, which started developing in the 1960s after the publication of the revolutionary article of Ronald Coase.24 Since the assumption of rational behavior is the basic premise of the Chicago School of EAL, its abandonment by the other direction of EAL supports the thesis of its gradual rejection or modification in accordance with the evolutionary development of the discipline. In fact, the rationality assumption gave impetus to researchers (mostly psychologists) to question its legitimacy in different social situations. Following these studies, EAL theorists gradually started accepting the new findings and incorporating them into their models, which eventually led to the development of a new direction of EAL, or a new and independent discipline, the Behavioral Law and Economics (BLE), whose subject matter and methodology are presented in this paper.

4. QUESTIONING SOME ASPECTS OF THE COASE THEOREM Any work of this nature and content must necessarily highlight the researches of two prominent behaviorists: Daniel Kahneman and Amos Tversky. Their theory, the so-called prospect theory,25 has expanded horizons in understanding human rationality in decision-making, challenging the findings of the standard expected utility theory. Generally speaking, this descriptive theory describes the choice between several risk-involving options, under the assumption that the individual is aware of the likelihood of different outcomes. In this regard, Kahneman and Tversky suggest26 that in the real world individuals tend to rely on simple rules generated through the evolutionary process or learning, which serve as a guide in (individual) decision-making processes. In theory, there is the so-called cognitive heuristics, an experience-based technique which is used in order to speed up the process of finding a favorable outcome.27 Using this technique of cognitive heuristics, individuals may rank the expected outcomes they encounter. More specifically, an individual ranks the expected outcomes on the basis of the so-called reference point,28 which serves as a demarcation line between the outcomes which are assessed as favorable outcomes (gains) and the outcomes which are assessed as unfavorable outcomes (losses). The process of coding the expected outcomes has an impact on the individual’s behavior by driving his/her behaviour towards chosing a particular option. According to the above cognitive heuristics criterion, there are several decision making effects. The first effect is designated as loss aversion,29 which implies that individuals are prone to negatively assess a loss from a specific reference point. For example, a house-owner would be willing to sell the house (which is perceived as a loss) at a much higher price than he/she would actually be willing to purchase the same house (which is perceived as a gain). In this case, it is obvious that the willingness to pay for some asset differs from the willingness to accept compensation in the event of revoking title to the same asset (endowment effect).30 This finding is inconsistent with the findings of the Coase theorem; the findings show that, regardless of the initial allocation of property rights, the outcome of the exchange of goods will be identical, providing that the transaction costs are low. In other words, according to Coase, it is irrelevant whether a legal system assigns a specific (property) right to Person A or to Person B (as participants in the exchange); given the assumption of low transaction costs, the parties will get involved in direct negotiations and efficiently transfer the property right under any legal regime. Consequently, at the normative level (which implies devising preferable legal rules), the Coase theorem implies that it would be good to choose a legal rule only by following the criterion of minimizing the transaction costs of the exchange (or maximizing the welfare of the parties involved), given the fact that transaction costs are the key obstacle to efficient exchange.31

A behavioral assumption of opportunistic behavior can be described as the behavior of an individual guided by self-interest, at the detriment of another; as such, it is usually manifested in confusion, lies, deceit and the like. In order to exhibit an opportunistic behavior, the individual has to externalize the costs of such behavior to another. Opportunism is a result of bounded rationality and incomplete information. See: Jovanović, A. (1998.) op. cit., pp. 46-47. 24 See: Coase, R. (1960.) The Problem of Social Cost. Journal of Law and Economics, Vol. 3, pp. 1-44. 25 See: Kahneman, D., Tversky, A., (1979.) Prospect Theory: An Analysis of Decision under Risk. Econometrica, Vol. 47. 26 See: Kahneman, D., Tversky, A., (1973.) On the Psychology of Prediction. Psychological Review, Vol. 80, No. 4, pp. 237-251. 27 More in: Shanteau, J. (1989.) Cognitive Heuristics and Biases in Behavioral Auditing: Review, Comments and Observations, in: Accounting, Organizations and Society 14(1/2), pp. 165–177, available at: http://www.k-state.edu/psych/cws/pdf/aos89.PDF 28 For the role of reference points in the context of negotiations, see: Kahneman, D. (1992.) Reference Points, Anchors, Norms and Mixed Feelings. Organizational Behavior & Human Decision Processes, Vol. 51, Issue 2, pp. 296-312. 29 Ibid., p. 298. 30 More about it in: Kahneman, D. (et al.). (1990.) Experimental Tests of the Endowment Effect and the Coase Theorem. The Journal of Political Economy, Vol. 98, No. 6, pp. 1325-1348. 31 Rule A is preferable to Rule B in case it provides for a greater maximization of parties’ welfare. According to Coase, the choice between the two rules depends on the evaluation of theirs effects (ex ante evaluation), which is based on the criterion of maximizing welfare or minimizing transaction costs. But, the problem arises because the presence of the endowment effect calls into question this evaluation; namely, the BLE researchers determined that the value of an asset may sometimes vary depending on whether it is owned or not. If an individual owns a particular asset, he/she will put a higher value on it, which may eventually hinder the exchange. However, researches show that the presence and impact of this effect largely depend on the context. See, for example, Plott, C., Zeiler, K. (2005.) The Willingness to Pay-Willingness to Accept Gap, the ‘Endowment Effect’, Subject Misconceptions, and Experimental Procedures for Eliciting Valuations, American Economic Review, Vol. 95, No. 3, pp. 530–545. 23

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However, the abovementioned BLE finding changes this kind of perception on the choice of preferable legal rules, thereby changing the character of the legal policy at the normative level, which must take into account that the final outcome of the exchange depends on the initial allocation of property rights. This practically means that it would be good to find another criterion for the selection of preferable legal rules. The BLE theory32 specifies two selection criteria: the selection based on the impact of the selected legal rule on a third party (rather than on the parties involved in the exchange), and/or the selection based on the circumstances in which the revealed preferences of the participants in exchange present a more favorable basis for normative assessment. Another equally important consequence of decision-making processes based on the reference point is the fact that individuals are more willing to take risk to avoid a sure loss, while they would refuse to take such a risk to achieve a gain of equal amount.33 For example, an individual were asked to chose between a sure gain of 4,900 dinars (RSD) and a 50% chance to get 10,000 dinars, he/she would choose a sure gain of 4,900 dinars, regardless of the fact that the other option is (rationally speaking) more justifiable because it has a higher expected value (5,000 dinars). On the other hand, if an individual were asked to choose between a sure loss of 500 dinars and a 50% chance of losing 1,000 dinars, he/she would choose the risktaking option, regardless of the fact that both options have an identical expected value (500 dinars). The example shows that individuals are systematically more inclined to assign more value to the current situation (status quo) than to change it, regardless of the fact that the change may generate a higher expected value. Also, the prospect theory seems to indicate that the process of devising options (alternatives) which individuals may encounter, such as a gain or a loss (the so-called framing effect), may have an impact on their decisions, their attitudes towards risk and the behavior stemming thereof. This finding has important implications for litigants, particularly in terms of the dilemma involving the choice between resolving a dispute in a court of law or by settlement. These issues will be discussed below.

5. OTHER BEHAVIORAL ANOMALIES AND THEIR IMPLICATIONS In addition to the aforesaid behavioral anomalies that impose certain limitations to the functionality of the Coase theorem, the BLE theory has identified some other deviations from rational behavior. Considering that a comprehensive overview of all behavioral anomalies would go far beyond the scope of this paper, the author provides an overview of the most representative behavior anomalies identified by BLE theorists. Another behavioral anomaly is related to the criterion governing the assessment of costs and benefits in decision-making processes. It is usually considered that a rational person relates that criterion only to future costs and benefits. But the BLE theory34 criticizes that kind of conventional reasoning and emphasizes that individuals exhibit a tendency to make a decision based on the costs that have already been sustained (sunk costs). Ignoring these costs can lead to erroneous predictions.35 Also, when assess the value of certain assets, individuals often exhibit an inability to calculate the highest missed gain stemming from its alternative use (ignoring opportunity costs).36 Furthermore, researches37 show the tendency to miscalculate probability, especially in case of assessing the occurrence of a low-probability event, which is frequently underestimated. It seems unnecessary to explain what kind of implications this (wrong) assessment may have on the decision to take precautions in certain social situations (for example, in traffic). Furthermore, researches38 show that people exhibit a strong tendency to overestimate the likelihood of a particular outcome pro futura, once they experienced the same outcome in the past (the so-called hindsight bias). This occurs because people believe that their past predictions were more accurate than they actually were. Owing to this tendency, their future predictions may be inaccurate, or overestimated. Psychological studies39 explain this phenomenon by the action of three independent mental processes: the first is related to the impression of inevitability, the second one pertains to the impression of predictability, and the third one refers to the distortion of memory (incorrect memorization). The BLE researchers also indicat40 a tendency towards exaggerated optimism (the so-called optimism bias). Individuals believe that the probability of occurrence of bad events is lower than

See, for example, Jolls, C. (2006.) Behavioral Law and Economics, Public Law and Legal Theory, Research Paper No. 130, John M. Olin Center for Studies in Law, Economics, and Public Policy, Research Paper No. 342, pp. 6-8. Available at: http://ssrn.com/abstract=959177 33 See: Kahneman, D. (1992.) op. cit., pp. 297-298. 34 See: Jolls, C. (et al.). (1998.) A Behavioral Approach to Law and Economics. Stanford Law Review. Vol. 50, pp. 1482-1483. 35 According to the conventional view, it follows that the price at which buyers are willing to buy a thing would be equal to the price at which the seller is willing to sell the same. Studies show that this view is erroneous since the relationship between the sale price and the purchase price is at least two to one. See: ibid. 36 See, for example, Sch채fer, H., Ott, C. (2004.) op. cit., pp. 60-61. 37 See: Ibid., p. 62. 38 See, for example, Goodwin, P. (2010.) Why Hindsight Can Damage Foresight. The International Journal of Applied Forecasting. Available at: http://www. forecasters.org/pdfs/foresight/free/Issue17_Goodwin.pdf 39 See: ibid., pp. 6-7. 40 See, for example, Jolls, C. (2006.) op. cit., p. 14. 32

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it actually is. In certain social situations (e.g., air travel), this kind of belief can obviously have disastrous consequences. Because of this anomaly, the state prescribes a mandatory health insurance and social security. Another anomaly worth noting is related to the interpretation of information in accordance with one’s own interests (the so-called self-serving bias)41, which is particularly evident if there is a dispute between two or more parties. It seems redundant to further elaborate on how this anomaly can jeopardize the efficient dispute resolution by direct negotiations.

6. THE SIGNIFICANCE OF BLE IN UNDERSTANDING BEHAVIOR OF LITIGANS Roughly speaking, the standard economic models of litigation42 suggest that rational litigants prefer to go to a settlement rather than a trial43 because it puts them in a better position which is reflected in saving transaction costs of litigation, primarily the cost of legal services (e.g. lawyer’s fee). Along with the gradual development of the EAL, these economic models are augmented with variables that disrupt the conventional economic logic of litigants regarding the choice between a trial and a settlement;44 these variables may include: different information that the litigants possess on the probable outcome of the court proceeding,45 the strategic behavior of litigants,46 and other variables. With these variables, the economic models of litigation become more realistic. But a vast number of economic models (both basic and extended) assume that litigants are capable of rational judgment, which is predominantly expressed in evaluating various outcomes (a settlement or a trial) on the basis of their expected values. The creators of these economic models have not questioned the assumption of human rationality, i.e. the presumption of rationality of litigants in the context of civil proceedings. However, as mentioned above, Kahneman and Tversky, the creators of the prospect theory, have challenged this assumption by calling into question the implications arising from the economic models as well as the conclusions thereof. According to this theory, if a settlement offer is a sure gain, and the amount that is expected on the basis of a court judgment is an uncertain gain,47 individuals (litigants) will choose a sure gain (even if it is lower than the uncertain gain). But the question is how the litigants will behave if they evaluate one of the two potential outcomes (settlement or trial) as a loss. In this regard, some studies48 suggest that plaintiffs often evaluate the settlement payment as a gain, while defendants evaluate such payment as a loss. According to the prospect theory, it follows that the defendant will be more willing (than the plaintiff) to proceed with a lawsuit until the end of the civil proceedings. In other words, the defendant will be more willing to take risk in order to avoid a sure loss. All this indicates that the final outcome of the litigation proceeding largely depends on the litigants’ assessment of the expected outcomes. In addition, this assessment is largely subjective and clearly deviates from the standard economic reasoning based on the assumption of rationality of litigants. Another important implication is that the framing of outcomes as a gain or a loss can affect individuals’ behavior and decisions. It follows that the decision-making process is not as simple as the standard neoclassical economic theory postulates. There are many factors that influence the decisionmaking process of individuals (litigants). For example, in one experimental research,49 individuals preferred to accept the settlement amount that exceeded the amount of actual damage even though the probability of winning in trial and the amount of awarded damages received under the judgment remained unchanged (constant). This has challenged the assumption that individuals only want to maximize the wealth. This study, essentially, confirms the existence of psychological barriers in decision-making which ultimately affect one’s decision on the choice between a trial and a settlement. Individuals are not driven only by rational logic; for example, if a settlement amount has been offered by a party who is perceived to be immoral, the other party may reject the settlement offer, despite the non-profitability of the act of rejection.50

Ibid., pp. 14-15. The economic modeling of litigants’ behavior, and particularly the analysis of the choice between trial and settlement has been explored by Shavell, Cooter, Miceli and other (more or less known) American theorists of the economic analysis of law. See, for example, Shavell, S. (1982.) Suit, Settlement and Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs. Journal of Legal Studies, Vol. 11, pp. 55-81, or Miceli, T. (1997.) Economics of the Law – Torts, Contracts, Property, Litigation, Oxford University Press, New York, Oxford, pp. 156-180, or Cooter, R., Rubinfeld, D. (1989.) An Economic Analysis of Legal Disputes and their Resolution. Journal of Economic Literature, Vol. 27, No. 3, pp. 1067-1097. 43 Assuming that the civil proceeding has already been initiated by filing a claim. 44 The standard economic logic implies that the plaintiff will initiate a civil proceeding if and only if the cost of filing a claim is lower than the expected value of the claim. In addition, the plaintiff can expect a certain gain (payoff) from the claim on the basis of an agreed settlement or a court judgment. For example, on the basis of a mathematical calculation, a rational plaintiff estimates that the expected value of the settlement is positive, and it follows that he will agree to settle at that stage of the litigation process. Similarly, if the complaint is filed, a rational plaintiff can calculate the expected value of the trial in the first instance, or in the second instance court. See: Cooter, R., Ulen, T. (2004.) Law & Economics, Fourth Edition, Pearson Addison Wesley, Boston, San Francisco, New York, London, Toronto, Sydney, Tokyo, Singapore, Madrid, Mexico City, Munich, Paris, Cape Town, Hong Kong, Montreal, pp. 392-396. 45 See, for example, the model of asymmetric information created by Miceli: Miceli, T. (2004.) op. cit., pp. 248-250, or Savell’s model of asymmetric information: Shavell, S. (1996.) Any Frequency of Plaintiff Victory at Trial is Possible. Journal of Legal Studies, Vol. 25, pp. 493-501. 46 See, for example, the model of strategic behavior of litigants: P’ng, I.P.L. (1983.) Strategic Behavior in Suit, Settlement, and Trial. The Bell Journal of Economics, Vol. 14, No. 2, pp. 539-550. 47 We may accept that this is a fairly realistic presupposition taking into account the many variables that affect the litigation, including both the measurable ones (such as: the average duration of civil proceedings, the amount of litigation expenses) and the subjective ones which are difficult to measure (such as: bias and lack of knowledge of judges, incompetence and lack of professionalism of lawyers, and others). 48 See in: Rachlinski, J. (1996.) Gains, Losses, and the Psychology of Litigation. Southern California Law Review, Vol. 70, pp. 130-149 et seq. 49 See in: Korobkin, R., Guthrie, C. (1994-1995.) Psychological Barriers to Litigation Settlement: An Experimental Approach. Michigan Law Review, Vol. 93, pp. 107-192. 50 See in: ibid., pp. 109-110. 41 42

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Furthermore, the standard economic models focus on the outcomes, i.e. on the amount of money received from a settlement or a judgment. Yet, the question is whether the well-being of individuals (litigants) is determined only by the money generated from a settlement or a judgment. In other words, there are other factors that may have a considerable impact on the individuals’ well-being, such as the possibility to participate in the civil proceeding. Litigants may prefer going to trial because it gives them the opportunity to exercise certain interests that are not necessarily economic in nature; in that case, the encouragement to resolve the dispute by settlement may be perceived as a threat to their interests. Moreover, litigants may perceive the settlement-promoting policy as a constraint which deprives them of the basic values of the judicial system, such as the belief in the authority of the judiciary, impartial administration of justice, etc.51 On the whole, it follows that the assumption of rationality of individuals in their different social roles and, specifically, in the role of litigants is not so realistic; hence, the conclusions arising from the economic models should be accepted with some reservation.

7. THE DEFENCE OF THE MODEL OF RATIONAL BEHAVIOR On the other hand, there are opinions that justify the model of rational behavior. Generally, they assert that the rationality assumption is only an approximation or simplification of reality.52 Yet, Richard Posner,53 one of the most prominent EAL thinkers, has probably gone furthest in criticizing the BLE and (thereby) defending the neoclassical assumptions of homo economicus. Аt this point, we will present his most important arguments which consistently support the neoclassical economic analysis of law even though he admitted54 that his research included some findings of behavioral economics and behavioral law and economics. First, Posner points out55 that the name of discipline Behavioral Law and Economics is wrong, and he supports the proposal of Rachlinski that a more appropriate term for this discipline would be Law and Psychology as it clearly distinguishes the new discipline (BLE) from Law and Economics (Economic Analysis of Law). Second, Posner considers56 that the behaviorists have a propensity toward something he calls “the tendency to caricature the rational model of human behavior”; he argues that the BLE premises are, in fact, an integral part of the theory of rational choice. Third, Posner blames the behaviorists for advocating a non-theoretical position. He argues that behavioral economics “is undertheorized because of its residual, and in consequence purely empirical, character. Behavioral economics is defined by its subject rather than by its method, and its subject is merely the set of phenomena that the most elementary, stripped-down rational-choice models do not explain”.57 Fourth, Posner criticizes the behaviorists for failing to construct their theoretical position on the principles of evolutionary biology, which may be explained by the fact that the behaviorists advocate the ideology of political liberalism, according to which the instinct for justice is rooted in altruism, not in revenge (as explained in evolutionary biology). Relying on this hypothesis, the behaviorists attempt to build a society based on collectivism rather than on the predominance of the free market.58 Finally, Posner criticizes59 the empirical side of behaviorism, which has a number of methodological problems, as well as the normative side of behaviorism60 given the fact that behaviorists have not offered proposals aimed at reforming certain legal phenomena which reflect the aforesaid behavioral anomalies. In this regard, some scholars criticize61 the normative side of Behavioral Economics or Behavioral Law and Economics, warning that its findings may be used as grounds for excessive government intervention and restriction of personal freedoms.

See in: Bronsteen, J. (2009.) Some Thoughts about the Economics of Settlement, Fordham Law Review, Vol. 78, p. 112, where noted by: Frey, B., Stutzer, A. (2002.) Happiness and Economics: How the Economy and Institutions Affect Well-Being, pp. 149-150. 52 See: footnote no. 3. 53 Posner’ argumentation is taken from: Posner, R. (2002.) Behavioral Law and Economics: A Critique. Economic Education Bulletin, published by American Institute for Economic Research, Great Barrington, Massachusetts, Vol. XLII, No. 8. 54 Ibid., p. 1. 55 Ibid., p. 34, footnote no. 2. 56 Ibid., pp. 1-2, and elsewhere. 57 Ibid., p. 12. 58 Ibid., p. 13. 59 Ibid., pp. 22-32. 60 Ibid., pp. 32-33. 61 See: Wright, J., Ginsburg, D. (2012.) Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty. Northwestern University Law Review, Vol. 106, No. 3, pp. 56-57. 51

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CONCLUSION In this paper, we examined the relationship between cognitive psychology and neoclassical economics; to be more precise, we explored the part of cognitive psychology which is referred to as behavioral decision theory and the neoclassical economic analysis of law. The author addressed the following key issues: has Behavioral Economics (Behavioral Law and Economics) developed as a result of spontaneous integration of different kinds of knowledge from various disciplines, or has this discipline developed as a result of an “undue” impact of psychological research in traditional neoclassical economics (the neoclassical economic analysis of law)? Namely, Arthur Leff pointed out to the nonrealistic feature of the assumptions of rationality and the need to redefine the methodological assumptions of neoclassical EAL by relying on the “assistance” of other social disciplines, such as psychology and sociology. Of course, he is not the original author of this idea which was originally promoted much earlier by Herbert Simon, who emphasized the need for integrating psychology and economics. Given the fact that the Economic Analysis of Law has been affirmed in the meantime as a scientific discipline based on neoclassical economics, criticism on the rationality assumption has expanded from the field of economic science to the economic analysis of law. Thus, Leff focused his critical remarks on the neoclassical economic analysis of law and the ideas promoted by Richard Posner as the most outstanding proponent of EAL. On the other hand, this idea is contested by the apologists (like Posner) who perceive the influence of other disciplines (such as cognitive psychology) into economics and the economic analysis of law largely as a threat. Yet, there is an issue whether this kind of attitude is justifiable at present, particularly considering the developments in these social science disciplines (psychology, economics and legal science) over the past several decades. Does the answer to this question reflect a response to another more substantial question about the necessity of integrating the findings of different disciplines? Do these conflicting views, despite being based on rational and logical argumentation, entail an ideological defense of a specific scientific discipline, or are they a mere reflection of conservative views on the status of the scientific discipline? Do the conflicting views of these two sets of scholars reflect the ideological clash of American political liberalism and political conservatism in the broadest sense of the word? There are no definite answers to all these questions which still remain open but the answers to some of them (at least) may be inferred. Behavioral economics certainly exhibits some weaknesses that may potentially lead to unnecessary “psychologizing“ of some other assumptions of neoclassical economics; we may also observe certain commercialization of research findings of behavioral economics which undermines the serious nature of this discipline. But, all scientific disciplines go through a similar formative process which includes initial weakness, evolutionary development and final recognition as a legitimate scientific discipline. In the author’s opinion, the specified psychological researches (and many others) support the hypothesis on the complementary approach to the study of human behavior, which implies a compatibility of the standard neoclassical economic theory (neoclassical economic analysis of law) and the behavioral theory dealing with the study of decision-making processes. The complementary approach to the study of human behavior may yield more accurate and reliable results in comparison to the currently existing body of knowledge which is the result of the standard economic modeling of the individual’s behavior. Any attempt to impose rigid constraints on a scientific discipline may jeopardize its very subsistence. There are times when fear may prove to be justified but, essentially, it is necessary to provide for a further development of Behavioral Economics (BE)/Behavioral Law and Economics (BLE) and promote human knowledge through its empirical findings. After all, Richard Posner is definitely right in asserting that the prospects of this discipline may not be quite bright without a clearly constructed theoretical position. Only time will tell if Behavioral Economics (BE)/Behavioral Law and Economics (BLE) prove noteworthy in terms of its origins and subsequent development. Until then, our knowledge will be promoted through the findings of the neoclassical EAL; in spite of facing numerous challenges and criticism,62 the very presence of this discipline indicates to the necessity of integrating the findings of different scientific disciplines. The greatest resistance to Behavioral Economics (or Behavioral Law and Economics) does not come from the traditional psychologists, economists and lawyers who might be expect to oppose the integration of the scientific disciplines they originally come from but rather from the proponents of neoclassical economics and neoclassical EAL (such as Richard Posner), whose intellectuals are most vocal exponents of this resistance.63 It remains to be seen whether the integrative development of law and economics will be preserved at the level of built (and recognized) theoretical position of EAL, or whether some other disciplines (such as cognitive psychology) will continue to exert their influence which will eventually generate the final theoretical profile of this new disciplines. The credibility of empirical findings of Behavioral Economics as well as the gradual acceptance of this theory by some EAL scholars goes in favor of the latter assertion. Anyway, we hope that this integration of social sciences will not be confined only to the traditionally See a summary of critical comments on the Chicago School of EAL, which is the most dominant school within the EAL, in: Јовановић, A. (2008.) op. cit., pp. 97-102. 63 The conflict between the two disciplines is also reflected in the US politics given the fact that the current US administration uses the findings of behavioral law and economics as a basis for implementing its regulatory program; in the past (during Reagan’ administration), the economic analysis of law was used as the basis for accomplishing rather different political goals. Read more about it in: Wright, J., Ginsburg, D. (2012.) op. cit., pp. 48-56. 62

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related disciplines, such as law and economics, given the fact that economics is inseparable from other social sciences; hopefully, there will be no abuse of the BE (or BLE) findings in terms of reducing personal freedoms and using excessive state intervention. In a nutshell, the key message of this intellectual reflection on the integration of different scientific disciplines may be briefly expressed by the following quotation: “There is only one social science“.64

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.

Aleksić, A. (2007.) Herbert Sajmon – inovator u oblasti poslovnog upravljanja i organizacije. Ekonomski anali, No. 172. Begović, B. (et al.). (2008.) Ekonomija za pravnike, Pravni fakultet Univerziteta u Beogradu, Izdavački centar, Beograd. Bronsteen, J. (2009.) Some Thoughts about the Economics of Settlement, Fordham Law Review, Vol. 78. Coase, R. (1960.) The Problem of Social Cost. Journal of Law and Economics, Vol. 3. Cooter, R., Rubinfeld, D. (1989.) An Economic Analysis of Legal Disputes and their Resolution. Journal of Economic Literature, Vol. 27, No. 3. Cooter, R., Ulen, T. (2004.) Law & Economics, Fourth Edition, Pearson Addison Wesley, Boston, San Francisco, New York, London, Toronto, Sydney, Tokyo, Singapore, Madrid, Mexico City, Munich, Paris, Cape Town, Hong Kong, Montreal. Ellickson, R. (1989.) Bringing Culture and Human Frailty to Rational Actors: A Critique of Classical Law and Economics. Chicago Kent Law Review, Vol. 65. Gaus, Dž. (2012.) O filozofiji, politici i ekonomiji, Službeni glasnik, Beograd. Goodwin, P. (2010.) Why Hindsight Can Damage Foresight. The International Journal of Applied Forecasting. Available at: http://www.forecasters. org/pdfs/foresight/free/Issue17_Goodwin.pdf Jolls, C. (2006.) Behavioral Law and Economics, Public Law and Legal Theory, Research Paper No. 130, John M. Olin Center for Studies in Law, Economics, and Public Policy, Research Paper No. 342, pp. 6-8. Available at: http://ssrn.com/abstract=959177 Jolls, C. (et al.). (1998.) A Behavioral Approach to Law and Economics. Stanford Law Review. Vol. 50. Jovanović, A. (1998.) Uvod u ekonomsku analizu prava, Savet projekta Konstituisanje Srbije kao moderne pravne države, Centar za publikacije Pravnog fakulteta, Beograd. Jovanović, A. (2004.) Ronald Kouz. Ekonomski anali, No. 161. Jovanović, A. (2008.) Teorijske osnove ekonomske analize prava, Pravni fakultet Univerziteta u Beogradu, Izdavački centar, Beograd. Kahneman, D. (1992.) Reference Points, Anchors, Norms and Mixed Feelings. Organizational Behavior & Human Decision Processes, Vol. 51, Issue 2. Kahneman, D. (et al.). (1990.) Experimental Tests of the Endowment Effect and the Coase Theorem. The Journal of Political Economy, Vol. 98, No. 6. Kahneman, D., Tversky, A., (1973.) On the Psychology of Prediction. Psychological Review, Vol. 80, No. 4. Kahneman, D., Tversky, A., (1979.) Prospect Theory: An Analysis of Decision under Risk. Econometrica, Vol. 47. Korobkin, R., Guthrie, C. (1994-1995.) Psychological Barriers to Litigation Settlement: An Experimental Approach. Michigan Law Review, Vol. 93. Leff, A. (1974.) Economic Analysis of Law: Some Realism about Nominalism. Virginia Law Review, Vol. 60. Miceli, T. (1997.) Economics of the Law – Torts, Contracts, Property, Litigation, Oxford University Press, New York, Oxford. Miceli, T. (2004.) The Economic Approach to Law, Stanford University Press, Stanford California. Nikolić, Lj. (2011.) Osnovi ekonomije, Centar za publikacije Pravnog fakulteta u Nišu, Niš. Nozick, R. (1993.) The Nature of Rationality, Princeton University Press, Princeton, New Jersey. P’ng, I.P.L. (1983.) Strategic Behavior in Suit, Settlement, and Trial. The Bell Journal of Economics, Vol. 14, No. 2. Plott, C., Zeiler, K. (2005.) The Willingness to Pay-Willingness to Accept Gap, the ‘Endowment Effect’, Subject Misconceptions, and Experimental Procedures for Eliciting Valuations, American Economic Review, Vol. 95, No. 3. Posner, R. (2002.) Behavioral Law and Economics: A Critique. Economic Education Bulletin, published by American Institute for Economic Research, Great Barrington, Massachusetts, Vol. XLII, No. 8. Rachlinski, J. (1996.) Gains, Losses, and the Psychology of Litigation. Southern California Law Review, Vol. 70. Schäfer, H., Ott, C. (2004.) The Economic Analysis of Civil Law, Edward Elgar Publishing, Cheltenham, UK, Northampton, MA, USA. Shanteau, J. (1989.) Cognitive Heuristics and Biases in Behavioral Auditing: Review, Comments and Observations, in: Accounting, Organizations and Society 14(1/2), pp. 165–177, available at: http://www.k-state.edu/psych/cws/pdf/aos89.PDF Shavell, S. (1982.) Suit, Settlement and Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs. Journal of Legal Studies, Vol. 11. Shavell, S. (1996.) Any Frequency of Plaintiff Victory at Trial is Possible. Journal of Legal Studies, Vol. 25. Simon, H. (1955.) A Behavioral Model of Rational Choice. Quarterly Journal of Economics, Vol. 69, Issue 1. Simon, H. (1959.) Theories of Decision Making in Economics and Behavioral Science. The American Economic Review, Vol. 49, No. 3. Trebješanin, Ž. (2001.) Rečnik psihologije, Stubovi kulture, Belgrade. Wright, J., Ginsburg, D. (2012.) Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty. Northwestern University Law Review, Vol. 106, No. 3.

DETAILS ABOUT AUTHORS: DOC. DR ALEKSANDAR MOJAŠEVIĆ ASSISTANT PROFESSOR UNIVERSITY OF NIŠ, FACULTY OF LAW NIŠ, SERBIA mojasevic@prafak.ni.ac.rs 64

See: Ellickson, R. (1989.) Bringing Culture and Human Frailty to Rational Actors: A Critique of Classical Law and Economics. Chicago Kent Law Review, Vol. 65, p. 55, where is noted by: Hirshleifer (1985.) The Expanding Domain of Economics, The American Economic Review, Vol. 75, No. 6, p. 53.

* Proofreading: Gordana Ignjatović

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INTERGENERATIONAL CONNECTEDNESS AND SOLIDARITY MAJA MEŠKO ZLATKA MEŠKO ŠTOK

ABSTRACT

Population ageing has become a characteristic feature of demographic development in the world and require a new solidarity between generations. The aim of the study is to review the current situation of intergenerational connectedness and suggest activities that could bring together different generations. The questionnaires were designed for young and old people separately. The Questionnaires were distributed to seniors and young people in Slovenia. The data were processed with the Microsoft Excel 2007 and SPSS 19.0. Descriptive statistics and ANOVA was applied as a method. We found out that there is a positive groups’ attitude toward each other, but seniors and young people are looking for more intergenerational activities. Recommendations for establishing a good intergenerational cooperation or improving the existing one were framed. KEYWORDS: Intergenerational relationships, Intergenerational connectedness, Intergenerational solidarity

1. INTRODUCTION The ageing of people has become a characteristic feature of demographic development in the world. “Developments in society such as geographic mobility, divorce, and nuclear families have led to an increasing gap between the old and young and minimized the opportunities for children to interact with grandparents or other older people (Kupetz, 1993)”. As Bernard and Phillips (2000) explain “the situation of older people is becoming an increasingly important element in social policy debates” and the urgent need for “an integrated social policy which addresses the broad needs of an ageing society”.

1.1. Population ageing Since the end of the 20th century, life expectancy, which causes ageing of population, has increased sustantially. The number of people above the age of 60 has increased by more than 60 million (Ramovš 2003, 225). By the average variant of population projection EUROPOP 2008, the share of population aged above 65 will have increased from 16% to 33.4% by the year 2060, and the share of population aged 80 and above will have increased from 3.5% to 14.1% (www.stat.si/pub.asp). According to the World Population Prospect Report (2008), »in the more developed regions, the population aged 60 or over is increasing at the fastest pace ever and is expected to increase by more than 50 per cent over the next four decades, rising from 264 million in 2009 to 416 million in 2050. Compared with the more developed world, the population of the less developed regions is ageing rapidly. Over the next two decades, the population aged 60 or over in the developing world is projected to increase at rates far surpassing 3 per cent per year and its numbers are expected to rise from 473 million in 2009 to 1.6 billion in 2050.« Each individual’s appearance is determined in a unique way and their appearance cannot be the same at the same age. Not all individuals look the same despite sharing the same age. The rate or pace of ageing depends on an elderly person’s thoughts and actions or their wilful decision on how they would like to grow old and what they are prepared to do for leading a quality life (Hojnik Zupanc 1997, 1). To assure the quality of life in all generations, the elderly generation must not be separated from the middle and young generation. If elderly people do not socialize with the young and middle generation, their life is unhappy and it is not a quality one (Ramovš 2003, 47). Today’s elderly people are different from those of the past and future. Nowadays they want to grow old actively also after their retirement, i.e. they want to be constantly active in the economic, social, cultural and civil area by participating in new kinds of activities that are beneficial to society (www. stat.si/pub.asp).

1.2. Intergenerational Connections Feelings of loneliness, needlessness, isolation (being pushed away) in elderly people who live in homes for the aged, since the middle generation is at work and the young generation is not around, have spurred the need to connect generations.

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Thus, the purpose of intergenerational connections are (Majhenič 1999, 98):

• to preserve the autonomy and individuality of the elderly since this promotes responsibility, creativity and indepen• • • •

dent life; to preserve the contacts with families, neighbours and peers (people of the same age); to provide for accessibility of information on the topics significant to the elderly; to promote the development of adolescents’ self-confidence and their own initiative to function independently; to encourage adolescents to learn the ethical dimension of interpersonal relations.

The results of intergenerational connections are passing on experience from the elderly to the young and bringing cheerfulness and joy to the elderly. This involves resuming and fostering or cultivating the basic relations among people. Such relations provide security and stamina, passing on the elderly generation’s legacy – experience and wisdom – and on the other hand bringing young people’s awareness of the importance of quality ageing (Postružnik 1999, 82). Interpersonal communication and profound experiencing or understanding is valuable and absorbing to the young generation. Intergenerational solidarity and the connectedness of generations are the basis for every society and its sustainable development. Nowadays, the networks of intergenerational programmes provides for generational connectedness (connecting generations), quality ageing and awareness of existence and organization of the networks of intergenerational programmes and projects at a local level. Example of such project is post-doctoral project Intergenerational Relations and Cooperation, which were the source for our investigation conducted by means of questionnaires. The post-doctoral project’s aim is to study and analyse intergenerational connectedness and suggest activities and programmes that would bring together different generations. The purpose of the research is to review the current situation of intergenerational connectedness in some European countries. On the basis of the survey conducted, activities that could bring together different generations are suggested.

2. METHODS 2.1. Participants Our sample includes 166 young and 77 elderly people, living in the area of 23 communities in the Celje Region: Celje, Štore, Vojnik, Dobrna, Laško, Radeče, Slovenske Konjice, Vitanje, Zreče, Šentjur, Dobje, Šmarje, Kozje, Podčetrtek, Rogaška Slatina, Rogatec, Bistrica ob Sotli, Žalec, Braslovče, Polzela, Prebold, Tabor and Vransko. The young are defined as persons aged 15 to 29, while the elderly are defined as persons aged 60 and above. The group consisting of young people includes 32 males and 134 females – among them there are 13 secondary school students, 49 graduate students, 81 employed persons and 23 persons who are either unemployed or taking part in professional training before employment. Their average age is 22.8 (SD = 6.17). 82 young participants are from the countryside and 83 from towns. Among 77 elderly participants, 26 of them are male and 51 are female, 7 of them are employed and 70 are retired. Their average age is 65.6. Among 77 elderly participants, 35 are from towns and 42 from the countryside.

2.2. Questionnaire and Procedure We designed a questionnaire adapted by the questionnaire in the »My Story« Project and by other international projects on the topic of intergenerational cooperation. A survey was conducted, employing two methods: mainly via the world wide web by using the web programme 1ka (enabling us to acquire the required number of completed questionnaires quite easily), and by means of personal survey (used above all with the elderly participants). The survey was conducted between 28th March 2013 and 14th April 2013. The questionnaire includes four parts:

• • • •

general part, questions enquiring opinions about the young and the elderly generation questions on intergenerational cooperation and an open-ended question to suggest types of cooperation.

After the completed survey, the data was processed by means of the software programme: SPSS 18.0.

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3. RESEARCH RESULTS AND DISCUSSION The current state analysis, i.e. the description of the young and elderly generation’s opinions about each other and opinions about intergenerational cooperation was performed considering both target groups in our research (the elderly and the young). The research deals with the young and the elderly separately. By employing questionnaires designed separately for the young and separately for the elderly, we acquired the data about their opinions and the data on intergenerational cooperation. On the basis of our methodology of data collection, we collected the list of the needs and requests of both target groups and, further on, by employing the appropriate methodological analysis framed a proposal for establishing and promoting successful intergenerational cooperation or enhancing the already existing one. In Table 1, the young generation’s opinions about the elderly generation are presented. The young assessed the characteristics of the elderly on the 1–5 scale, where 1 signifies the lowest rate of a certain characteristic and 5 the highest rate of a certain characteristic. Table 1. Assessment of the characteristics of the elderly generation Assess the characteristics of the elderly generation on the 1–5 scale (1 – the lowest rate and 5 – the highest rate) Questions

Answers

Valid

No.of items

Average

Standard deviation

Skupaj

Having the ability to understand (comprehensive)

14 (10%)

38 (26%)

60 (42%)

24 (17%)

8 (6%)

144 (100%)

144

166

2.8

1.0

Capable

0 (0%)

17 (12%)

60 (42%)

52 (36%)

14 (10%)

143 (100%)

143

166

3.4

0.8

Experienced

1 (1%)

3 (2%)

10 (7%)

51 (36%)

78 (55%)

143 (100%)

143

166

4.4

0.8

Not willing to do anything

23 (16%)

46 (32%)

49 (35%)

22 (15%)

2 (1%)

142 (100%)

142

166

2.5

1.0

Overburdened

13 (9%)

45 (32%)

43 (30%)

31 (22%)

10 (7%)

142 (100%)

142

166

2.9

1.1

Possessing a vision

16 (11%)

46 (32%)

48 (34%)

24 (17%)

8 (6%)

142 (100%)

142

166

2.7

1.1

Sociable

2 (1%)

13 (9%)

61 (43%)

52 (37%)

14 (10%)

142 (100%)

142

166

3.4

0.8

Stubborn

1 (1%)

14 (10%)

46 (32%)

49 (35%)

32 (23%)

142 (100%)

142

166

3.7

1.0

Predictable

3 (2%)

6 (4%)

59 (42%)

55 (39%)

19 (13%)

142 (100%)

142

166

3.6

0.9

Economical

0 (0%)

3 (2%)

25 (17%)

57 (40%)

58 (41%)

143 (100%)

143

166

4.2

0.8

Embittered

9 (6%)

26 (18%)

60 (42%)

38 (27%)

9 (6%)

142 (100%)

142

166

3.1

1.0

Critical

2 (1%)

16 (11%)

42 (30%)

60 (42%)

22 (15%)

142 (100%)

142

166

3.6

0.9

Hard-working

2 (1%)

13 (9%)

40 (28%)

59 (41%)

29 (20%)

143 (100%)

143

166

3.7

0.9

Slow

4 (3%)

29 (20%)

49 (35%)

43 (30%)

17 (12%)

142 (100%)

142

166

3.3

1.0

Responsible

0 (0%)

7 (5%)

32 (23%)

67 (47%)

36 (25%)

142 (100%)

142

166

3.9

0.8

Pretentious

5 (4%)

20 (14%)

58 (41%)

37 (26%)

21 (15%)

141 (100%)

141

166

3.3

1.0

Strong-headed

4 (3%)

20 (14%)

47 (33%)

41 (29%)

31 (22%)

143 (100%)

143

166

3.5

1.1

Activist

16 (12%)

38 (27%)

64 (46%)

19 (14%)

2 (1%)

139 (100%)

139

166

2.7

0.9

Source: authors

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The young believe that the characteristics of the elderly generation include, above all, experience (M=4.4), economy (parsimony) (M=4.2), responsibility (M=3.9), diligence (M=3.7) and stubbornness (M=3.7). The elderly generation is considered more economic than the young generation, who used to live in the era of prosperity (http://www.financnitrgi.com/radar/9-modrih-nasvetov-na-katere-mlada-generacija-pozablja), and this may be the reason that the young people see the elderly generation as more economic. The elderly generation is considered to be the generation of workaholics as work is of great importance to them (http://www2.arnes.si/~gzver/arhiv%202012/Peta%20stran/ Monika%20Horvat/generacije.html). The elderly are considered more experienced by the young since they are older and more experienced, and therefore possess more knowledge. Reviewing the analysis of the answers to other questions related to cooperation between the two generations, we established that the young believe that the experiences of the elderly are beneficial to the society and that the elderly help preserve traditional values. The young assess work with the elderly mainly (59 %) as positive since they believe that it presents an important experience in young peopleâ&#x20AC;&#x2122;s life. 27% of the young respondents believe that work with the elderly encourages the elderly people to solve their problems independently. Most of the young (59 %) would like to spend more time in the company of the elderly, spending their free time doing variety of activities, preferably going for a walk and doing some sport (114 answers) as well as taking part in social games (61 answers). The young generation suggests that the intergenerational cooperation should take place in workshops where the elderly would teach the young such skills and activities that used to be practiced in the past: crochet, needlework, bobbin-work, baking, manual skills; in educational seminars (where the elderly could tell the young what life used to be like, and by doing so they teach the young to be grateful for what they have now), on the other hand the young could help the elderly with the use of information technology; by active socialising during various activities (hiking, trips, social events, cultural events or performances, etc.); in debate clubs discussing various topics; in courses (e.g. photography, drawing, foreign languages, etc.). It is also suggested that regular meetings of local districts (quarters) should be called, where all members of a community could take part and where the goals shared by all community members and fulfilling their needs (also the need for intergenerational cooperation) should be set or determined, and the budget should be allocated. In Table 2, the opinions of the elderly generation about the young are presented. The elderly assessed the young generationâ&#x20AC;&#x2122;s characteristics on the 1â&#x20AC;&#x201C;5 scale, where 1 signifies the lowest rate of a certain characteristic and 5 the highest rate of a certain characteristic.

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Table 2. Assessment of the characteristics of the young generation Assess the characteristics of the young generation on the 1–5 scale (1 – the lowest rate and 5 – the highest rate) Questions

Answers

Valid

No.of items

Average

Standard deviation

Skupaj

Having the ability to understand (comprehensive)

0 (0%)

3 (4%)

14 (19%)

35 (49%)

20 (28%)

72 (100%)

4.0

0.8

Capable

0 (0%)

2 (3%)

15 (21%)

35 (49%)

20 (28%)

72 (100%)

4.0

0.8

Not willing to do anything

17 (24%)

18 (26%)

25 (36%)

8 (11%)

2 (3%)

70 (100%)

2.4

1.1

Overburdened

4 (6%)

12 (17%)

20 (28%)

27 (38%)

9 (13%)

72 (100%)

3.3

1.1

Possessing a vision

2 (3%)

11 (15%)

21 (30%)

27 (38%)

10 (14%)

71 (100%)

3.5

1.0

Sociable

3 (4%)

6 (8%)

21 (30%)

28 (39%)

13 (18%)

71 (100%)

3.6

1.0

Stubborn

4 (6%)

9 (13%)

23 (32%)

22 (31%)

14 (19%)

72 (100%)

3.5

1.1

Predictable

2 (3%)

17 (24%)

32 (44%)

16 (22%)

5 (7%)

72 (100%)

3.1

0.9

Economical

8 (11%)

27 (38%)

21 (30%)

11 (15%)

4 (6%)

71 (100%)

2.7

1.1

Embittered

8 (11%)

11 (15%)

32 (44%)

17 (23%)

5 (7%)

73 (100%)

3.0

1.1

Critical

2 (3%)

11 (16%)

21 (30%)

27 (39%)

9 (13%)

70 (100%)

3.4

1.0

Hard-working

2 (3%)

8 (11%)

42 (59%)

13 (18%)

6 (8%)

71 (100%)

3.2

0.9

Responsible

4 (6%)

11 (15%)

36 (50%)

16 (22%)

5 (7%)

72 (100%)

3.1

0.9

Pretentious

3 (4%)

9 (13%)

16 (22%)

36 (50%)

8 (11%)

72 (100%)

3.5

1.0

Strong-headed

2 (3%)

6 (9%)

25 (36%)

27 (39%)

10 (14%)

70 (100%)

3.5

0.9

Activist

5 (7%)

18 (25%)

23 (32%)

4 (5%)

73 (100%)

3.0

1.0

Source: authors

The elderly mainly believe that the young generation is, above all, characterised by the ability to understand (AS=4.0), capability (AS=4.0), sociability (AS=3.6), pretentiousness (AS=3.5) and stubbornness (AS=3.5). According to some sources, the young are very self-confident, strong-headed, self-trusting, prone to experimenting in their sex life as well as with drugs. Most of them were born in the era of the internet, computer and other technology. They adore electronic music and they are also very tallented and innovative (http://www2.arnes.si/~gzver/arhiv%202012/Peta%20 stran/Monika%20Horvat/generacije.html). The elderly generation also see the young as capable, able to understand and strong-headed. They believe the young are our future, and the future should be different from the present. Reviewing the analysis of the answers to other questions related to cooperation between the two generations, we established that the young are considered by the elderly as our society’s future, the future which should be different from the past. They relate them to energy, beauty and health, hankering for independence, dependence on modern technology as well as with a difficult economic situation. Work/engaging with the young is assessed or considered as positive by the majority of the elderly (61 %) since they believe that work with the young represent an important investment. 23 % of the elderly believe that work with the young encour-

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ages the young to solve their own problems. The majority (66 %) would like to spend more time in the company of the young, and they would like to spend their free time in various ways, most willingly going for a walk and engaging themselves in sports activities (46 answers), going on holidays (28 answers) and educating themselves (26 answers). The elderly generation suggests that the intergenerational cooperation should take place within various sports activities (e.g. hiking); trips; various workshops and courses; debate clubs; camps; social games; by the young generation providig help with every-day chores, e.g. taking the elderly by car when they go on errands, helping with their work in the garden, keeping in touch on a daily basis, etc.

CONCLUSION Intergenerational cooperation contributes substantially to solidarity, tolerance and quality of interpersonal relations, both, from a wider social viewpoint as well as from a narrower family viewpoint. Therefore, it is of utmost importance to devote more attention to education for coexistence/cohabitation, solidarity and cooperation of all generations in the long-lived society. The mode or way of family life has changed, and young and elderly generations do not live together (cohabit) any longer. This is due to the lack of intergenerational dialogue. Moreover, the years of service (period of employment) is getting longer and the number of elderly people in the society is getting higher. Consequently, there is more and more tension between generations. The young are busier and busier and they cannot find any proper support to improve their quality of life. On the other hand, elderly people are isolated and lonely. It is necessary to establish what the new relations and relationships between generations are, since sustainable development is feasible only in a genuine contact and coexistence of all generations. To coexist or cohabit peacefully and to lead a quality life, a positive communication and willingness between generations to achieve this goal, as well as a more active role of neighbourhood, local and other communities are required. Coexistence and solidarity depends on the cooperation of all three spheres, i.e. the state, which possesses power instruments, the market, which possesses capital, and the civil society, which possesses the quality of solidarity. To exit the crisis, the roles of all the above mentioned spheres and the roles of the young and the elderly generations should be balanced. As the society is becoming more and more aware of this important fact, it encourages intergenerational cooperation and coexistence by implementing various programmes for the young and for the elderly, by which it enhances the active role of the elderly, develops the creativity of the young and connects generations since the quality of life and the future of the coming generations depends on these activities.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9.

Bernard, M., Phillips, J. (2000.) The challenge of ageing in tomorrow’s Britain. Ageing & Society 20(1), pp. 33-54. Finančni trgi, B.U. (2011). 9 modrih nasvetov, na katere mlada generacija pozablja!. Http://www.financnitrgi.com/radar/9-modrih-nasvetov-nakatere-mlada-generacija-pozablja (13. 4. 2013). Hojnik-Zupanc I. (1997.) Dodajmo življenje letom: Priprava na upokojitev in starost, Gerontološko društvo Slovenije, Ljubljana 1997. Horvat, M. (2012). Generacije mojega življenja. Http://www2.arnes.si/~gzver/arhiv%202012/Peta%20stran/Monika%20Horvat/generacije.html (13. 4. 2013). Kupetz, Barbara N. (1993.) Bridging the gap between young and old. Children Today, 22(2), pp. 10-13. Majhenič M. (1999.) 2. Slovenski kongres prostovoljcev: Prostovoljno delo s starimi, za stare in skupaj z njimi, Socialna zbornica Slovenije, Ljubljana. Postružnik A. (1999.) 2. Slovenski kongres prostovoljcev: Prostovoljno delo srednješolcev in osnovnošolcev – medgeneracijsko povezovanje, Socialna zbornica Slovenije, Ljubljana. Ramovš J. (2003.) Kakovostna starost, Inštitut Antona Trstenjaka, Ljubljana. RS Statistični urad RS. (2010.) Starejše prebivalstvo v Sloveniji, Ljubljana, september 2010 www.stat.si/pub.asp.

DETAILS ABOUT AUTHORS: MAJA MEŠKO ASSISTANT PROFESSOR FACULTY OF MANAGEMENT, UNIVERSITY OF PRIMORSKA KOPER, SLOVENIA maja.mesko@fm-kp.si ZLATKA MEŠKO ŠTOK ASSISTANT PROFESSOR FACULTY OF MANAGEMENT, UNIVERSITY OF PRIMORSKA KOPER, SLOVENIA zlatka.stok@fm-kp.si

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ESTIMATION OF UNPAID WORK VALUE IN THE SLOVAK HOUSEHOLDS ALENA KAŠČÁKOVÁ ĽUBA KUBIŠOVÁ GABRIELA NEDELOVÁ

ABSTRACT

The aim of the contribution is to describe possible ways of the unpaid work value estimation in households in Slovakia. For the computation, we use method of time mapping household members´ activities. As the Statistical Office of the Slovak Republic does not collect the data necessary for these calculations, the relevant data were gathered by primary research. Processed data from the preliminary research were divided into groups according to the number of household members. Each activity was assigned the average gross nominal monthly wage based on the occupational category in the national economy. After recalculating the unpaid work values in the groups of households and their weighing it was possible to establish the value of unpaid work in Slovak households as well as its share on the GDP. The final results for the years 2011 and 2012 were then compared. KEYWORDS: households, unpaid work, Time Use Survey, input method

1. INTRODUCTION The amount of unpaid work of household members varies in national economies as a result of several different factors. As many studies in the fields of economics and mainly sociology show, women do more unpaid work in households than men. Unpaid work in the broad sense includes a wide range of activities taking place outside the official labour market and without remuneration. A significant portion of human needs is actually satisfied by the results of unpaid work. Unpaid work includes activities that use economic resources to satisfy human needs, such as domestic work, childcare, caring for other dependants, volunteering, help in the family business etc. National economies do not differ only in the amount of unpaid work; in fact there is a variety of methods and procedures to measure it. In most cases, the source of information about the amount and structure of unpaid work is statistical Time Use Survey (TUS). In the beginning of 1990-s, the Eurostat began to lay the foundations of harmonisation of similar surveys in the European countries. By the end of the 1990-s these efforts were successfully concluded and in 2000 a final version of the proposal for the unified structure of surveys was published. At present, 15 European countries participate in this survey (HETUS – Harmonised European Time Survey). In Slovakia, work on this type of surveys only began several years later. In 2005, the implementation of the pilot project was prepared using the Time Use Survey (TUS) methodology provided by Eurostat and based on the terms specified in the Council Regulation (EC) No. 322/97. The task was to prepare time use survey in the selected households in the Slovak Republic that would be most representative of a variety of households in terms of the way of living, employment, size of households and the age category of household members and thus warrant comprehensive time use survey implementation to take place in 2008 – 2010. The pilot project was implemented in 2006 and it included 200 private households in the survey. The project ended in November 2006 and further surveys were cancelled. With view of the fact that there is no relevant source of information about the size and structure of the unpaid work in Slovakia, the issue is dealt with by a primary survey through questionnaires within the research projects VEGA 1/1141/11 and VEGA 1/0935/13 conducted at the Faculty of Economics, Matej Bel University.

2. NOTION OF RATIONALITY From analytical point of view, the day time of a human can be divided into nonworking and working time. The first category comprises nonworking activities including individual self-care and leisure activities. Working time consists of time an individual spends on activities for which he/she is remunerated based on a contract. On the contrary, unpaid work consists of activities that an individual is not remunerated for. In connection with the methodology of national accounts it is possible to divide the unpaid work into two groups, that is economic (put simply, its results can be placed on the market) and noneconomic. In accordance with the Eurostat definitions, the following types of activities can be considered as unpaid work in the household (Hirway, 1999).

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Table1. Type and description of the activities connected with household and family care classified as unpaid work Type of activity

Brief description of the activity

Food management

Food preparation, Dish washing, Food serving and other specified food management

Household upkeep

Unspecified food management, cleaning, heating and water, cleaning and maintenance of the yard around the house, other household upkeep

Making and care for textiles

Laundry, ironing, care for textiles, shoes, making textiles, handicraft and other making and care for textiles and shoes

Gardening and pet care

Gardening, tending domestic animals, caring for pets etc.

Construction and repairs

House construction and renovation, repairs of dwelling, furniture, vehicle repairs and maintenance, making equipment, other construction and repairs

Shopping and services

Purchases of goods and capital, commercial, administrative, healthcare, veterinary and other personal services and other shopping

Childcare

Physical care and supervision, reading, playing and talking with children, teaching and accompanying child, taking to and from school, nursery, other childcare activities

Help to an adult family member

Physical care of and help to a dependent (disabled) adult family member, other help to such person

Volunteering

Volunteering is a freely chosen activity in favour of others performed with no financial gain involved.

Source: Eurostat, 2006.

Noneconomic group of unpaid work activities in the household includes meal preparation, household upkeep – cleaning, making and care for textiles, growing foliage plants, caring for pets, repairs and maintenance of a flat and a car, shopping and services, childcare, caring for adult family members and volunteering. Economic activities within unpaid work fall into production boundaries of the SNA national accounts. This group of unpaid domestic work activities that can be valued on the market consists of growing subsistence plants, tending domestic animals and construction and repairs (Považanová - Paľa, 2011). When quantifying the value of unpaid domestic work, we will further distinguish between unpaid work in total and unpaid work excluding market activities.

3. CRITICISM ON THE RATIONALITY ASSUMPTION Measuring the value of unpaid work is based on the idea of financial valuation. To measure the financial value, we can use both input and output methods. When using the output method, the financial value is assigned to the domestic production produced by unpaid work. The valuation uses the market prices of the substitutes of goods and services produced by households available on the market. Due to the lack of data regarding the amount of outputs produced by the households as well as the problem of expressing the results of some services (bringing up children, for example), we will not use this approach in our measurements. Using the input approach, it is necessary to assume that the value of goods and services produced within a household equals the costs of their production. In spite of the fact that the production of households that is not offered on the market requires also other inputs, not only labour, the valuation includes only labour that is consequently valued (Považanová - Paľa, 2011) Out of the input methods, the one used most often is the method of market-replacement cost based on valuation of the performed unpaid work by comparison with the price (cost) of respective (substitute) of unpaid work, i.e. remuneration for this labour. When using a generalist approach, the remuneration of a person doing household upkeep professionally is taken into account, whereas the specialist method uses the remuneration of the persons specialised at a specified kind of activity (a cook, cleaner, carer etc.) The amount of unpaid work can then be calculated as follows: Where N - is the size of the sample, Xi - extrapolation factor (weights used to generalize the value of the sample), tj - number of activities of unpaid work in the group j,

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Hij - number of hours spent on unpaid work from the group of activities j per one time unit (period) corresponding to an individual i, Wj - average wage of specialized occupations in the group j, Wjk - wage of the specialized position k in the group j. (Poza – Smith, 1999).

4. PILOT SURVEY IN SLOVAK HOUSEHOLDS Questionnaire survey designed to determine the volume of unpaid work in Slovak households was implemented in 2 stages – the pilot survey and the main survey. The goal of the pilot survey was to test the questionnaire, its structure, completeness and intelligibility of the questions, to verify the coverage of the area in the SR and validate both economic and noneconomic hypotheses. It was necessary to clarify and unify some definitions, determine the statistical sample and select the variables to be collected through the questionnaire. The decision was made to collect the data in the way of personal in-home surveys with the help of volunteers –students of the Faculty of Economics. The volunteers were properly trained and could use the guidance and consultations of experts in the process. The pilot survey took place at the end of 2011, from 21. 11. – 13. 12. 2011 and included 233 households with 763 persons in all regions of the SR. The questionnaire contained questions for two statistical units – 8 questions were aimed at individual members of the household and 4 at the household as a whole. The questions were aimed at social and demographic characteristics of respondents – both individual and households, amount of time used weekly for activities classified as unpaid work by household members, information about paid work, volunteering, help with unpaid work, motivation factors, respondents’ estimations regarding the extent of unpaid work in the future, their relation to unpaid work etc. After the evaluation of the data collected in the pilot survey we concluded that the acquired sample of responses was not representative according to some important characteristics, such as space (distribution across regions) and a number of household members. It also became clear that it is necessary to ensure the representativeness of the sample based on gender, as we assumed that it was one of the key determinants affecting the amount of unpaid work in households. The structure of the questionnaire proved to be adequate but it was necessary to make some small changes. Some questions were excluded due to their low response rate. The key question about the amount of unpaid work was extended with options indicating the length of the season for seasonal activities. Some questions received more answer options, some explanatory notes to the choice of answers and their coding were added and some changes to the form of the questionnaire were made as well. The results of the pilot survey have already been published (Kaščáková, Nedelová, 2012). The main survey was planned for the spring 2012.

5. RESULTS OF THE MAIN SURVEY IN THE SLOVAK HOUSEHOLDS With view of the pilot survey results and following the recommendations of the experts from the Statistical Office of the SR we made some adjustments in both the contents and the form of the questionnaire and also in the way of administering the questionnaire. The questionnaire was divided into 12 modules: 7 modules for household members

• • • • • •

Social and demographic characteristics How many hours a week on average do respondents spend on each category of unpaid work Information on paid employment/jobs Who helps most often with unpaid work in the household Estimation of the unpaid work in the future Motivation to do unpaid work

5 modules for household

• • • • •

Care for pre-school aged children Type of household Type of municipality Region Explanatory notes to the questionnaire

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The main survey was implemented in the period of 22. 2. â&#x20AC;&#x201C; 2. 4. 2012. In total, 1564 households with 4 435 members were approached in all regions of the SR. It had two main objectives: to verify both the economic and noneconomic hypotheses and quantify the amount of unpaid work in the Slovak households. This required a representative sample of the households so that processing of the questionnaires would not produce distorted results. The research team consulted the experts of the Statistical Office of the SR and their experience with arranging similar surveys prior to setting the main criteria of representativeness, such as those based on spatial distribution (in every region), number of household members and gender. Collected data were processed with the SPSS software (PASW Statistics 18). The hypotheses were tested using the chi-squared goodness-of-fit test with the 0.05 significance level. The representativeness verification results are shown in Tables 1 â&#x20AC;&#x201C; 6. Tables 1 - 2 Verification of the sample representativeness according to spatial distribution (regionality) Region Observed N

Expected N

Residual

488

495,3

-7,3

428

455,5

-27,5

503

486,5

16,5

555

566,1

-11,1

567

566,1

541

539,6

1,4

696

667,8

28,2

649

650,1

-1,1

Total

4427

Tests statistics Kraj Chi-square

3,747a

Asymp. Sig.

Source: output SPSS

,808

a. 0 cells (,0%) have expected frequencies less than 5. The minimum expected cell frequency is 455,5.

Tables 3 - 4 Verification of sample representativeness according to the number of household members Number of household members Observed N

Expected N

Residual

1,00

368

384,7

-16,7

2,00

343

358,2

-15,2

3,00

323

292,5

30,5

4,00

333

334,7

-1,7

Chi-square

5,00

197

193,9

3,1

Total

1564

Tests statistics no. of members_sk 4,614a 4

Asymp. Sig.

Source: output SPSS

,329

a. 0 cells (,0%) have expected frequencies less than 5. The minimum expected cell frequency is 193,9

Tables 5 - 6 Verification of the sample representativeness according to gender Tests statistics

Gender Observed N

Expected N

Residual

2108

2150,0

-42,0

Chi-square

2325

2283,0

42,0

Total

4433

Source: output SPSS

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Asymp. Sig.

1,594a 1 ,207

a. 0 cells (,0%) have expected frequencies less than 5. The minimum expected cell frequency is 2150,0

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The results of representativeness verification show that the sample is representative at all commonly used levels of significance in all three chosen characteristics – region, number of household members and gender. After ensuring the representativeness it was necessary to focus on selection of only the relevant and comparable data. With respect to the valid legislation, the calculation of the total amount of unpaid domestic work in Slovakia as well as per individual activities, we considered only work of respondents over 15 years of age. The respondents also stated the seasonality of some activities throughout a year. Further calculations required comparable data for calculating the amount of unpaid work for the whole year of 2012. The amount of time spent on seasonal activities was thus recalculated to such a value that would apply if the activity was performed all year round. At describing the sample of respondents we focused mainly on the second module dealing with the amount of time the respondents devote to individual activities of unpaid domestic work. When following the structure of these activities based on gender, we found significant differences between men and women in the time they spend on food preparation, cleaning, care for textiles, care for foliage plants, childcare and care for adults. In all cases there was significantly higher proportion of time spent on these activities by female population. Conversely, in case of repairs and maintenance it was the male population who spent significantly more time on these activities. Total average time spent in housework weekly was 21.41 for males and 35.58 hours for females. The collected data and calculated standard deviation showed quite high variability of answers to the question about the amount of time spent on all types of unpaid work activities within a household. Detailed results are presented in the Table 7. On the whole, in the sample of our respondents, an average weekly amount of unpaid work was 25.8 hours per person, which accounted for a daily amount of approximately 3.7 hours (222 min), i. e. a value comparable with the value measured in TUS in some other European countries. In one-member households, the average weekly time spent on unpaid domestic work per member was 26, in two-member households it was 34.1 hours, in three-member households it was 23.9 hours and in four-member households 20.9 hours, always per one member of the household. Table 7. Descriptive characteristics of weekly time spent on individual activities of unpaid work as well as total unpaid work in the household excluding market activities, by gender. Gender

Food management

Household upkeep

Making and care of textiles

Gardening – growing foliage plants

Pet care

M Valid Missing Mean Std. Dev.

1831 14 3,28 3,735

495,3

1831 14 ,48 1,206

1831 14 ,80 2,874

1831 14 1,68 4,982

2115 9 8,53 6,592

455,5

2115 9 2,87 3,352

2115 9 1,41 2,624

2115 9 1,75 5,023

Construction and repairs

Shopping and services

Child care

Adult care

Volunteering

M Valid Missing Mean Std. Dev.

1831 14 2,06 3,261

486,5

1831 14 3,29 9,585

1831 14 ,68 3,240 6

1831 14 ,39 2,053 6

2115 9 ,26 ,810

566,1

-2115 9 6,96 19,016

2115 9 1,50 7,973

2115 9 ,38 2,894

Valid Missing Mean Std. Dev. Gender

Valid Missing Mean Std. Dev.

Source: output SPSS

When comparing differences between males and females, there was also a difference in time spent in paid work. Weekly amount of time spent in paid work was 43.8 ± 12.7 hours for males and 39.7 ± 13.8 hours for females.

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It is also interesting to compare the average weekly amount of unpaid work in households living in different types of municipalities. 283 households living in regional administrative centres (largest towns in the region) had average of 56.34 hours spent on unpaid work weekly, 654 households in other towns had average of 71.63 hours weekly and 622 households in other municipalities (villages) spent on average 86.11 hours on unpaid work weekly. The situation regarding unpaid work also differed in different regional administrative units. The highest amount of weekly unpaid work was calculated in the households of Žilina region (88.84 hours per household), followed by the Nitra region (86.26 hours), Trnava region (81.79 hours), in the Prešov region (79.23 hours), Banská Bystrica region (72.38 hours), Košice region (70.88 hours), Trenčín region (69.79 hours) and in Bratislava region (54.99 hours).

6. UNPAID WORK IN HOUSEHOLDS IN RELATION TO GDP We chose the input method and generalist approach to calculate the amount of unpaid work in Slovak households and its share on GDP. Firstly, it was necessary to value all activities within unpaid work category by assigning them gross wage for comparable activities in the national economy of SR in 2011. For that we used Standard Classification of Occupations. Volunteering was valued with an average hourly wage of all activities included in unpaid domestic work. Gross monthly wage was recalculated to average gross hourly rate for individual occupations. In the calculation, we used average monthly number of working hours in 2011, i. e. 171.67 hours. Weekly amount of time devoted to individual activities in the household in hours was multiplied by gross hourly wage. The value of unpaid work for all activities and all respondents was aggregated for households with the same number of members. The types of households based on the number of their members were weighted according to their representation in the sample and after reweighting, the value of unpaid work was calculated for each type of household based on the number of its members. Weekly value of unpaid work was multiplied by the number of weeks in 2011 and its year value was divided by the GDP value in 2011 published by the Statistical Office of SR in the amount of 63,906 million €. Using the computation method described above we found that the proportion of unpaid work on GDP generated in the SR, excluding market activities, was 27.43% in 2011. In case we included market activities in the value of unpaid work (like tending domestic animals, growing subsistence plants, construction and renovation), the share of unpaid work produced in households would rise to 30.94% of GDP generated in 2011.

CONCLUSION The outcomes of the research confirmed our expectations regarding relatively high weekly volume of unpaid work in households (on average, more than 20 hours per household member over 14 years of age) and differences in the volume of unpaid work done by males and females taking into consideration variations depending on the kind of activity. Knowing about substantial differences between unpaid domestic work done by males and females in Slovakia (on average, women do weekly 14 hours more unpaid domestic work then men) and differences in time spent at paid work (men spend more time at paid work than women) may give an answer to the question why women earn less in paid work. Men, who normally do few domestic jobs and little childcare, can work overtime. On the contrary, women have to do their best to balance family and working life and so they try to use their time most effectively and efficiently, which applies to working time too. So if the evaluation at work takes into consideration only the number of hours worked and the overtime but the individual differences in efficiency and productivity are ignored, the women may be disadvantaged (Pietruchová, 2007). The findings also suggest that there is a potential market for supply of services that would substitute the unpaid domestic work. One of the ways how to encourage the households to use the services on the market would be to allow employees to use the mandatory contributions from employers for regeneration to cover part of the expenses connected with household upkeep, or to implement a new scheme to support working parents by enabling them to buy the services rather than do all the domestic work on their own. That, in turn, would generate more employment in the service sector. his resistance.63 It remains to be seen whether the integrative development of law and economics will be preserved at the level of built (and recognized) theoretical position of EAL, or whether some other disciplines (such as cognitive psychology) will continue to exert their influence which will eventually generate the final theoretical profile of this new disciplines. The credibility of empirical findings of Behavioral Economics as well as the gradual acceptance of this theory by some EAL scholars goes in favor of the latter assertion. Anyway, we hope that this integration of social sciences will not be confined only to the traditionally related disciplines, such as law and economics, given the fact that economics is inseparable from other social sciences; hopefully, there will be no abuse of the BE (or BLE) findings in terms of reducing personal freedoms

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

Antonopoulos, R. 2009. The Unpaid Care Work – Paid Work Connection. Working Paper No. 86. International Labor Organizationa. pp. 2-9. ISBN: 978-9221218074. [online]:http://www.ilo.org/wcmsp5/groups/public/---dgreports/---integration/documents/publication/wcms_119142.pdf Antonopoulos, R. Hirway, I. 2010. Unpaid Work and the Economy. Palgrave Macmillan, pp. 1-14. ISBN 978-230-21730-0. Bútorová, Z. at al. 2008. Ona a on na Slovensku. Inštitút pre verejné otázky, 2008, pp. 235 -241. ISBN: 978 − 80 − 89345 − 10 – 6. [online]: http://www.ivo.sk/buxus/docs//Plus_pre_zeny_45/Ona_a_on.pdf European Communities. 2009. Harmonised European time use surveys. 2008 guidelines, pp. 193-193. ISBN 978-92-79-07853-8. [online]: epp.eurostat.ec.europa.eu/cache/ITY.../KS-RA.../KS-RA-08-014-EN.PDF Hirway, I. 1999. Time Use Studies: Conceptual and Methodological Issues with Reference to the Indian Time Use Survey Paper presented at the International Seminar on Time Use Studies, 7 - 10 December 1999, Ahmedabad, India (source courtesy of UNESCAP), pp. 30-32. [online]:http://www.undp.org/content/dam/india/docs/time_studies_conceptual_methodological_issues_reference_indian_time_survey.pdf Kaščáková, A., Nedelová, G. 2012. Možnosti odhadu veľkosti neplatenej práce v domácnostiach SR. In : Forum statisticum slovacum, Bratislava 2012, VIII (5/2012), pp. 66-70. ISSN 1336-7420 Martinkovičová, M., Kika, M. (2012.) Socio-kultúrne aspekty neplatenej práce. [Socio cultural aspects of unpaid work]. Ekonomika a spoločnosť, 13(2), pp. 125-136. Paľa, J., Považanová, M. 2011. Metódy merania monetárnej hodnoty neplatenej práce. In : Nové trendy – nové nápady 2011. Znojmo: Súkromná vysoká škola ekonomická Znojmo s.r.o. 1. Vyd. September, 2011. ISBN 978-80-87314-20-3. Pietruchová, O. 2007. Nedocenená práca žien. In: http://pietruchova.wordpress.com/2008/04/10/nedocenena-praca-zien/ Poza, A.S, Schmid, R.W.H. 1999. Assigning monetary values to unpaid labor using input-based approaches: The Swiss case. Nr. 59 der Reihe Diskussionspapiere des Forschungsinstituts fur Arbeit und Arbeitsrecht an der Universitat St. Gallen, 1999, p. 5. Stiftung, H. Böll. 2002. Na ceste do Európskej únie. Sprievodkyňa nielen pre ženy. ISBN 80–85549-39-5. Vydalo Záujmové združenie žien Aspekt, p. 8. System of National Accounts 2008. 2009. European Communities, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations and World Bank. ISBN 978-92-1-161522-7, p. 98. Uramova, M., Tuschlová, M. 2012. Špecifiká trhu práce na Slovensku a v Banskobystrickom kraji. In : Kitekintés – Perspektive. Magyar-románszlovák periodika, Szent István Egyetem, Gazdasági, Agrár-és Egészségtudományi Kar, Békéscsaba-Szarvas-Gyula, Békéscsaba 2012, XVI, (18), pp. 24 - 28. ISSN 1454-9921

DETAILS ABOUT AUTHORS: ALENA KAŠČÁKOVÁ Ing. PhD. EKONOMICKÁ FAKULTA, UNIVERZITA MATEJA BELA, DEPARTMENT OF QUANTITATIVE METHODS AND INFORMATICS BANSKÁ BYSTRICA, SLOVAKIA alena.kascakova@umb.sk ĽUBA KUBIŠOVÁ Mgr. EKONOMICKÁ FAKULTA, UNIVERZITA MATEJA BELA, DEPARTMENT OF FOREIGN LANGUAGES BANSKÁ BYSTRICA, SLOVAKIA luba.kubisova@umb.sk GABRIELA NEDELOVÁ RNDr., PhD. EKONOMICKÁ FAKULTA, UNIVERZITA MATEJA BELA, DEPARTMENT OF QUANTITATIVE METHODS AND INFORMATICS BANSKÁ BYSTRICA, SLOVAKIA gabriela.nedelova@umb.sk

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THE EFFECT OF EXCHANGE RATE ON ECONOMIC GROWTH SUNA KORKMAZ

ABSTRACT

Since ancient times, humans have exchanged goods continuously to meet their needs. As the economy progresses, transport and communication networks develop the exchange between countries expands beyond its own borders. In a globalized World, countries are producing and exporting goods that they have an advantage over in the production power and importing goods that they need. Money has been the tool used in this trade. In this study, exchange rate systems were mentioned; by using annual data of the 2002-2011 period from nine randomly selected European countries, if there is a relationship between the exchange rate and economic growth has been tested by doing panel data analysis. As a result of the study, it has been found that there is causality from exchange rate towards economic growth for the nine European countries. KEYWORDS: Exchange Rate, Economic Growth, Panel Data Analysis

1. INTRODUCTION National economies had local characteristics in the 14th century. Trade was performed within the country. As a result of the economic depression which emerged in the 17th century, they started to follow a different foreign trade policy. They sought to have foreign trade surplus which is similar to today’s economy. In other words, they started to take some measures restricting import in order to reduce import while promoting export. Particularly upon the emergence of the Classical economics opinion, a different understanding was adopted in trade. Along with the theory of comparative advantages, countries specialized in products which are manufactured for less cost and exported them to other countries, and they started to consider the opinion that they will have more profit by importing the products which are manufactured more expensively by them from the country which manufactures for less cost would be more dominant. Before economy developed, gold and silver was being used as means of payment in trade. As economy developed and became more complicated, the countries started to use money due to the ease provided in interchange. Foreign exchange rate, which is the value of the money of a country in the currency of another country, is an important factor in determining the real value of the money of a country. Foreign exchange rate can deeply influence the economy of a country. Furthermore, as foreign exchange rate regimes are considered one of the important factors in the occurrence of financial crises, which foreign exchange rate to apply also becomes important for policy makers. Although the crisis in the countries may have different reasons, high value losses have been seen in the nominal rates as a result of the crises. The exchange rate regime which will be chosen by the countries based on their own economical structure will reduce their fragility towards the crises. The economic factors which influence the foreign exchange rate include balance of payments, economic growth, money supply, inflation rate, unemployment rate etc. The sustainability of growth depends on the foreign exchange rate. That is to say, one should consider the source of growth. If growth is provided by public expenditures and current deficit is given to provide this, one cannot talk about a complete growth in an economy. If the source of growth is investments (especially foreign investments) and export, the money of the country will increase in value and growth will be possible.

Exchange rate regimes In the late 1980s and early 1990s, and after a period of relative disfavor, rigid nominal exchange rates made a comeback in policy and academic circles. Based on time-consistency and political economy arguments, a number of authors argued that fixed, or predetermined, nominal exchange rates provided an effective device for guiding a disinflation program and for maintaining macroeconomic stability. According to this view, an exchange rate anchor was particularly effective in countries with high inflation—say, high two-digit levels—that had already tackled (most of) their fiscal imbalances. By imposing a ceiling on tradable prices, and by guiding inflationary expectations, it was said, an exchange rate nominal anchor would rapidly generate a convergence between the country’s and the international rates of inflation (Edwars, 2003: 33). Many theories of the international transmission of real and monetary shocks predict that the transmission process depends critically on the exchange rate system (Baxter and Stockman, 1989: 378). Each of the major international capital market-related crises since 1994- Mexico, in 1994, Thailand, Indonesia and Korea in 1997, Russia and Brazil in 1998, and Argentina and Turkey in 2000-has in some way involved a fixed or pegged exchange rate regime. At the same time, countries that did not have pegged rates-among them South Africa, Israel in 1998, Mexico in 1998, and Turkey in 1998-avoided crises of the type that

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afflicted emerging market countries with pegged rates. Little wonder, then, that policymakers involved in dealing with these crises have warned strongly against the use of adjustable peg and other soft peg exchange rate regimes for countries open to international capital flows. That warning has tended to take the form of the bipolar, or corner solution, view, which is that countries need to choose either to peg their currencies hard (for instance, as in a currency board), or to allow their currencies to float, but that intermediate policy regimes between hard pegs and floating are not sustainable (Fischer, 2001: 3). The exchange rate system is an important topic in international economic policy. A fixed exchange rate regime occurs when the exchange rate does not move while reserves are allowed to fluctuate. A crawling peg corresponds to the case where changes in the nominal exchange rates occur with stable increments (i.e. low volatility in the rate of change of the exchange rate) while active intervention keeps the exchange rate along that path (Levy-Yeyati and Sturzenegger, 2005: 1606). A system of pure floating (or flexible) exchange rates can be thought of as an exchange rate band with in-finite bounds, while a system of pure fixed (or pegged) rates is a band with zero bounds (Stockman, 1999: 1484). By a floating exchange-rate regime, a regime in which no government agency intervenes in the foreign exchange market for the sake of intervention (Helpman, 1981: 876). The exchange rate is pegged to a fixed par-value to a single foreign currency. Similar to single currency peg, except that the currency is pegged to a basket consisting of two or more currencies. Basket can be designed according to country-specific criteria or be a composite currency. Cooperating central banks agree to keep the bilateral exchange rates of their currencies within a preset range of each other. Policy instruments include adjustment of domestic monetary policy as well as (joint and coordinated) intervention. Arrangement can impose constraints on monetary policy, the severity of which depends on the relative position of the various currencies (Ghosh et all., 2002: 40-41). There are four advantages of fixing: providing a nominal anchor to monetary policy, encouraging trade and investment, precluding competitive depreciation, and avoiding speculative bubbles. There are four advantages of floating: giving independence to monetary policy, allowing automatic adjustment to trade shocks, retaining seigniorage and lender-of-last-resort capability, and avoiding speculative attacks (Frankel, 2003: 9). The advantage of choosing fixed exchange rates consists in â&#x20AC;&#x2DC;importingâ&#x20AC;&#x2122; the inflation rate of a virtuous country, or, in other words, overcoming a time-consistency problem; the disadvantage consists in relinquishing the possibility of using monetary policy as a stabilization tool, when the economy faces supply shocks (Milesi-Ferretti, 1995: 1383). A country that allows a floating exchange rate may pursue a number of very different monetary policy strategies: for example, targeting the money supply, targeting the inflation rate or a discretionary approach in which the nominal anchor is implicit but not explicit. But regardless of the choice of monetary regime, in many emerging market economies, exports, imports and international capital flows are a relatively large share of the economy, so large swings in the exchange rate can cause very substantial swings in the real economy. Even a central bank that would prefer to let the exchange rate float must be aware that if the countryâ&#x20AC;&#x2122;s banks have made loans in U.S. dollars, then a depreciation of the currency versus the dollar can greatly injure the financial system (Calvo and Mishkin, 2003: 101). Marston (1981) has emphasize that if wages are sufficiently sensitive to exchange rates, flexible rates will exhibit much the same variability of output as a fixed exchange rate regime. Foreign wage behavior is also of key importance, since high wage flexibility abroad can insulate the domestic country from some foreign disturbances regardless of domestic wage behavior, while for other economic disturbances it is the relative degree of wage flexibility that determines the desirability of flexible rates. A country will have a pegged exchange rate; for simplicity, assume that pegging is done solely through direct intervention in the foreign exchange market (Krugman, 1979: 311). The pegged-exchange-rate system provides a convenient way for households and enterprises to rebuild their real money balances after a bout of high inflation. At the start of stabilization, economic agents find themselves desiring to hold higher real money balances. Under pegged exchange rates, these desires are satisfied automatically through the balance of payments, as agents repatriate their offshore capital and convert it into domestic currency (Sachs, 1996: 149). The advantages of hard pegs, especially of currency boards, have been discussed extensively in recent years. They provide a nominal anchor that helps keep inflation under control by tying the prices of domestically produced tradable goods to those in the anchor country, attenuating the inertial component of inflation that feeds into wages and prices of nontradable goods, and making inflation expectations converge to those prevailing in the anchor country. Hard pegs reduce and, in the limit, eliminate the currency risk component from domestic interest rates thus lowering the cost of funds for the government and the private sector and improving the outlook for financial deepening, investment, and growth. Hard pegs provide an automatic adjustment mechanism for the money supply that helps mitigate the time-inconsistency problem of monetary policy (Mishkin and Savastano, 2001: 417). Ozyildirim and Muslumov (2003) mention that some of the disadvantages of hard pegs deemed in the literature are; loss of flexibility since the monetary policy is relinquished or tightly restricted, loss of seiniorage as a result of the dependence of monetary policy, relinquishing lender of last resort feature of central bank, and vulnerability to external and internal real shocks.

Literature Review MacDonald (2000) emphasizes one key feature of flexible exchange rates is that they are highly volatile and such volatility

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may affect growth through the channels of trade and investment. He also considers the links between sectoral and aggregate growth and the exchange rate, using the Balassa-Samuelson and Houthakker-Magee-Krugman hypotheses. The main conclusion of its paper is that the current exchange rate arrangements for the euro-zone area, both internal and external, are likely to stimulate economic growth. Chen (2012) studies the role of the real exchange rate in economic growth and in the convergence of growth rates among provinces in China. Using data from 28 Chinese provinces for the period 1992–2008 together with dynamic panel data estimation, He find conditional convergence among coastal provinces and also among inland provinces. The results reported there confirm the positive effect of real exchange rate appreciation on economic growth in the provinces. Hua (2012) denominate by proposing a real exchange rate augmented Cobb-Douglas production function, it is demonstrated that the real exchange rate exerts multiple effects on economic growth. If a real appreciation has negative effects on growth by deteriorating international competitiveness in the tradable sector and by causing job losses, at the same time it exercises positive effects on economic growth by favoring capital intensity, human capital and by exerting pressure for efficiency improvements. The function is estimated by using the GMM system estimation approach and a panel data for the 29 Chinese provinces over the period from 1987 to 2008. The results show that the real exchange rate appreciation had a negative effect on economic growth, which was more marked in coastal provinces than in inland provinces, contributing to a reduction in the difference in GDP per capita between the two kinds of provinces. F. McPherson and Rakovskipaper (2000) their paper which had discussed the relationship between economic growth and exchange rate in Kenya. Based on data for the period 1970 to 1996, they analyze the possible direct and indirect relationship between the real and nominal exchange rates and GDP growth. The results show that there is not a statistically significant direct relationship between the two variables. Razmi et al. (2012) paper presents (i) a formal model to help explain these findings and (ii) econometric evidence on the relation between investment and the real exchange rate. Their model emphasizes the existence of (hidden) unemployment as a source of endogenous growth, even under constant returns to scale. Growth promoting policies, however, affect the external balance, and two instruments are needed in order to achieve targets for both the growth rate and the trade balance. The real exchange rate can serve as one of those instruments. The implications of the model for the relation between real exchange rates and the rate of capital accumulation find support in our econometric analysis. Kogid et al. (2012) study attempts to investigate the effects of the exchange rates on economic growth in Malaysia using time series data spanning from 1971 to 2009. Both exchange rates, nominal and real, are considered to have similar effects on economic growth. The results of ARDL bounds test suggest that long-run cointegration exists between both nominal and real exchange rates and economic growth with a significant positive coefficient recorded for real exchange rate. In addition, the results of ECM-based ARDL also reveal that both exchange rates have a similar causal effect towards economic growth. Aman et al. (2013) study is an attempt to explore the relationship between exchange rate and economic growth in Pakistan for period 1976–2010. Using simultaneous equation model, employing two, three stage least square (2SLS and 3SLS) techniques and found that exchange rate has a positive association with economic growth through the channel of export promotion incentives, enlarging the volume of investment, enhancing FDI inflow and promoting import substitute industry. Although, exchange rate is positively affecting economic growth, yet it can’t be used as a policy tool. Tarawalie (2010) main focus is to examine the impact of the real effective exchange rate on economic growth in Sierra Leone. He used quarterly data and employing recent econometric techniques, the relationship between the real effective exchange rate and economic growth is then investigated. A bivariate Granger causality test was also employed as part of the methodology to examine the causal relationship between the real exchange rate and economic growth. The empirical results suggest that the real effective exchange rate correlates positively with economic growth, with a statistically significant coefficient. The results also indicate that monetary policy is relatively more effective than fiscal policy in the long run, and evidence of the real effective exchange rate causing economic growth was profound.

Data and Methodology In this study, it was analyzed whether or not exchange rate had effect on macro variable economic growth (GDP) for 9 randomly-selected European countries (France, Germany, Greece, Hungary, Italy, Spain, Turkey, Poland and United Kingdom) by using the annual data of 2002-2011. Exchange rate definition was used effective exchange rates (indices 2005=100). GDP definition is used annual growth rates (%). Exchange rate datas were taken from OECD Outlook’s internet environment and GDP datas were taken from World Bank data internet environment. Exchange rate datas were taken to reduce the logarithm of the datas. Panel data analysis was used as a method. Forecasts were made with Eviews 7.0 program.

Panel Unit Root Tests Doing unit root test in time series studies is becoming common among researchers and increasingly gaining importance in the field of econometrics. However, as it can be seen in the studies by Levin and Lin (1992), Im et al (2003), Haris and Tzavalis (1999), Maddala and Wu (1999: 636), Choi (2001), and Hadri (1999), the application of unit root tests in the panels is quite new. Apart from this, Bhargava, Franzini& Narendranathan, Boumahdi and Thomes, Breitung and Meyer and Puali

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suggested a new test in the fixed effective dynamic model. In this suggestion, they recommended Durbin Watson statistics as a newly modified form of the test statistics based on fixed effect residues and differentiated Least-Squares method residues. While N goes to forever they recommended their own DW statistics in micro panels. Besides these, Quah (1994) suggested unit root test in the panel data model where N/T ratio is fixed, N and T values go to infinite and do not have fixed effects. Levin and Lin (1992), on the other hand, developed this model to allow fixed effects, individual determinant trends and heterogeneous correlation errors in series. Levin and Lin considered that N and T values went to infinite. However, when N/T ratio goes to zero, T goes to infinite in higher ratio when compared to N. Even though this literature was developed from the time series and panel data, when N which refers to the number of horizontal sections and T which shows the length of the time series tend to go to infinite, this model is important in determining the asymptotic features of the estimators. A successive limit theory in which N value goes to infinite was developed by Philips and Moon. Philips and Moon (2000) also prepared a simple example which shows how consecutive limits can sometimes lead to wrong asymptotic results. A second model which was prepared by Quah, Lin and Levin, on the other hand, allows N and T indexes to pass and exceed infinite in this two-dimension order through a specific diagonal way. This way can be determined through a functional relationship which monotically increases in T= T(N) type and where N goes to infinite. Philips and Moon (2000) attributes the limit theory obtained from this approach to a T= T(N) functional relationship. This third approach, on the other hand, is a theory which is a combination of the above and allows N and T values to go to infinite simultaneously and they do not bring diagonal (transverse, cornered) limitations in their distancing from each other. Somehow controlling the relative ratio of the expansion is necessary for obtaining clearer results. According to Philips and Moon, this hybrid limit theory is stronger than diagonal way limit theory and consecutive limit theories. However, it is more difficult to produce this theory. Scientists who perform studies in relation to panel unit root tests are divided into two groups. The first group is based on the assumption that there is no dependency among the series. ADF power is weak because if there is a strong dependency among the series hypothesis refuses more than required. The studies regarding the first generation include Peron, Eliet, Kwiatowski et al (1992), Quah, Levin and Lin, Levin et al (2002), Im et al (2003), Breitung, Hadri, Maddala and Wu (1999), Choi (2001), Breuting and Pesaran. In my study, the stability of the variables were determined through the stability tests which were developed by Levin and Lin and Chu (LLC), Im and Pesaran and Shin (IPS), ADF, PP. In all tests among these tests which are one of the first generation stability tests, it is seen that FER series has only constant and it does not have a trend. It is shown that the general unit root process is in the first difference for FER series, at 1% significance level, stable for LLC, IPS, ADF-Fisher, ADF and PP-Fisher tests. The stability results are given in Table 1. Likewise, in the general unit root process of EG series, it is shown that it is stable for LLC, IPS, ADF-Fisher, ADF and PP-Fisher tests in the first difference, at 1% significance level. The stability results for EG series are given in Table 2. Table 1: FER Variable Panel Unit Root Test Results Method

Statistic

Prob.**

Levin, Lin & Chu t*

8.22810

0.0000

Method

Statistic

Prob.**

Im, Pesaran and Shin W-stat

3.54694

0.0002

Method

Statistic

Prob.**

ADF - Fisher Chi-square

49.1089

0.0001

ADF - Choi Z-stat

-4.43010

0.0000

Method

Statistic

Prob.**

PP - Fisher Chi-square

76.1438

0.0000

PP - Choi Z-stat

-6.38231

0.0000

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Table 2: EG Variable Panel Unit Root Test Results Method

Statistic

Prob.**

Levin, Lin & Chu t*

8.17759

0.0000

Method

Statistic

Prob.**

Im, Pesaran and Shin W-stat

3.64503

0.0001

Method

Statistic

Prob.**

ADF - Fisher Chi-square

49.7710

0.0001

ADF - Choi Z-stat

-4.49046

0.0000

Method

Statistic

Prob.**

PP - Fisher Chi-square

75.8232

0.0000

PP - Choi Z-stat

-6.37404

0.0000

Panel Co-integration Test Pedroni co-integration test is based on Engle-Granger method. The co-integration system is as follows;

t=1,…T ;

i=1,…N ;

m=1,2,…M

Here, T shows the total number of observations made during the period, N shows the total number of the individual units in the panel, and M shows the number of regression variables. In the above equity, Xi shows one item of the specific intersection; Ƴt shows the common time dummy of all items in the panel and δit determinant shows the time trend and all these pertain to individual panel members (Pedroni, 1995: 173). The presence of the co-integration relationship between the variables is tested by means of the stability of the above error terms. The equity created for non-parametric tests;

the parametric test estimation are as follows;

H0 hypothesis means co-integration is not available for all units, and H1 hypothesis means there co-integration for all units. The alternative hypothesis does not make common first order autoregressive coefficient pre-assumption for all units and its test statistics have a normal distribution.

here XN,T is the form of test statistics.µ and ν values are values corresponding the average and variance of each test respectively and they are given in Pedroni (Yilgör et al, 2012). Table 3: Pedroni Co-integration Tests (Only with Constant) Weighted Statistic Prob. Statistic

Prob.

Panel v-Statistic

-0.116571 -0.116571 -0.116571 -0.116571

Panel rho-Statistic

-0.001339 -0.116571 -0.116571 -0.116571

Panel PP-Statistic

-0.697943 -0.116571 -0.116571 -0.116571

Panel ADF-Statistic

-0.344484 -0.116571 -0.116571 -0.116571

Alternative hypothesis: individual AR coefs. (between-dimension)

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Statistic

Prob.

Group rho-Statistic

1.129064

0.8706

Group PP-Statistic

-3.523283

0.0002

Group ADF-Statistic

-2.020093

0.0217

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H0 = No co-integration. H1 = Co-integration available. As the above hypothesis test statistics are higher than Z0,05=1,96, the hypothesis that there is no co-integration in H0 : Series will be rejected and the alternative hypothesis will be accepted. In other words, when I look at the possibility values, panel PP, panel ADF, Group PP will be significant at 1% and Group ADF will be significant at 5%. Therefore, I can say that there is a long run equilibrium relationship between FER and EG variables.

Granger Causality Test The series encountered in practice carry deterministic elements and they are far from being covariance-stable. It is necessary to clear the series of the deterministic elements such as trend seasonal mobility and to make transformations which do not disrupt their causality structure such as taking their logarithms and first degree differences in order to provide covariance-stability. We assume that the series which are subject to tests are past series in these processes (Erlat, 1983: 66-67).

and with equation no (5), whether X is a cause for Y is investigated by testing H0 ( X →Y ) : a12,1=.........=a12,m=0 hypothesis, and whether Y is a cause for X is investigated by testing H0 (Y → X ) : a12,1=.........=a12,m=0 hypothesis. If H0(x→y) is not rejected but H0( y→x) is rejected, if it is concluded that Y is a Granger cause for X, I conclude that X is a Granger cause for Y. If neither H0(x→y) nor H0( y→x) is rejected, it will be concluded that X and Y are independent, and if both hypotheses are rejected, it will be concluded that there is two-side Granger causality (Yilgör et al, 2012). Granger causality test results are given in Table 4. Table 4: Granger Causality Test :

Null Hypothesis

EG does not Granger Cause FER

Obs

F-Statistic

Prob.

0.85947

0.4955

2.52411

0.0539

FER does not Granger Cause EG H0: EG is not a cause of FER. H1: EG is a cause of FER.

In the first hypothesis, as the possibility value is higher than 1%, H0 will be accepted. So, there is no causality from EG towards FER. H0: EG is not a cause of FER. H1: EG is a cause of FER. In the above mentioned second hypothesis, as the possibility value is near 5% and lower than 10%, H0 will be rejected. Therefore, I can say that there is causality from FER towards EG.

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Results Any change in the foreign exchange rate becomes effective on the economic variables of a country. The foreign exchange, on the other hand, is affected not only by economic factors (inflation, unemployment, money supply etc.) but also by political decisions. The decision of the Central Bank of a country taken in relation to foreign exchange can affect the foreign exchange market of another country. The expectation that FED will start to withdraw the monetary support it has provided has deeply affected the foreign exchange market, too. Naturally, especially developing countries suffered more due to this. After the increase in dollars in global markets, inflation figures more than expected were encountered. The increase in the value of dollars affects Turkey in two aspects. The first one is that our foreign exchange liabilities are more than our receivables in foreign exchange, and secondly our saving percentage is very low. In order to seize a good level of growth, the percentage of investments within the national revenue should increase. The expectation of increase in the interest rates along with the foreign exchange rate influences growth and unemployment variables. If these increases become continuous, there will be a decrease in growth and an increase in unemployment rates. High interest rates especially appeals to foreign investors. In order to make use of interest gain, hot money arrives in Turkey. Upon the entrance of hot money into the market, Turkish Liras become valuable. This adversely affects external trade. Turkish goods become more expensive and there is a decrease in export. In this case, it is expected that the interest rates of the Central Bank of Turkey will decrease and foreign exchange will be bought from the market in order to increase the foreign exchange reserves. In this study, the relationship between the foreign exchange rate and economic growth variables were tested with respect to the 9 randomly selected European countries (France, Germany, Greece, Hungary, Italy, Spain, Turkey, Poland, England). It was determined that there was a long term balance relationship between the foreign exchange rate and economic growth for the 9 European countries. Granger causality test was applied and it was concluded that there was a causality from the foreign exchange rate towards economic growth

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

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Aman, Q., Ullah, I., Khan, M.I., Khan, S., 2013, “Linkages between Exchange Rate and Economic Growth in Pakistan (An Econometric Approach)”, European Journal of Law and Economics, pp. 1-8. Baxter, M. and Stockman, A.C., 1989, “Business Cycles and the Exchange-Rate Regime”, Journal of Monetary Economics, 23, pp. 377-400. Calvo, G.A and Mishkin, F.S, 2003, “The Mirage of Exchange Rate Regimes for Emerging Market Countries”, The Journal of Economic Perspectives, 17 (4), pp. 99-118. Chen, J., 2012, “Real Exchange Rate and Economic Growth: Evidence from Chinese Provincial Data (1992 - 2008)”, Paris-Jourdan Sciences Economiques Working Paper, http://hal.inria.fr/docs/00/66/74/67/PDF/wp201205.pdf. Choi, I., 2001, “Unit Root Tests for Panel Data”, Journal of International Money and Finance , 20 (2), pp.249-272. Edward, S., 2003, “Exchange Rate Regimes, Capital Flows, and Crisis Prevention”, NBER, http://www.nber.org/chapters/c9774.pdf, (28.03.2013). Erlat, H., 1983, “Nedensellik Üzerine Sınamalar”, ODTÜ Gelişme Dergisi, pp.66-67. F. McPherson, M. and Rakovskipaper, T., 2000, “Exchange Rates and Economic Growth in Kenya: An Econometric Analysis”, African Economic Policy Discussion Paper, 56, http://pdf.usaid.gov/pdf_docs/pnack375.pdf. Fischer, S., 2001, “Distinguished Lecture on Economics in Government: Exchange Rate Regimes: Is the Bipolar View Correct?”, American Economic Association, 15 (2), pp. 3-24. Frankel, J.A., 2003, “Experience of and Lessons from Exchange Rate Regimes in Emerging Economies”, NBER Working Paper, No. 10032. Ghosh, R.A., Gulde, A. and Wolf, C.H., Exchange Rate Regimes: Choices and Consequences, MIT Press, 2002, USA. Hadri, K., 1999, “Testing The Null Hypothesis of Stationary Against The Alternative of a Unit Root in Panel Data With Serially Correlated Errors”, Manuscript (Departmant of Economics and Accounting, University of Liverpol). Harris, R. D.F and Tzavalis, E., 1999, “ Inference for Unit Root in Dynamic Panels Where The Time Dimencion is Fixed”, Journal of Econometrics, 91 (2), pp.201-226. Helpman, E., 1981, “An Exploration in the Theory of Exchange-Rate Regimes”, Journal of Political Economy, 89 (5), pp. 865-890. Hua, P., 2012, “Real Exchange Rate and Economic Growth in China”, Journal of Reviews on Global Economics, 1, pp. 89-105. Im K.S, Peseran, M.H and Shin, Y., 2003, “Testing For Unit Roos İn Heterogenous Panels”, Journal of Econometrics, 115 (1), pp. 53-74. Kogid, M., Asid, R., Lily, J., Mulok, M., Loganathan, N., 2012, “The Effect of Exchange Rates on Economic Growth: Empirical Testing on Nominal Versus Real”, The IUP Journal of Financial Economics, 10 (1), pp. 1-17. Krugman, P., 1979, “A Model of Balance-of-Payments Crises”, Journal of Money, Credit and Banking, 11 (3), pp. 311-325. Kwiatkowski, D., Philips, C.B.P., Schmidt, P. and Shin, Y., 1992, “Testing the Null Hypothesis of Stationary Against the Alternative of a Unit Root: How Sure are we that Economic Time Series Have a Unit Root?”, Journal of Econometrics, 54 (1-3), pp. 159-178. Levin, A. and Lin, C. F., 1992, “Unit Root Test in Panel Data: Asymptotic and Finite Sample Properties”, University of California at San Diego, Discussion Paper, No. 92-93. Levin, A., Lin, C-F. and Chu, C-S. J., 2002, “Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties”, Journal of Econometrics, 108 (1), 1-24. Levy-Yeyati E. and Sturzenegger, F., 2005, “Classifying Exchange Rate Regimes: Deeds vs. Words”, European Economic Review, 49, pp. 1603-1635. MacDonald, R., 2000, “The Role of The Exchange Rate in Economic Growth: A Euro-Zone Perspective”, NBB Working Paper, No.9. Maddala, G.S and Wu, S., 1999, “A Comparative Study Of Unit Root Tests With Panel Data And A New Simple Test”, Oxford Bulletin Of Economics and Statistics, 61, pp. 631-652. Marston, R.C., 1981, “Wages, Relative Prices and the Choice Between Fixed and Flexible Exchange Rates”, NBER Working Paper, No. 793. Milesi-Ferretti, G.M., 1995, “The Disadvantage of Tying Their Hands: On the Political Economy of Policy Commitments”, The Economic Journal, 105 (433), pp.1381-1402. Mishkin, F.S and Savastano, M.A., 2001, “Monetary policy strategies for Latin America”, Journal of Development Economics, 66, pp. 415-444.

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28. Ozyildirim, C. and Muslumov, A., 2003, “The Effects of Exchange Rate Regime Choice on Economic Performance: The Case of Turkey”, http:// papers.ssrn.com/abstract _id=2097493. 29. Pedroni, P., 1995, “Panel Cointegration : Asymptotic and Finite Sample Properties of Pooled Time Series Tests, With an Application to the PPP Hypothesis, ” Indiana University Working Papers in Economics, No. 95-013. 30. Philips, P.C.B and Moon,R.H., 1999, Linear Regression Limit Theory For Nonstationary Panel Data, Econometrica, 67 (5), 1057-1111. 31. Philips, P.C.B and Moon, R.H., 2000, “Nonstationary Panel Data Analysis: An Overview of Some Recent Developments, Econometric Reviews, 19 (3), pp. 263-286. 32. Razmi, A., Rapetti, M. and Skott, P., 2012, “The Real Exchange Rate and Economic Development”, Structural Change and Economic Dynamics, 23, pp. 151-169. 33. Sachs, D.J., 1996, “Economic Transition and the Exchange-Rate Regime”, The American Economic Review, 86 (2), pp. 147-152. 34. Stockman, A.C., 1999, “Choosing An Exchange-Rate System”, Journal of Banking & Finance, 23, pp. 1483-1498. 35. Tarawalie, A.B., 2010, “Real Exchange Rate Behaviour and Economic Growth: Evidence from Sierra Leone”, South African Journal of Economic and Management Sciences, 13 (1), 8-25. 36. Quah, D., 1994, “Exploiting Cross Section Variation for Unit Root Inference in Dynamic Data”, Economics Letters, 44 (1-2), pp. 9-19. 37. Yilgör, M., Karagöl, T.E and Saygili, A.Ç., 2012, “Panel Causality Analysis between Defence Expenditure and Economic Growth in Developed Countries”, Defence and Peace Economics, pp. 1-11. DETAILS ABOUT AUTHOR: ASSOCIATE PROFESSOR DR. SUNA KORKMAZ BALIKESIR UNIVERSITY BANDIRMA FACULTY OF ECONOMICS AND ADMINISTRATIVE SCIENCES DEPARTMENT OF ECONOMICS skorkmaz@balikesir.edu.tr

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TOURISTS’ PERCEPTION OF AUTHENTICITY IN WORLD HERITAGE HISTORIC CENTERS ODETE PAIVA JOSÉ LUÍS ABRANTES CLÁUDIA SEABRA FERNANDA CRAVIDÃO

ABSTRACT

There is a clear ‘cult of authenticity’, at least in modern Western society (Assi, 2000). So, there is a need to analyze the tourist perception of authenticity, bearing in mind the destination, its attractions, motivations, cultural distance, and contact with other tourists (Kohler, 2009). Our study seeks to investigate the relationship among cultural values, image, sense of place, perception of authenticity and behavior intentions at World Heritage Historic Centers. From a theoretical perspective, to our knowledge, no study exists with a focus on the impact of cultural values, image and sense of place on authenticity and intentions behavior in tourists. The intention of this study is to help close this gap. A survey was applied to collect data from tourists visiting two World Heritage Historic Centers – Guimarães in Portugal and Cordoba in Spain. Data was analyzed in order to establish a structural equation model (SEM). Discussion centers on the implications of model to theory and managerial development of tourism strategies. Recommendations for destinations managers and promoters and tourist organizations administrators are addressed. KEYWORDS: World Heritage Historic Centers, cultural tourism, authenticity perception, cultural values, behavior intentions.

1. INTRODUCTION Tourism is a social phenomenon that happens at a specific location (Poria, Reichel & Biran, 2006). A place can correspond to an intense personal experience which evokes memories with specific meanings (Herbert, 1996). Cultural tourism is a kind of tourism motivated by the desire to experience places: the authentic natural, historic and cultural resources of a community or region (NCDOT, 2000). Nowadays cultural tourism in World Heritage Sites is an important market especially to urban tourists. The search for authenticity reflects the needs of urban tourists from industrial countries; when these people travel, they seek something outside their daily lives, something innovative and different, an escape (Pauchant, 2006). They want to experience new things and enjoy the sensation of being where things are real and original. They want to be able to say “I was there”. The importance of authenticity in sustainable tourism is clear: “Authenticity is synonymous with tourism that is done well” (Pauchant, 2006). An effective way of addressing research is to understand some features of cultural tourists in World Heritage Sites, their motivations, behaviors and desired experiences (Pedersen, 2002). This study tries to analyze an important experience and feeling to cultural tourists – authenticity perception. Future tourists will desire an authentic rather than false experience because they will be better educated, more sophisticated, globally aware and environmentally conscious (Yeoman, Brass & Mcmahon-Beatie, 2007). The search for authenticity and difference becomes essential to make World Heritage Sites differentiated from any other tourism places and attractions (Turok, 2009). A growing number of cities and regions are basing their tourism development strategies on the promotion of cultural heritage, and the number of cultural attractions is growing rapidly (Richards, 2005). In 2012, for the first time, the French tourists were the most visited Portugal. So, this study focused on an important market to European tourism industry. This market is difficult to quantify. Experts suggest that more research would help (Rickly-Boyd, 2012). Authenticity as an evaluative judgment may enrich the understanding of tourist experience and behavior and serve for marketing management purposes (Kolar & Zabkar, 2010). Our aim is to analyze what influences the search for authenticity in cultural tourists visiting World Heritage Sites.

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2. THEORETICAL FRAMEWORK Over recent years, a great effort has been put into adapting cultural resources as products for tourism, in preparing heritage destinations, in expanding the range of museums and in strengthening the tourism’s cultural dimension (Vinuesa & Torralba 2010). Therefore, cultural tourism is a phenomenon of interdependencies and its relationship with historic cities is multifaceted, with both positive and negative aspects (Vinuesa & Torralba, 2010). In this research we try to analyze some issues that link cultural tourists with World Heritage Sites, namely, cultural values, image, sense of place, authenticity and behavior intentions, as follows.

2.1. Cultural values Culture can be defined as the interactive aggregate of common characteristics that influence a group’s response to its environment (Hofstede, 1990). Many aspects of culture form patterns of beliefs, attitudes, norms, values, and social behaviors (Kim, 1998). Values are psychological variables that characterize people within the same culture. (Reisinger, 2009). Therefore, people with similar values belong to a similar culture. The values that permeate a culture are called “cultural values”, and they inform about what is good or bad, right or wrong, true or false, positive or negative, and about what they like (Reisinger, 2009). Cultural values are powerful forces that shape perception and individual behavior (Triandis, 2000).

2.2. Image Destination image is defined as ‘‘an attitudinal construct consisting of an individual’s mental representation of knowledge, beliefs, feelings, and global impression about an object or destination’’ (Baloglu & McCleary, 1999, p.870). Or, in a more short way, as an global perception that a individual holds from a destination (Alhemoud & Armstrong, 1996; Bigné & Sánchez, 2001). This concept is identified as a key issue in the travelling decision making process (Um & Crompton, 1990; Woodside, Frey & Daly, 1989) and is associated with a subjective interpretation of tourists’ feelings and believes towards a destination (Baloglua & McClearyb, 1999; Bigné & Sánchez, 2001). The destination image perceived in the mind of the tourist is mediated by the person’s identity – cultural background and social, personal and psychological characteristics (Govers & Go, 2005). Tourists develop both cognitive and affective responses and attachments to environments and places: the cognitive component refers to the appraisal of physical features of environments while the affective component refers to the appraisal of the affective quality of environments (Baloglu & McCleary, 1999). Several studies suggest that tourist’s cultural values are preconditions to destination image (Kim & Prideaux, 2005; Kozak, 2002). Based on this, the following hypothesis is developed: H1 - Tourist’s cultural values positively influence the World Heritage Historic Centers a) cognitive image b) affective image

2.3. Sense of Place Sense of place refers to the emotional and physical bond that an individual has towards a place (Tapsuwan, Leviston & Tucker, 2011). It is a feeling that may be derived from the natural environment, but is more often made up of a mix of natural and cultural features in the landscape (Seddon, 1972). People develop a sense of belonging, identity, and dependence on certain places (Korpela, Hartig, Kaiser & Fuhrer, 2001). The concept of place identity carries two different meanings: the first means a set of place features that guarantee the place’s distinctiveness and continuity in time; the second means “genius loci”, used to describe the impalpable but agreed upon unique character of a place (Lewicka, 2008).

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Place dependence, in contrast to place identity, refers to connections based specifically on activities that take place in an outdoor, recreational setting. It develops out of the fit between one’s intended use of an area and the area’s ability to adequately provide that use, especially relative to alternative sites. Place dependence is recognizable in the concept of resource specificity common in the recreation literature (Farnum, Hall & Kruger, 2005). Place memory can be measured by expressed interest in place history, place historical knowledge, and ethnic bias (Lewicka, 2008). Recent research shows that the concept of sense of place facilitates the comprehension of leisure behavior (Su, Cheng, & Huang, 2011). Consequently, many studies have been done to determine what antecedes sense of place as an activity and leisure involvement (Kyle & Mowen, 2005) and destination image (Prayag & Ryan, 2011). Destination image is an antecedent of place attachment (Prayag & Ryan, 2011). It influences significative and positively the attachment to a destination (Veasna, Wu & Huang, 2012), to international tourists (Prayag & Ryan, 2011 ) and residents that visit cultural sites (Hou, Lin & Morais, 2005). So, it is expected that a favorable image of a destination leads to a strong cognitive attachment to that destination (Veasna, Wu & Huang, 2012). Based on this, the following hypothesis is developed: H2a - Cognitive image of World Heritage Historic Centers positively influence tourist’s a)place identity b) place dependence c)place memory When tourists select some places and not others to visit, it is fairly obvious that some predictable factors - distance, accessibility, type of activities provided, destination image, or social influence - come to mind (Farnum et al., 2005). The new paradigm in tourism research emphasizes the understanding of emotional and symbolic subjective meanings associated with places and also the connection of people to those places (Williams & Vaske, 2003). Based on this, the following hypothesis is developed: H2b - Affective Image of World Heritage Historic Centers influences positively tourist’s a) place identity b) place dependence c) place memory A place can correspond to an intensely personal experience which evokes memories and allows them to be relived and acquire a specific meaning (Herbert, 1996). The main motivation for heritage tourists visiting a place is based on the heritage’s characteristics of the place (Poria et al., 2006). Places that have genuine links with culture can develop them, with clear advantage for the place and its visitors. Cultural meanings and values of the tourist attach themselves to similar meanings and values of the place (Herbert, 1996). The relationship between the individual values and places has been mentioned as important in heritage management (Howard, 2003). Cultural tourists that visit cultural places have a sense of meaning or emotional attachment with them (Herbert, 1996). According to this, the following hypothesis is developed: H3 - Tourist’s cultural values positively influence a) place identity, b) place dependence c) place memory In a tourism context, place dependence is described as visitors’ functional attachment to a speciﬁc place and their awareness of the uniqueness of a setting, which contributes to meeting their visitation goals (Williams, Patterson, Roggenbuck, & Watson, 1992). ”Urban reminders” the leftovers from previous inhabitants of a place, may influence memory of places, either directly, by conveying historical information, or indirectly, by arousing curiosity, and increasing motivation to discover the place’s forgotten past (Lewicka, 2008). People aware of the place’s history express more interest in the place’s past and in their own roots than people with fewer emotion bonds to a place (Lewicka, 2008).

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This mode of being is based on events that happened during our life, one can develop a connection to a destination due to activities that he/she develops or to what the place itself symbolizes (Yuksel, Yuksel & Bilim, 2010). Or that took place before we were born and therefore belong to the history of the family, ethnic group, state, or the world (Lewicka, 2008). In the latter cases, what we remember depends not on personal experience but on oral traditions, cultural transmissions or own motivation to do the detective work in discovering the past (Lewicka, 2008). So, we advance the following hypothesis: H4 - The tourist’s place memory of World Heritage Historic Centers is influenced by a) Place identity b) Place dependence

2.4. Authenticity Authenticity is a complex concept that is central in tourism research (Rickly-Boyd, 2012). Authenticity can be approached in two different perspectives: object based (Wang, 1999; Steiner & Reisinger, 2006) and events considered as real and genuine (Steiner, Reisinger, 2006), and based on the touristic experience (Wang, 1999), like a human being’s attribute meaning one’s true essence (Steiner & Reisinger, 2006). Image, as said before, is an important component of tourism destination marketing because it influences tourists’ behavior by stimulating multiple creative activities and experiences (Nicoletta & Servidio, 2012). Image, as one of the most influential factors affecting tourist perception and consequent behaviors, is a mixture of various feelings about attitudes toward and ground for an overall evaluation of an object (Lee, O’Leary & Hong, 2002). Heritage, tourism and authenticity become a powerful part of the destination image (Frost, 2006). Tourist may enter in World Heritage Sites with some predetermined conception encouraged by the area’s destination image (Farnum et al., 2005). So, we advance the following hypothesis: H5 - Tourist’s perception of authenticity experienced at World Heritage Historic centers is influenced by a) cognitive image b) affective image Values give some things significance over others and thereby transform some objects and places into heritage (Avrami, Mason & Torre, 2000). Labeling something as heritage is a value judgment that distinguishes that object or place from other objects and places for particular reasons, and as such, the labeling adds new meaning and values (Avrami, et al., 2000). An important characteristic of heritage is authenticity that identifies traditional cultures and their origins as genuine, real and unique, establishing a strong connection with the communities’ heritage (Sharpley, 1994). The understanding of authenticity plays a fundamental role in all scientific studies of the cultural heritage, in conservation and restoration planning, as well as within the inscription procedures used for the World Heritage Convention and other cultural heritage inventories (ICOMOS, 1994). Typologies of tourist experiences have shown that the quest for authenticity on vacation is a function of stratification and emphasizes the multiplicity of personal identities (Waitt, 2000). Based on this, the following hypothesis is developed: H6 - Tourist’s cultural values positively influence the perception of authenticity of the touristic experience on World Heritage Historic Centers. Places involve meanings and values that facilitate intimate connections with particular geographical areas (Tuan, 1977). Especially in high-profile places/World Heritage Sites visitors may come to areas with preconceived notions of what their experience should consist of, and what types of encounters are needed in order to have an authentic experience (Farnum et al., 2005). So, we propose that: H7 – Tourist´s perception of authenticity who visit World Heritage Historic Centers is positively influenced by a) place identity b) place dependence c) place memory

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2.5. Behavior intentions The concept of human behavior is multidisciplinary and as a result it has different meanings in each discipline. In tourism, some concepts that define tourist behavior have been borrowed from several disciplines, such as from recreation, geography, urban and regional planning and education, among others (Reisinger, 2009). Behavior intentions in tourism refer to the set of tourists’ attitudes after their visit experiences. Thus, each distinct and favorable experience will positively influence future behavior, for example in the subsequent evaluation of the destination, the future intentions to return or to recommend the visited place (Bigné & Sànchez, 2001). “Images guide and shape behavior’’ (Barich & Kotler 1991, p.95) providing a cue for information processing (Nadeau, et al, 2008). They are knowledge structures that can be used as mental short-cuts for processing information in decision-making processes (Kotler & Gertner 2002). Destination image exerts a significant influence on destination choice but also preconditions tourist destination behaviors and attitudinal consequences (Lee & Lee, 2009). So a broader conceptualization of image can show the way to greater understanding of touristic intentions on recommendations and on visiting it again (Nadeau, Heslop, O’Reilly, Luk, 2008). Image of the destination positively affect an intention to revisit it in the future (Court & Lupton, 1997). The more favorable image of a destination, the higher the probability that the tourist will return and will recommend it (Bigné & Sànchez, 2001). Based on this, the following hypothesis is developed: H8 - Behavior intentions towards World Heritage Historic Centers is positively influenced by a) cognitive image b) affective image Authenticity is a subjective experience and deals not only with facts but also with myths and imagination (Jewell & Crotts, 2001). Authenticity as an evaluative judgment may enrich the understanding of tourist experience and behavior and serve for marketing management purposes (Kolar & Zabkar, 2010). Tourists’ authentic experiences are not “object-and-contextfree” (Reisinger & Steiner, 2006). So, cultural and heritage tourists are looking for experiences, based on the tangible remains of the past (Herbert, 2001). According to this, the following hypothesis is developed: H9 - Tourist’s Perception of experienced authenticity positively influence the behavior intentions towards World Heritage Historic Centers. A place can be valued by an individual because it is a good place to undertake a particular activity, or it is seen as special for emotional or symbolic reasons (Kyle & Mowen, 2005). Cultural and heritage tourists are looking for a sense of place, a connection to a place, with their traditions and customs (Jewell & Crotts, 2001). Sense of place is a significant predictor of skiers’ loyalty and allows establishing the intentions to return and recommend a specific touristic destination (Prayag & Ryan, 2011). A strong place attachment may lead to repeatedly returning to a special place (Farnum et al., 2005). In line with this, we can advance that: H10 - Behavior intentions towards World Heritage Historic Centers is positively influenced by a) place identity b) place dependence c) place memory Cultures represent a complex whole of value systems that potentially affects tourists’ behavior intentions (Woodside, Hsu & Marshall, 2011). The background of each person provides them with different culture (Hofstede, 1994). So, understanding people means to consider their background, from which their present and future behavior can be predicted (Hofstede, 1994). Values are related to decision making, further, there is evidence that values impact behavior (Parks & Guay, 2009). Some tourists like to travel to destinations that share the same cultural background, but the opposite is also true, cultural differences, rather than similarities, can also attract tourists to different destinations (Hottola, 2004; Reisinger, 2009). In consequence, the tourist’s culture influences and contributes to explaining the tourist’s behavior (Reisinger, 2009). According to this we propose:

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H11 - Cultural values positively influence behavior intentions towards World Heritage Historic Centers. In sum, we propose the following model (Figure 1):

3. METHODOLOGY A survey was applied to collect data of French tourists, in two Europeans historic centers, Guimarães in Portugal and Córdoba in Spain, classified by UNESCO as World Heritage Historic Centers. The conceptual framework was simultaneously estimated in a structural equation model using FIML estimation procedures in LISREL 8.80 Specifically; this model contains five constructs, 24 observable indicators, measurement and latent variable errors, and intercorrelations between the latent constructs. This model has a chi-square of 585.56 (239 df, p=0.00); the fit indices suggest a good fit of the model to the data (NFI=0.91, NNFI=0.96, PNFI=0.81, CFI= 0.96, IFI= 0.96, RFI=0.93, RMSEA=0.060). Several factors were eliminated from the conceptual model presenting Cronbach’s alphas less than .65 and / or for revealing no significant values when were tested to incorporate the final model. The hypotheses relating the constructs fixed in the CFA model were tested. The following are the results (see Figure 2) through measures of standardized coefficients and t-values.

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A structured questionnaire was developed and applied to collect data of French tourists, in two destinations classified by UNESCO as WHHC, Guimarães in Portugal and Córdoba in Spain. The data is composed by 400 questionnaires collected between July and August 2012. This final sample allowed us to have a proportion of 5 observations for each indicator - 78 variables (see Bentler, 1989 in Westland, 2010). The final model represents a 16:1 proportion - 24 observable indicators. Measurement scales: 28 items were operationalized from Hofstede, Hofstede, Minkov and Vinken (2008), 21 items of cognitive and affective image were operationalized from Kim and Richardson (2003); 15 items of sense of place were adopted from Williams and Vaske (2003) and Lewicka (2008); 10 items of experience authenticity were operationalized from Kolar and Zabkar (2010), Poria, Reichel and Biran (2006); 4 items of behavior intentions were adopted from Kolar and Zabkar (2010). The measured was based on a 5 point Likert scale – 1 = strongly disagree to 5 = strongly agree. The hypotheses relating the constructs fixed in the CFA model were tested with significant results. After the CFA test the conceptual framework was simultaneously estimated in a structural equation model using Full Information Maximum Likelihood (FIML) estimation procedures in LISREL 8.80. This model contains five constructs, 24 observable indicators, measurement and latent variable errors, and intercorrelations between the latent constructs. This model has a chi-square of 585.56 (239 df, p=0.00); the fit indices suggests a good fit of the model to the data (NFI=0.91, NNFI=0.96, PNFI=0.81, CFI= 0.96, IFI= 0.96, RFI=0.93, RMSEA=0.060). The following are the results (see Figure 2) through measures of standardized coefficients and t-values.

4. RESULTS AND DISCUSSION This study tried to better understand what influences cultural French tourists’ perception of authenticity and the future intentions to return or recommend the visit at World Heritage Historic Centers. The empirical investigation revealed that tourist’s cultural values influences cognitive and affective image of World Heritage Historic Centers. Affective and cognitive image impacts sense of place, specifically place dependence and memory. An important conclusion of this study is that French tourist cultural values don’t influence directly the experienced authenticity. Cultural values do influence authenticity indirectly trough affective image. Behavior intentions are impacted by cultural values, sense of place and authenticity. Our model gives an extended and integrated vision of what influences authenticity perception and behavior intentions. When marketers understand how cultural tourists react to authenticity, they can create more effective campaigns to influence consumers’ expectations and decisions. From a theoretical perspective, to our knowledge, no study exists with a focus on the impact of cultural values, image and sense of place on authenticity and behavior intentions. Now, that marketing researchers are challenged to provide research with practical implications, it is believed that this theoretical framework may be used as a basis to pursue service-oriented destination and business strategies

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.

Alhemond, A., & Armstrong, E. (1996). Image of tourism attracting in Kuwait. Journal of Travel Research, 34 , 1-4. Assi, E. (2000). Searching for the concept of authenticity: implementation guidelines. Journal of Architectural Conservation, 6 , 60-69. Avrami, E., Mason, R., & Torre, M. (2000). Values and Heritage Conservation. Los Ageles: Research Report: The Getty Conservation Institute. Baloglu, S., & McCleary, K. (1999). A model of destination image formation. Annals of Tourism Research, 26, 4 , 868-897. Bigné, J., & Sanchez, J. (2001). Tourism image, evaluation variables and after purchase behaviour inter-relationship. Tourism Management, 22, , 607–616. Court, B., & Lupton, R. (1997). Customer Portfolio Development: modeling destination adopters, inactives and rejecters. Journal of Travel Research , 35-43. Farnum, J., Hall, T., & Kruger, L. (2005). Sense of place in natural resource recreation and tourism: an evaluation and assessment of research findings. Portland: Gen. Tech. Rep. PNW-GTR-660. Frost, W. (2006). Braveheart-ed Ned Kelly: historic films, heritage tourism and destination image. Tourism Management 27, , 247-254. Govers, R., & Go, F. (2005). Projected destination image online. nformation Technology & Tourism, 7, , 73-89. Herbert, D. (1996). Artistic and literary places in France as tourist attractions. Tourism Manegement 1 , 77-85. Herbert, D. (2001). Literary Places, tourism and heritage experience. Annals of Tourism Research, 28,2, , 312-333. Hofstede, G. (1990). Culture’s Consequences. International differences in work-related values. Abridged Edition. Hofstede, G., Hofstede, G. J., Minkov, M., & Vinken, H. (2008). VSM 08 values survey model 2008 manual. Obtido de www.gerthofstede.nl. Hostede, G. (1994). Business Culture. The UNESCO Courier , 12-17. Hottola, P. (2004). Cultural confusion intercultural adaptation in tourism. Annals of Tourism Research, 31 , 447-466. Hou, D., & Lin, C. M. (2005). Antecedents of attachment to a cultural tourism destination: The case of Hakka and non- Hakka Taiwanese visitors to Pei-Pu, Taiwan. Journal of TRavel Research, 1 , 321-350. Howard, P. (2003). Heritage: management, Interpretation, identity. Cornwall: MPG Books. Jewell, B., & Crotts, J. (2001). Adding psychological value to heritage tourism experiences. Journal of Travel and Tourism Marketing, 11(4), , 13-28. Kim, C. (1998). Cross- cultural perspectives on motivation. Annals of Tourism research, 25,4 , 202- 205. Kim, H., & Richardson, S. L. (2003). Motion picture impacts on destination images. Annals of Tourism Research, 30 , 216-237. Kim, S. S., & Prideaux, B. (2005). Marketing Implications arising from a comparative study of international pleasure tourists’ motivations, and other travel-related characteristics of victors in Korea. Tourism Management 26, , 347-357. Kohler, A. (2009). Autenticidade: origens e bases da discussão em Turismo. Turismo Visão e Acção, 3, , 282-303. Kolar, T., & Zabkar, V. (2010). A consumer-based model of authenticity: an oxymoron or the foundation of cultural heritage marketing? Tourism Management, 31, , 652-664. Korpela, T., Hartig, T., Kaiser, F., & Fuhrer, U. (2001). Restorative experience and self-regulation in favorite places. Environmental and Behavior, 33, , 572-589. Kotler, P., & Gartner, D. (2002). Country as a brand , product and beyond: a palce marketing and brand managemente perspective. The Journal of Brand Management 9 , 249-261. Kozak, M. (2002). Comparative analysis of tourist motivation by nationality and destination,. Tourism Management 23, , 221-232. Kyle, G., & Mowen, A. (2005). An examination of the leisure involvement agency commitment relationships. Journal of Leisure Research, 37 , 342-363. Lee, G., & Lee, C. (2009). Cross-cultural comparison of the image of Guam perceived by Korean and Japanese leisure travelers: importanceperformance analysis. Tourism Management 30, , 922-931. Lee, G., O’Leary, J., & Hong, G. (2002). Visit propensity predicted by destination image. International Journal of Hospitality & Tourism Administration, , 63-92. Lewicha, M. (2008). Place attachment, place identity, and place memory: Restoring the forgotten city past. Journal of Environmental Psychology, 28, , 209-231. Nadeau, J., Heslop, L., O’Reilly, N., & Luk, P. (2008). Destination in a country image context. Annals of Tourism Research 35, 1 , 84-106. NCDOC, N. C. (2000). Heritage Tourism Program. Obtido de http://www.commerce.state.nc.us/tourism/heritage/. Nicoletta, R., & Servidio, R. (2012). Tourist´s opinions and their selection of tourism destination image: an affective and motivational evaluation. Tourism Management Perspectives, 4 , 19-27. Parks, L., & Guay, R. (2009). Personality, Values and Motivation. Personality and Individual Differences, 47 , 675-684. Pauchant, E. (2006). First Tourism Summit. La part de l’authenticité dans le tourisme durable. Chamonix: www.canadatourism.com. Marketingand sales,february. Pedersen, A. (2002). Managing Tourism at World Heritage Sites: a practical manual for World Heritage Sites Manageres. World Heritage Manuls,1. UNESCO, World Heritage Centre. Poria, Y., Reichel, A., & Biran, A. (2006). Heritage Sites Management: Motivations and expectations. Annals of Tourism Research, 33 (1) , 162-178. Prayag, G., & Ryan, C. (2011). Antecedents of Tourists’ Loyalty to Mauritius: The role and influence of destination image, place attachment, personal involvement, and satisfaction. Journal of Travel Research, XX, , 1-15. Reisinger, Y. (2009). International Tourists: Cultures and Behaviour. Oxford: Butterworth-Heinemann. Reisinger, Y., & Steiner, C. (2006). Reconcptualizing object authenticity. Annals of Tourism Research, 33 , 65-86. Richards, G. (2005). Cultural Tourism in Europe. ATLAS. Rickly-Boyd, J. (2012). Authenticity & Aura - A Benjaminian Approach to Tourism. Annals of Tourism Research 39 , 269-289. Seddon, G. (1972). Sense of Place: a response to an environment. The Swan Coastal Plain, Western Australia. Sharpley, R. (1994). Tourism, Tourists & Society. Huntingdon, Cambridgeshire: ELM. Steiner, C., & Reisinger, Y. (2006). Understanding existential authenticity. Annals of Tourism Research, 33, , 299-318. Su, H., & Cheng, K. &. (2011). Empirical study of destination loyalty and its antecedent: the perspective of place attachment. The Service Industries Journal, 31 , 2721-2739. Tapsuwan, S., Leviston, Z., & Tucker, D. (2011). Community values and attitudes towards land use on system: a Sense of Place study in Perth, Western Australia. Landscape and Urban Planning, 100 , 24-34. Triandis, C. (2000). Dialectics between cultural and cross-cultural psychology. Asian Journal of Social Psychology, 3, , 185-195. Tuan, Y. (1977). Space and Place: The perspective of experience. Minnesota: The University of Minnesota Press. Turok, I. (2009). The distintive City: Pitfalls in the pursuit of differential advantage. Environment and Planning 41, 1 , 13-30. Um, S., & Crompton, J. (1990). Attitude Determinants in Tourism Destination Choice. Annals of Tourism Research, 17 , 432-448. Veasna, S., Wu, W., & Huang, C. (2012). The impact of destination source credibility on destination satisfaction. Tourism Management XXX, , 1-16. Vinuesa, M., & Torralba, L. (2010). Histoic Cities and Tourism: Functional dynamics and Urban policy. The Open Urban Studies Journal, 3 , 47-57. Waitt, G. (2000). Consuming Heritage- Perceived Historical Authenticity. Annals of Tourism Research, 27,4 , 835-862.

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55. Wang, N. (1999). Rethinking authenticity in tourism experience. Annals of Tourism Research , 349-370. 56. Westland, J. (2010). Lower Bounds on Sample Size in Structural Equation Modelling. Electronic Commerce Research and Application, 9 (6) , 476-487. 57. Williams, D., & Vaske, J. (2003). The measurement of Place Attachment: Validity and generalizability of a psychometric approach. Forest Science 49. , 830-840. 58. Williams, D., Patterson, M., Roggenbuck, J., & Watson, A. (1992). Beyond the commodity metaphor: examining emotional and symbolic attachment to place. Leisure Science 14 , 29-46. 59. Woodside, A., Frey, L., & Daly, R. (1989). Linking Service Quality, Customer Satisfaction and Behavioral Intentions. Journal of Health Care Marketing, 9 , 5-17. 60. Woodside, A., Hsu, S., & Marshall, R. (2011). General theory of cultures’ consequences on international tourism behaviour. Journal of Business Research, 64, (8) , 785-799. 61. Yeoman, I., Brass, D., & Mcmahon-Beatie, U. (2007). The Autentic Tourist. Tourism Management, 28 (4) , 1128-1138. 62. Yuksel, A., Yuksel, F., & Bilim, Y. (2010). Destination Attachment: effects on customer satisfaction and cognitive affective and conative loyalty. Tourism Management 31, 2 , 274-284. Acknowledgments: FCT, CEGOT and CI&DETS (PEst-OE/CED/UI4016/2011)

DETAILS ABOUT AUTHORS: ODETE PAIVA PHD STUDENT - COIMBRA UNIVERSITY ASSISTANT - POLYTECHNIC INSTITUTE OF VISEU; PORTUGAL ODETEPAIVA@GMAIL.COM JOSÉ LUÍS ABRANTES POLYTECHNIC INSTITUTE OF VISEU jlabrantes@estv.ipv.pt CLÁUDIA SEABRA POLYTECHNIC INSTITUTE OF VISEU cseabra@estv.ipv.pt FERNANDACRAVIDÃO UNIVERSITY OF COIMBRA

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TOURISM AND TERRORISM: STRANGE COMPANIONS CLÁUDIA SEABRA MARIA JOSÉ NOGUEIRA ODETE PAIVA MARGARIDA VICENTE JOSÉ LUÍS ABRANTES

ABSTRACT

Terrorism became an important and recurring topic in in the XXI century public discourse since in the last decades the world assisted to the growing of terrorist attacks. In its domestic and international form is practiced by revolutionary groups, being a constant in modern life (Feichtinger et al., 2001). The terrorist groups are increasingly sophisticated, dangerous and destructives. Paradoxically, international terrorism and tourism share some characteristics. They both cross national borders, involve citizens from different countries and use the new travel and communications technologies. Terrorists often use tourism to gain publicity and support to achieve their goals. Tourists are chosen as targets for their symbolic value representing Western capitalism, consumption, and values such as wealth, freedom of choice and independence (Richter & Waugh, 1986). For terrorists, the symbolism, high profile, and news coverage brought by international tourists makes them too valuable to leave to be explored (Sonmez et al., 1999). This paper tries to gather research and data based on this strange link between terrorism and tourism. KEYWORDS: Tourism, Terrorism, Safety, Risk Perception Acknowledgments: FCT and CI&DETS (PEst-OE/CED/UI4016/2011)

1. INTRODUCTION Markets are more and more global due to a combination of economic, socio-cultural, political, and technological factors (Douglas & Craig, 1995). The world is becoming a single market (Levitt, 1983), in which an increasing number of products is offered simultaneously and similarly in different countries (Swarbrooke & Horner, 1999). Tourism products are eminently global products and the globalization of tourism has led to its expansion on an international scale (Levitt, 1983).The globalization of tourism markets entails increasing global risks that are inherent to businesses that grow on a global scale. Tourism, in fact, is one of the most susceptible activities towards these global risk factors (Ritchie, 2004). Small-scale crises in a part of the world can have profound repercussions elsewhere, or events in one destination can impact other destinations. The tourist demand is particularly sensitive to the tourists’ safety, health and well-being concerns (Blake & Sinclair, 2003). So, risk in tourist markets have been mostly associated with a large number of factors, including political instability, threats to health, crime, violence, war, natural disasters and terrorism in destinations or in its surrounding area (Kozak et al., 2007). Those events dominate the discourse of contemporary media. Its impact on tourism demand started to become increasingly prominent at the same time as the importance of communication and crisis management in organizations and tourist destinations (Frisby, 2002). Despite the fact that natural disasters have a significant impact on changes in tourism demand, terrorist attacks and tourism instability is more important for tourists (Sonmez, 1998).Terrorism has become an important and recurring topic in public discourse in the XXI century. In its domestic and international form is practiced by revolutionary groups and vigilantes, and it is constant in modern societies (Feichtinger et al., 2001). Terrorists continue to select vulnerable and defenceless targets (Atkinson et al., 1987). Tourists have been examples, in recent years, of these vulnerable targets and more and more desirable for terrorists. A terrorist attack targeting tourists can help their authors to achieve several objectives: advertising, economic threat, ideological opposition to tourism, among others (Sonmez, 1998). Terrorist attacks on tourists, due to massive coverage, by the media, began to be seen, by terror groups, as having a close relationship between tourism and terrorism. This relationship has gained international notoriety in 1972 during the Berlin Olympics (Sonmez & Graefe, 1998b). The awareness of the human costs associated with the recent terrorist events and the redirection of the economic resources, presumably driven by perceived risks associated with future terrorist incidents, have led to a concentration of efforts, by various organizations, to improve their understanding on terrorism and on its consequences (Blomberg et al., 2004). The

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increased exposure to significant political, economic, social and technological forces guides tourism companies and managers to become more vigilant in order to deal with impending crises. The understanding of the terrorism phenomenon and of its impacts makes it possible to develop more effective strategies to stop or reduce the severity of their impacts both on the economy and on the society (Ritchie, 2004). It is probably impossible to control terrorism, but nations cannot ignore it. Governments, companies and tourism institutions need to focus their attention on this threat in order to create effective marketing strategies (Hall & O'Sullivan, 1996). With this work, it is hoped to make an important contribution to science and management and to analyze the phenomenon of terrorism and its connection with the tourist industry.

2. LITERATURE REVIEW Terrorism is a puzzling phenomenon that has attracted the attention of researchers in various fields of study (Sonmez & Graefe, 1998b). Hoping to understand and control these occurrences, as well as their adverse effects, governments and academic communities have begun efforts in understanding it (Schmid & Jongman, 1988). The topic is so troublesome and studied in so many perspectives that conceptually there is no universally accepted definition for it (Poland, 1988). The often quoted cliché that "for some is a terrorist, for others is a freedom fighter" shows the various views and the definition problems that this concept entails (Sonmez & Graefe, 1998b). The definition of terrorism has raised quite a buzz among researchers over the years, including the discussion between what is a terrorist and a freedom fighter. Thus, some studies advance four criteria for the definition of terrorist activity (Ruby, 2002.):

• • • •

Motivation for the terrorist act (political or otherwise); Target against which it is directed (sub-national groups or clandestine agents); Objective (creating an atmosphere of fear); Intended audience (greater than the immediate victims)

A perspective that can help clarify the term is the classification and the perception of terrorist objectives (Sonmez, 1998). Broadly, it can be classified as revolutionary (antigovernment, including the overthrow of the current government) or subrevolutionary (political changes, social or personal, for example, the release of prisoners). In a more specific way, the terrorist purposes can be considered ideological, strategic and tactical (Richter & Waugh, 1986). Their goals are usually related to issues of national struggle that are manifested over a long period of time. The tactical objectives are more affected by supremacy and legitimacy situations of more or less armed forces, involving, usually, robbery or picking crowded touristic places as target (Sonmez, 1998). The most consensual definition is, indeed, the one on the civil code of the United States: terrorism is "an act of premeditated, politically motivated violence perpetrated against unarmed civilian targets by sub-national groups or clandestine agents, which aim to influence an audience" and international terrorism as an action that "involves citizens or territory of more than one country" (U.S. Department of State, 1996).

2.1. Terrorism: A new reality Contrary to expectations, the end of the Cold War was not the beginning of peace. There has been a proliferation of armed conflicts around the world in recent years. Geopolitical changes are largely related to the evolution of terrorism we see today (Cutter & Wilbanks, 2003; Le Billon, 2001). The global configuration and geopolitics changed after the fall of the Berlin Wall. The economic, social, technological and cultural globalization also influenced the evolution of terrorism in the field of national and transnational countries. Since the late 60s, the terrorist attacks have become more severe, better organized, more specialized and violent, and more geographically dispersed (Reisinger & Mavondo, 2005). International or domestic terrorism has become a fact of modern life since the 80s. The Palestinian attack in 1972 during the Munich Olympics that caused the deaths of 11 Israeli athletes and reached an audience of 800 million viewers was seen as a success in terms of media (Schmid & DeGraaf, 1982) and catalysed terrorism to the international scene (Sonmez & Graefe, 1998b). In the 80s and 90s of last century, researchers have predicted a substantial increase of terrorist attacks in the future (D'Amore & Anuza, 1986). Experts speculated that the terrorist groups would continue to select vulnerable targets, the attacks would be more indiscriminate, and terrorism would become more institutionalized and geographically wider as a method of armed conflict. On the other hand, they argued that thanks to media coverage the public would be watching more terrorism than ever (Atkinson et al., 1987). Some authors have even said that extraordinary security measures would become a permanent way of life and that terrorism would become almost a routine and something 'tolerable' (Jenkins, 1988). Indeed, terrorism has increased from 967 incidents in 1973 to 5417 in 1983, 16831 in 1992 to 13508 in 2012. The international terrorist at-

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tacks rose from an average of 1650 per year between 1973 and 1982 to 3827 between 2003 and 2012. Presently, the public fears terrorism more than ever (see Graph 1). Graph 1. Terrorist Incidents between 1973 and 2012

Source: the authors based on University of Maryland, Global Terrorism Database (2013)

Also, there is a phenomenon of globalization, because all regions showed an increase in different periods of time in the number of attacks, the major variations were in Asia, Middle East and North Africa and Sub-Saharian Africa positively and in North and Central America and Europe negatively. When a terrorist incident involves citizens, targets, institutions or governments from another country, terrorism assumes an international nature. In this case, the actions taken in one country inflict costs to people and property on other countries (Enders & Sandler, 2004). International terrorism has been growing since the 60s. With large variations among the different regions in the world, it has occurred a spread of the phenomenon from the underdeveloped regions, such as Africa and South America, to more developed regions, such as Europe and Asia (see Table 2). Table 2. Terrorist Incidents by regions between 1973 and 2012 North & Central America

South America

Europe

Asia

Australasia

Middle East & North Africa

SubSaharian Africa

Total

1973-1982 5229

2247

5976

543

2048

446

16509

1983-1992 5969

11963

5242

6972

114

4211

2655

37126

1993-2002 1281

2703

3399

6736

4114

1873

20186

2003-2012 253

995

1323

19824

12661

3196

38270

Source: the authors based on University of Maryland, Global Terrorism Database (2013)

However, despite the decrease in the number of attacks, there is a substantial increase in deaths caused by those incidents. The belief of many researchers is that during the 90s the world has entered a new phase of terrorism dramatically different from the previous. It is called by some the 'new terrorism' (Jenkins, 2001), or 'new types of terrorists post-Cold War' (Hudson, 1999), 'a new type of terrorists' (Stern, 1999), a' new terrorists generation' (Hoffman, 1999), 'Terror in the name of God' (Jurgensmeyer, 2000); 'a clash of fundamentalisms' (Ali, 2002), or simply a' new wave of terrorism ' (Rapoport, 2001). Generally, the argument is the same; terrorism is changing in new ways (Bergesen & Han, 2005):

• The organization has changed to a network. Some authors argue that new terrorist organizations have left the struc• • • •

tured format with a group of members trained on a central command to move on to a more flexible and anonymous structure. Between the 60s and the 80s terrorist groups clearly took a nationality, new organizations, like Al-Qaeda, have members of various nationalities and cells outside the country of origin, constituting themselves as transnational groups. The identities of transnational terrorist groups are more difficult to identify, once not always someone claims responsibility for the attacks, the most visible example was the September 11, 2001. The terrorists’ demands are vaguer, sometimes nonexistent. There seems to be a change on terrorist motivations, before clearly political, now, clearly religious. The so-called religious terrorism or "sacred" demonstrates the prevalence of religion in the origins of the new terrorism, particularly

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Islamic fundamentalism, Christian, messianic Zionism, religious sects like Aum Shinrikyo (sarin gas release incident in the Tokyo subway). Also there seems to be an increase in groups with vaguer and ancient religious ideologies. There seems to be a more global dispersion of targets. While in the 60s and 70s international terrorism was more concentrated in Europe and the Middle East, in the 90s it spread to Africa, South America and the U.S. It is being extended to Asia since 2000. Violence seems to be happening at random. The collateral damage is higher than previously. In the 60s and 70s most of the targets were businessmen or politicians, nowadays terrorism attacks are aimed at civilians, including tourists.

2.2. Terrorism and Tourism: Strange Companions? The growth of terrorism, crime and violence in the world brought a larger problem: international terrorism which makes tourists as preferred targets of violence (Cavlek, 2002). Paradoxically, international terrorism and tourism share some characteristics. Both cross national boundaries, involving citizens of different countries and use new technologies associated with travel and telecommunications (Schlagheck, 1988; Sonmez & Graefe, 1998a). Words tourism and terrorism can be placed at opposite ends of a continuum of quality of life. Tourism suggests life, relaxation, fun, while terrorism readily recalls feelings of death, destruction, fear and panic (O'Connor et al., 2008). The target attack ensures tourists media attention and limits the ability of particular political elites to control the content of what the media covers. Tourists are regarded as having symbolic value as indirect representatives of hostile or opposed governments and, on the other hand, are easy targets concentrated in hotels and tourist attractions (Richter & Waugh, 1986). Traditional targets (politicians and embassies) are less attractive to terrorists because they are able to increase security measures, while tourists, by contrast, are soft targets (Lehrman, 1986). There are several reasons why tourists are chosen as targets (Richter & Waugh, 1986):

• They are easily identifiable: the tourists have habits, behaviors, specific dress codes which are sometimes different from the locals (Aziz, 1995),

• Usually, they carry many electronic devices (camcorders, cameras, cell phones) that identify themselves, • Attend crowded public places (museums, tourist attractions ...) • The nature of tourism services places tourists in easily attackable settings (hotels, tourist attractions, markets ...) (Brunt •

et al., 2000).

Tourism is still capitalism and consumption, so an attack on that activity means ideological opposition to Western values (Lepp & Gibson, 2003). Discrepancies, cultural, socio-economic and communication between tourists and residents can create resentment and incite violence (Aziz, 1995; Lea, 1996; Wahab, 1996). A terrorist attack targeting tourists has the potential to punish capitalist ideologies and also affect the economy. The fact that tourists are foreigners can also increase the support of locals, as there are less likely to achieve domestic targets which could endanger the terrorist organization (Richter & Waugh, 1986). Terrorists see tourists as targets for various reasons (Sonmez et al., 1999), because they allow them to achieve strategic and ideological purposes. A large number of authors have investigated the link between terrorism and tourism (Pizam & Mansfeld, 1996; Pizam & Smith, 2000; Ryan, 1993; Sonmez, 1998; Sonmez et al. 1999) and concluded that terrorist group destinations are places where you can easily manage to infiltrate; tourists are prime targets because they allow them to achieve their goals easily causing damage to the industry and ensuring international publicity. Tourists are effective tools to convey a message of ideological opposition and broader policy (Sonmez et al, 1999). An attack on a foreign tourist means a triple return to terrorists: on one hand, the international publicity caused by the attack, on the other hand, the loss of attractiveness and of income for the local government, the ideological opposition to the tourism activity (Blake & Sinclair, 2003; Sonmez, 1998). Finally, tourists are vulnerable and easy targets for terrorists because they are obvious in their behavior and appearance, move in large groups, are relaxed and not at all cautious (Ryan, 1993). Some researchers have established a symbolic parallel between tourism and diplomatic relations (Richter, 1983). According to this theory, the tourists are targeted because they are seen as ambassadors of their countries, they are easy targets and because they symbolize, indirectly, the hostile governments and not of the terrorist causes (Richter, 1983; Richter & Waugh, 1986.) On the other hand, the involvement of citizens from other countries means international coverage for the terrorist cause. When tourists are kidnapped or killed, the situation is immediately dramatized in the media, which helps make the conflict globally visible. The terrorists achieve the exposure they need and the media raise their audiences (Richter, 1983; Sonmez, 1998. Although several authors describe the goals of terrorists differently, they agree that the terrorists have much to gain by attacking tourists (Sonmez, 1998). When tourism symbolizes capitalism and they are supported by the government, then an attack on the industry is also an attack on capitalism. The tourism sector is an important economic activity, terrorist attacks

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cause a decline in foreign exchange inflows, allowing terrorists to impose indirect costs and gain political advantage on the aimed governments (Hall & O'Sullivan, 1996; Richter & Waugh, 1986). For many countries such as Egypt, Israel, Greece, Sri Lanka and Indonesia, the tourism industry is an extremely important force for the economy, that is why the terrorists have come together to stop the national economy and their governments (Aziz, 1995; & Paraskevas Beverley, 2007). In fact, in recent decades, there has been an increase of terrorist attacks having as targets the tourism industry. Touristsâ&#x20AC;&#x2122; decisions to change their plans, particularly in the choice of other destinations, may involve significant losses for the tourism industry and to the places where terrorist incidents occur (Coshall, 2005). The decline in tourist arrivals and economic effects arising from the results are well documented (Mansfeld, 1994, Hall & O'Sullivan, 1996; Wahab, 1996). Perceptions of risk, especially of terrorism, influence the tourism demand patterns, because the destination image is a key criterion when choosing a destination (Dann, 1993) (see table 3). Table 3. Destinations Dramatically Affected by Terrorist Attacks Country

Description

China

After the incident in Tiananmen Square, in Beijing, in 1989, the majority of tour operators canceled their packages and voyages to that country. Tourism revenue, that year, fell 430 million U.S. dollars (Gartner & Shen, 1992, Hall & O'Sullivan, 1996; Sonmez, 1998). Hotel occupancy fell below 30%. About 11,500 tourists canceled their visit to Beijing in 1989 (Gartner & Shen, 1992). In subsequent years, China has made great efforts to attract international tourists. Although there was an increase of 55% of foreign tourists in 1991 and 48% in 1992, the memories of that incident still remain (Hall & O'Sullivan, 1996).

Cyprus

t is the third largest Mediterranean island and very popular as a tourist destination beach for European tourists. Between 1986 and 1998 there was a very strong growth of the tourism industry in the country, meaning, in the 90s, 50% of total service revenues. The two Gulf wars caused drastic falls in international tourist arrivals in that destination (Hoti et al., 2007).

Egypt

More than 120 tourists have been targeted by Islamic terrorist attacks between 1992 and 1994. In the second half of the 90s, Egypt suffered a 22% decrease in international tourist arrivals, 30% in sales and 43% of beds in tourist revenue (Aziz, 1995; Wahab, 1996). Successive crises in Egypt led to the withdrawal of what was considered to be a good destination for tour operators. In 1992-1993, the largest European tour operator, TUI, sold 30% less travel to this country, another European operator, Tjaereborg, sold least 77%. From the mid-90s, the situation stabilized and revenues rebounded. However, after the attack in Luxor, in 1997, in which 64 tourists were killed, most operators withdraw this destination from their lists again. In the summer of 1998, the operators became to include Egypt in their programs, again, but only 1/10 of the customers picked this destination.

Spain

ETA, created in 1959, is an independence movement in the Basque region of Spain. Members of the Spanish army and government are their traditional targets; however, ETA also pointed their attacks to the tourist industry, mainly between 1984 and 1987. Hotels and travel agencies were bombarded. Over 200 letters were sent to embassies, travel agencies and foreign media grasping terrorist intentions (Enders & Sandler, 1991). In the "Summer Campaign", in 1996, ETA bombed several airports and hotels along the Gold Coast, which caused a major recession in tourism (Bar-On, 1996). Between 1970 and 1988, the estimated decline was of 140,000 tourists (Enders & Sandler, 1991). ETA continues to be engaged in terrorist activity, but their targets, recently, are politics. On March 11, 2004, an attack claimed by an arm of al-Qaeda brought about 200 dead people and more than 500 injured in the bursting of several bombs, in carriages and stations of the railway system in Madrid.

USA

One of the most significant episodes of disruption in tourism demand was the attacks of September 11, 2001 in the USA. In the following year there was a decrease of 6.8% of international tourists in that country (Qi et al., 2009). Air traffic fell about 17% in the month of September and did not grow in the first nine months of the following year (Drakos, 2004). This attack led to an overall decline in the international tourism activity. In addition, the September 11th became known as the incident which led to a global economic downturn, mainly because of the fast decrease of air transport (Drakos, 2004).

Europe

After the kidnapping of the cruise ship Achille Lauro in the Mediterranean (October 1985), the capture of the Egyptian Boeing from Athens to Cairo (November) and the attacks of armed Palestinians towards passengers at airports in Rome and Vienna (December), Europe, in generic terms was considered a dangerous and insecure destination. The number of American tourists, in 1986, going to UK and to Germany fell 20%, to Italy it fell 23% and to Greece it fell 53% (Ryan, 1993).

Fiji

At the end of the 80s, after the election of a majority foreign government, Fiji experienced two revolutions. Because the media presented these two rebellions in such a sensational manner, Australian and Neo-Zeeland authorities advised their citizens not to go to this destination (Hall & O'Sullivan, 1996; Lea, 1996, Scott, 1988). In 2000 there was another takeover and the arrivals and tourism revenues fell 28% and 35%, respectively, when compared to the previous year. Hotel occupancy declined between 25-30% when compared to the expectations they had before the takeover. The 2006 revolution resulted in even greater falls in what concerns the international tourism.

Florida

After many deaths between 1992 and 1994 foreign tourists in different parts of Florida, European tour operators have allowed its customers to replace this by another destination. Many took advantage of this opportunity causing enormous damage to tourism on this USA destination (Cavlek, 2002). British and German tourists, the main Florida European supply markets, fell 22% in 1994 (Pizam & Mansfeld, 1996).

Gambia

The bloody revolution in the summer of 1994 caused a drop in tourist arrivals and the closure of many hotels.

Global

The first Gulf War caused a decline from 21.5% (in 1990) to 3.2% (in 1991), in the global tourism revenues. In April 2002, the International Association of Air Transport estimated that the second Iraq war caused reductions in 10 billion dollars in air travel (Taylor, 2006).

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Indonesia

In the period 1997-2002 the country suffered a series of shocks that received international attention and resulted in a drastic reduction of tourist entries. Among them are the following: civil conflict after the fall of President Suharto (1997-1998), ethnic conflict, including attacks on Chinese businessmen (1997-1999); religious conflicts between Christians and Muslims (19972000); separatist movements in East Timor, Aceh and Irian Jayra (90s); the effects of El Niño; the offensive on East Timor was condemned by many countries, namely Australia, and led to a cut of businesses between them (1999-2000); terrorist attack with a disco explosion in Bali (2002) (Prideaux et al., 2003).

North Ireland

Sinn Fein, an armed movement named ‘Provisional Republican Army’ (PIRA), formed in 1969, is a legal political movement that aims to remove the British jurisdiction from Northern Ireland and unify it with the Republic of Ireland. The targets of the armed movement included British police officers in the Northern Ireland. The terrorist activity and retaliation by British troops banned the tourist activity. Between 1969 and 1999 there were 3740 (54% civilian) deaths attributed to conflicts linked to terrorism in that country. The arrival of visitors fell from 1,080,000 in 1967 to 321,000 in 1976 as a result of the negative image (insecurity) associated with this destination (Buckley & Klemm, 1993; Wall, 1996; Witt & Moore, 1992). The ceasefire, between 1994 and 1996, led to significant improvements in tourism: 11% increase of hotel occupancy, 18% of visitors from other states and 68% of tourist arrivals (O'Neill & Fitz, 1996).

Israel

Since its foundation, in 1948, Israelis and Palestinians living in the occupied territories experienced constant insecurity. In 1987, the Palestinian conflict intensified itself and the Islamic Resistance Movement (Hamas) joined the movement for restoration of an Islamic Palestinian state in Israel. The attacks by the Israelis and Palestinians caused many deaths since. Between 2000 and 2005 there were about 135 attacks which resulted in 588 deaths (Spilerman & Stecklov, 2009). The arrival of tourists, since the 70s, has fallen, especially due to the images and news provided by the media.

Libya

It is a country seriously affected by political instability and armed conflicts. Due to armed confrontation with the USA, in 1985, about 2 million Americans canceled their travel plans to the country in the following year, which resulted in a fall of 30% of total tourist holidays (Qi et al., 2009). After accusations that the Libyan government sponsored the Lockerbie attack in 1989 and the after the UN sanctions that followed, there was a serious damage to the tourism image of this country, which led to the prohibition of international tourism in and from Libya (Gray, 2000).

Mexico

From the establishment of NAFTA (Northtern American Free Trade Agreement), the Zapatista National Liberation Army launched a rebellion against the Mexican government. The first 12 days of rebellion resulted in about 500 deaths. In 1994, the death of the favorite presidential candidate Donaldo Colosia created a climate of great instability in Mexico. Some of the spots affected by the incident, and which were highly sought by the tourists, as San Cristobal in Chiapas, suffered a major decline in terms of international tourist arrivals. In the first two months of 1994, tourists decreased 70% when compared to the previous year (Pitts, 1996).

Nepal

In the 90s tourism in Nepal had an exceptional growth. In 1998 there was an increase of about 42,000 arrivals. Between 1983 and 2000 the contribution of this activity rose from 1.4% to 3.2% of GDP. In 2000 total revenues with international tourism exceeded 166 million USD. After an attempted of deviation of an Indian Airlines plane, in December 1999, and after the negative publicity of this fact, entries fell dramatically, 6% in 2000 and 22% in the following year. The Indian airline canceled flights to that country. Being India the main outbound market and an important spot on the route of American and European tourists, the entry in Nepal became compromised (Baral et al., 2003).

Peru

The Shining Path is a Maoist terrorist group, formed in the late 60s, which aims to restore the Peruvian institutions with a revolutionary government and free the territory of foreign influences. The terrorist attacks caused a decrease of international visitors. While in 1989 they were 350,000, in 1991 they were only 33,000 (Wahab, 1996).

Kenya

It is one of the most popular destinations in Africa, especially the safaris. In August 1998, a terrorist attack against the USA and Tanzania embassies, by a massive car bomb, nearly caused 231 deaths. In November 2002, new terrorist attacks with tourist targets. The attacks began with two-air missiles fired at a 757 Boeing, carrying almost 271 Israeli tourists. This attack had no victims, because the plane was diverted and landed safely. 20 minutes after three suicide bombers launched an attack in a hotel on the Kenyan coast. 15 people died in the hotel. A group named "Army of Palestine", in Lebanon, claimed responsibility for the attack. Although the number of tourists has decreased between 2000 and 2001, tourism revenues increased. The fall of tourist arrivals continued in 2002, this time accompanied by the tourism revenues (Fletcher & Morakabati, 2008).

Turkey

The PKK (Kurdistan Labor Party) a Marxist-Leninist group was formed in 1974 with the aim of establishing an independent Marxist state in southeastern Turkish territory. The PKK, initially attacked government forces and civilians. Since 1991, this party has become more active against tourist targets either by kidnapping tourists either by laying bombs on hotels. The tourist industry has been seriously damaged since. For example, between 1993 and 1994 one of the largest European operators, TUI, had a 47% sales decrease to this country. Between 1997 and 1998 there was a decrease of 11.1% of German passengers (Göymen, 2000).

3. CONCLUSIONS AND IMPLICATIONS The main objective of terror is to achieve an emotional policy, more than to achieve the target military defeat. The terrorists achieve that objective by choosing civilian targets or national society’s symbols. Therefore, while the number of casualties is lower than the number of wars, keeping structures and institutions largely intact, terrorism can generate deeper fear and anxiety, causing changes in the individual and organization’ s behavior (Spilerman & Steckov, 2009). The growth of terrorism, crime and violence throughout the world has raised a new problem: tourists as terrorism targets and criminal acts (Cavleck, 2002). Tourists are chosen as targets for their symbolic value: they represent Western capitalism, consumption, and values such as wealth, freedom of choice and independence (Richter & Waugh, 1986). For the terrorists the symbolism, high profile, and news coverage brought by international tourists makes them too valuable to be left out of their terrorist acts (Sonmez et al., 1999). On the other hand, tourists’ attacks signify attacks to their governments (Richter

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& Waugh, 1986). The social nature of violent crimes (murder, rape and armed robbery) and political crimes (terrorism, political confrontations) resulted, in many individuals, in fear of traveling, especially abroad, and specifically to destinations perceived as unsafe. The violence directly affects the image of a country internally and internationally, destroying the smooth functioning of society and interfering with the free flow of people and ideas. Few people travel to places where they feel threatened. When people are afraid of travelling isolation and xenophobia begins and cooperation and cultural exchange ends (Pizam et al., 1997). The tourist crises caused by terrorism are different from those caused by other types of disasters. Although terrorism is a political weapon since the beginning of history, this form of struggle in contemporary periods has an impact and frequency never witnessed before. Terrorism in the present day is almost a commonplace (D'Amore & D'Anuza, 1986; Richter & Waugh, 1986). Most terrorist attacks are difficult to prevent. They are different and difficult to solve with simple formulas, however, the tourist destinations should be prepared in order to build their own specific action plan. Having this device, you can save yourself time, energy and valuable resources. In light of social and global complexities, no target is immune to negative occurrences and thinking that "it only happens to others" may be dangerously immature and may be catastrophic (Sonmez, 1998). Crises resulting from terrorist attacks, which have become increasingly frequent, put enormous pressure on staff and managers (Ritchie, 2004). Marketers, especially, need to understand the behavior and decision-making mechanisms of tourists in order to pool resources with managers in an attempt to attract tourists in a world where fear is global (Yeoman et al., 2006). REFERENCES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35.

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36. O’Neill, M., & Fitz, F. (1996). Northern Ireland Tourism: What Chance Now? Tourism Management , 17 (3), 161-163. 37. Paraskevas, A., & Beverley, A. (2007). A Strategic Framework for Terrorism Prevention and Mitigation in Tourism Destinations. Tourism Management , 1, 1-14. 38. Pitts, W. (1996). Uprising in Chiapas Mexico: Zapata Lives: Tourism Falters. In A. Pizam, & Y. Mansfeld (Edits.), Tourism, Crime and International Security Issues (pp. 215-227). New York: Wiley. 39. Pizam, A., & Mansfeld, Y. (Edits.). (1996). Tourism, Crime and International Security Issues. Chichester: Wiley. 40. Pizam, A., & Smith, G. (2000). Tourism and Terrorism: A Quantitative Analysis of Major Terrorist Acts and their Impact on Tourism Destinations. Tourism Economics , 6 (2), 123-138. 41. Pizam, A., Tarlow, P., & Bloom, J. (1997). Making Tourists Feel Safe: Whose Responsability Is It? Journal of Travel Research , 3 (3), 23-28. 42. Poland, J. (1988). Understanding Terrorism. Englewood Cliffs: Prentice-Hall. 43. Prideaux, B., Laws, E., & Faulkner, B. (2003). Events in Indonesia: Exploring the Limits to Formal Tourism Trends Forecasting Methods in Complex Crisis Situations. Tourism Management , 24, 475-487. 44. Qi, C., Gibson, H., & Zhang, J. (2009). Perceptions of Risk and Travel Intentions: The Case Of Chine and the Beijing Olympic Games. Journal of Sport & Tourism , 14 (1), 43-67. 45. Rapoport, D. (2001). The Fourth Wave: September 11in the History of Terrorism. Current History , December, 419-424. 46. Reisinger, Y., & Mavondo, F. (2005). Travel Anxiety and Intentions to Travel Internationally: Implications of Travel Risk Perception. Journal of Travel Research , 43, 212-225. 47. Richter, L. (1983). Tourism Politics and Political Science: A Case of Not So Benign Neglect. Annals of Tourism Research , 10 (3), 313-315. 48. Richter, L., & Waugh, W. (1986). Terrorism and Tourism as Logical Companions. Tourism Management , 7 (4), 230-238. 49. Ritchie, B. (2004). Chaos, Crises and Disasters: A Strategic Approach to Crisis Management in the Tourism Industry. Tourism Management , 25 (5), 669683. 50. Ruby, C. (2002). The Definition of Terrorism. Analyses of Social Issues and Public Policy , 2, 9-14. 51. Ryan, C. (1993). Crime, Violence, Terrorism and Tourism: An Accidental Relationship or Intrinsic Relationship? Tourism Management , 14 (3), 173-183. 52. Sönmez, S. (1998). Tourism, Terrorism and Political Instability. Annals of Tourism Research , 25 (2), 416-456. 53. Sönmez, S., & Graefe, A. (1998b). Determining Future Travel Behavior From Past Travel Experience and Perceptions of Risk and Safety. Journal of Travel Research , 37 (4), 171-177. 54. Sönmez, S., & Graefe, A. (1998a). Influence of Terrorism Risk on Foreign Tourism Decisions. Annals of Tourism Research , 25 (1), 112-144. 55. Sönmez, S., Apostolopoulos, & Tarlow, P. (1999). Tourism and Crisis: Managing the Effects of Terrorism. Journal of Travel Research , 38 (1), 13-18. 56. Sönmez, S., Backman, S., & Allen, L. (1994). Managing Tourism Crisis: A Guidebook. Clemson, SC: Clemson University. 57. Schlagheck, D. (1988). International Terrorism. Lexington MA: Lexington Books. 58. Schmid, A., & DeGraaf, J. (1982). Violence as Communications: Isurgent Terrorism and the Western News Media. Berverly Hills: Sage. 59. Schmid, A., & Jongman, A. (1988). Political Terrorism. New York: North-Holland. 60. Spilerman, S., & Stecklov, G. (2009). Societal Responses to Terrorist Attacks. Annual Review of Sociology , 35, 167-189. 61. Stern, J. (1999). The Ultimate Terrorists. Cambridge, MA: Harvard University Press. 62. Swarbrooke, J., & Horner, S. (1999). Consumer Behavior in Tourism. Oxford: Butterworth-Heinemann. 63. Taylor, P. (2006). Getting Them to Forgive and Forget: Cognitive Based Marketing Responses to Terrorist Acts. International Journal of Tourism Research , 8, 171-183. 64. University of Maryland. (2013). Global Terrorism Database . Obtido em 12 de Dezembro de 2013, de http://www.start.umd.edu/gtd/ 65. US Department of State. (1996). Patterns of Global Terrorism. Washington, DC: US Department of State. 66. Wahab, S. (1996). Tourism and Terrorism: Sinthesis of the Problem with Emphasis on Egypt. In A. Pizam, & Y. Mansfeld (Edits.), Tourism, Crime and International Security Issues (pp. 175-186). New York: Wiley. 67. Wall, G. (1996). Terrorism and Tourism: An Overview and an Irish Example. In P. A., & Y. Mansfeld (Edits.), Tourism, Crime and International Security Issues (pp. 143-158). New York: Wiley. 68. Witt, S., & Moore, S. (1992). Promoting Tourism in a Face of Terrorism: The Role of Special Events in Northern Ireland. Journal of International Consumer Marketing , 4 (3), 63-75. 69. Yeoman, I., Munro, C., & McHahon-Beattie, U. (2006). Tomorrow’s: World, Consumer and Tourist. Journal of Vacation Marketing , 12 (2), 174-190.

DETAILS ABOUT AUTHORS: CLÁUDIA SEABRA cseabra@estv.ipv.pt MARIA JOSÉ NOGUEIRA mjnogueira@estv.ipv.pt ODETE PAIVA odetepaiva@estv.ipv.pt MARGARIDA VICENTE margarida@estv.ipv.pt JOSÉ LUÍS ABRANTES jlabrantes@estv.ipv.pt FOR ALL AUTHORS: POLYTECHNIC INSTITUTE OF VISEU HIGHER SCHOOL OF TECHNOLOGY AND MANAGEMENT CAMPUS POLITÉCNICO REPESES, 3504-510 VISEU - PORTUGAL

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MOTIVATION AND INVOLVEMENT IN INTERNATIONAL TOURISM CLÁUDIA SEABRA MARGARIDA VICENTE CARLA SILVA JOSÉ LUÍS ABRANTES

ABSTRACT

Using a sample of international tourists travelling in Portugal, Spain and Italy, this study identifies key issues related with tourist involvement. One of the main aspects in the consumer behavior and the decision processes’ understanding is the concept of involvement (Broderick & Mueller, 1999; Dimanche et al., 1993) because it influences the decision rules used by tourists to reach the final decision (Sirakaya & Woodside, 2005). An empirical study of 600 international tourists reveals that motivation to relax influences tourists’ involvement with the trip. A structural model reveals that when tourists are motivated to relax they get directly more involved with their trip (pleasure and information seeking). The motivation to relax also influences indirectly the tourist involvement with the evaluation and quality perception of the trip through its influence on involvement with the trip planning. Discussion centers on the implications of this model to theory and managerial development of tourism and services strategies. Directions for future research are also presented. KEYWORDS: Motivation, Involvement, International Tourism Acknowledgments: FCT and CI&DETS (PEst-OE/CED/UI4016/2011)

1. INTRODUCTION Tourism decisions are considered as highly risky due to the high monetary and non-monetary costs associated (Sirakaya & Woodside, 2005), so the process of buying tourism products is very engaging, which means that tourists devotes to it a considerable effort and time (Seabra et al., 2007). Additionally depending on the product or situation, tourists may be more interested, concerned or involved in the buying decision process. In general, each buying decision process in tourism correspond to the existence of a service encounter, which typically involves interpersonal relationships between the producer and the customer. In consequence, this situation requires a higher degree of involvement by the consumer (Varki & Wong, 2003) for various reasons (Laroche et al., 2003): its production requires human interaction which introduces some uncertainty in their outcomes; the delivery, in most cases, is not possible without the participation of the consumer; there is no transfer of ownership, so the buyer cannot sell or return the product to the seller. Involvement is, in fact, the basis of the tourist purchase decision (Zaichkowsky, 1986b) and profoundly affects the perceived value of the product and its evaluation (Bolton & Drew, 1991). This concept is a central issue in the study of consumer behavior in general (Zaichkowsky, 1985, 1986a) and especially in the decision to purchase tourism products (Dimanche et al., 1991). Involvement is a key issue to explain what attracts consumers to products and how they make their buying decisions allowing distinguishing types of consumers (Kassarjian, 1981). In turn involvement study can help organizations to define strategies to influence consumers’ decisions. Research on involvement has been neglected in services context, especially in tourism. Also, research should focus on what influences involvement, namely motivations. Motivations that underlie a trip have a significant influence on tourists’ behaviors (March & Woodside, 2005; Morrison, 1996). Accordingly, the intrinsic forces that motivate tourists to travel, the push factors, will have a significant impact on tourists’ behaviors from planning to consumption and evaluation of tourism products (Moutinho, 1987). Motivation is the set of internal forces that push people to undertake certain actions to achieve an end, so it explains why individuals decide to do something, for how long and with which commitment. In short, they represent the internal forces that lead individuals to action (Schiffman & Kanuk, 1997). Motivations are an important dimension in tourism research. It is a central concept in the comprehension of consumer behavior and in the tourism decision process. Many key questions related with tourism activities can be answered

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trough motivation study, namely those of why people travel, why do they visit some destinations and choose certain activities? The understanding of those questions helps researchers to justify the comprehension of the higher or lower investment that tourists imply in their trips. Motivation measuring allows identifying and categorizing tourists, also to understand and analyze trips patterns (Fodness, 1994). Is not possible to make future decisions in marketing and promotion plans without evaluating what motivates tourists to travel and how those strengths influence their involvement on buying decision. So, it is our main goal to develop a model for measuring the importance and the influence of motivations on tourist buying involvement in an international context.

2. LITERATURE REVIEW Tourists are becoming more demanding in their travel behavior, which makes its study more complex. Also, the process of purchasing tourism products has some peculiarities (Gursoy & Gavcar, 2003):: cconsumers buy and consume the products outside the places where they live (Sirakaya et al., 1996);; the decision-making process used is longer than in much of the tangible products (Gursoy & Gavcar, 2003); more often tourists don’t receive anything tangible in return for their investment (Seabra et al., 2007); tourists deal with a high level of perceived risk due to their personal investment of time, effort and money (Teare, 1990); consumers plan and save money over a long period of time to be able to travel (Moutinho, 1987), which leads them to have a greater level of involvement in the decision making, selection and purchase of such products (Gursoy & Gavcar, 2003). The purchase of tourism products requires high involvement in the decision making process (Swarbrooke & Horner, 1999), which makes involvement a central issue to understand and explain the buying and consumption of tourism products. Tourists individual features are important variables influencing involvement with buying and decision process (Hawkins et al., 1995), namely motivations. Tourism Motivations Tourist motivation can be defined as “the global integrating network of biological and cultural forces which gives value and direction to travel choices, behavior and experience” (Pearce et al., 1998). Past research establishes that individuals are guided by socio-psychological motivations variables into making travel decisions (Sirakaya &Woodside, 2005). Travel motivation relates to why people travel (Hsu & Huang, 2008) and are an important issue in explain tourist behavior because they are the starting points of the travel decision and destination choice processes (Crompton & McKay, 1997). Travelling motivations can be divided in three major groups: knowledge, cultural and education motivations (Formica & Uysal 1996; Ryan & Glendon, 1998); social motivations (Fodness, 1994); and benefits seeking, this is escape from the daily life and sensation seeking (Mitchell, 1998). One particular reason for people travelling to other countries is to seek different experiences or lifestyles that they cannot obtain from their usual environment (Uysal & Hagan, 1993). The contact with different environments, places and people, which is an inherent characteristic of tourism, allows a strong experience of learning (Formica & Uysal, 1996), by developing and enhancing knowledge and exploring new things and places (Fodness, 1994; Ryan & Glendon, 1998, Silva, Abrantes & Lages, 2009). Many tourists seek the unknown of each place (Lee & Crompton, 1992), they travel in order to learn something new and to see beautiful objects (Hsu & Huang 2008). Tourism is a social phenomenon that also allows people to develop social interaction, to satisfy social acceptance, approval and integration needs. In tourism, the need for affiliation is often manifested in terms of need for social experience like meeting new people and having good times with others, friends and family. Tourism is a form of intercultural meeting and interaction (Ward et al., 2001). Therefore, social motivations are related with the internal needs that tourists have for social interaction by being entertained (Ryan & Glendon, 1998) and meeting different people (Ray & Ryder, 2003), building friendships and developing close relationships (Kim & Lee, 2002). This refers to social motives stimulating individuals to participate in activities that would satisfy also their desire of belonging according with the need for belongingness in Maslow’s theory of needs (Ryan & Gledon, 1998). On the 80’s arises a new stream of studies in the research on motivations in tourism, travel, leisure and recreation: the benefits sought. This current research argues that tourist behavior are mostly motivated by the benefits they can offer. Thus, travel behavior is understood as a reward in itself, such as the activities associated with it (Mitchell, 1998). Tourists experience the inherent need to relax when on holiday because ‘‘tourism is essentially a temporary reversal of

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everyday activities - it is a no-work, no-care, no-thrift situation’’ (Cohen, 1979, p.181). Relaxation represents a central distinguishing motivational theme (Beard & Ragheb, 1983; Kozac, 2002) and Crompton (1977) referred to it as “escaping from everyday environment‟. Relaxation and getting away from routine life are the first two psychological reasons for taking a vacation (Krippendorf, 1987). In fact, tourists are motivated to travel in order to escape from their everyday life (Crompton, 1977; Hsu & Huang 2008) and to rest and relax physically and mentally (Goeldner et al., 2003). On the other hand, one of the most attractive tourism characteristics is the ability to provide different and intense experiences. Tourism is an experimental phenomenon (Botterill & Crompton, 1996; Frochot & Morrison, 2000) where experiences are sought in relation to feelings of motivation (den Breejen, 2007). There is a new generation of travelers emerging. Instead of a tourist, the traveler has become a searcher – pleasure and sensation seeker (Moutinho, 2000). A sensation seeker is seen as a person who needs varied, novel, and complex sensations and experiences to maintain an optimal level of arousal (Zuckerman, 1979). Sensation seeking is therefore a tourism motivation which is “a trait defined by the seeking of varied, novel, complex and intense sensations and experiences, and the willingness to take physical, social, legal and financial risks for the sake of such experience” (Zuckerman 1994, p. 27). Thus, sensation seeking motivations include novelty seeking (Crompton, 1979; Rowland et al., 1986), challenge abilities (Andersson, 2007), use imagination and physical skills in sport (Ryan & Glendon, 1998). In this study we consider four main motivations: (1) knowledge, (2) relaxation, (3) sensation-seeking and (4) social motivations (Fodness, 1994; Moutinho 1987; Ryan & Glendon, 1998). Involvement Involvement is the degree in which consumers are committed in different aspects of the process of consumption: product, demand for information, decision making and the purchase (Broderick & Mueller, 1999; Zaichkowsky, 1985). It is the basis of the purchase decision (Zaichkowsky, 1986a) and affects profoundly the perceived value of products and its evaluation (Bolton & Drew, 1991). Involvement in tourism was defined as "a psychological state of motivation, arousal and interest between an individual and a recreation activity, tourist destination, or related equipment at any given time, characterized by the perception of the following elements: importance, pleasure value, symbolic value, probability risk and consequences of risk" (Havitz & Dimanche, 1990, p.180). The same authors later proposed another simpler definition: involvement as the unobserved state of motivation, arousal and interest in respect of a recreational activity or associated product. It is evoked by a particular stimulus or situation. Therefore, involvement refers to what tourists think about leisure and recreation and that affects their behavior (Havitz & Dimanche, 1997). Tourist products are highly engaging due to their intangibility and inseparability (Swarbrooke & Horner, 1999). And when consumers are involved, they give attention, perceive the importance and behave in a different way than when they are not (Zaichkowsky, 1986b). Involvement is related to all stages of purchase, from the pre-purchase standards to the subsequent evaluations (Shaffer & Sherrel, 1997). Involvement is a set of stages, all related from the involvement with the product to its evaluation:

• Involvement in pre-purchase or with the generic product: involvement occurs at the individual level and results •

• •

from the interaction with products (Zaichkowsky, 1985). The focus in this research area relies on the relevance or importance that a product has for consumers, particularly the relevance that products have to the consumers’ needs and values (Zaichkowsky, 1986a). Involvement with the decision to purchase the product: is the commitment to the decisions regarding the purchase or simply with the buying act. It is conceptualized as the behavior that occurs when the consumer faces the situation of acquisition or consuming as personally relevant or important. When the buying is considered as important, consumers will spend more efforts to obtain information in order to reduce uncertainty (Zaichkowsky, 1986b). Tourists use various amounts and types of information sources in response to internal and external contingencies to facilitate trip planning decisions for primary and secondary decisions (Fodness & Murray, 1997). Involvement with the products' consumption: tourism involvement level can be faced from the perspective of affection, in that it can be defined as “the intensity level of interest or motivation" (Ratchford & Vaughn, 1989, p.28) with a specific tourism product and with certain consequences. This perspective assumes that involvement can be measured, directly or indirectly, by its consequences (Lehto et al., 2004). Involvement in product evaluation or post-purchase: involvement is strongly correlated with the product evaluation activities. Several empirical studies have confirmed the influence of involvement in the processes of post-purchase.

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If the consumer is highly involved, products are evaluated in a deeper way (Richins & Bloch, 1991). The overall assessment in the post-purchase tourist experience includes the experience of travel or duration of stay, the perceived quality, perceived value and overall satisfaction with the intentions of future behavior (Bolton & Drew, 1991). In this study the concept of involvement is considered in all stages of the tourist buying process, according to the Theory of Information Processing (Bettman et al., 1998) where the process is understood as an optimal alternative individual choice by a series of rational steps (Chen, 1997), from the pre-purchase stage, through the decision, consumption and to evaluation or post-purchase.

3. CONCEPTUAL MODEL Involvement and motivation are very close concepts since involvement is defined as interest in something or like a motivational state. Involvement is a motivational state observably induced by an association between an activated attitude and the consumer ego concept. It is considered as an intermediate step in the explanation of the relationship between consumers’ individual characteristics and behaviors (Bloch, 1982). Consumers’ specific characteristics are considered as background to the consumer involvement. The individuals’ system of values, experiences and motivations determine their greater or lesser degree of involvement with a product (Zaichkowsky, 1986b). Involvement with a particular product or class of products relates strongly with motivational aspects related to the purchase (Dholakia, 2001). In line with the above we propose the following model:

4. METHODOLOGY The research setting refers to a survey approach, applied in three European countries – Portugal, Spain and Italy –, in an international tourism context, more specifically in an international air travelling context. Sample and data collection The final data was collected from January 2009 to March 2009. Tourists were randomly selected in loco across 3 international airports: Madrid/Barajas, Lisbon/Portela and Milan/Malpensa, from those agreeing to participate in the study. However, only tourists who had undertaken an international trip were interviewed. The questionnaires were self-administrated, which allowed us to ensure that the data was not biased. We obtained a final sample of 613 questionnaires and a total of 600 valid ones, equally divided among the 3 international airports. Measures We sourced measures from the literature and adapted them to the current research context (see Churchill, 1979). Constructs were first order, and we measured them with multi-item scales.

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To measure the motivation to travel respondents were asked to rate the importance of several types of motivation from four dimensions: Motivation to Knowledge, Motivation for Relax, Motivation for Sensations and Social Motivation. We used scales adapted from Beard and Ragheb (1983), Fodness (1994), Goossens (2000) and Ryan and Glendon (1998). Involvement, as explained before, was considered in four different facets.

• Involvement in pre-purchase or with the generic product. Respondents rated their level of agreement with state•

• •

ments regarding their knowledge, pleasure/interest, risk probability and importance attributed to and prestige related with tourism products, namely travelling (adapted from Park et al., 1994 and Gursoy & Gavcar, 2003). Involvement with the decision to purchase the product. We considered involvement with the decision to purchase the product in terms of information that tourists sought for preparing the trip. So, respondents had to classify the importance of several information sources to take the primary and secondary trip decisions. This scale is composed of 13 items regarding personal sources, marketing communication sources, neutral and experience information sources and were adapted from Assael (1998), Fodness and Murray (1998) and Seabra et al., (2007). Involvement with the product’s consumption. As far as tourism product consumption is concerned, we considered the money tourists spent with many items during their trip. Also the activities that tourists engaged in during their trip were considered (Lehto et al., 2004). Involvement in product evaluation or post-purchase. Respondents had to rate their quality perception regarding four specific items of their trip namely hospitality, attractions, transportation and infra-structures (Chen & Tsai, 2007). The perceived value was the other scale used to measure involvement with evaluation (Bolton & Drew, 1991)

Survey instrument development After selecting the scales from the literature, they were discussed with experts. The initial scales were translated into three languages: Portuguese, Spanish and German and then the instrument was back-translated to English. After revision, we used a pre-test sample of 30 international travellers in order to test the scales’ reliability (through Cronbach’s alpha). The pre-test results were used to further refine the questionnaire. Data profile Tourists in this study sample were from 41 countries, from all over the world. The sample was mainly composed of men (56%), with ages mostly under 35 years (56%). Approximately 74% had university education, 22% were middle and senior management, 20% were businessmen, about 19% were freelancers/self-employed and 15% students. The average income ranged from 2000 to 3000 Euros per month. The sample was mainly composed of frequent travellers, who had undertaken, on an average, seven international trips in the last three years, lasting nine days each. There was a relatively high degree of familiarity with the destination visited; since tourists had in average visited the destination 3.5 times before. Each tourist used, on the average, 15 days to plan the trip, and referred to reservations planning with a period of 25 days in advance.

5. DATA ANALYSIS To refine the measures and assess the reliability and validity of the constructs, the items were subjected to an exploratory factor analysis followed by a confirmatory factor analysis (CFA), using full-information maximum likelihood estimation procedures in LISREL 8.8 (Jöreskog & Sörbom 1996). Measurement model To assess the adequacy of the measurement model, we examined initially the Cronbach’s alphas from each construct of the conceptual model. In result, several factors were eliminated were not included in the measurement because they presented alphas less than .65 and / or for revealing no significant values when tested to incorporate the final model. We also examined individual item reliabilities, convergent validity, and discriminant validity (see Appendix A). We assessed item reliabilities by examining the loadings of the individual items in the respective constructs. In this model, each item is restricted to load on its priori specified factor, with the factors themselves allowed to correlate with one another. The overall chi-square for the model is significant (χ2=213.69, df=59, p<0.00). Four measures of fit were examined: the comparative fit index (CFI=.96), the incremental fit index (IFI=.96), the Tucker-Lewis fit index (TLI=.95), and the root mean square error of approximation (RMSEA=.066). The results suggest that the scale measures are internally consistent, able to provide a good fit of the factor model to the data. Internal consistency was evidenced by composite validity (ρ) (Bagozzi, 1980). All the constructs passed the minimal acceptable values of .7 (Nunnally, 1978) and are valid presenting internal consistency above .80 and Cronbach’s alphas of .80. Convergent validity is evidenced by the large and significant standardized loadings of each item on its intended

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construct (average loading size was .78). Discriminant validity among the constructs is stringently assessed using the Fornell & Larcker (1981) test; all possible pairs of constructs passed this test. Appendix A presents all the constructs, scale items and reliabilities. Discriminant validity was assessed by observing the construct intercorrelations. The root of AVE for each construct was compared with the shared variance between constructs. The square root of the AVE should be greater than the correlation between a construct and any other construct (Chin, 1998). Table 1 provides an overview of the means, standard deviations, and correlation matrix among the constructs. Adequate discriminant validity is evident since the square root of AVE between any two constructs (diagonal) is greater than the correlation between those constructs (off-diagonal). Table 1. Means, standard deviations, and correlations among constructsa,b

Structural equation model The conceptual framework depicted in Fig. 1 was tested using structural equation modeling. Specifically, this model contains four constructs, 13 observable indicators, measurement and latent variable errors, and inter-correlations between the latent constructs. The results suggest a good fit of the model to the data (χ2=216.15, df=61, p<0.00, CFI=.96, IFI=.96, TLI=.95, RMSEA=.065). The hypotheses defined in the conceptual model that linked those eliminated constructs presenting low Cronbach’s alphas and not included in the measurement model were not tested (H1a, H1c; H3). The hypotheses relating the constructs fixed in the CFA model were tested. The following are the results (see Figure 2 and Table 2) through measures of standardized coefficients and t-values.

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Table 2. Testing results

DISCUSSION In this work we undertook a literature revision of two important concepts in tourism study: motivation and involvement, namely in natural areas study. Results indicate that motivations are effectively related with involvement. Also, involvement can be related with some phases of consumer behavior decision. Motivation to relax influences involvement with the pleasure to travel and with the trip planning. Motivation to relax implies personal involvement with the product in the pleasure dimension. When tourists travel motivated to relax, they face the tourism product as a gift that they buy with careful implying extra efforts in the planning stage namely searching for information. Relaxation is an important motivation that leads tourists to prepare and plan their trips in a more committed way. Tourists that want to relax mental and physically, to avoid the hustle and bustle of daily life, and to be in a calm atmosphere are more involved with the pleasure to travel and with the trip planning. Tourists motivation to relax influence positively their search for information in sites like travel clubs, books, magazines, reports in TV, radio, press, and in welcome centers. In this circumstances tourists experiment more pleasure when they buy a vacation to them, it is to like buy a personal gift. Involvement with the pleasure to travel contributes positively to the trip evaluation involvement. When tourists are involved with tourism products and when they faced them as something with great meaning to them, they will be more critical in evaluation. The results confirmed also the significant relationship between involvement with the trip planning and trip evaluation involvement. When tourists prepare their trips in an extensive way, they create high expectations. So, they will be more involved in the trip evaluation. Specifically, those related with general infrastructures, travel information, and with local signs and indicators. Therefore, the selection of a strategy for tourism depends on how tourists connect with products and destinations. It is expected that through the understanding of how motivation and involvement are connected, tourism organizations may better understand the type of connection that tourists establish with tourism and what its impact on tourists’ decision making. They may, as a consequence, use a framework to develop and implement strategies to increase the value associated with destinations and their services. These results may provide some guidance on how to better pursue an information-oriented business strategy. By identifying tourists’ levels connection with tourism it becomes possible to make choices regarding the best marketing strategies to address, such as identifying different market segments and corresponding differentiated strategies, or improving the destination’s positioning. Finally, the model developed here can be an important basis for the segmentation of a tourist market. There are some limitations of the research to be considered. The first limitation is linked to the characteristics of the sample, which may restrict the generalization of the results to a certain extent. We include travelers that used only three European airports. Future studies with larger samples could allow for a comparison between tourists from different regions of the world, using multi-groups methodology. Moreover, we need further research on the antecedents of motivation to relax and consequences of trip evaluation involvement, namely intention to buy. We also suggest the implementation of the conceptual model to other services and other regions.

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LITERATURE 1.

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Broderick, A., & Mueller, R. (1999). Theorectical and Empirical Exegesis of the Consumer Involvement Construct: The Psychology of the Food Shoper. Journal of Marketing Theory and Practice, 7, 97-108.

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42. Laroche, M., Bergeron, J., & Goutaland, C. (2003). How Intangibility Affects Perceived Risk: The Moderating Role of Knowledge and Involvement. The Journal of Services Marketing, 17(2/3), 122-140. 43. Lee, T., & Crompton, J. (1992). Measuring Novelty Seeking in Tourism. Annals of Tourism Research, 19, 732-751. 44. Lehto, X., O’Leary, J., & Morrison, A. (2004). The Effect of Prior Experience on Vacation Behavior. Annals of Tourism Research, 31(2), 801-818. 45. March, R., & Woodside, A. (2005). Testing Theory of Planned Versus Realized Tourism Behavior. Annals of Tourism Research, 32, 905-924. 46. Mitchell, R. (1998). Learnning through Play and Pleasure Travel: Using Play Literature to Enhance Research into Touristic Learning. Current Issues in Tourism, 1(2), 176-188. 47. Morrison, A. (1996). Hospitality and Travel Marketing . Albany: Delmar. 48. Moutinho, L. (1987). Consumer Behavior in Tourism. European Journal of Marketing, 21(10), 5-44. 49. Moutinho, L. (2000). Consumer Behavior. In L. Moutinho (Ed.), Strategic Development in Tourism (pp. 41-79). New York: CABI Publishing. 50. Nunnally, J. (1978). Psychometric Theory. New York: McGraw-Hill. 51. Park, C., Mothersbaugh, D., & Feick, L. (1994). Consumer Knowledge Assassment. Journal of Consumer Research, 21, 71-82. 52. Pearce, P., & Caltabiano, M. (1983). Inferring Travel Motivation from Travelers’ Experiences. Journal of Travel Reserch, 22(2), 16-20. 53. Pearce, P., Morrison, A. M. & Rutledge, J. L. (1998). Tourism: Bridges Across Continents. Sidney: McGraw-Hill. 54. Ratchford, B., & Vaughn, R. (1989). On the Relationship between Motives and Purchase Decisons: Some Empirical Approaches. Advances in Consumer Research, 16, 293-299. 55. Ray, N. M. & Ryder, M. E. (2003). “Ebilities” Tourism: An Exploratory Discussion of the Travel Needs and Motivations of the Mobility-Disabled. Tourism Management, 24(1), 57-72. 56. Richins, M., & Bloch, P. (1991). Post-Purchase Product Satisfaction: Incorporating the Effects of Involvement and Time. Journal of Business Research, 23, 145-158. 57. Ryan, C., & Glendon, I. (1998). Application of Leisure Motivation Scale to Tourism. Annals of Tourism Research, 25, 169-184. 58. Schiffman, L., & Kanuk, L. (1997). Consumer Behavior. London: Prentice-Hall International. 59. Seabra, C., Abrantes, J., & Lages, L. (2007). The Impact of External Information Sources in Expectations Formation and Future Use of Media. Tourism Management, 28(6), 1541-1554. 60. Shaffer, T., & Sherrell, D. (1997). Consumer Satisfaction with Health-Care Services: The Influence of Involvement. Psychology & Marketing, 14, 261-285. 61. Silva, C., Abrantes, J., & Lages, C. (2009). Push Motivations for Tourism Mountain Destinations. In A. Fyall, M. Kozak, L. Andreu, J. Gnoth, & S. Sibila, Marketing Innovations for Sustainable Destinations. Goodfellow Publishers . 62. Sirakaya, E., & Woodside, A. (2005). Building and Testing Theories of Decision Making by Travellers. Tourism Management, 26(6), 815-832. 63. Sirakaya, E., McLelland, R., & Uysal, M. (1996). Modeling Vacation Destination Decisions: A Behavioral Approach. Journal of Travel & Tourism Marketing, 5(1/2), 57-75. 64. Slama, M., & Taschian, A. (1985). Selected Socioeconomic and Demographic Characteristics Associated with Purchasing Involvement. Journal of Marketing, 49, 77-82. 65. Swarbrooke, J., & Horner, S. (1999). Consumer Behavior in Tourism. Oxford: Butterworth-Heinemann. 66. Teare, R. (1990). An Exploration of the Consumer Decision Process for Hospitality Services. In R. Teare, L. Moutinho, & N. Morgan (Edits.), Managing and Marketing Services in the 1990s (pp. 233-248). London: Cassell Educational. 67. Uysal, M., & Hagan, L. (1993). Motivation of Pleasure to Travel and Tourism. In A. Khan, M. Olsen, & T. Var (Edits.), VNR’s Encyclopedia of Hospitality and Tourism (pp. 798-810). New York: Van Norstrand Reinhold. 68. Varki, S., & Wong, S. (2003). Consumer Involvement in Relationship Marketing of Services. Journal of Service Research, 6, 83-91. 69. Ward, C., Bochner, S. & Furnham, A (2001). The Psychology of Culture Shock. London: Routledge. 70. Zaichkowsky, J. (1985). Measuring the Involvement Concept. Journal of Consumer Research, 12(December), 341-352. 71. Zaichkowsky, J. (1986a). Conceptualizing Involvement. Journal of Advertising, 15(3), 4-34. 72. Zaichkowsky, J. (1986b). The Emotional Aspect of Product Involvement. Advances in Consumer Research, 14, 32-35. 73. Zuckerman, M. (1979). Sensation Seeking: Beyond the Optimal Level of Arousal. Hillale, NJ: Lawrence Erlbaum Associates. 74. Zuckerman, M. (1994). Behavioral Expressions and Biosocial Bases of Sensation Seeking. Cambridge: Cambridge University Press.

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Appendix A. Constructs, scale items and reliabilities

DETAILS ABOUT AUTHORS: CLÁUDIA SEABRA cseabra@estv.ipv.pt MARGARIDA VICENTE margarida@estv.ipv.pt CARLA SILVA csilva@estv.ipv.pt JOSÉ LUÍS ABRANTES jlabrantes@estv.ipv.pt FOR ALL AUTHORS: POLYTECHNIC INSTITUTE OF VISEU HIGHER SCHOOL OF TECHNOLOGY AND MANAGEMENT CAMPUS POLITÉCNICO REPESES, 3504-510 VISEU - PORTUGAL

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SUSTAINABLE TOURISM FOR BETTER LIFE: REVITALIZATION OF ABANDONED VILLAGES IN CROATIAN ISLANDS SANJA ROCCO NIKO BARBIĆ

ABSTRACT

Croatian islands have already been recognized as places of extraordinary natural beauty, as well as a diversity of cultural heritage. Unfortunately, most of the islands are facing the problem of continuous depopulation, resulting long-term demographic processes such as aging of population, reduced birth rates, as well as more and more abandoned homelands. There have been different causes of this negative process, starting from the beginning of the 20th century up to these days. However, this trend could only stop by developing the islands and giving more opportunities to young population for better life conditions. The islands situated in the south of the Adriatic, such as Brač, Hvar and Vis, have great potential for developing sustainable rural tourism on the ruins of abandoned houses and even whole villages, mostly situated in the interior of the islands. A new model of revitalization could be developed for each specific situation, using experience from similar cases in other Mediterranean countries, but adapted according to different circumstances, needs and capabilities. This paper deals with a possible model of revitalizing the almost abandoned village of Pitve in the interior of Hvar, developing a sustainable rural tourism project for its inhabitants. The proposed model of sustainable revitalization would take special care in the redesign of old houses according to the traditional techniques, delivering at the same time all the benefits of modern life expected by the visitors. The village would not only provide accommodation but also various everyday life activities (gardening, vineyards, olives or herbs harvest, olive oil or vine production, taking care of domestic animals etc.). A research has been undertaken among the remaining inhabitants of the village, as well as the owners of the abandoned houses living nearby that were available, in order to examine their attitude towards rural tourism and their willingness to participate in the project realization. KEYWORDS: Croatian islands, revitalization, rural tourism, sustainability, redesign

1. INTRODUCTION Rural tourism as a way of bringing new life and better future to the village Pitve inland the island of Hvar is an attempt of defining a model for revitalization of almost abandoned villages by developing sustainable rural tourism. Due to rapid depopulation of the village, its extinction has become the reality, whereas the tourism on the Island of Hvar has not been developing within a sustainable framework, distinguishing the sea and its coast as the only attractions and neglecting the rural hinterland areas, such as Pitve.

1.1. Rural tourism - term definition Rural tourism can be defined as tourism in rural areas with all its’ specific activites and is characterized by preserved environment, the absence of noise, communication with local residents, homemade food, getting to know the local customs, way of life and peasant labor (European Council, 1986). According to the Organization for Economic Co-operation and Development (OECD) as a relevant source, rural areas are those with less than 150 inhabitants per square kilometer. Following this criteria, 91,6% of Croatian territory is considered rural, while there is 8,4% of urban area.* According to the Strategy of Urban (Space) Planning for the Republic of Croatia from 1997, approximately 20% of its inhabitants live in the rural areas.Ɨ Rural area as defined in the Strategy of Space Planning for the Republic of Croatia is the entire area outside the cities which is a subject of interest in the sociological and economic terms, the area in which small rural societies or rural communities are spread, closely associated with the predominantly natural life and work environment. The definitions and standards of rural tourism have been established at the General Assembly of the European Federation of Rural Tourism ‘Eurogites’ in 2005, as well as supported by all its members:

* The data from the Strategy of Rural Development for the Republic of Croatia in the period 2008-2013. Available at: http://www.mps.hr/default.aspx?id=3652 Ɨ The data from The Strategy of Urban Planning. Available at: http://www.mgipu.hr/doc/StrategijaRH/Strategija_I_II_dio.pdf

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Table 1.: The criteria for defining a framework of rural tourism Criteria

Interpretation

Accommodation households in a natural environment, vil- Less than 5,000 residents in the village, town or very typical lage or small town traditional villages The rural environment with distinct characteristics of tradi- Outstanding natural values are the park of nature or similar. tional agriculture or the exceptional natural values Traditional farming excludes the prevailing industrial agriculture (viewpoint dominated by greenhouses, very large production facilities, etc.) Tourism is not the main or predominant activity or source The ratio of the number of tourist beds and residents in of income in the immediate area rural areas must not exceed 1:1 Good environmental protection, quiet location, no noise or Acceptable are odors and noise typical for traditional agripollution cultural production The authenticity of the object and the environment

Hospitality, host´s personal care about the guest

The small capacity of the accommodation

The upper limit of the capacity is 40 beds if not legally designated or prescribed by member internal standardization

Compliance with the criteria in the evaluation process

Respect of Federation´s custom standards in quality evaluation

Social sustainability in the context of multifunctional activi- Applying the criteria of ‘Agenda 21’ for tourism ties in rural areas The connection with the local community and its tradition- Minimum is the integration of activities within the commual culture nity from the environment, guests are able to make contact with the locals if they want it Local products and gastronomy

Available in the environment

Culture (folklore, handicraft products, customs, heritage Available in the environment etc.) Excluding criteria are: urban and industrial sites and their Typical rural impacts are acceptable surroundings, areas of highly developed or mass tourism, noise, risk / danger, visible or other pollution Source: Demonja, Ružić: Ruralni turizam u Hrvatskoj, p 22

Rural tourism has not been systematically developed in Croatia until the early 90s when due to warfare Adriatic coast become inaccessible to tourists. As in Europe for some time, great attention was given to the development of rural areas, it became clear that the Croatian continental area, which is predominantly rural, can be a valuable tourism resource. The Croatian Government adopted in 1995 the national program ‘Development of SMEs in the tourism industry with a focus on sustainable tourism development in rural areas’. However, due to the re-establishment of tourist activities in the Adriatic, the idea of development of rural tourism in Croatia has significantly slowed down. (Čorak, Mikačić, 2006). Only from 2004 the theme of rural development re-updated, and Croatia holds regular congresses of rural tourism from 2007.

1.2. The development of rural tourism in Croatia As an introduction to the subject engaged in this work, which is restoration and redesign of abandoned villages inlands of the Dalmatian islands, as well as finding a sustainable model of their inclusion in the tourist offer, which is seen as a problem and examines the specific case, a small village Pitve on the island of Hvar, follows a brief analysis of the literature and then some previously initiated projects related to the reconstruction of rural areas in the function of tourism in Dalmatia.

1.2.1. Literature Overview One of the main works containing data on the development and the current state of rural tourism in Croatia is “Rural Tourism in Croatia with Examples of Best Practice and European Experiences” (Demonja, Ružić 2010) ǂ. This book is a valuable ǂ

“Ruralni turizam u Hrvatskoj s hrvatskim primjerima dobre prakse i europskim iskustvima”

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source of information on the current state of rural tourism in Croatia and is especially pertinent for our subject because it provides an in-depth analysis of rural tourism as one of the potentially significant drivers of economic development in Croatia. The book also includes many examples of good practice in Croatia. An authoritative piece of literature on tourism development is Eduard Kušen’s “The Basis of Tourist Attraction”§ published in 2002. This book provides a broad definition of the basis of tourist attraction as a foundation for tourist “narratives”. “The Island of Hvar” (Mihovilović, 1995)** provides a more detailed account of the island of Hvar and the village of Pitve, as well as of their history and population through the centuries. Valuable detailed insights into the history of the area can be found in “Notes on the Homeland” (Duboković Nadalini, 1973) ƗƗ and “Hvar Almanac” ǂǂ by a group of authors published in 1978. These two books contain varied stories and legends about Hvar and Pitve. Other texts of special interest are Janus’ Head in Pitve§§, Traces of Antiquity in the Former Municipality of Jelsa*** , An Attempt at Interpreting Certain Hvar Toponyms ƗƗƗ, while “The Traditional Building Techniques of the Island of Hvar” ǂǂ ǂ by the author Bojanić Obad Šćitaroci provides a detailed overview of the architecture of the central part of Hvar and Pitve itself. This work gives an in-depth analysis of the classification of settlements in the central part of the island, their beginnings and development, as well as a presentation of a broader thematic framework regarding heritage and the preservation of traditional building techniques.

1.2.2. Development Projects for Rural Tourism in Split-Dalmatia County Strategy for the Development of Rural Tourism in Split-Dalmatia County The Strategy for the Development of Rural Tourism in Split-Dalmatia County was developed in 2009 by Horwath Consulting, as commissioned by The Split-Dalmatia County Tourist Board. Its main guidelines are as follows: The Master Plan for the Development of Tourism in Split-Dalmatia County was adopted on March 13th, 2007, and its main goal was to create a regulatory framework which would balance economic development and growth sustainability. It also strived to ensure accord between the public and private sectors with regards to the direction of the development and projects in tourism as a new model of governing the county. The plan presents a vision of tourism development in the county in which central Dalmatia is steered towards transforming into a tourist destination which is active most of the year and is therefore able to provide long-term profitability and tourism sustainability for all involved parties. Central Dalmatia would also become a favorite destination on the European tourism market by offering honest household hospitality, as well as unique and memorable experiences of visiting the inland and the coast. Furthermore, clusters were formed within the integral area of central Dalmatia, which offer varied adventures and experiences that would be used as marketing and communication keys for geographic areas which have historically crystalized into tourist micro destinations. Therefore, Dalmatinska Zagora (Dalmatian hinterlands) is a cluster which will utilize the entirety of its tourist offer in order to provide an experience of tradition, culture and undiscovered nature. As a means to deliver this vision, the Plan suggests development scenarios for every cluster. The Dalmatinska Zagora cluster should, therefore, focus on market-oriented development which is primarily based on traditional and ecological thematization of the tourist offer and services. In this sense, the main tourist products in Dalmatinska Zagora would include tours, special interests (among other things, this would include rural tourism, eco/ethnic villages etc.), short vacations, wellness and spa, as well as encounters, incentive trips and events. The Master Plan for the Development of Tourism in Split-Dalmatia County suggests the following investment activities for the area of Dalmatinska Zagora: Developing new high-quality products and a limited number of new accommodation capacities such as building a golf course and accompanying accommodation facilities in Sinjsko polje, building ethnic-eco villages all over the county, building a “101 Dalmatian” theme-park close to the Zagreb-Split highway and building the Cetina sports recreational facility near Omiš. Since this Plan was adopted, several projects have been started in accordance with the guidelines that this plan provides, the aforementioned Strategy being one of them. The key guidelines within the Master Plan for the Development of Tourism in Split-Dalmatia County with regards to the development of rural tourism in Dalmatinska Zagora, and which will guide/shape the strategy of its development are as follows: §

“Turistička atrakcijska osnova” “Otok Hvar” ƗƗ “Zapisi o zavičaju” ǂǂ “Hvarski zbornik” §§ Janusova glava u Pitvama *** Tragovi antike na dijelu bivše Općine Jelsa ƗƗ Ɨ Pokušaj tumačenja nekih hvarskih toponima ǂǂ ǂ "Tradicijsko graditeljstvo otoka Hvara" **

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• Market oriented development based on traditional and ecological thematization. • Tourist valorization of the hinterlands as an antipode to the developmental matrix on the coast. • Qualitative tendency towards a traditional matrix and a system of recreational activities which would complement the coast and towards the development of independent high-quality products.

(Final report on the Strategy for the Development of Rural Tourism in Split-Dalmatia County (2009) Horwath Consulting Zagreb) This strategy obviously focuses on the Dalmatian hinterlands and completely ignores the possibility of developing rural tourism on the coast and on central Dalmatian islands. The authors of the strategy note that it was developed on the example of Dalmatinska Zagora and that the key steps of the strategy can subsequently be applied to other parts of the county, e.g. islands’ interior. This proposition is questionable because Dalmatinska Zagora and the islands have a great many differences, therefore copying the same tourism development model and applying it on any micro location would be unacceptable. Every destination has its own unique set of characteristics which should be taken into account when planning for tourism. Therefore, it is quite unclear why this strategy was not planned in such a way as to cover the whole county.

Project COAST Project COAST (Conservation and Sustainable Use of Biodiversity in the Dalmatian Coast) was implemented in the period between 2007 and 2013 in four Dalmatian counties. The project was initiated by the Ministry of Environmental Protection with the support of UNDP (United Nations Development Programme) and in cooperation with the local government. The goals of the project are to preserve the biological and environmental diversity, as well as to protect valuable cultural heritage of the coastal region of Dalmatia by developing key economic branches of activity such as tourism, agriculture, fishing and mariculture. This project aims to enhance the current practices related to tourism, agriculture and fishing in such a way as to implement elements of biodiversity and environmental protection. Four areas were chosen where examples of sustainable natural resource management were developed and tested:

• • • •

Pelješac peninsula, Malostonski bay and Mljet island The islands of Vis, Biševo and Svetac The mouth of Krka river Pag island, the Novigrad and Karin seas

Many studies and guidelines on the sustainable development of tourism have been developed within the scope of this project, with an emphasis on merging tourism with other traditional activities. The logical progression of these steps leads to encouraging the development of rural tourism. Therefore, a plan to develop eco and rural tourism was developed for the island of Vis. The project also directly encouraged “green entrepreneurship”, i.e. ecological agriculture, growing autochthonous varieties and breeding local breeds of animals, etc. A total of 97 projects from all over Dalmatia qualified for subsidies, amounting in a total of 6 million Croatian kunas (HRK).

Adriatic Provence The “Adriatic Provence” idea project was put forth by the Croatian government in 2012 and it is aimed at developing rural tourism in Dalmatinska Zagora (http://www.mvep.hr/hr/posebni-projekti/jadranska-provansa/). According to the initial concept, the project would be partially funded by the European Investment Bank and the European Bank for Reconstruction and Development. The project would not only include the four counties (Zadar, Šibenik-Knin, Split-Dalmatia and Dubrovnik-Neretva) but also the neighboring Bosnia and Herzegovina, with which the area of Dalmatinska Zagora borders to the east. The goals of the project are the preservation of cultural heritage, creating conditions for demographic growth and cross-border cooperation. In this early phase of the project one could suppose that there is a plan to reconstruct old stone houses in which farmhouses and rural households would be set up. It is unclear why these types of projects exclude islands, which also have rural areas that are equally derelict as those in the Dalmatian hinterlands. Furthermore, using the analogy with Provence is to a degree understandable, as a way to illustrate the guidelines of the project. However, in the later stages of project development it would not be advisable to use comparisons with other regions. Provence has its unique characteristics and attractions as well as a thoroughly constructed image, while Dalmatinska Zagora, in order to be recognizable on the market, has yet to make one, based on the unique characteristics of the area and its cultural heritage, such as numerous folk legends about mystic beings and events.

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2. The research problem and the subject of research This paper deals with the topic of potential revitalization of largely abandoned traditional houses in the village of Pitve situated in the interior of Hvar island through rural tourism. Due to the rapid depopulation, the dying out of the village is becoming a real threat. Furthermore, tourism within Hvar island is not being developed within the margins of sustainability and the only attractions being emphasized are the sea and the coast, with no concern for the interior rural areas such as Pitve. The main problem, as defined in this paper, is Hvarâ&#x20AC;&#x2122;s one-dimensional tourist offer focused solely on the summer season. Due to these circumstances, the coastal area is becoming overly crowded because it is emphasized as the only attraction. On the other hand, the islandâ&#x20AC;&#x2122;s interior remains isolated and neglected, and the local population is not given an equal chance for development and economic prosperity by utilizing their resources. The attitudes of the inhabitants of Pitve are a crucial factor in the potential development of rural tourism in their village. Therefore, a research was conducted among the inhabitants to determine their inclination towards the idea of tourism development as well as their willingness to be involved in such a project. In order to familiarize them with the idea, the respondents were given a potential model of revitalization which gives a detailed break-down of the concept of rural tourism development in the village as a whole, ranging from accommodation units, catering facilities and added services (workshops, various activities including gardening, tending gardens and vineyards, picking seasonal crops and herbs as well as specific excursions and sightseeing tours) to implementing urban equipment in the function of tourist content, such as a systematic development of directional signage. The method used in the research was conducting interviews with the aid of questionnaires, and the respondents were the remaining indigenous inhabitants and the available house owners who live nearby (mostly in Jelsa and Zavala).

2.1.

Research goals and questions

The primary research goal is to develop a revitalization model for Pitve by way of rural tourism. The secondary goal is to examine the attitudes of the local inhabitants with regards to the revitalization model. Other notions were revealed, such as a general inclination towards tourism, attitudes on tourism as the new main economic driver of the area, opinions on the present mode of tourism development in Pitve and the local governmentâ&#x20AC;&#x2122;s position on the problem of tourism development in Pitve. This paper examines the following questions: 1. What type of revitalization model for the village of Pitve could be applied in the function of tourism? 2. Does Pitve have the necessary potential for rural tourism development which might ultimately bring economic growth and prosperity to the local population? 3. Are the inhabitants of Pitve willing to get involved and invest their resources in rural tourism development in their community?

2.2. Research Description The research was conducted on the inhabitants by using the face-to-face interview method aided by structured questions. This qualitative method was chosen so that any potential ambiguities in direct communication could be explained to the respondents. The research enveloped 43% of the population of Pitve (according to the official 2011 census), as well as the available owners of derelict houses who live in the vicinity (Jelsa, Zavala). A questionnaire containing 9 questions was designed for the purpose of the interview, and it was given with the explanation of the potential revitalization model.

2.3. Results The research was conducted over a two month period. 30 questionnaires were gathered, of which 22 respondents still live in Pitve and 8 respondents live in Jelsa or Zavala, but originate from Pitve and own derelict houses. What follows is a representation of selected results.

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Graph 1: Question no.1

Source: Research by the author

Graph 1 illustrates the results from the first question which examines the opinions the inhabitants have on the tourists' perception of their village. The majority of 97% of respondents feels that tourists have a positive perception of Pitve. This attitude can provide a foundation for tourism development in the village, but could also indicate a danger that the inhabitants don't feel they need to invest as much in the project as a whole. Opinions like these might have a negative effect on the project development and the extreme seasonality which happens precisely because of the lack of additional content and activities. Graph 2: Question no.2

Source: Research by the author

Responding to the second question, the majority of respondents emphasized architecture, geographical location and landscape and nature as the three main attractions. The inhabitants recognize the preserved local architecture as the village's most valuable asset and as the main attraction. The inhabitants of Pitve also feel that the geographical location is a big advantage for the potential tourism development in the village. Situated on the main thoroughfare, 2.5 km away from Jelsa (an established tourist destination) and 3 km from the southern coast of Hvar, well known for its many beaches, it does indeed have a big potential for development. An additional advantage of the location is the fact that the village is situated on a slope which provides a vista over Jelsa and the island of BraÄ? all the way to Biokovo and Makarska. Landscape and nature were chosen as an attraction by 12 of the 30 respondents. This indicates that a significant part of inhabitants realizes the importance of a healthy and preserved environment for tourism development. Other specified attractions include history, agriculture, the local church and the inhabitants and their customs. It is important to note that 23% of the respondents feel that agriculture is a tourist attraction, which is not an insignificant percentage.

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Graph 3: Question no. 3

Source: Research by the author

All 30 respondents feel that Pitve is a suitable place for rural tourism development. Apart from the location and architectural heritage, the inhabitants emphasize the richness of agriculture and labor culture, as well as interesting properties that could be used in tourism. This makes the core of rural tourism and it is very encouraging that the inhabitants of Pitve recognize their assets. Graph 4: Question no. 4

Source: Research by the author

As much as 28 respondents (93%) replied that they consider tourism to be an opportunity to develop the village, and only two respondents perceive tourism as a threat. The same two respondents fear that the development of tourism will disturb the architectural heritage of the village. The remaining 28 respondents divided their explanations into four reasons. The majority see tourism as an opportunity for development because they feel that tourism is the economic prospect of the area. A third of the respondents believe that rural tourism development in the village will cause the population to return, which they see as favorable. Just under a third of the respondents think that tourism development will contribute to the planning and design of the village and only a fraction see the opportunity to sell their own domestic products. These results can be explained by the poor long-term policy by the local government which neglects local farmers and their products.

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Graph 5: Question no. 5

Source: Research by the author

The fifth question assesses the relationship of the Jelsa Municipality and its tourist board towards the tourist development of Pitve. Only two respondents stated that Jelsa Municipality has a positive relationship towards tourist development of Pitve, explaining that the municipality is doing everything it can and that they are investing in infrastructure. The remainder, 93%, marked their answer as „negative relationship“, with explanations such as neglecting the village (51%), lack of understanding for local problems (26%) and nontransparent funding (23%). The first two explanations indicate a degree of resentment that the inhabitants feel for the municipal government, while “nontransparent funding” indicates a suspicion the inhabitants have about the misappropriation of tax-payers’ funds. 6. Do you think that derelict stone houses can have a new function through tourism? All respondents answered this question affirmatively. Two additional comments were noted which point out the unsettled ownership disputes regarding old houses and the need to renovate in accordance with the traditional architecture of the village. 7. Do you think that the traditional ways of life and work in Pitve can be utilized as an attraction or a resource for rural tourism development? As in the former question, all answers were affirmative. Three respondents additionally noted that the prerequisite for presenting customs related to life and work is stopping depopulation. They also specified agriculture and religious customs as something they would emphasize. Graph 6: Question no. 8

Source: Research by the author

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Question 8 was aimed at examining opinions on the most prominent problems concerning tourism development in Pitve. For the answers to be as concrete as possible, the respondents had to specify three segments they consider problematic. The problem which stands out is the financial situation (14 out of 30 respondents). The inhabitants feel that they do not have enough resources to undertake investments by themselves. A similar amount of responses concerned lack of residents and lack of information, especially among the younger residents, as well as disinterest of the Municipality. A smaller percentage of the inhabitants (20%) feel that their fellow residents are disinterested in tourism development, and only 13% feel that there is a lack of ideas. These data indicate that there is still optimism and that the inhabitants have not succumbed to apathy. 9. Would you personally, according to your capabilities, get involved in rural tourism development in Pitve? All respondents answered this question affirmatively. Additional comments included individuals stating they would get involved with their wine-cellar, that they would do anything for the benefit of the village and that they would organize events. The research answered all three of the posed questions: in the initial phase, the presented model of a thorough reconstruction of the village was found acceptable. The model includes utilizing all of the village’s resources, with the support of the inhabitants, whereby the primary task would be to settle the property and legal disputes. The research has shown that the inhabitants recognize the potential of their village as well as the opportunities that rural tourism would bring. All inhabitants participating in the research were willing to participate in such a project and the only obstacle that was pointed out, apart from the lack of support from the local authorities, was the lack of financial resources.

CONCLUSION The survey conducted among Pitve inhabitants and available property owners of houses in Pitve has shown that they are interested in developing rural tourism in their village. The inhabitants are willing to welcome projects which would revitalize Pitve, but not at any price. In other words, they realize the value of their architectural heritage, and many see that there is great potential in other resources (geographical location of the village, agriculture, culture of labor, etc.) which could be utilized in tourism development. Almost all inhabitants see the development of tourism as the main economic perspective of Pitve, believing that this would encourage the return of the inhabitants who have moved to larger nearby towns (Jelsa, Stari Grad, Hvar) or off the island. There is a strong sense of dissatisfaction concerning Jelsa Municipality’s relationship towards the village. This fact is not surprising considering that there is no plan to develop rural parts of the municipality. The only serious obstacle to the rural tourism development model was identified in the lack of financial resources. The locals cannot undertake such projects individually, so involvement is needed from Jelsa Municipality and the wider local community, as well as the support from the government in the form of subsidies and providing help with designing projects to be applied for getting resources from the European Union funds. Also worth noting are IPARD programs, specifically the measure 302 which states “diversification and development of rural economic activities”. Detailed information can be found on The Ministry of Agriculture’s website (http://www.mps.hr/ipard/). In conclusion, the trend of village depopulation is still present in Croatia. The population sees no perspectives in agriculture, and there are virtually no other employment options. The situation on Croatian islands is similar. Villages like Pitve can find their chance of a better life in rural tourism, the sustainable kind, which would enable the development of a quality and varied tourist offer independent of the season, as well as coexistence of guests and locals, with better life conditions in the village and an opportunity to place their products on the market. One of the limitations of this paper is the unavailability of information about the rest of the inhabitants which would enable a greater sample to conduct the survey on. For the same reason, it is difficult to establish the details of the ownership and legal status of some buildings in Pitve, and this is an aggravating circumstance in the majority of abandoned villages on Dalmatian islands. Remark: this paper is based on the research undertaken by Niko Barbić for his thesis at the specialist graduate professional study “Managing Sustainable Tourism Development”, the University of Applied Sciences VERN, written under the supervision of MSc Sanja Rocco, defended in July 2013.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Agapito, D., Mendes, J., Oom do Valle, P. (2012). Ruralno turističko naselje kao otvorena vrata turizmu u prirodi u Portugalu: primjer naselja Aldeia da Pedralva. Turizam: međunarodni znanstveno-stručni časopis, 60(3), 349-362. Bojanić Obad Šćitaroci, B. (1997). Tradicijsko graditeljstvo otoka Hvara: naselja i arhitektura središnjeg dijela otoka. Zagreb: Epoha. Čorak, S. i Mikačić, V. (2006). Hrvatski turizam: plavo bijelo zeleno. Zagreb: Institut za turizam. Demonja, D. i Ružić, P. (2010). Ruralni turizam u Hrvatskoj s hrvatskim primjerima dobre prakse i europskim iskustvima. Zagreb: Bibliotheca Geographia Croatica. Duboković Nadalini, N. (1973). Zapisi o zavičaju. Zagreb: Grafički zavod Hrvatske. Grupa autora (1978). Hvarski zbornik 6. Split: samoupravna interesna zajednica za kulturu općine Hvar. Institut za turizam (2010). Strateški marketing i menadžment plan destinacije Općina Jelsa. Zagreb Institut za turizam, autor Filip Šrajer (2006): Mediteranska kamena kuća. Zagreb Kušen, E. (2002). Turistička atrakcijska osnova. Zagreb: Institut za turizam. Kušen, E. (2006). Seoska tradicijska graditeljska baština i ruralni turizam. Turizam: međunarodni znanstveno-stručni časopis, 54(4), 452-459. Kušen, E. (2001). Hrvatski otoci u deset slika: Prilog procjeni utjecaja turizma na razvoj hrvatskih otoka. Sociologija sela, 39(2001), 109-150. Mihovilović, M. (1995). Otok Hvar. Zagreb: Matica Hrvatska. Nejašmić I., Mišetić, R. (2006): Depopulacija otoka Visa, Geoadria 11/2, pp 283-309 Sharpley, R. (2003): Tourism, Modernisation adn Development of the Island of Cyprus: Challenges and Policy Responses, Journal of Sustainable Tourism, Vol 11, No. 2&3, pp 246-265 Šimić, LJ. (1886). Nov dokaz, da se je otok Hvar prvobitno zvao Pitieja. Viestnik hrvatskoga arkeologičkoga družtva, 3(8), 5-6. Šverko, A., Plejić, J., Nikšić, G., Krstulović-Opara, A., Gamulin, A., Buble, S., Belamarić, J. (2007). Pouke baštine za gradnju u hrvatskome priobalju. Zagreb: Hrvatska gospodarska komora.

Internet sources Ruralis: www.ruralis.hr/en/agroturizam.html Strategija ruralnog razvoja RH: www.mps.hr/default.aspx?id=3652 Strategija prostornog uređenja RH: www.mgipu.hr/doc/StrategijaRH/Strategija_I_II_dio.pdf Državni zavod za statistiku: www.dzs.hr Horwath HTL (2009). Strategija razvoja ruralnog turizma Splitsko-dalmatinske županije. Preuzeto sa http://www.dalmacija.hr/Portals/0/PropertyAgent/558/Files/409/strategija_ruralnog_turizma.pdf COAST Poject. Preuzeto sa http://www.undp.hr/show.jsp?page=151067 Jadranska Provansa. Preuzeto sa http://www.mvep.hr/hr/posebni-projekti/jadranska-provansa/ DETAILS ABOUT AUTHORS: MSC. SANJA ROCCO, SENIOR LECTURER ZAGREB SCHOOL OF BUSINESS AND VERN – UNIVERSITY OF APPLIED SCIENCES e-mail: sanja.rocco@vpsz.hr SPEC. OECC. NIKO BARBIĆ e-mail: niko.barbic@yahoo.com

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RUNNING FOR LIFE: EXPLORING DISTANCE RUNNERS’ MOTIVATIONS AT SPORT TOURISM EVENTS FELICITE A FAIRER-WESSELS

ABSTRACT

The Comrades Marathon and the Two Oceans Marathon are two major sporting events on the South African calendar with little research on the motivation and behaviour of serious leisure participants who participate in these events. Following on research by Stebbins (1982) who identified six characteristics of distance runners and further explored by Shipway and Jones (2007), these characteristics are investigated in this article in relation to the Needs Theory of Personality (Murray 1938) and Maslow’s (1954) Hierarchy of Needs within the contexts of the Comrades Marathon and the Two Oceans Marathon and the phenomenon of distance running. A qualitative explorative study was done to understand the motivation and behaviour of serious leisure participants employing non-probability purposive sampling to select 30 respondents who had participated in the Comrades Marathon and/or the Two Oceans Marathon in at least four years’ races (including the 2010 Comrades Marathon and the 2010 Two Oceans Marathon) over the past decade. The findings indicate a strong identification with the activity, with social ethos and sub-culture influence in social identity also indicated. This research attempted to confirm theory and link the characteristics with the Maslow’s ‘hierarchy of needs’ and Murray’s ‘list of needs’, but due to the inherent limitations of the research future investigation in the field is imperative. KEYWORDS: Croatian islands, revitalization, rural tourism, sustainability, redesign

1. INTRODUCTION Leisure studies as a field of research is associated with terms such as relaxation, triviality and freedom from responsibility, and referred to as ‘casual’ leisure; whereas ‘serious’ leisure is ‘the systematic pursuit of an amateur, hobbyist or volunteer activity (such as community charities related to the stated marathons) sufficiently substantial and interesting in nature for the participant to find a career there acquiring and expressing a combination of special skills, knowledge, and experience” (Stebbins, 1982: 254-266). However, despite Stebbins’ (1982) classification of these forms of serious leisure participation, limited systematic research into the motivation behind serious leisure participation exists (Gibson 2006: 34; 2008: 29; Roberts, 1999) within the South African context that this research proposes to investigate. Participation in serious leisure is viewed as serious sport tourism by Gibson (2006: 43), however serious leisure will be used as framework to explore the behaviour of the committed sport tourist. The meaning of these concepts will not be pursued in this instance. Many authors have investigated the concepts of needs, motives and behaviour underlying long distance runners (Masters & Lambert, 1989; Stebbins 1992; Funk & James, 2001; Ogles & Masters, 2003; Gillet & Kelly, 2006; Kotze, 2006; Shipway & Jones, 2007) and have differing opinions with regard to psychological needs and/or motives (e.g. identity, self-esteem, self-actualization, social interaction, perseverance, affiliation); physiological needs; and motives (e.g. unique ethos, specialist skills, competition, durable benefits, rewards, career development). In terms of the above-mentioned motives and behavioural characteristics specific to serious leisure participants (i.e. long distance runners). Using the characteristics developed by Stebbins (1982) the above motives and behaviour are tested on participants in the Comrades Marathon and the Two Oceans Marathon. Within the serious leisure context this research also attempts to relate these characteristics to Murray’s (1938) ‘needs theory of personality’ as motivators of behaviour and the ‘needs hierarchy’ of Maslow (1954). Globally people are motivated to annually run gruelling distance races such as ultra-marathons. In South Africa a number of ultra-distance events are held such as the Comrades Marathon, the Two Oceans Marathon, Om die Dam, Rhodes Trail, Addo, and more. Both the Comrades Marathon and the Two Oceans Marathon are 1-day ultra-marathons of 89 km and 56 km respectively. Some other marathons are multi-day events such as the Marathon des Sables (Morocco) that is a 6-day stage race covering 250 km through the Sahara desert, while Namibia hosts a marathon across the Namib desert of 250 km. All of these marathons boast international participants. In 2010 the Comrades Marathon, also known as “the ultimate human race” received recognition as a Guinness World Record, as the event with ‘the most runners in an ultra-marathon’ with more than 23,500 entries. In 2011 there was a drop to 19,591 entries, ascribed to the FIFA Soccer World Cup 2010 that enlarged the international category of runners (as serious sport tourists) in the 2010 event that may have taken the opportunity to also attend soccer matches, or vice versa. On the other hand, the Two Oceans Marathon had 8,700 participants in 2010 had an increase to over 9,000 entries in 2011.

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Whereas the 2010 Two Oceans Marathon, known as “the world’s most beautiful race” (due to the magnificent scenery) did not coincide with the 2010 FIFA Soccer World Cup dates taking place on 2 April, two months in advance to the soccer world cup, indicating that overseas participants of the Two Oceans Marathon were not influenced by the soccer world cup. The Comrades Marathon is run between Durban and Pietermaritzburg (alternated annually) over a distance of approximately 89 kilometres that has to be completed in less than 12 hours. Whereas the Two Oceans Marathon is a 56 kilomentres race that if completed under five hours wins an athlete the “Sainsbury” medal. This research sets out to explore the motives and behaviour of serious leisure participants to partake in the phenomenon of distance running, incorporating the six distinctive characteristics proposed by Stebbins (1982), and aims to assess whether the needs hierarchy of Maslow and needs of Murray form the base of the motives and behaviour of such participants. The focus is specifically on participants of the Comrades Marathon and/or the Two Oceans Marathon over the past number of years to determine: the sense of identity participants have with distance running; the unique ethos and subculture of the participants within the distance running community; the need to persevere and master the skill (through effort) of running the above marathons; the durable benefits (including community charity events) and career development of participating in distance running; and finally to explore a possible link between motives and behaviour of participating athletes and the theories and approaches of Maslow and Murray.

LITERATURE REVIEW Serious leisure versus casual leisure Serious leisure is often contrasted with casual leisure in that the latter is a relatively short-lived pleasurable activity that requires little or no special training that is intrinsically rewarding. Casual leisure is regarded as all leisure falling outside the basic types of serious leisure. Whereas serious leisure is distinguished from casual leisure by six unique qualities or characteristics developed by Stebbins (1982), and can be summarised as: the need to persevere; finding a career; significant personal effort based on specially acquired knowledge, training or skill; certain durable benefits; a unique ethos; and a strong identity with the chosen pursuit. Serious leisure describes activities that are interesting and substantial in terms of allowing participants to find careers that acquire a combination of knowledge, special skills and experience (Stebbins, 1982). Serious leisure participants may often identify strongly with the sub-culture of their chosen activity, as with long distance running in this case. Within this context sport tourism can provide serious leisure participants with ways to confirm or construct their leisure identity; provide a time and place to interact with like-minded persons sharing the ethos of the activity; to celebrate their social identity; and provide a way to benchmark their leisure ‘careers’ (Green & Jones, 2005: 164). Gibson (2006: 2) defines leisure-based travel as: “… travel that takes individuals temporarily outside of their home communities to participate in physical activities (active sport tourism), to watch physical activities (event sport tourism)….” Therefore, athletes that participate in the Comrades Marathon and/or the Two Oceans Marathon may be classified as serious leisure participants (tourists) as they strive for the six characteristics mentioned above and, since the majority travel to Durban/Pietermaritzburg and/or Cape Town which is outside of their home environment to participate in the running of the Comrades Marathon and/or Two Oceans Marathon that can be classified as (serious) leisure-based travel to sport tourism events. Motivation and behaviour of serious leisure participants Fundamental to all behaviour are needs and motivations based on the intrinsic physiological and socio-logical wants (and needs) of human beings. Classic theories of motivation applied to understanding leisure, sport and tourism behaviour are, amongst others, Murray’s (1938) Needs theory of Personality; and Maslow’s Needs Hierarchy (1954). Murray’s (1938) most important contribution to theory in personality is his use of the concept of needs to explain the motivation and reason for behaviour, stating that motivation is the core that refers to something from within (the human being), and especially his needs of achievement, affiliation and exhibition (that will be related to the current study). Maslow’s (1954) Needs Hierarchy as one of the most well-known theories of motivation can be associated with Murray’s approach, where he proposed that human behaviour is driven by both physiological and psychological needs, and developed a hierarchical order to depict needs from the most basic (physiological) need to the highest need of self-actualization (psychological). Studies in leisure, sport and tourism have used either the theories of Murray or Maslow, or a combination of the two. Other social theories that have been used in the field of sport are, amongst others, the optimal level of stimulation (Berlyne, 1960), the functional, conflict, critical and feminist theories (Coakley, 2007: 33), whereas this research only explores the theories of Maslow and Murray within the context of serious leisure participation within the South African serious leisure participation context.

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Motivation is concerned with why people do certain things, the benefits they seek and the experiences they pursue to satisfy their needs and desires (Cooper et al, 1993; Higham, 2005: 21). Motivation is a function of self-perceived needs of the participant/athlete which drives the decision-making process, and the purchase of related products. The motivational profile of the (marathon) runner is a combination of intrinsic and extrinsic factors that have been described in terms of the push (psychological) and pull (cultural) factors. The push factors are intrinsic and unique to each runner as they are determined by the personality and attitude of the individual. In the context of sport specifically, push factors may extend to the desire to achieve serious leisure objectives or a ‘career’ that cannot be achieved at home; whereas pull factors include the interplay of a significant sports event (Comrades Marathon/Two Oceans Marathon), people and place that a distinctive destination may offer. Specifically in terms of sport experiences, pull factors may relate to the search for desired competition of the achievement of sporting experiences that are unique to particular places (Hinch & Higham, 2011: 152-153) such as the physical space (route) and race of the Comrades Marathon and/or the Two Oceans Marathon. The six distinctive characteristics of serious leisure developed by Stebbins (1982) and also researched by other authors (Green & Jones, 2005: 164-181; Shipway & Jones, 2007: 374) were tested amongst the respondents who were selected for the empirical fieldwork and participated in the Comrades Marathon and/or the Two Oceans Marathon to better understand their behaviour of and motives for running; and brought into relation with the needs of Maslow’s hierarchy and Murray’s personality needs. This study considers both individual needs and the social need of belonging to a group, such as belonging to a running club (Coakley, 2007: 47-49; Shipway, 2010: 22). The following section focuses on the six unique characteristics of Stebbens (1982): Sense of identity refers to the human need for identity reinforcement. This characteristic is satisfied by top level sport and this motivation is based on external satisfaction associated mainly with displaying special skills in sports and receiving approval, status or rewards for performing well. In modern society there is no other social sub-culture that gives so many people, regardless of their gender, age, social or educational level or religion, access to a system of social validation and acknowledgement by others (Weiss, 2001: 393). “To be socially accepted” was a main finding of Shipway and Jones (2007: 373) and plays a major role in the lives of distance runners (Masters & Lambert, 1989; Kotze, 2006). The identity theory is approached from the individual and the group by Shipway (2010: 22) in the sense that it enables one to develop identity, a sense of who one is and how one is connected to the social world. Sport therefore provides the ideal environment for different sub-cultures to form, each with their own set of beliefs and value systems (Green, 2001: 3). Unique ethos of distance runners relates closely to social identity that is created when becoming part of a sub-culture through participating in an activity. Social identity is where participants have the desire to affiliate with other runners and to receive recognition or approval from them (Masters & Lambert, 1989). Homogeneity was evident amongst runners at a major International Marathon (the ‘Cyprus International Four-day Challenge’ (in Shipway and Jones, 2007: 373) even when runners were not competing; they were wearing clothes that clearly identified them as runners. This type of behaviour can occur for two reasons, the first is to gain the approval of other members within the group or secondly to avoid negative evaluation (Shipway, 2010: 71). Need to perserve as characteristic can be described as the personal effort of an athlete based on his/her specialist skills, knowledge or ability. These are aspects such as time spent training, understanding different techniques or strategies, money saved months in advance to cover costs involved in participating in the event, and time taken to go to the event (Shipway, 2010: 18). Perseverance is a sense or form of endurance, persisting through difficult and possibly painful times. It is how athletes deal with any failures or difficulties that come across their path in preparation of and during the event (Shipway, 2010: 18). Distance runners need to persevere in the process of developing their careers in distance running by gathering and testing information on training methods, eating methods and organising the trip to the destination where the event will be taking place. A reciprocal relationship appears evident between effort and social identity as participants might feel that if an activity requires a large amount of effort a valued identity is developed, and a large amount of effort is then put into maintaining this identity (Shipway, 2010: 71). Durable benefits are benefits that last beyond the event. These include community charity event participation and include motives such as self-esteem, self-actualization (Maslow’s highest level of need), and social interaction months prior to the event during training and even health benefits (Jones & Green, 2005). In the literature (Shipway & Jones, 2007; Shipway & Holloway, 2010), participants identified with the activity of distance running and saw it as a lifelong (durable) activity. The esteem need is to recognize and achieve one’s own goals and be recognized by others, also in terms of charity events. The Comrades Marathon launched the Amabeadibeadi Charity in 2010 that is aligned to five official charities (i.e Campaign starfish – focusing on HIV/Aids children; Pink Drive – focusing on breast cancer; Wildlands Conservation Trust – a sustainable community program; Community Chest – a welfare charity; and Sports Trust – focusing on actively building communities through sport and recreation). The Two Oceans Marathon launched TOMI (the Two Oceans Marathon Initiative) in 2012 that replaced all previous charities. Their prioirities lie with ensuring that the education and sporting needs of children are

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met, education facilities are provided and upgraded, and environmental issues involving park, flora and fauna, as well as animals both on land and in the water are included (www.twooceansmarathon.org.za). As stated these are benefits that are durable and that last beyond the event and addresses especially the need of self-actualization of Maslow, where runners feel that their participation in the events have real meaning for society at large. Some authors maintain that the field of sport and tourism lacks integration in terms of, amongst others, research (Gibson, 1998: 45; Glyptis, 1991: 165); whereas Weed (2008: 20) is of the opinion that research in the field of sports tourism lacks epistemological diversity with the majority of empirical research using quantitative methods with positivist assumptions rather than following more interpretivism epistemologies (the relationship between reality and research seeking to understand specific context (Costa & Chalip, 2005: 259-281) that focus on individuals and their experiences of sports tourism, as for example in this case, the Comrades Marathon and/or the Two Oceans Marathon, people (the other runners) and the place (the route between Pietermaritzburg/Durban or vice versa and Cape Town and environs) of the occurance.

METHODOLOGY This study attempts to address the apparent lack of qualitative research in the field (Weed 2008: 20) by using non-probability purposive sampling to select 30 respondents from various (selected) running clubs in Gauteng Province who have participated in the Comrades Marathon and/or the Two Oceans Marathon over the past ten years (2003-2013). Data is collected through interviewing, qualitative open ended-questions, analysis is done inductively, and the focus is on participants’ perspectives (Creswell, 1998: 16). This method also involves the use of the dialect or language used by the respondents, long-term immersion in a context (Arnould & Wallendorf, 1994) and understanding the cultural and symbolic meanings and ‘local rules’ of the participants (Hochschild, 1979). The target population is male and female adults aged 18 years and older, and the unit of analysis individuals who had completed four or more Comrades Marathons and/or the Two Oceans Marathons and are members of various (selected) running clubs in Gauteng. The reasoning behind this was that athletes who had run four or more Comrades Marathons and/or the Two Oceans Marathons are immersed in long distance running and have a definite identity within the distance running world, although none of them are professional career athletes. Data collection The data collection took place after Comrades Marathons and the Two Oceans Marathons between October 2011- July 2013, and never during or at the finish of races. Individual in-depth interviews were held with athletes who had completed four or more Comrades Marathons and/or the Two Oceans Marathons. Pretesting of the data collection instrument involved individual in-depth interviews with two experienced distance runners to improve the reliability of the outcome of the data and to ensure that more in-depth knowledge could be obtained about the needs and behaviour implicit in distance running. The discussion schedule used for the in-depth interviews consisted of two general question sections and six themed questions in accordance with the six characteristics of serious leisure (Stebbins 1982) as well as questions related to Maslow’s (1954) hierarchy and Murray’s (1938) needs. Examples of types of interview questions asked were: Do you feel the need to perserve against all odds? Explain the meaning of rewards? Do you feel that you have achieved something each time you finish the marathon? Can you comfortably interact socially with other runners? Do Comrades Marathon and/or the Two Oceans Marathon runners have a distinctive way of dressing? Do you as runner have your own jargon? How would you explain the value of the Comrades Marathon and/or the Two Oceans Marathon in terms of your own life? In terms of aspects of the race, questions such as: Does the start of the race affect you in any way? For this research the actual ‘voices’ of the participants were ‘heard’, categorized, coded and interpreted. Analysis of data Qualitative content analysis was used to analyse the transcribed texts as a method for the subjective interpretation of the content of text data through the systematic classification process of coding and identifying themes or patterns (Hsieh & Shannon, 2005: 1278). Content analysis is a qualitative data reduction technique that attempts to identify core consistencies and meaning (Patton, 2002: 453). It emphasises an integrated view of speech/texts and their specific context (i.e. participants of the Comrades Marathon and/or the Two Oceans Marathon). Qualitative content analysis is mainly inductive, grounding the examination of themes as well as the inferences drawn from them in the data. In some cases qualitative content analysis attempts to generate, or at least confirm existing theory (as in this case). Since Stebbins’s characteristics were used as the basis of the themes, the aim was to identify relationships between categories, between the needs theories of Maslow and Murray, and to uncover underlying patterns between them. Qualitative content analysis does not produce counts and statistical significance, but uncovers patterns, themes and categories important to a social reality, i.e. the reality of serious leisure participants participating in distance running, i.e. the Comrades Marathon and/or the Two Oceans Marathon. As the sample was small it was decided to analyse the data manually and not to use a software programme such as Atlas TI or Nvivo, although in retrospect such a programme would have assisted in text editing, text retrieval and category manipulation and is recommended for future research.

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Limitations of the research are that only thirty respondents were interviewed that excludes the possibility to generalise or present meaningful suggestions.

RESULTS AND DESCRIPTIVE FINDINGS In terms of the categories identified in the content analysis, the category ‘sense of identity’ (also one of Stebbins’ unique characteristics) and how it relates to the activity of distance running (the Comrades Marathon and/or the Two Oceans Marathon) is interpreted as follows: the respondents as athletes have been participating in the activity of distance running for at least four years and have been part of this particular long distance running sub-culture which has subsequently influenced their sense of identity with this activity. As they are closely related to this sub-culture it has become part of their value and belief system. Social identity is defined by Tajfel (1972: 292) as “the individual’s knowledge that he/she belongs to certain social groups together with some emotional and value significance to him/her of the group membership.” A respondent mentioned that he went back after the first Comrades because he had now made friends, and these friends formed this runner’s social identity to a certain extent - “We all experience the same things, we do the same things and you can get caught up in it and, I mean, some people just live it.”, which ties in with Murray’s need for affiliation. All respondents felt that the Comrades Marathons and/or the Two Oceans Marathon had a high emotional value for them with 75% not able to see themselves separate from distance running, they felt it as “a part of myself”. Due to their long distance running careers and immersion within the sub-culture this had become part of their identity. Curry and Weiss (1989: 258) define sport motivation as “the reasons that people give for participation in sport”; and empirically demonstrate that there is a link between sport motivation and “self” or social identity (Curry & Weiss, 1989: 266). However Weiss (2001: 400) later states that social recognition and or the reinforcement of identity can only be maintained on the basis of controlling the value and norm system of the surrounding social group (sub-culture) – for example, in the Comrades Marathon and/or the Two Oceans Marathon there is a sense of identification that the runners share amongst themselves, such as achievement, knowledge, perseverance, self-control, that are valued in their particular social environment or sub-culture that relates to a controlling value and norm system of this group. The need for belonging (Maslow’s level 3) links with social identification and personal effort as these athletes put in tremendous effort to develop and sustain an identity they have created through distance running. In Shipway (2010: 71) one respondent said: “Where else can you finish 27,532th and still feel as if you were in an Olympic final?” From this statement it can be said that this runner felt like she belonged at this event. When Comrades Marathon and/or the Two Ocean Marathon athletes stand at the start of the race, they are standing amongst numerous other athletes who have the same goal - to finish the race. This creates a sense of belonging with regard to the event (i.e. the Comrades Marathon/Two Oceans Marathon) and the activity (i.e. distance running). Runners feel a sense of belonging because of the camaraderie, as one respondent said: “When you’re on the road everybody’s on the same level. If you’re a CEO of a company or a gardener, you’re on the same level. The …Club goes out of its way to make new members feel welcome, more so than other clubs and therefore it is easier to feel a sense of belonging”. The need of belonging is surpassed by the self-actualization need (Maslow’s 5th and highest level of need), that is satisfied when you become self-fulfilled and feel completely content with who you are as an individual but also what you are doing as a distance runner. However, according to Maslow et al., (1987: 22) feelings of dissatisfaction and agitation can arise if an individual is not doing what he or she is interested in i.e. distance running, and Morgan (in Shipway & Holloway, 2010: 271) suggests that runners experience a sense of withdrawal when not able to run, supporting Maslow’s theory. As with Murray’s need of ‘infavoidance’ that refers to humiliation of an athlete, as when the marathon was not completed successfully. The category ‘unique ethos’ (also one of Stebbins’ characteristics) of the responding participants and the ethos of distance running as a sport activity, relates to the participants’ behaviour, their dress code and overall norms and values found within the distance running community (Jones & Green, 2005). With regard to a specific dress code, all the respondents replied that they occasionally (at leisure) wore Comrades/Two Oceans t-shirts, and even during the interviews, it was observed that some respondents (50%) had their Comrades/Two Oceans photos and previous race numbers on their office walls. However pre-, post and during the Comrades/Two Oceans weekend, 75% of the respondents acknowledged to wearing watches and shirts from previous years; the current year’s Comrades Marathon and/or the Two Oceans Marathon; or gear from other prestigious running events – this can be related to Murray’s need of ‘exhibition’, to show (exhibit) oneself off in terms of others in the same sub-culture. These findings are consistent with Shipway’s (2010: 71) observations that homogeneity was evident at the International Marathon in terms of dress. During Comrades Marathons and/or the Two Oceans Marathons it was observed via television that most runners in general terms (not necessarily those later interviewed) were wearing their running shoes and Comrades/Two Oceans t-shirts. Comrades athletes were observed with their ‘green number’ clothes (i.e. dedicated ‘green number’ shirts, sweaters and caps) buying exclusive ‘green number’ merchandise. ‘Green number’ status is when a runner has completed ten Comrades Marathons, and is regarded as the most prestigious

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of the runner groups. This behaviour indicated serious identification with the Comrades Marathon. Only runners who had completed the races (four or more) were interviewed and not any that did not finish, although this could also be addressed in future research, i.e. to determine the differences between runners and their performances, in terms of those athletes that finish a race and those that do not. Under the content analysis category of unique ethos, the codes for language usage and use of jargon amongst runners became apparent, especially as most respondents (90%) agreed to using ‘runner language’, with phrases such as “running in a bus”, “silver”, “Bill Rowen”, “Sainsbury”, “bronze”, “hills” and “hitting the wall” used during the interviews. In Shipway and Jones (2007: 373-383) competitors spoke of “blowing up”, “hitting the wall”, and “miles in your legs”, also that they became a person to ‘stay away from’ in the months leading up to the event; which supported that there was a certain dialect or jargon runners use within this fraternity. Language and communication between participants and in the club/bar after a run reinforces the feeling of belonging that can be related to Maslow’s need of belonging/friendship. The wisecracks and joint singing all serve this purpose (Weiss, 2001: 394), “... they felt a sense of belonging and knew what everyone was talking about”. The social behaviour of runners seemed a common denominator amongst the entire running community. In terms of the contents analysis category ‘need to perservere’ (this includes two characteristics of Stebbins, i.e. need to perservere & significant personal effort based on specialised skills, etc.) of the responding participants and their mastery of the skill of distance running, it became evident that Comrades Marathon and/or the Two Oceans Marathon athletes put in a lot of personal effort to enable them to participate in the event. On the Comrades Marathon website (www.comrades. com), the link ‘ask the coach’, is a forum for athletes to ask advice on any aspect of preparing for the race. Another link refers to different training programs that are worked out for runners, depending on the goal(s) they want to reach (Comrades Marathon 2011). Extreme physical effort and perseverance go into training for the Comrades Marathon (more so than for the Two Oceans Marathon) and these runners train between four and six times a week for the six months leading up to the event. As one respondent clearly stated, “you have got to do your homework.” To finish comfortably within the 12 hour deadline (for the Comrades), between 1,000-1,200 km of training is needed, and to run a silver medal (to run under sevenand-a-half hours) between 2,000-2,500 km training is needed, that indicates the need to persevere as well as the realisation that a certain mileage within a certain timeframe ensures that proper preparation is done for the event, as one respondent stated, “mentally you have to also convince your body to get out of bed on those cold winters mornings, and when your body is drained you have to convince it that it can still go on and go for the run”, indicating the strenuous mental preparation required. (Also refer to the Two Oceans Marathon (www.twooceansmarathon.org.za) website.) The respondents were all (100%) of the opinion that as they progress as runners and gain experience over the years, they also gain knowledge in terms of what physically works for them, how to train and what is a sufficient level of training. Most respondents (80%) mentioned the fact that it had become a lifestyle and that was why they kept on running. Other reasons were that it kept them healthy and kept their weight under control. Most respondents said that they would run until their bodies did not allow them to run anymore, as one respondent noted: “I think it’s a way of lifelong fitness…”. The following eight reasons were given by respondents as to why they had perservered with running: lifetyle, weight control, sense of achievement, stay fit, enjoyment, to achieve goals, love of the sport and being a ‘drug’. From the data it was evident that there is a strong need to persevere against all odds when participating especially in the Comrades Marathon. It is seen as a challenge and a goal that these runners set for themselves. Responses from the runners were: “We all experience and do the same things, we just live for it.” And “I don’t think I will easily be able to give up”, “Never, ever did it occur to me that I’m not going to make it or [that] I’m going to give up”, “I will do it, I will finish”. One respondent who has completed 21 Comrades Marathons of which 11 medals were silver, said that “The men in … (Athletic Club] don’t bail”. Another respondent even mentioned that he had put his marathon races on his curriculum vitae to get a job, to emphasise his level of personal perseverance. Runners experience difficulties during the training that leads up to the Comrades Marathon and/or the Two Oceans Marathon, as well as on the day. Cramps, nausea and exhaustion/tiredness are the three main causes of difficulty during the day, with cramps/pain mentioned by 50% of the respondents, and nausea and exhaustion 25% each. A few runners in addition mentioned that it is a mind thing on the day to get to the end: “it’s just mind against body”. All respondents said the only way to get though these difficulties was to run through them, to keep on moving forward, that it would go away. The respondent who had done 21 consecutive Comrades Marathons said: “Somebody gave me advice once that if you do have a problem just walk for an hour or so and it will go away, and that is true.” In Shipway and Jones (2007) one runner said that he was sick and might struggle but: “I just don’t want to fail after training so hard, I just don’t want to let my family and friends down.” Similar responses were made by other respondents saying they had trained hard and given up a lot and could not fail, could not give up and not finish this race. Interpreting the category ‘durable benefits’ (two characteristics of Stebbins, i.e. durable benefits & finding a career) of participating in long distances for (non-professional) career development, are benefits that last beyond the event and are

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related to self-esteem, self-actualization (Maslow’s highest level of need), and to the social interaction months prior to the event during training, as well as health benefits (Jones & Green, 2005). The esteem need is to recognize and achieve one’s own goals and be recognized by others; an example of this would be setting a goal for yourself to finish the Comrades Marathon and/or the Two Oceans Marathon when achieving the goal being recognized by others, who may be fellow runners, family and friends. Self-esteem and durable benefits of distance running are thus interlinked. In Shipway and Jones (2007: 381) a runner said: “Despite being in horrific pain for the last couple of miles, my feet actually felt they were on fire, I loved every single minute of it and have never been so proud of myself.” The need both for self-esteem and self-actualization go hand in hand due to self-esteem being the satisfaction of achieving a specific goal. As one respondent stated, “it is one of the most rewarding things you can ever do because of the incredible degree of difficulty of the race, so anyone that finished the Comrades is just simply, in sport I believe, of the best”, with another respondent stating that “you are invincible”, which boosts self esteem. Self-actualization is about fulfilling ones true potential when related to Maslow’s needs hierarchy. Most respondents (95%) feel they have achieved something every time they finish the Comrades Marathon and/or the Two Oceans Marathon, and all agree that“…each run is special.” This sense of achievement and fulfilment of personal potential (self-actualization) can be seen as a durable benefit of feeling good about oneself. In the literature (Shipway & Jones, 2007; Shipway & Holloway, 2010) participants identified with the activity of distance running and saw it as a lifelong (durable) activity that correlated with the respondents. Some respondents (20%) started running due to medical reasons, as they had severe back problems and doctors recommended them to be super fit, they chose running as the activity to accomplish that goal. A respondent who was suffering from depression said: “I had very little self-worth, but after completing the marathon I felt much better. I’m still on the road to recovery, but the doctors seem to think that the running is playing a major positive part in my recovery.” This statement links the benefits of health and self-esteem. However during the research another aspect of distance running came to light, that it could have negative impacts on runners, as it did on the following respondent: “I had to drop out of a marathon at halfway. All my family and friends knew I was running, and I was raising money for charity, and I had to spend the next few weeks explaining how and why I didn’t finish. I haven’t entered a marathon since, and find it hard to consider doing another one, knowing that I failed to finish.” Another respondent had serious personal problems they were facing, and running gave them that perfect escape -“Comrades gave me my life back”, stating the rewards running had had for him. Therefore, in terms of durable benefits of distance running, the need for self-esteem and self-actualization are apparent amongst the behaviour of distance runners, and applied to Maslow’s hierarchy amongst distance runners’ experiences where meaning is given to life through relationships with others. The code ‘to develop a career in distance running’ (under the content analysis category ‘durable benefits’ – refer to fig 1) respondents all had different reasons for why and how they started running. Many runners (75%) started running through friends, relatives or work colleagues. Respondents were asked if the level of achievement was of significance and responses were mixed as some said that no matter the time they did, being good or bad, they felt they had achieved something major every time they crossed the finishing line. “My Bill Rowens’s aren’t more special than my bronze ones.” Athletes who participate in the Comrades Marathon, who have completed ten or more races have developed their ‘careers’ to a certain extent. They have developed from being “fun” runners who started out on minimum mileage, trained to run their first Comrades and then continued to run to develop to an intermediate level, gained experience and knowledge over time and are now at a master level of the activity, which also correlates with Stebbins’ characteristic of significant personal effort based on specialised knowledge, training and skill (discussed under need to perservere above), indicating the inherent interplay and interrelationships between the characteristics. From the above findings an attempt is made to apply Murray’s motivators of behaviour and Maslow’s hierarchy of needs to the Comrades Marathon and/or Two Oceans Marathon participants. Murray (1938) listed various needs that underly the motivation of behaviour, of which three have been applied to this research, i.e. the need for achievement: to accomplish something difficult, to master, manipulate…overcome obstacles and attain a high standard, to rival and surpass others can directly be related to athletes of the Comrades Marathon and/or Two Oceans Marathon the need for affiliation – to draw near and enjoyably cooperate with an allied other who resembles one … is also applicable to athletes of the Comrades Marathon; and finally the need of exhibition – to make an impression, to excite, amaze…others, can also be seen as applicable to Comrades Marathon and/or Two Oceans Marathon athletes. Although many of Murray’s (1938) other needs may also be relevant to the respondents, the above-mentioned are regarded as the most applicable. Although the needs of Murray (1938) have been divided into groupings, many overlap with those of Maslow, with the latter developing a hierarchy that categorizes the needs from the most basic need level such as the physiological need for food, water, shelter and sex (this need for sex is also mentioned by Murray, but is explained in terms of relationships rather than procreation as Maslow views it), but may comprise of different needs depending on the circumstances (Maslow et al., 1987: 16). When compared to distance running these basic needs would be level of physical health and ability to participate in such an activity. A Comrades Marathon and/or Two Oceans Marathon runner has to be sufficiently healthy for the long distances required and in addition sufficient food and water are required during training and on the day of the event to ensure that runners are

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hydrated and maintain normal sugar levels to enable them to physically participate in the event (level 1 of Maslow). Safety needs (Maslow’s 2nd level of need) such as security includes law and order, and would entail safety on the roads when training and participating in an event. Within the context of motivation theory, the physiological needs still hold but are less dominant at this level as they have been satisfied. Therefore once the first level need is satisfied the next level need takes over in terms of the importance that Maslow describes as the need for safety (Maslow et al, 1987: 18). For example, in October 2011 five road runners preparing for the Soweto Marathon were killed by a ‘drunk driver’ (Sapa, 2011), “when runners and cyclists end up losing their lives in this manner something must be done as this is going to discourage people of all ages from taking up sport.” This supports the need to be safe when training and participating in events. It also shows the risk of the sport due to motorists not acting in a safe and responsible manner. However the social aspect can also be related to the need for self-esteem and self-actualization that are apparent amongst the behaviour of distance runners, and applied to Maslow’s hierarchy amongst distance runners’ experiences. Respondents socialising after a run reinforces the feeling of belonging that can be related to Maslow’s need of friendship and belonging.

DISCUSSION AND CONCLUSION The characteristics of serious leisure (Stebbins 1982), Maslow’s (1954) needs hierarchy and Murray’s (1938) needs have potentially been linked to develop a better understanding of the running needs and behaviour of serious leisure participants in the Comrades Marathon and/or the Two Oceans Marathon. Respondents in both this study and that of Shipway and Jones (2007) strongly identify with distance running as a lifelong activity with 75% of runners stating that they could not see themselves separate from distance running. The Comrades Marathon and/or the Two Oceans Marathon has a high emotional value for these runners, due to the sub-culture they find themselves in. Social ethos was also evident within distance running, as the respondents have a strong need to persevere and finish the race they started with a large amount of effort going into the preparation for the event both physically and mentally. As these athletes developed a (non-professional) ‘career’ in distance running they needed to persevere through the stages of development from being a novice runner to a level of mastery. Benefits such as self-esteem and self-actualization, sense of belonging and social interaction were evident and link with Maslow’s hierarchy of needs and Murray’s needs and indicate that these perspectives can be used to further explain the needs and behaviour of serious leisure participants. Although this research has not brought much innovation to the fore its value can be seen as confirming existing theory. Limitations of this study are that only runners from selected Gauteng Province clubs were interviewed and that the data are from a one-sided biased perspective in terms of running clubs. Thus due to the limited results of this study it is not possible to make suggestions in terms of the implications for management and the organisers of long distance running events in general. The study has aimed to investigate a possibile link between the needs theories of Maslow (1954) and Murray (1938) and the motivations and behaviour of a select group of serious leisure participants in two particular events, i.e. the Comrades Marathon and the Two Oceans Marathon, and although empirically limited in scope, attempts to reaffirm previous research in the field of serious leisure participation.

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AGER, M. (1996). The Professional stranger. London: Academic Press. ARNOULD, E. & WALLENDORF, M. (1994). Market-oriented ethnography: interpretation building and marketing strategy formulation. Journal of Marketing Research, 31 (Nov): 484-504. BERLYNE, D. (1960). Conflict, arousal and curiosity. New York: McGraw-Hill. (in Gibson) COAKLEY, J. (2007). Sports in society. 9th ed. Boston: McGraw-Hill. COMRADES MARATHON (2011). Comrades Marathon Association. Hyperlink [http://www.comrades.com/AboutUs/CMA-Structure.aspx]. Retrieved 14 November 2011. COMRADES MARATHON. (2011). Comrades Marathon Results. Hyperlink [http://results.comrades.com/Teams.aspx?&ClientId=1&RaceId=91&E ventId=1&TeamId=84]. Retrieved 11 November 2011. COMRADES MARATHON. (2011). Training Methods. Hyperlink [http://www.comrades.com/Training/Training-Methods.aspx]. Retrieved 14 November 2011. COOPER, C., FLETCHER, J., GILBERT, D. & WANHILL, S. (1993). Tourism: Principles and practice. Harlow (UK): Longman. COOPER, D.R. & SCHINDLER, P.S. (2011). Business research methods. (11th ed.). New York: McGraw-Hill/Irwin. COSTA, C. & CHALIP, L. (2005). Adventure sport tourism in rural revitalisation: an ethnographic evaluation. European Sport Management Quarterly, 5(3): 259-281. CRESWELL, J.W. (1998). Qualitative enquiry and research design: choosing among five traditions. Thousand Oaks, CA: Sage. CURRY, T.J. & WEISS, O. (1989). Sport identity and motivation for sport participation: a comparison between American College Athletes and Austrian Student Sport Club members. Sociology of Sport Journal, 6: 257-268. FUNK, D.C. & JAMES, J. (2001). The psychological continuum model: a conceptual framework for understanding an individual’s psychological connection to sport. Sport Management Review, 4(2): 119-150. GIBSON, H.J. (1998). Sport tourism: a critical analysis of research. Sport Management Review, 1(1): 45-76. GIBSON, H. (2006). Sport tourism: concepts and theories. An introduction. In: Gibson, H. (ed). Sport Tourism, concepts and theories. Abington (Oxon): Routledge.

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16. GIBSON, H.J. (2008). Sport tourism at a crossroad? Considerations for the future. In Weed, M. (ed.) Sport & Tourism, a reader. Abington (Oxon): Routledge. 17. GILLET, P. & KELLY, S. (2006). “Non-local” masters games participants: an investigation of competitive active sport tourist motives. Journal of Sport Tourism, 11(3-4): 239-257. 18. GLYPTIS, S.A. (1991). Sport and tourism. In Cooper, C.P. (ed.) Progress in tourism, recreation and hospitality management. (vol 3). London: Belhaven Press. 19. GREEN, B.C. (2001). Leveraging subculture and identity to promote sport events. Sport and Management Review, 4: 1-19. 20. GREEN, B.C. & JONES, I. (2005). Serious leisure, social identity and sport tourism. Sport in Society: Cultures, commerce, media, politics, 8(2): 164-181. 21. HALL, C. (1992). Adventure, sport and health tourism. In Weiler, B. & Hall, C. (ed). Special interest tourism. New York: Wiley: 1-14. 22. HIGHAM. J. E. S. (2005). Sport tourism destinations – Issues, opportunities and analysis. Oxford: Elsevier Butterworth-Heinemann. 23. HINCH, T. & HIGHAM, J. (2011). Sport tourism development. 2nd ed. Bristol: Channel View Publications. 24. HOCHSCHILD, A. (1979). Emotion work, feeling rules, and social structure. American Journal of Sociology 85(3): 551-575. 25. HSIEH, H-F., & SHANNON, S.E. (2005). Three approaches to qualitative content analysis. Qualitative Health Research, 15(9): 1277-1288. 26. JONES, I. & GREEN, B.C. (2005). Serious leisure, social identity and sport tourism. In: Gibson, H. (ed.) Sport tourism, concepts and theories. Abington (Oxon): Routledge. 27. KEYTON, J. (2010). Communication research. 3rd ed. New York: McGrawHill. 28. KOTZE, N. (2006). Cape Town and the Two Oceans Marathon: the impact of sport tourism. Urban Forum 17(3): 282-293. 29. KRUGER, M., & SAAYMAN, M. (2012). Creating a memorable spectator experience at the Two Oceans marathon. Journal of Sport and Tourism, 17(1): 63-77. 30. MASLOW, A.H. (1954). Motivation and personality. New York: Harper & Row. 31. MASLOW, A.H., FRAGER, R. & FADIMAN, J. (1987). Motivation and personality. 3rd ed. Boston: Addison-Wesley Publishing. 32. MASTERS, K.S. & LAMBERT, M.J. (1989). On gender comparison and construct validity: an examination of the commitment to running scale in a sample of marathon runners. Journal of Sport Behavior 12(4): 196-202. 33. MEAD, G. H. (1934). Mind, self and society. Chicago: University of Chicago Press. 34. MURRAY, H. A.(1938). Explorations in personality. New York: Oxford University Press. 35. OGLES, B.M. & MASTERS, K.S. (2003). A typology of marathon runners based on cluster analysis motivations. Journal of Sport Behavior, 26(21): 69-85. 36. PATTON, M.Q. (2002). Qualitative research and evaluation methods, Thousand Oaks, CA: Sage. 37. ROBERTS, K. (1999). Leisure in contemporary society. Oxford: CABI. 38. SAPA (2011). Soweto runners killed by ‘drunk driver’. Sowetan Live. 24 October. Hyperlink [http://www.sowetanlive.co.za/news/2011/10/24/ soweto-runners-killed-by-drunk-driver]. Retrieved 14 November 2011. 39. SHIPWAY, R. & JONES, I. (2007). Running away from home: understanding visitors experiences and behaviour at sport tourism events. International Journal of Tourism Research, 9: 373-383. 40. SHIPWAY, R.M. (2010). On the run: perspectives on long distance running. Hyperlink [http://0-eprints.bournemouth.ac.uk.innopac.up.ac.za/ 16239/1/Library_Copy __PhD _Thesis_-On_the_Run-_Richard_Shipway-25_August_2010.pdf ]. Retrieved 11 November 2011. 41. SHIPWAY, R. & HOLLOWAY, I. (2010). Running free: Embracing a healthy lifestyle through distance running. Perspectives in Public Health, 130(6): 207-276. 42. STEBBINS, R (1982). Serious leisure: a conceptual statement. The Pacific Sociological Review, 25(2): 251-272. 43. STEBBINS, R. (1992). Amateurs, professionals and serious leisure. Montreal: McGill-Queen’s University Press. 44. TAJFEL, H. (1972). Experiments in a vacuum. In Israel J and Tajfel H (eds.) The Context of Social Psychology: a critical assessment. London: Academic Press: 69-119. 45. THE TWO OCEANS MARATHON. (www.twooceansmarathon.org.za) Hyperlink [http://www.twooceansmarathon-Training.aspx]. Retrieved 30 April1 2013. 46. WEED, M. (2008). Sport tourism theory and method – concepts, issues and epistemologies. In: Weed M. (ed.) Sport & tourism: a reader. Abington (Oxon): Routledge. 47. WEISS, O. (2001). Identity reinforcement in sport: revisiting the symbolic interactionist legacy. International Review for the Sociology of Sport, 36(4): 393-405. DETAILS ABOUT AUTHOR: DR FELICITE A FAIRER-WESSELS (PHD) DEPT OF TOURISM MANAGEMENT UNIVERSITY OF PRETORIA ffairer-wessels@up.ac.za

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CATEGORY MANAGEMENT PLANNING: DEFINITION OF TACTICS MILAN GASOVIC DARKO VASELIC

ABSTRACT

Planning of product categories is a first function of Category Management. Within this function occur six out of eight steps of Category Management. Having in mind extremely time and resource consuming process of Category Management introduction, planning phase of this process becomes so much important for successful implementation. It can be considered through next steps: Category Definition, Category Role, Potential of a Category, Category Balance Score Card, Definition of Strategy for a Category and Definition of Tactics for a Category. This structuring nature of Planning Phase significantly makes easier introduction of Category Management. Thereby, Definition of Tactics is the last planning step and the document which specifies actions that have to be undertaken in order to accomplish planned targets in a Category. Definition of tactics goes through two steps: development of general guidelines in order to develop tactical plans for bigger number of categories and development of specific action solutions for particular categories. In this way, Category Management teams become familiar with clear specific guidelines and actions for the basic elements of Tactical Plan: Assortment, Prices, Promotions, Merchandising and Refilling of Retail Shelves. Depending of a category role, format of a retail store, competitive position of a retail company, and competitive position of suppliers in category and etc. elements of Tactical Plan can vary at higher or lower extent. KEYWORDS: Product Categories, Tactical Plan, Assortment, Prices, Promotions, Merchandising.

1. INTRODUCTION Planning is one of the key management activities. It includes selection of missions and goals, as well as activities for their achievement. Planning requires decision making, between alternative and future directions. So, plans provide rational approach to realization of previously adopted goals. Category planning is first function of Category Management. After planning follow organizing, implementation, controlling and revision. All these phases are characterized by high cause and consequent connection. Given importance of planning in Category Management, set of steps has been developed. Planning in Category Management process is consisted from following steps: forming of a category, category role defining, category potential evaluation, balance score card setting, category strategies setting, category tactics defining. Structure of planning is one of the important facilitative occasions in adopting Category Management. As a final planned element in Category Management process appears tactical plan for a category. Tactical plan has a mission to specify actions which will be held, so goals of categories could be achieved. So, participants of Category Management process in this way are familiar with clear directions for the basic elements of a tactical plan: assortment, prices, promotions, merchandising and refilling of shelves. Through already mentioned elements of a tactical plan, strategic goals of categories from the strategic plan should be achieved. Through tactical elements definition, it is necessary to start from buyers, consumers, competition, market situation, channels of distribution, models of serving final consumer, etc.

2. ELEMENTS OF TACTICS OF A PRODUCT CATEGORY Category managers while create tactical plan of category and its individual elements, start with key consumers, their demographics, psychological characteristics and their consumer behavior from one side, as well as capabilities of retailer, shop and supplier to support traced elements of a tactical plan, from the other side. Depending on category characteristics and segmentation of category itself from the position of consumption and buying, it is often to have dividing on subcategories which have separate elements of a tactical plan.

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Figure 1: Tactics of a category aligned with strategies of the subcategories

Assortment Prices Strategy 1 of subcategory 1

Promotion Merchadising on shelf Refilling of shelf Assortment

Category role

Strategy of a category

Strategy 2 of subcategory 2

Prices Promotion Merchadising on shelf Refilling of shelf Assortment Prices

Strategy 3 of subcategory 3

Promotion Merchadising on shelf Refilling of shelf

Source: Vaselic D. (2010). Upravljanje kategorijama roba široke potrošnje, p. 99

Additionally to this, it is possible to have a need to differentiate elements of the tactical plan for different regions of the same market. Combining two previous factors can bring to the high number of variations of the elements of the tactical plan of one category. Because of that, it is optimal to manage elements of the tactical plan on cluster level or format of retail stores. Clusters or formats are groups of retail stores, grouped according to the common characteristics: characteristics of target consumers, surface, market potential, competition and other characteristics necessary for total business. Bogetic quotes approach which suggests tactical development into 2 steps: • Development of general directions for development of tactical plans of larger number of categories; • Development of concrete action solutions for certain (sub)categories from the general directions Stated elements of a tactical plan have to, clearly and precisely, define all aspects of assortment, prices, promotion, merchandising and refilling of shelves. Clear and precise definition of these elements enables to avoid confusions in implementation and possible mistakes and waste of resources.

2.1. Assortment Assortment is first element of tactical plan. It is also the most important element because consumers are very sensitive in terms of choice of a product which can be found on retail shelves. Faced with decision of a new product inclusion, retailers do not observe exclusively sales of a product in other markets or at competitors, they are also interested if that product can increase sales of a total category. So, retailers do not want to provoke cannibalization of other products in a category, but they want to have incremental sales of a new product inclusion. For realization of such approach it is necessary to know consumers and answer their needs in the most adequate way. Suppliers are, verily, interested in higher rate of participation of their products in assortment of a retailer. For such intentions they have their arguments. Category managers in retail and managers at suppliers have to define most acceptable assortment, which enables accomplishment of goals of a category. Usable indicator could be data about sales of a product in a market, which can be bought in research agencies which are dealing with trade panels. For new products, very often, it is common practice to introduce those who are “promising” in trial period of 3-6 months. If those products satisfy criteria

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they are kept in assortment, and vice versa. General guidelines for decision making in assortment of category, starting with defined roles of individual subcategories, can be shown in schema in table 1. Table 1. Illustration of general directions of decisions about assortment Role of subcategory

General tactical approach to assortment of a subcategory

Improvement of traffic

Product selection must include those with high intensity of loyalty of biggest consumers Keep best sellers in every subcategory or segment

Profit generating

Special treatment provide to: - Products with the highest price - Products with the highest margin - Merchandising of a private label

Protection

High intensity of promotion of chosen products, so their availability and competitive advantage in a market is visible Follow and be better of competitor’s prices Focusing on media and happenings

Source: Vaselic D. (2010). Upravljanje kategorijama roba široke potrošnje, p. 102

This table gives general, but very useful directions to category managers during decision making process about category assortment, according to defined roles of subcategory. Marketing and financial directions are included and they need to help in process of decision making process.

2.2. Prices Consumers perceive prices in three different ways: awareness, comparing with other reference and response on their increase or decrease. Even though price is main criteria for buying particular product, consumers can not always remember absolute amount which they paid for the product. In most of the cases they estimate if they pay fair price for a product. Fair price is amount of money which consumers perceive as a reasonable to pay for certain product and is formed by the experiences from previous shopping. If price is higher than fair price, consumers find it as an expensive, and vice versa. Studies of consumer behavior connected with price changes show that consumers are concerned more for price increase than they are delighted with price decrease. Following models of price politics are the most common in retail:

• Every Day Low Price (EDLP), so consumers can get a message of price leadership. This is the way to simplify internal operations with prices.

• Hi-Low prices, continuous promotions for attracting consumers and offering products with advantageous conditions. • Hybrid pricing, certain amount of main products are using EDLP strategy, and for the rest of the assortment works HighLow prices strategy, with occasional promotions.

These three strategies sometimes incorporate higher regular discounts, but only for owners of their Loyalty cards. When deciding about prices of the products in category/subcategory, category mangers are thinking about 2 things:

• How company can be different, compared to competitors, and be positioned as a convenient place for shopping? • What is a role of prices, when we consider certain store and particular category, compared to local competitors?

It is much easier to implement pricing politics if have formed clusters of retail objects. It is often case that clusters of stores exist under diferent brands with different price strategy. This is the way to adopt multibrand-multiformat strategy of business, which gives more flexibility in attracting different target groups of consumers. When we look at all above mentioned, following questions or analyses emerge:

• • • • • •

252

What is a value for consumer in certain category, subcategory, segment, etc. What is competition in prices and is the company leader with prices Which price politics is the most consistent with total marketing strategy - EDLP, Hi-Low, Hybrid Are the goals achieved (in area of prices) How prices are reflecting on gross margin Does price increase or decrease affect significantly sales and revenues

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Is margin adequate for the best selling products How big is market share, sales and profit in percentages and absolute What is a contribution to gross margin What is price elasticity

Illustration of general directions for decision making process about prices in category is visible in Table 2. Table 2. Illustration of general directions for decision makings process for pricing tactics of a category / subcategory Role of subcategory

General tactical approach to prices of subcategory

Protection

Parity retail prices with competition Keeping prices of other products so they are competitive on a market

Improvement of transactions

Total retail prices should be competitive on a market Certain products/segments should have aggressive prices, so cross sale can be stimulated with higher prices

Traffic improvement

Products with high loyalty could be offered with discounted prices, so traffic of consumers can be stimulated Most of the price sensitive products should have prices on a same level or below the prices of key competitors

Generating of profit

Retail prices should provide maximal margin, and to be competitive in a market in the same time Think about selective margin change, based on a consumer demand

Creation of excitement

Periodically limited promotional supply of selected products/segments, so buying tension and buying spirit can be created.

Source: Vaselic D. (2010). Upravljanje kategorijama roba široke potrošnje, p. 104

Promotion, as a tactical instrument of business improvement, becomes more important in a Fast Moving Consumer Goods industry. Because of that, for every category we define 6 month or annual plan of promotional activities. According to this, very tight cooperation of suppliers and retailers is needed. It is like that because most of the promotional activities are financed by suppliers, but they are happening in retailer’s stores. In general, promotions could be divided into three groups:

• Exclusively sales oriented (ex. If consumer buys 2 products, 3rd is for free, or promotions which include discount for bigger value sales)

• Exclusively for brand development/image (ex. Tasting or free sampling without invitation for buying) • Combination of two previous mentioned methods, what is actually the most common (ex. If consumer buys 2 products, he gets branded gift which will stay at his house to remind him on a brand).

According to a way of performing, there are promotional activities which are consisted from short term price discounts, and long term discounts as well as gratis offers for final consumer. It can be communicated towards final consumer through displays in a store, promoters, catalogues and many more ways. Frequent price promotions which offer price discounts to a consumer erode loyalty of consumers. This is how consumers create habit to buy certain products only when they are on promotion. This is particularly often at products with low buying frequency. It is also important to avoid frequent price discounts at premium products. Reason for this is a fact that consumers of such brands are not so price sensitive, and discounts does not mean too much for them. For such products it is much better to use image building promotions and thematic promotions. It is necessary to know that consumers of premium brands are demanding some kind of exclusivity. For such consumers it is better to offer larger pack with the same price, than lower price on a shelf. Illustration of general directions of promotional activities according to roles of category is shown in Table 3.

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Table 3. Illustration of general directions of promotional activities according to roles of category / subcategory Role of subcategory

General tactical approach to promotion of subcategory

Improvement of transactions

Use store promotions to stimulate consumers for buying bigger packs or quality products With promotion enable cross sale merchandising

Traffic improvement

Frequent sales promotion of products with high loyalty and penetration with irresistible offers Offer savings or any other value to consumer if he returns to the store, and that should be continuous process

Generating of profit

Limit promotions for products with margin higher than average Use promotion to enable cross sale merchandising for products with high margin Use promotional activities which don’t have roots in price discounts

Creation of excitement

Chose new/visible products supported with suppliers marketing Use assets which promote excitement of consumers Organize promotions in the best places of a store (best location)

Source: Vaselic D. (2010). Upravljanje kategorijama roba široke potrošnje, p. 106

2.4. Merchandising Merchandising in the past years becomes more and more important part of a program of marketing mix in the Fast Moving Consumer Goods industry. It is clear that everyone who is employed and has certain budget for regular shopping, has less time for shopping and that point of sale has much higher importance as well as offer in store. Particularly, if we look at the fact that lack of time for shopping has negative impact on lists prepared before the shopping, it means that more and more of the shopping trips are impulsive and subject of influence on a point of sale. Short period of time which consumer spends in front of a shelf is called Moment of Truth. In that short sequence of time, biggest chance for buying have those products which attract a consumer the most. Best chances have those products which attracts consumer first (here are not taken in consideration price, quality, brand equity, etc). Because of that, great efforts have been made to achieve fair share of shelf. Fair share of shelf means that share of shelf is equal to share of a market. Many suppliers for their goal set the challenge to achieve higher share of shelf than share of market (+3% or +5%). For attraction of consumer’s attention primary and secondary communication are important. Primary suggests from larger distance that category is just there and products are nearby. This can be achieved with domination of the same color on a package for all products of one brand in a category. So, if products are arranged this way in one clear block, they become noticeable from larger distance and they lure views of consumers. Secondary communication gives necessary information from short distance (up to 3 meters). Such merchandising which enables easier managing in front of shelves increases possibility for buying. This is the way to build image of premium point of sale. It means products inclusion in categories where they belong, vertical merchandising in brand blocks, horizontal merchandising by the regimes of use, price next to every product, neighboring merchandising of categories with possible cross buying (cross merchandising), etc. Percentage of unplanned shopping trips varies from category to category, but in general it increases for almost all categories in Fast Moving Consumer Goods industry and have significant impact on business of retailer as well as supplier. General directions for merchandising according to roles of subcategories are shown in Table 4.

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Table 4. Illustration of general directions of merchandising of product subcategories/categories Role of subcategory

General tactical approach to merchandising of subcategories on points of sales

Improvement of transactions

Merchandising on shelves should direct attention on more expensive products, and get better exposure to a consumer

Traffic improvement

Good quality of a category location, with receiving actual space in a category Total merchandising should be attractive, to bring back consumers in the shop Special focus in product segments with high loyalty

Generating of profit

Planogram should direct attention of consumers on products with higher margin Capitalize on products with impulsive buying decisions Locate categories with higher margin in passages with intensive traffic of consumers Think about combination/mix of expensive products to get better visibility and with intention to stimulate purchase Maximize visibility of private label and products/segments with high profitability

Source: Vaselic D. (2010). Upravljanje kategorijama roba široke potrošnje, p. 108

2.5. Refilling of retail shelves

Refilling of shelves can be done with use of 4 models in Fast Moving Consumer Goods industry. They are shown on figures 2, 3, 4 and 5. Figure 2: The flows of goods and information - Model 1

Producer

Distributor The flow of goods The flow of information

Retail distributive center

Retail store

Headquarter of retailer

Source: Vaselic D. (2010). Upravljanje kategorijama roba široke potrošnje, p. 108

Model 1 shows flow of goods from producer, over distributor, through retail distributive center to retail shelves. The flow of information goes from headquarter of retailer and distributor to producer. This model is used very often by international companies on a market of limited potential, where retailer has own distributive center. Figure 3: The flow of goods and information - Model 2

Producer

Distributor

The flow of goods The flow of information

Retail store

Headquarter of retailer

Source: Vaselic D. (2010). Upravljanje kategorijama roba široke potrošnje, p. 109

Model 2 shows the flow from producer, over distributer to retail shelves. The flow of information goes from retail store, over headquarter of retailer and distributor to producer. This model is used very often by international companies on a market with limited potential, where retailer does not have distributive center.

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Figure 4: The flow of goods and information - Model 3 Producer

The flow of goods The flow of information

Retail distributive center

Retail store

Headquarter of retailer

Source: Vaselic D. (2010). Upravljanje kategorijama roba široke potrošnje, p. 109

Model 3 shows the flow of goods from producer, over distributive center to retail shelves. The flow of information goes from retail store, over headquarter to producer. This model is used very often by the domestic companies towards retailers which have distributive center. Figure 5: The flow of goods and information - Model 4 Producer

The flow of goods The flow of information

Retail store

Headquarter of retailer

Source: Vaselic D. (2010). Upravljanje kategorijama roba široke potrošnje, p. 110

Model 4 shows flow of goods from producer to retail shelves, without middleman. The flow of information goes from retail store, over headquarter of retailer to producer. This model is used often by producers which don’t use distributors towards retailers which don’t have distributive center. Which one of the offered models should be adopted in everyday business depends on several factors. In general, it should answer on questions how each of the offered models affect costs, and is it possible to conduct it, from the operating point of view.

3. CRITICAL REVIEW ON A USE OF TACTICAL PLAN IN RETAIL COMPANIES IN BOSNIA AND HERZEGOVINA Assortment in retail companies which operates in a market of Bosnia and Herzegovina, unfortunately, has higher index of variability, than it is a case with other neighboring markets. It is mainly because of demographic constitution of Bosnia and Herzegovina and different preferences of consumers towards particular brands in different parts of Bosnia and Herzegovina. To illustrate this, in Republic of Srpska consumers have preferences towards brands from Serbia, but in southern part of Bosnia and Herzegovina they have preferences towards brands from Croatia, and in the rest of the Federation of Bosnia and Herzegovina they have preferences to Croatian brands and brands from Arab countries. If take this in consideration, with combination of different formats of retail stores, at some even with different brands of retail stores, emerges extremely difficult task for category managers in finding optimal assortment for market of Bosnia and Herzegovina. Next obstacle in a way of optimal managing of retail assortment is connected with low economy of scale of every retailer, what makes a trouble for them in building private label as tool for differentiating from competitors. Private label development is just started, and all retailers are just a little bit far away from the beginning of first phase of development, where private label is present with generic name and brand of retailer. Further concentration of retail should be expected in Bosnia and Herzegovina, what should provide strength for easier management of already mentioned challenges with assortment. Prices in retail are connected with assortment in different regions of Bosnia and Herzegovina. Above all of this, it is also a question of market potential for bigger number of formats, where is quite hard to have price differentiating between

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particular retail formats. It should be more acceptable to do it through different brand of retailer, than through different formats of the same brand. It is interesting to appoint that in Bosnia and Herzegovina is not present retailer with hard discounter strategy of business. Consider the fact that Bosnia and Herzegovina market is highly price sensitive, great potential for such retailer is obvious. Promotional activities, as part of tactical plan of categories in Bosnia and Herzegovina are very developed. Retailers, together with suppliers use different varieties of these activities. The problem for retailers and suppliers is increasing share of sales on promotion, and lower profitability of such promotion because of limited potential. To illustrate this, same promotion brings few times bigger incremental of sales in other markets, than in Bosnia and Herzegovina. It effects on higher complexity and fixed costs, what in the end brings lower profitability. Merchandising on shelves is also directly connected with complexity of defining optimal assortment in Bosnia and Herzegovina. Also, in Bosnia and Herzegovina (similar to other neighboring countries) still does not exist understanding of advanced merchandising practice. There is a practice at some retailers, of merchandising of products according to type of product, or type of package, instead of according to consumer behavior and shopping habits. Feasible model of refilling of shelves defines existence of central warehouse of retailer. If retailers have built its own distributive warehouse, they will strive during negotiations, to get certain compensation, and will push suppliers to accept that way. Critical moment of operationalization of this model is managing out-of-stock situations. It is obvious that out-of-stock situations appear more often than in case of direct supply of retail stores. In Bosnia and Herzegovina small number of retailers has decided to establish central warehouse, and this is directly conditioned with low market potential and undeveloped road infrastructure.

4. CONCLUSION Tactical plan of a category represents primary tool of operational business, with aim of achieving strategic goals of product category. Consumers and competition are basic starting points for decision making process about elements of tactical plan of a category. Managing elements of a tactical plan is much easier with introduction of clusters of retail stores, consisted of stores for which is possible to have the same elements of tactical plan. Assortment represents first and basic element of a tactical plan. Because of sensitivity of consumers on available assortment, and because of limited shelves in retail, great efforts have been made in finding optimal assortment by clusters. Defining assortment for individual categories should be done according to role of category itself. Prices are, after assortment, second the most sensitive element of a tactical plan of a category. Consumers perceive prices in 3 ways: awareness, comparing with other reference, and answer to their increase or decrease. They are defined also by the category role. In retail are mostly used following models: Everyday low prices, High-low price, Hybrid of these two models. Support in promotion of every category depends on role of a category. In promotion of every category is necessary to have decent cooperation between supplier and retailer. In practice are mainly used 3 models of promotional activities: sales oriented, brand equity development oriented, and combination of these two types. Frequent price promotions can have negative impact on loyalty of consumers, what can have significant impact on profitability of every retailer. Merchandising becomes more and more important, having in mind market researches which say that higher and higher percentage of buying decisions, in area of consumer goods, has been made in front of shelves. Ideal merchandising should enable fast and easy navigation in front of shelves, what is under high impact of primary and secondary communication, positioning in vertical blocks, horizontally according to regimes of use, with stimulation of cross sale. Quality management of logistics is important because of, at least two reasons, which could make company work positive or negative. First one is that logistics produce large scale of costs (direct and indirect). Second one is that logistics is main source for cost cutting in retail. Stock management as one of the crucial activities in logistics can have significant impact on costs of business by avoiding out-of-stock situations. Having in mind this, tight cooperation between category managers and logistic managers is welcomed.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

AC Nielsen with Karolefski J., Heller A. (2005.) Consumer – Centric Category Management, New Jersey, Bogetić P. Z. (2007.) Menadžment kategorije proizvoda, Data status, Beograd, Gašović M. (2007.) Menadžment proizvoda, IntermaNet, Beograd, Kotler P. (2000.) Marketing Management Milienium Edition, Prentice Hall, New Jersey, Singh J., Blattberg R. (2001.) Next Generation Category Management, Datamonitor PLC, London, Vranešević T. (2002.) Upravljanje zadovoljstvom klijenta, Golden marketing, Zagreb, Woolf B. (2002.) Loyalty marketing – The Second Act, Teal Books, Richmond, Singh J., Mandel H. (2006.) Category management, Category Management Workshop, Zagreb, Singh J. (2008.) Category management – Past, Present, Future, Category Management conference, Beograd – Kovilovo, Vaselic D. (2010.) Upravljanje kategorijama roba široke potrošnje, non-published master`s work, Economic Faculty Subotica, Subotica, Win Weber (2009.) Category Management Needs New Life, www.winstonweber.com

DETAILS ABOUT AUTHORS: MILAN GASOVIC ASSOCIATE PROFESSOR UNIVERSITY OF NOVI SAD, FACULTY OF ECONOMICS SUBOTICA BELGRADE, REPUBLIC OF SERBIA gasovicm@ef.uns.ac.rs DARKO VASELIC BUSINESS DEVELOPMENT MANAGER FOR BOSNIA AND HERZEGOVINA, ALBANIA, MACEDONIA AND KOSOVO JOHNSON&JOHNSON COMPANY BOSNIA&HERZEGOVINA dvaselic@gmail.com

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CROATIAN T&C INDUSTRY AND STUDENTS CUSTOMER SATISFACTION WITH CLOTHING PRODUCTS PRODUCED IN DOMESTIC COMPANIES RUŽICA BREČIĆ MAJA STRACENSKI KALAUZ ALICA GRILEC KAURIĆ

ABSTRACT

In today's world of globalization and economic crisis threats for the manufacturing business in such competitive market is also the case in sector of fashion industry. It brings worries for the future and is growing every day, especially for small and medium enterprises (makes 98,56% of all) in clothing industry (C14) in Croatia in the year 2011. In creating an effective marketing strategy it is important to identify factors that determine demand, satisfaction and idealistically, brand loyalty. This paper examined some macroeconomic indicators of Croatian textile and clothing (T&C) industry sector and demand for clothing products trough students customer perception and behaviour about Croatian producers clothing products, their satisfaction and their brand loyalty. Data were collected by surveying student population - customers of Croatian clothing products. On-line surveying students (N=311) from three faculties of University of Zagreb (EFZg, AgrF and TTF)* showed that the most of them do buy Croatian clothing products. Products quality showed to be an important factor in their purchase. Other important factors are price, fashion trends, brand image and companies’ image. Furthermore, consumers are very pleased with products quality, but discontented with price, promotion and availability of products. There are a large number of customers that are not loyal to Croatian brands. Results show that Croatian clothing companies don't have clearly developed marketing strategy and should pay more attention to developing long-term relationships with their customers, researching reasons for their loyalty and developing loyalty programs. All customers agreed about buying more Croatian clothing products in case of better and more modern design, lower price, bigger promotion and wider distribution. The scientific contribution of this paper are new insights and better understanding of the demand for clothing products in Republic of Croatia, as well as the specifics required to build a competitive marketing strategy. KEYWORDS: Croatian textile and clothing (T&C) industry sector, small and medium enterprises, costumer perception and demand, domestic clothing market, satisfaction and loyalty, marketing strategies, students population

1. INTRODUCTION The aim of this paper is to give a brief simple, descriptive time series analysis of some macroeconomic indicators of Croatian textile and clothing (T&C) industry as a base for understanding the place of this manufacturing industry sector in last 4 years (2008-2011) in the Croatian economy. The other aim is to empirically research the customers (students) perception and behaviour considering domestic (Croatian) producers clothing products, their satisfaction and their subjective loyalty (affiliation), as a croaky view of this interesting marketing segment which potential should grow in years ahead considering domestic (Croatian) producers of clothing products. In general, as Andolfinin and Andersen (2011, 19) indicate the textile and clothing manufacturing industry sector is strongly driven from the dynamics in textile and clothing markets and therefore it is necessary to distinguish between two different market systems: 1. Consumer markets that are predominantly served through retailing and 2. Industrial markets where textiles are part of a system (e.g. a car) or a project (a hotel or luxury yacht) predominantly served through downward industries. There are no precise estimates of the share of both markets, but a rough approximation indicates that consumer markets represent 60% of total textile market and industrial markets 40%.(Andinolfi, Andersen, 2011, 19). This paper tries to add some empirical facts based on the analysis of data, their trends and drivers of change found in available literature, students survey and data analysis.

* EFZg – Faculty of economics and businesses Zagreb, AgrF – Faculty of Agriculture and TTF – Faculty of Textile Technology at University of Zagreb

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1.1. Croatian textile and clothing (T&C) This section provides data overview of some macroeconomic indicators and their key developments, trends and drivers in the Croatian textile and clothing industry (C13 textile production and C14 clothing production; T&C sector). The Croatian textile and clothing manufacturing industry (C13 and C14) shows generally mostly declining data trends over the last twenty years. Thus recent statistical data of some macroeconomic indicators of industrial production and employment in textile and clothing industry, they continue to record a decrease in production. Graph 1. and Table 1. as well as Table 2. presents quick view and tendency of some macroeconomic data in Croatian textile and clothing manufacturing industry (C13 and C14) that mostly decline (number of enterprises, number of employees, production volume and value, growth rate). Graph 1. Presentation of absolute values of macroeconomic indicators of in Croatian textile and clothing manufacturing industry during time period (2008. -2011.) by number of enterprises, market trade value, value of production and number of employees

3000 2500 2000 1500

2280

2113

1561 1652 1510

1000 719

776

603

7000000

6000000

5919774 5638877 5389277 5348575 5000000 4402514 3917108 3323843 4000000 3260185 3000000 2315034 2088390 200000015172601472169 1000000

2428 1850

1311 539

500 0

2008

No. of enterprises

2009

2010

34444 27544

10000 6900

1000000 0

30922 24755

6167

28108 27452 22381 22067

5727

5385

5000 2008

2008 2009 2010 2011

40000 5903272 5225773 35000 4926640 4651847 5000000 4395096 30000 3862476 4000000 25000 2907192 2764243 3000000 20000 18876042019448 200000015081761363297 15000

2011

2009

2010

2011

0 2008

Value of production

Market trade value

2009

2010

2011

No. of emploees C13 Textile production C14 Clothing production C Total (13 and 14)

Source: Authors according to CBS data

In the year 2009, there were 22.447 employees in the textile and clothing industry; 17,30% in textile and 83,79% in clothing industry. Table 1. Frequencies in the year 2008 and time series indices during period (2008-2011) in Croatian textile and clothing manufacturing industry by number of enterprises, market trade value, value of production and number of employees 2009 2008

2008

Year

(2008=100%)

Indicator Branches of manufacturing ind.:

No.of enterprises

C13 Textile production

2010 2008

2011 2008

2009 2008

2010 2009

2011 2010

Basal index (Ib) %

Chain index (Iv) %

Basal index (Ib) of No.of enterprises

Chain index (Iv) of No.of enterprises

719

107,93

83,87

74,97

107,93

77,71

89,39

C14 Clothing production

1.561

105,83

96,73

83,98

105,83

91,4

86,82

C Total (13 and 14)

2.280

106,49

92,68

81,14

106,49

87,03

87,55

Market trade value (HRK) C13 Textile production

1.517.260

97,03

137,64

152,58

97,03

141,86

110,85

C14 Clothing production

4.402.514

88,97

74,05

75,50

88,97

83,23

101,95

5.919.774

91,04

90,35

95,25

91,04

99,24

105,43

C Total (13 and 14)

Value of production (HRK) C13 Textile production

1.508.176

90,39

125,16

133,90

90,39

138,46

106,98

C14 Clothing production

4.395.096

87,88

62,89

66,15

87,88

71,57

105,17

C Total (13 and 14)

5.903.272

88,52

78,80

83,46

88,52

89,02

105,91

6.900

89,38

83,00

87,32

89,38

92,87

94,03

C14 Clothing production

27.544

89,87

81,26

80,12

89,87

90,41

98,60

C Total (13 and 14)

34.444

89,77

81,60

79,70

89,77

90,9

97,67

No.of emploees C13 Textile production

Source: Authors according to CBS data

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Textile sector (C13) shows generally brighter perspective comparing to clothing sector (C14). Textile sector perform, during the selected period and especially recently, at least encouraging, increase in i.e. market trade value, value of production and labour productivity (2,2% comparing to all sectors in the year 2012) while decrease and negative rates are general characteristic of other indicators in C13 and generally whole Croatian clothing sector. Table 2. Industrial production indicators: gross volume, growth rate, Structure and rates of persons employed and Labour productivity (2012)

Indicators of Croatian industry (2011., 2012.)

Industrial productionGROSS VOLUME indices, total, according to MIGs

Industrial productionGROW RATES calculated on basis of working-day ajusted indices,

Structure of persons employed

Persons employed

Labour productivity

I. – XII. 2012. I. – XII. 2011.

Ø 2012.

XII. 2012. XII. 2011.

Ø 2012.

2009. and NKD 2007. sections and divisions

Total industry

94,5

-5,5

100,00

93,9

98,7

C Manufacturing

94,7

-5,1

89,91

93,6

99,1

C 13 - Manufacture of textiles

91,4

-7,8

1,72

88,2

102,2

C 14 - Manufacture of wearing apparel

86,7

-13,4

8,12

85,3

96,3

Source: Croatian Bureau of Statistics (CBS): Industrial production volume index and indices of stocks, persons employed and labour productivity

The distribution of enterprises in Croatian textile and clothing (T&C) sector, according to their proportions of enterprise sizes, selected by number of persons employed, shows a little variation during the selected period and average (in 4 years) and it is shown at Graph 2. There lays the opportunity for Croatian T&C sector when knowing that customersatisfaction and customer-orientation are strongly associated with successful small companies (Blythe, 2001; Brooksbank et al., 1992). “It is the customer who determines what a business is, what it produces, and whether it will prosper.” (Drucker, 1954, 37). Ties with customers enable Small and Medium Sized companies (SME’s) to know customers taste and demands and respond appropriately in order to satisfy them. It also promotes open communication, which in turn develops trust and reliability of the SME in the eyes of customers (Gilmore et al., 2001). Graph 2. Croatian textile and clothing total number of enterprises and their distribution by sizes of company during fouryear time series No. of enterprices in C13 and C14 according to No. of pearsons emploeed (2008.-2011.)

3000 No. of enterprices by no. of emploees

2500 2000

2428 2280

2113

2063

1897

1850

1786

1550

1500

Total emploees 0-9

1000 500 0

1O-19 20-49 148 107 104 24 1

137 11888 22 2

year

117107 84 19

100 89 89

50-249 22

250 and more

No.of enterprieses in C13 and C14 according to emploeed persons No.of pearsons emploeed Average 4 years proportion

0-9

10-19

20-49

50-249

250 and more

84,12

5,62

5,01

4,24

1,01

Source: Authors according to CBS data

While industrial producer price indices somewhat weary since 2008 Prices are displayed as indices (base is the value in

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previews year) methodological validity. Table 3 shows the movement of prices of textile and clothing products. Table 3. Manufacturers price indexes of textile and clothing products in the years 2009, 2010 and 2011 Industrial producer price indices (total) according to MIGs 2009. and NKD 2007. sections and divisions, in december

Indicies – Iv (%) I. – XII. 2009. I. – XII. 2008.

I. – XII. 2010. I. – XII. 2009.

I. – XII. 2011. I. – XII. 2010.

C 13 - Manufacture of textiles

96,9

111,0

89,0

C 14 - Manufacture of wearing apparel

79,9

98,9

105,0

Source: Authors adaption from Croatian bureau of statistics data: Short-term Indicators of Industry, 2009; 2010; 2011 – Industrial Production, Producer Prices, Turnover and New Orders of Industry-Statistical reports - 1402/2010; 1429/2011; 1458/2012

According to Anić, et al. (2011) in research on the differences and similarities in strategies employed by 80 companies operating in the Croatian textile and clothing industry, research results indicate that textile and clothing manufacturers in Croatia employ two major strategies: low cost strategy and value-oriented strategy. This paper will hereinafter try to investigate the other perspective, focusing on the students costumer’s perspective, i.e. perception, satisfaction and loyalty intention of clothing products produced in Croatian companies, as well as the specifics required to build a competitive marketing strategy.

1.2. Costumers perception and behaviour at fashion and clothing market Fashion Marketing is commonly classified in two micro and macro topics, include: Micro topics are focused on services / products offered and how to deal with customer. In fact, long-term services of customer should be considered for maintaining profitable ones. According to Anić and Rajh, (2008, 137) numerous studies have analyzed the demand and consumer behaviour in the textile and garment industry. Studies have mostly focused on the clothing industry. Many factors influence the increase or decrease in demand for some products, and factors affecting the increase in demand are: price, income, population, cost and availability of complementary products, prices and availability of substitutes, consumer needs and tastes, and special effects (Grabovac, 1998, 44). According to Solomon and Rabolt (2004.): many studies have looked at evaluative criteria that customers use when making apparel and fashion decisions. Some of them were studies of authors like: Jacoby, Olson and Haddock (1971), Davis (1985), Hatch and Roberts (1985), Casill and Drake (1987), Eckman, Damhorst and Kadolph (1990), Kwan et al. (2004) or Stracenski (2004). Usually criterias/factor are/is divided at intrinsic factors or extrinsic factors. Intrinsic attributes of the product cannot be hanged without changing physical characteristics of the products such as design/stile, colour, fabric, quality, fit, and care. Extrinsic ones are determinate by manufacturers and/ or retailers and cannot be the basic component part of the product such as the brand, price, image, country of origin. Different criteria may have also different importance on consumers buying decision (Stracenski et al., 2012). When speeking about fashion and clothing market Andinolfi and Andersen (2011.) emphesise that in EU, consumer markets are stable or declining in mature markets (but are less sensitive to the conjectural cycle) whereas industrial markets are growing slightly above the rate of economic growth (but are far more sensitive to cycles). In Emerging Economies the trend is slightly different as societies are normally based on a dynamic and youthful population that has still some basic needs to be fulfilled but is looking at Fashion and especially Fashion Brands as a way to show their personal and professional accomplishment (Andinolfi; Andersen, 2011, 19). According to the data from Croatian bureau of statistics there are 1,535,635 private households in Republic of Croatia (CBS, 2011) and it is assumed that the market potential for the Croatian textile and clothing sector is about 6 million HRK. In theory, income is the most important determinant of demand for textile and clothing products (Grahovac, 1998). Data from Central Bureau of Statistics in Croatia show that between 2005 and 2007 total disposable income per household had increased from 69.180HRK to 77.442HRK, relatively 11,9%. In the same time there was an increase in the average annual personal consumption of clothing and footwear in the household from 5.377 HRK to 5.867 HRK, relatively 9,1%. But as it is shown in table 4, since 2008, time when recession began, it shows constant declining tendency.

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Table 4. Personal consumption, annual average per household for clothing and footwear, expenditures, structure and indicies Personal consumption, annual average per household on clothing and footweare(HRK)

Expenditures, Structure, % out of total that year

Indicies

Consump. expend. group C14 Clothing and C15 footweare

Year

Total C14 and C15

2008

5.902

7,90

100,00

Total C14 and C15

2009

5.553

7,30

94,09

Total C14 and C15

2010

4.787

6,40

86,21

81,11

Total C14 and C15

2011

4.493

6,00

93,86

76,13

4.493

100,00

Iv (%) (v=year befoure)

C14 - clothing

2011

3.124

69,50

C15 - footweare

2011

1.369

30,50

Ib (%) (b=2008)

Source: Authors adaption from Croatian bureau of statistics data

Unfortunately, the elasticity of demand considering income in Croatia by groups of textile products can not be calculated (Anić et. al. 2008), because the lack of statistical data by groups of textile products and expenditures. According to Haluk Köksal and Özgül (2007), economic crises affect consumers both psychologically and economically, i.e. consumer behaviour and habits adapt to changing economic conditions (Ang, 2001; Ang, et al., 2000; Zurawicki; Braidot, 2005). Negative trend of total economic activity was moderated in 2010 to a decline level of -1,2% (CCE). According to a generally accepted practical definition of economic research, if GDP drops for two consecutive quarters, a recession may officially be declared (Shiskin, 1975). Other macroeconomic indicators also suggest a decline in business activity. The year 2010 will be registered for the largest unemployment increase in newer Croatian history. Stronger economic recovery is not expected in 2011, therefore significant positive shifts in the labour market could not be expected as well. The registered unemployment rate in February, 2011 was 19,6%, which is 1,3 percentage points higher than last year’s and 5,1 percentage points higher than before the crisis in 2008 in the last sixteen years, due to further reductions in domestic demand, growth of unemployment and a decline in disposable income (CCE). Such heavy blows to the economy have forced customers to consider their own expenditures more thoroughly. They try to maximize their usefulness in the selection of goods depending on the consumption of that good (Banks, et al. 1997). Purchasing process through which consumer goes when buying, includes the following phases: identification of needs, seeking product information, evaluation of product attributes, product selection, making the purchase, ratings of satisfaction after buying the product, possible re-purchase and customer loyalty (Giese; Cote, 2000; McQuitty et al., 2000). Unfortunately, on the other hand, Croatian textile and clothing companies in dynamic environment have weaken their competitive position. Resent data show negative trade balance (in 2011 it was –344.573, and in 2012 it was -282.879, but a bit encouraging is that in 2012 the negative trade balance is 17,9 index points lower than in 2011, based on CBS data (2013) presented in table 5. Table 5. Export and import and incdicies of manufacturing of textiles, clothing, footwear, lether and simmilar products (2011. and 2012.) Export and import according to NKD 2007. (production principle/approach) CB Manufacturing of textiles, clothing, footwear, lether and simmilar products

EXPORT

IMPORT

I. – XII. 2011.

I. – XII. 2012.

Indicies I. – XII.2012. I. – XII.2011.

I. – XII. 2011.

I. – XII. 2012.

Indicies I. – XII.2012. I. – XII.2011.

749.343

727.768

97,10

1.093.916

1.010.647

92,40

Source: Croatian Bureau of Statistics (CBS)

The company’s survival depended on the ability to introduce radical changes necessary to cope with new market challenges. Even though the crisis environment can pose a significant threat, it is also an opportunity to improve business performance, depending on the nature and root of the crisis (IMF). Some economies (countries) tried to empower their strength by encouraging their costumers to by more or at least, more often domestic products.

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So, to empower the domestic industry, different countries carried out campaigns to convince consumers to support domestic industry products such as the campaign carried out by the U.S. clothing (apparel) industry during the 1980s named “Crafted with Pride” in the USA or “Let’s by domestic (Croatian)” in Croatia 2000s. The goal of this kind of extensive campaigns were to promote labels, hangtags, and extensive advertising were used in attempts to convince consumers that Made in the national economy (USA; Croatia) and its effect should play a fundamental role in clothing purchase decisions (Crafted with Pride Dazzles America 1986; Dickerson 1995). Consumer decision-making has both cognitive and affective characteristics when the fashion and clothing items/brands are researched. Although many factors influence consumer decision-making, consumers are thought to approach the market with certain basic decision-making styles (Sproles; Kendall, 1986). In the existing consumer behaviour literature, most studies assume that all consumers’ approach shopping with certain decision-making traits that combine to form a consumers’ decision-making style (Zhang, 2012), such as: the consumer typology approach, the psychographics/lifestyle approach, and the consumer characteristics approach and utilized a Consumer Styles Inventory (CSI) (Sproles; Kendell, 1986). But the consumer characteristics approach has been perceived to be more powerful and explanatory than others, as its focus on consumers’ mental orientation (Lysonski, et al., 1996). Sproles and Kendell, (1986) define eight factors included in the CSI to describe clothing decision making styles: (1) quality - Perfectionism or High-quality conscious – consumers seek the very best quality products, have high standards and expectations for consumer goods, and are concerned with the function and quality of products; (2) image - Brand consciousness – consumers are oriented toward the more expensive and well-known national brands and feel price is an indicator of quality; (3) fashion - Novelty-fashion consciousness – consumers gain excitement and pleasure from seeking out new things, and are conscious of the new things; (4) recreation - Recreational, Hedonistic Shopping consciousness – consumers find shopping pleasant, shop just for fun of it; (5) value- Price Conscious, or “Value for money” – consumers are low-price conscious, look for the best value for the money, and are likely to be comparison shoppers; (6) emotion - Impulsiveness, Careless – an orientation of consumers not to plan shopping or to be concerned about the amount of money they spend; (7) confusion- Confused by Over-choice – consumers who perceive many brands and stores from which to choose and have difficulty making choices; and (8) loyalty - Habitual, Brand-Loyal toward consumption – consumers who are apt to have favourite brands and stores. The numerous cross-cultural studies have shown that the CSI has a potential utility across international populations, although decision-making styles can vary across cultures. Zhang (2012) had found that it has been applied in following nine countries: initially in the U.S. (Sproles; Kendall, 1986) and to countries such as Korea (Hafstrom; Chae; Chung, 1992), New Zealand (Durvasula; Lysonski; Andrews, 1993), Greece, India (Lysonski; Durvasula; Zotos, 1996), the United Kingdom (Mitchell; Bates, 1998), China (Fan; Xiao, 1998; Hiu et al., 2001), Germany (Walsh; Mitchell; HennigThurau, 2001), Singapore (Leo; Bennett; Hartel, 2005), and afterword i.e. China and India (Byoungho; Park; Ryu, 2010), U.S. and Japan (Lee, J.; Karpova, E.E., 2011.) or U.S. and China (Zhang, 2012). Hiu et al. (2001) recommended four factor model: “Quality Conscious”, “Brand Conscious”, “Fashion Conscious”, and “Recreational” are more fit to measure global consumer decision making style. According to Yang and Tsai (2007), overall satisfaction reflects customers’ cumulative impression of a clothing performance and that, in turn, may serve as a better predictor of customer loyalty (Yang; Peterson, 2004). Recently, it has attracted researchers to pay attention to the formal tests of the mediation effects of customer satisfaction in an integrated loyalty model or behavioural intentions model (e.g., Yang; Lin, 2006). Furthermore, numerous studies considering the effects of the Made in the USA label on clothing purchasing showed that country-of-origin was far less important to consumers’ clothing decisions than product attributes such as price, aesthetics, and quality (like: Abraham-Murali and Littrell 1995; Eckman, Damhorst, and Kadolph 1990; Ettenson, Wagner, and Gaeth 1988; Forney, Rabolt, and Friend 1993; Gipson and Francis 1991; Hester and Yuen 1987; Lang and Crown 1993). Few consumers appeared to be aware of the country-of-origin of their clothing purchases, and even fewer consumers admitted to caring (Forney et al. 1993; Hester and Yuen 1987). Customer loyalty has been shown to have a strong impact on firm performance. Research has also indicated consumers may demonstrate their loyalty towards a firm in numerous different ways including willingness to pay higher prices, advocacy and the establishment of a long lasting relationship (Rowley, 2005). Dick and Basu (1994) argued that consumer loyalty is primarily determined by the strength of the relationship between an individual’s repeat patronage and their relative attitude towards the entity. Generally, consumers who display relatively high levels of loyalty are likely to be more actively involved with the company and are also more likely to spend a significantly higher proportion of their expenditure with businesses they are loyal towards (Knox, 1998).

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The rest of the paper is organized as follows: the next section present research design and data analysis, followed by a brief presentation of the results of the data analysis and discussions that leads to the key messages, conclusions and recommendations of future research areas.

2. METHODOLOGY According to the theme of this research, parts of this study are based on exploratory research and parts of it are based on descriptive purpose. For the empirical research, the method of convenience sample was used. In total, 480 students’ population customers (student’s mailing list studying economics classes/module) equally from Faculty of economics and business Zagreb (EFZg), Faculty of Agriculture (AgrF) and the Faculty of Textile Technology (TTF) of Zagreb’s University, studying during the year 2012, were selected. As a result the total sample comprises responses from 311 students/ costumers students whom were willing, anonymously to participate, i.e. who filled out a questionnaire and processed it back. All surveys (respondents) were aggregated from above faculties (regardless of institution) of University of Zagreb studying economic course/module. Data were collected and partially analysed via on-line questionnaire using free program “SurveyMonkey online surveys” and SPSS17. Of all respondents (N=311), 65,27% (203) were females and 34,73% (108) were males with. Both sex groups having an average age of 20 years old (disperse from 19-24 years old). Data were presented via tables and graphs. Statistical analysis used simple and descriptive statistics method. The method of on-line questionnaire was designed based on two demographic questions about age and gender and 6 criteria questions was adapted from established measurement scales (Anić et al., 2008.) on which the measurement of each variable was automatically generated. Several changes were made in the wording of some items. First question (Q1.: Do you buy clothes produced in Croatia?) was dichotomous; second question (Q2: What are your main reasons for buying Croatian products?) was semi structured; third question (Q3: What is your main reasons for buying Croatian clothing products?) was semi structured; next question/set of questions (Q4: How much are You satisfied with following characteristics of Croatian producers clothing products: a) Price, b) Quality, c) Fashion design, d) Availability and e) Promotion) was structured and all items in scales were retained, and for all scales Likert-type response categories (1 completely dissatisfied – 7 extremely satisfied) were used; fifth question asked about subjective perception of their own “loyalty”/affiliation for Croatian producers clothing products (Q5: How much are you loyal to Croatian clothing products?) also scales 5 point Likert- type response (1 extremely unloyal – 5 extremely loyal); and last open ended question (Q6: In what situation would Croatian manufacturers of clothing have been your first choice in buying clothing product?).

3. ANALYSIS At the first question with closed, dichotomy answers responded 99,04% students (308), i.e. three respondents (out of 311) didn`t answer the Q1.: Do you buy clothes produced in Croatia? 68,18% (210) of respondents answered with „yes“, so they buy Croatian clothing products. While 31,82% (98) do not buy it. We are free to conclude that Croatian consumers perceive the value of Croatian clothing products. The several main factors which, according to survey, encourage consumers to purchase are shown in table 6. On second, semi structured question (Q2: What are your main reasons for buying Croatian products?), answered 96,14% of respondents. The most significant factor for the selection of clothing manufactured in Croatia respondents found quality of products (33,12%). The second one is price (16,72%), while fashion trends, image of the brend and image of the company tend to be less significant. The 36,98% respondents, when added the answers shomting else and missing answer, are mostly those, which answer on priviews Q1, that they do not by Croatian clothing products. On Q2 shomting else answered 33,12% respondents, which on open-ended subquestion what else, responded mostly with larger answer (not just by giving single but reather combination or multiple characteristics), specifieing answers like: balans of „good quality and price“, „I by what (if), I like (it)“ or patriotic reasens „...because it is domestic product“. Table 6. What are your main reasons for buying Croatian products? The main reasons for buying Croatian clothing products (N=311) Price Quality

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Frequency

Rank

Percentage of answered (299)

Percentage of total (311)

17,39

16,72

103

1-2

34,45

33,12

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Image of the company

2,01

1,93

Image of the brand

5,02

4,82

Fashion trends

6,69

6,43

Something else

103

1-2

34,45

33,12

Answered

299

100

96,14

Missing

3,86

Source: Authors

The satisfaction of 5 factors shown in table 4 were also tested using grades that represent degree of satisfaction as follows: 1= completely dissatisfied, 2=dissatisfied, 3=somewhat satisfied, 4=neutral level of satisfaction, 5=somewhat satisfied, 6=satisfied, 7= extremely satisfied. Less then 5% of respondents didn`t answered this set of questios and they mostly, strongly declare they do not by Croatian clothing. Table 7. Rate the extent to which respondents are satisfied with the 5 factors/characteristics The rate of satisfaction with product characteristic when purchasing Croatian clothing (N=311)

General grade of 5 researcher charasteristics

Total

Percentage of 300

5,00

13,67

30,33

23,33

18,00

8,67

1,00 100,00

Percentage of total

4,82

13,18

29,26

22,51

17,36

8,36

0,96

96,46

3,54

296

Percentage of 296

0,68

5,07

19,26

21,62

24,32

26,01

3,04 100,00

Percentage of total

0,64

4,82

18,33

20,58

23,15

24,76

2,89

95,18

4,82

298

300

Percentage of 298

2,68

13,42

23,49

20,81

18,12

19,46

2,01 100,00

Percentage of total

2,57

12,86

22,51

19,94

17,36

18,65

1,93

95,82

4,18

297

Percentage of 297

7,07

22,22

22,90

20,88

15,82

8,08

3,03 100,00

Percentage of total

6,75

21,22

21,86

19,94

15,11

7,72

2,89

95,50

4,50

296

Percentage of 296

14,19

27,03

19,59

12,16

6,42

1,01 100,00

Percentage of total

13,50

25,72

18,65

11,58

6,11

0,96

Percentage of average grade

5,92

16,28

23,11

21,25

17,68

13,73

Mod of grade

Frequency Promotion

4 70

Frequency Availability

3 91

Frequency Fashion design

2 41

Frequency Quality

Missing answer

Frequency Price

Answers

95,18

4,82

2,02 100,00 7

Source: Authors

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Graf 3. Distribution of share of 5 characteristics/factors of satisfaction of respondents among each grade (shown verticali, by single grade) The share distribution of 5 characteristics of Croatian clothing products (based on respondents perception) among each of 7 satisfaction grade (1-7) factors share distribution among each satisfaction grade

100% 19,59

90% 80% 70%

27,03 14,19

22,90

60%

22,22

50% 40% 30% 20% 10%

7,07 2,68

13,42 5,07

0,68

5,00

13,67

19,59 20,88

23,49

20,81

19,26

21,62

30,33

23,33

12,16

6,42

1,01

8,08 15,82 18,12

Promotion percentage of 296

3,03 19,46

Availability percentage of 297

2,01 24,32

18,00

Fashion design percentage of 298

26,01

8,67

3,04

Quality percentage of 296

1,00

Price percentage of 300

completely dissatisfied somewhat neutral level somewhat satisfied (6) extremely satisfied (5) satisfied (7) (2) satisfied (3) of dissatisfied satisfaction (1) (4)

satisfaction grades

Source: Authors

Even respondents/Croatian consumers declaire they are not at all loyal to Croatian clothing products declaire 15,11% and 28,61% express that are unloyal, while 31,19% of them have neutral level of loyalty, i.e. affiliation. Only 18,33% considere themselves as loyal. Extremely loyal to Croatian products declaire 3,54% of respondents, as it is shown in table 8. Table 8. Frequency and rate the extent to which you are brand loyal Croatian clothing products Brand loyal to Croatian clothing products

Extremly unloyal 1

Frequency

Extremly loyal 2

Answered

Missing 11

300

Percentage of 300

15,67

29,67

32,33

19,00

3,33

100,00

Percentage of total

15,11

28,62

31,19

18,33

3,22

96,46

3,54

Source: Authors

The last open-ended question refers to situation in which Croatian clothing products would be the first choice to buy for surveyed consumers were answers that encompasses characteristics of price, quality, trendiness and design (single or in combination) appears in more then 70% of all answers: (1)“Adequate, better price”, “If they will be not too expensive”; (2)“If they will be more trendy”; (3)“Good, balanced price- quality ratio”; (4)“In the case of reasonable prices, exceptional quality and interesting design”; (5)“In case in which design could compete with brands such as Zara, Mango H & M, etc., and quality and price would be near theirs”; (6)“I think that there are (if they at least were) many manufacturers who produce high quality clothing in Croatia, but aren’t promoted well and do not follow fashion trends”; (7)“I would buy Croatian clothes if it was more present in the shops, there is no way you can find it in the stores. I think the whole problem of restructuring the textile industry in Croatia need to be solved. Croatian producers doomed to a very small production.”; or (8)“I think when you enhance the advertising and fashion design of Croatian producers, success could be much better”. Based on the poll that have been carried out, shown that there is a consensus among consumers that Croatian brands are not sufficiently modern and that their products are not being adequately promoted and distributed. In order to change this perception, a long-term marketing strategy relating to the promotion, price and distribution as well as bust the branding (at national but also at international market) of the products should be developed.

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5. DISCUSSION The purpose of this research was to identify the situation (potential strength) of the Croatian T&C sector (macroeconomic view) on one hand and at the other hand to indicate perception and behaviour of Croatian student’s market segment for the domestic clothing products (microeconomic view) proposed for use by apparel manufacturers and retailers (or even economic policy makers). The results of a survey carried out among Croatian student population, i.e. consumers showed that according to their answers, most of them buy cloths made by Croatian manufacturers. An important factor that influenced their decision to buy these products was their quality. Other important factors are products’ price, fashion trends, image brand and companies image. The results of the survey differ from the conclusion drawn by Anić et al. (2008) that the main factor influencing the purchase is the price of the product. Stracenski (2004) find out that 22 or more factors (out of 83 researched) were important in 50% of respondents (N 306 Zagreb’s young clothing costumers aged 15-35), which as a most influential factors for buying clothes ranked appearance of the apparel item (96,41%), own appearance in the apparel item (95,75%), comfort (91,18%), quality (85,95%) and price (83,99%) A survey among the US consumers (Fadiga et al. 2005, Lee, J.; Karpova, E.E., 2011) also showed that the price is the main factor that influences their decision when buying clothes as well as Chinese consumers (Byoungho, et al., 2010), while, by contrast, Japanese consumers increased their purchases of higher quality, domestically produced apparel, but decreased the purchase of low quality imported apparel when its price increased (Lee, J.; Karpova, E.E., 2011). This discrepancy is probably result of the demographic characteristics, time and place of the consumers who have taken part in the survey – young newly employed people who readily give out money for clothes of high quality. Respondents are contented with the quality of the product. However, they are not contented with price, promotion, distribution and availability of the products. In the eyes of respondents, contented buyers are likely to become regular costumers, while those not contented will reach for more competitive products, sooner or later. If buyers are contented with products, they are likely to have a positive perception. This increases the probability that customers will recommend the product to someone else, they will buy the product again and in this way increase ordering of goods and their consumption. This conclusion is in concord with the survey by Anić et al. (2008) that customers can very easily choose goods by other manufacturers. The survey on the perception of loyalty of buyers, i.e. researched students to Croatian clothing brands shows that there is a large number of buyers that are not loyal to Croatian clothing brands and that only a smaller number of buyers considers themselves to be loyal. That finding is consistent with research results of Stracenski Kalauz (2010) on younger teenagers (N507), which are among 7 types of loyalty (ultimately loyal, loyal, loyal to several brands, potentially loyal, inert, explorers and disloyal) mostly inert (26,4%), then disloyal (20,71%) and loyal (17,16%). The loyalty strength exists but it was relatively low, and only 17,32% of respondents waned to be loyal to the clothing brand (regardless of country of origin). This results indicates that Croatian manufacturers should pay more attention to the development of long-term relations with buyers, that they should examine the reason why their image (as a producers) as a main reason for buying Croatian products isn’t recognized enough by student costumers and why brother students costumers are not loyal and producers should work more harder to develop a program, which would help to attract and bound more customers. Consumers agree to buy clothes of Croatian producers in cases of better and modern product design, better promotion, wider distribution and lower prices, and that supports the findings of Anić, et al. (2011) that textile and clothing manufacturers in Croatia employ two major strategies: low cost strategy and value-oriented strategy. Like most (Croatian) studies, this study had difficulties with primary macroeconomic data about Croatian T&C sector on one hand, and on the other hand took a “snapshot” of a sample. More abundant and richer data would have enlarged the scope of analysis as well as nowadays well known much richer statistics. But despite these limitations, the results of this study can be indicative and useful insights into the Croatian T&C industry performance and students (costumers) satisfaction with clothing products produced in domestic companies.

6. CONCLUSIONS The paper analyzed the situation (potential strength) of the Croatian T&C sector (macroeconomic view) on one hand, and at the other hand to indicate perception and behaviour of Croatian student’s market segment for the domestic clothing products (microeconomic view) proposed for use by apparel manufacturers and retailers that are mostly SMEs, and their marketing strategies. In period from 2008 to 2011 the textile sector indicate slight recovery considering market trade value, value of production and labour productivity (2,2% comparing to all sectors in the year 2012.) while decrease and negative rates are general characteristic of other indicators in C13 and generally whole Croatian clothing sector C14.

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In this paper it was also examined the demand for clothing products, customer satisfaction and brand loyalty (affiliation) in Croatia. Data were collected by surveying 311 students (customers) of Croatian clothing products. Research of Zagreb’s University students, i.e. consumers found that most students buy clothes of Croatian producers. An important factor of buying proved to be products quality. Other important factors are price, fashion trends, brand image and company’s image. Among answer something else that with quality share first place, were answers that combine: balans of „good quality and price“, „I by what (if), I like (it)“ or patriotic reasens „...because it is domestic product“. Furthermore, consumers are satisfied with the quality of products, while they express dissatisfaction with price, promotion and availability of Croatian producers clothing products. There is a number of customers who are not loyal to Croatian brands producers. Results indicate that Croatian clothing manufacturers haven’t developed a clear marketing strategy, that they should pay more attention to developing long term relationships with consumers and researching reasons of their low loyalty. Consumers agree to buy clothes of Croatian manufacturers in case of better and modern product design, more/ better promotion, wider distribution and lower prices. Brands of Croatian producers are not sufficiently known, due to poor promotion. The coverage of Croatian market is unfavorable and distribution channels are limited. In order to achieve sales growth, Croatian producers would have to increase investment in marketing activities, development of their own products and brands. All this must be accompanied with promotion in order to create positive consumer perceptions and positive image. Marketing strategy of Croatian producers should be adapted to particular market segments. It is necessary to follow market and take care of customer satisfaction and loyalty. The scientific contribution of this paper are new insights and better understanding of the demand for clothing products in Republic of Croatia, as well as the specifics required to build a competitive marketing strategy.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

Abraham-Murali, L.; Littrell, M.A. (1995.) Consumers’ Conceptualization of Apparel Attributes. Clothing and Textiles Research Journal, 13(2), pp. 65-74. Andinolfi, R., Andersen, T. (2011.) In-depth assessment of the situation of the T&C sector in the EU and prospects, EURATEX European Apparel and Textile Confederation and Danish Technological Institute, Final report entr/2010/16, prepared for EUROPEAN COMMISSION ENTERPRISE AND INDUSTRY DG, OCTOBER 2011., Bruxelles Ang, S. H. (2001). Crisis marketing: a comparison across economic scenarios, International Business Review, 10, 263-284, ISSN Ang, S. H.; Leong, S. M.; Kotler, P. (2000). The Asian apocalypse: crisis marketing for consumers and businesses, Long Range Planning, 33(1), pp. 97-119., ISSN 0024-6301 Anić, I.-D.; Radas, S. (2006). The Role of Satisfaction and Demographic Factors in Building Store Loyalty, Privredna kretanja i ekonomska politika, 108(16), pp. 66-86. Anić, I.-D.; Rajh, E. (2008). An analysis of demographic and benefit sought effects on purchasing outcomes in the Croatian footwear market, Ekonomski pregled, 59(5-6), pp. 222-242. Anić, I.-D.; Rajh, E.; Teodorović, I. (2008). 7. Potražnja, zadovoljstvo i lojalnost marki u industriji tekstila i odjeće u Hrvatskoj, u Ekonomski aspekti razvitka industrije tekstila i odjeće u Republici Hrvatskoj, Ekonomski Institut Zagreb i Hrvatsko društvo ekonomista, Zagreb Anić, I.-D.; Rajh, E.; Teodorović, I. (2011.) Strategy and firm performance in the Croatian textile and clothing industry, Ekonomski pregled, 62 (1-2), pp. 35-47. Banks, J.; Blundell, R.; Lewbel, A. (1997). Quadratic Engel Curves and Consumer Demand, Review of Economics & Statistics, 79(4), pp. 527-539, Blythe, J. (2001). Beliefs and attitudes of Welsh SMEs to marketing, AMA Conference Proceedings, Cardiff, July 2001, AMA (American Marketing Association), Cardif Brooksbank, R.; Kirby, D.A.; Wright, G. (1992). Marketing and company performance: an examination of medium sized manufacturing firms in Britain, Small Business Economics, 4(3), pp. 221-236. Byoungho, J.; Park, J.Y.; Ryu, J.S. (2010.) Comparison of Chinese and Indian consumers’ evaluative criteria when selecting denim jeans: A conjoint analysis, Journal of Fashion Marketing and Management, 14 (1), pp.180-194. Croatian Bureau of Statistics (CBS): Industrijal production volume index and indices of stocks, persons employed and labour productivity, december 2012, First results, First release, 29. January, 2013, XLIX 49(2.1.3/12), ISSN 1330-0350, available on: http://www.dzs.hr/Hrv_Eng/publication/2012/02-01-03_12_2012.htm, (assessed: 21.6.2013.) Croatian bureau of statistics (CBS): Short-term Indicators of Industry, 2009; 2010; 2011 – Industrial Production, Producer Prices, Turnover and New Orders of Industry-Statistical reports - 1402/2010; 1429/2011; 1458/2012 Drucker, P. (1954). The practice of management, Harper and Row Publishers Inc., New York, NY Durvasula, S.; Lysonski, S.; Andrew, C. (1993). Cross-Cultural Generalizability of a Scale for Profiling Consumers’ Decision-Making Styles. The Journal of Consumer Affair, 27(1), pp. 55-65. Eckman, M.; Damhorst, M.L.; Kadolph, S.J. (1990.) Toward a Model of the In-Store Purchase Decision Process: Consumer Use of Criteria for Evaluating Women’s Apparel. Clothing and Textiles Research Journal, 8(1), pp. 13-22. Ettenson, R.; Wagner, J.; Gaeth, G. (1988.) Evaluating the Effect of Country of Origin and the Made in the USA’ Campaign: A Conjoint Approach. Journal of Retailing, 64 (2), pp. 85-100. Fadiga, M.L.; Misra, S.K.; Ramirez, O.A. (2005). US consumer purchasing decisions and demand for apparel, Journal of Fashion Marketing and Management, 9(4), pp. 367-379 Fan, J.X.; Xiao, J.J. (1998). Consumer decision-making styles of young-adult Chinese. Journal of Consumer Affairs, 32(2), pp. 275-294. Forney, J.C.; Rabolt, N.J.; Friend, L.A. (1993.) Clothing Values and Country of Origin of Clothing: A Comparison of United States and New Zealand University Women. Clothing and Textiles Research Journal, 12 (3), pp. 36-42. Giese, J.L.; Cote, J.A. (2000). Defining Consumer Satisfaction, Academy of Marketing Science Review, 1, Avaliable at: http://www.amsreview.org/articles/ giese01-2000.pdf, (assessed: 06.02.2012.) Gilmore, A.; Carson, D.; Grant, K. (2001). SME marketing in practice, Marketing Intelligence & Planning, 19 (1), pp. 6-11.

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24. Gipson, K.; Francis, S.K. (1991.) The Effect of Country of Origin on Purchase Behaviour: An Intercept Study. Journal of Consumer Studies and Home Economics, 15(1), pp.33-44. 25. Grabovac, N. (1998). Marketing tekstilne industrije, ABC Fabulas, Sarajevo 26. Hafstrom, J.L.; Chae, J.; Chung, Y. (1992). Consumer decision-making styles: comparison between United States and Korean young consumers. Journal of Consumer Affairs, 26(1), pp.146-158. 27. Hiu, A.Y.; Siu, N.M.; Wang, C.L.; Chang, L. K. (2001). An investigation of decision-making styles of consumers in China. Journal of Consumer Affairs, 35(2), pp. 326-345. 28. Hester, S. B.; Yuen, M. (1987.) The Influence of Country of Origin on Consumer Attitude and Buying Behavior in the United States and Canada. Advances in Consumer Research, 14, pp. 538-542. 29. Haluk Köksal, M. & Özgül, E. (2007). The relationship between marketing strategies and performance in an economic crisis, Marketing Intelligence & Planning, 25(4) 30. Lee, J.; Karpova, E. (2011). U.S. and Japanese apparel industry demand conditions: Implications for industry competitiveness. Journal of Fashion Marketing and Management, 15(1), pp. 76-90. 31. Leo, C.; Bennett, R.; Härtel, C. (2005). Cross-cultural differences in consumer decision-making styles. Cross Cultural Management: An International Journal, 12(3), pp.32-62. 32. Leung, J.W. & Taylor, G. (2002). Fashion buying criteria of X generation consumers in Hong Kong, Journal of Fashion Marketing and Management, 6(1), pp. 63-76. 33. Lysonski, S.; Durvasula, S.; Zotos, Y. (1996). Consumer decision-making styles: A multicountry investigation. European Journal of Marketing. 30(1 2), pp. 10-21. 34. Seo, J.I., Hathcote, J.M. & Sweaney, A.L. (2001). Casualwear shopping behaviour of college men in Georgia, USA, Journal of Fashion Marketing and Management, 5(3), 208-222, ISSN 1361-2026 35. Shiskin, J. (1975). The Changing Business Cycle, New York Times, New York, U.S.A. 36. Solomon, M.R.; Rabolt, N.J. (2004). Consumer behavior: In fashion, Prentice Hall, New Jersey, U.S. 37. Sproles, G.B.; Kendall, E.L. (1986). A methodology for profiling consumers’ decision-marking styles. Journal of Consumer Affairs, 20(2), pp. 267-279. 38. Stracenski M. (2004). The research of structure and important factors that influence young on making decision for buying clothing items. MS Thesis. In Croat. University of Zagreb, Zagreb 39. Stracenski Kalauz, M.; Tratnik M.; Nedanov A.; Ljubaj T.; Grilec Kaurić, A. (2012). The Analysis of Jeans Purchase Factors and Consumption Choice Among Students Population of Zagreb University”, Dragčević, Z.; Hursa Šajatović, A.; Vujasinović, E. (Ed.): - 6th International Textile, Clothing & Design Conference, Dubrovnik, Croatia, 07.10.2012.-10.10.2012., Magic World of Textiles, Book of proceedings. Faculty of Textile Technology, University of Zagreb, Zagreb, Croatia, 2012., pp. 685-690. 40. Yang, Z.; Peterson, R.T. (2004). Customer Perceived Value, Satisfaction, and Loyalty: The Role of 41. Switching Costs. Psychology & Marketing. 21(10), pp. 799-822. 42. Yang, Hao-erl; Lin, Shih-hsuan (2006). The Role of Customer Satisfaction in an Online Shopping Environment. available at: http://www.iamot.org/conference/papers.php? first_ letter =all&cf=10 (assessed: 15.5.2013.) 43. Yang, H.; Tsai, Feng-Shii (2007). General E-S-QUAL Scales Applied To Websites Satisfaction and Loyalty Model, Communications of the IIMA, 7(2), available on: http://www.iima.org/CIIMA/15%20CIIMA%207-2-07%20Yang-Tsai%20115-126.pdf, (assessed: 10.5.2013.) 44. Zhang, Y. (2012). Fashion Attitudes and Buying Behaviors of Cross-cultural College Students toward Apparel Products, Master Thesis of Arts, Ball State University, Applied Sciences and Technology, Munice, Indiana, U.S.A., May 2012 45. Zurawicki, L.; Braidot, N. (2005). Consumer during crisis: responses from the middle class in Argentina, Journal of Business Research, 58, pp. 1100-1109. 46. Walsh, G.W.; Mitchell, V.W.; Hennig-Thurau, T.H. (2001). German consumer decision-making styles, The Journal of Consumer Affairs, 35 (1), pp. 73-96.

DETAILS ABOUT AUTHORS: RUŽICA BREČIĆ ASSISTANT PROFESSOR FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF ZAGREB, ZAGREB, CROATIA rbutigan@efzg.hr MAJA STRACENSKI KALAUZ SENIOR ASSISTANT FACULTY OF AGRICULTURE, UNIVERSITY OF ZAGREB, ZAGREB, CROATIA mskalauz@agr.hr ALICA GRILEC KAURIĆ ASSISTANT, FACULTY OF TEXTILE TECHNOLOGY, UNIVERSITY OF ZAGREB, ZAGREB, CROATIA agrilec@ttf.hr

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CHARACTERISTICS OF BENEFICIARIES SERVED BY NONPROFIT ORGANIZATIONS IN ALBANIA XHILIOLA AGARAJ (SHEHU)

ABSTRACT

In the profit sector main objective of all firms operating in the market is profit maximization. While in the non profit sector organizations objective is not profit maximization but the service of society in various fields in which they operate in the field of environment, in the social field in the area of rights protection etc. The purpose of this paper is to provide information about the characteristics of beneficiaries served by non-profit sector in relation with their type, age group served, gender, criteria that affect beneficiaries to provide a service, the time it takes a beneficiary to match the service offered by non-profit organizations operating in Albania. Descriptive information of the beneficiaries will be provided regarding the type of nonprofit organizations operating in Albania and their location. Another objective of this paper is the identification of the marketing techniques used by non-profit organizations to attract beneficiaries. In function of the number of non-profit organizations that are active in Albania is taken in the study a representative selection. Techniques used for data collection were questionnaires, and interpretation of the results was made based on focus group discussions. KEYWORDS: Beneficiaries, nonprofit sector, marketing tools

1. INTRODUCTION Some organizations talk about beneficiaries, others refer to participants, others to clients, service users or partners. Here we will refer to beneficiaries and mean the people whom the organization seeks to serve. When thinking about beneficiaries, itâ&#x20AC;&#x2122;s important to be clear about who they are. For example, if an organization provides activities for children with disabilities, are the beneficiaries the parents or guardians of the children? Or is it the children themselves? If a charity provides free veterinary services for animals are the beneficiaries the animals or the animalsâ&#x20AC;&#x2122; owners? Knowing who the beneficiaries are can be more complex than we might first anticipate, and is fundamental to consider carefully who they are if we are going to serve them effectively. Beneficiaries perform a whole range of activities from asking their opinions on services they provide, to including them on recruitment panels for staff and volunteers and involving them in the running of the organization at board level. Beneficiaries bring a unique perspective to any discussion about the success of a not-for-profit organization because they can talk about their direct experience what it is like to be on the receiving end of the services.

2. ANALYSIS OF FINDINGS Beneficiaries of non-profit organizations can be individual beneficiaries, organizational beneficiaries or a non-profit organization can serve both types of beneficiaries. Organizational beneficiaries can be public or private businesses operating in various fields such as health, education, protection of human rights, social area etc. From the findings results (fig 1) that 38% of NPOs serve only individual beneficiaries, 10% of NPOs organizational beneficiaries and 52% of them individual beneficiaries and organizational beneficiaries.

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Figure 1. Percentage of NPOs by beneficiaries

If we look at the gender of beneficiaries served by non-profit organizations results that 56.49% of NPOs serving female beneficiaries, while 43.51% of NPOs serve male beneficiaries. This means that there is no discrimination between genders served by NPOs, although NPOs that serves female beneficiaries are characterized by a high percentage. If we look at the percentage of beneficiaries served by genders and location (fig 2) note that in Tirana (capital of Albania) NPOs that serve beneficiaries in this area have not more difference from the average, so there is an equal distribution between NPOs that serve male and female beneficiaries. In the area of Northern Albania noted that 64% of NPOs serve female beneficiaries and the remaining 36% male beneficiaries. There is a difference in percentage due to the fact that the economic dependence of female to male provides greater social problems. While for the South of Albania there is a roughly equal distribution between NPOs that serve female and male beneficiaries dominated again by female. Figure 2: Percentage of beneficiaries served by gender and location

If see who are the beneficiaries of the NPOâ&#x20AC;&#x2122;s served by age appears that there is an approximately uniform distribution between different age groups served by NPOs. The age group most targeted by NPOs is the age group 26 -40 years that is age group that is having more social and economic problems (fig 3).The age group less served is age group over 65 years old where 72% of NPOs served. This is explained by the criteria that NPOs consider to be positioned in an age group that are, social and economic problems of the beneficiaries, their age, and foreign donors are those who orient NPOs towards projects in some areas. In other words, the age group 26-40 years is most targeted by donors in order to ensure economic, political, and social stability.

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Fig: 3 Beneficiaries by age-groups

There is no relation between age group and type of NPO served. In general, a high percentage of associations, foundations, and centers serving different age groups. Small difference has the age group 26 -40 years where percentages of associations, foundations, and centers are higher for this age group. Non-profit organizations that provide services to beneficiaries can immediately accept the service or may need time to be accepted. From the findings results that 51.9% of NPOs (fig 4) state that beneficiaries need very little time to adapt service. 13% of NPOs state that beneficiaries need time to adapt service, these are services that other people influence. As can be the case of a gypsy woman to attend a social center where are taken advice and drug on family planning where the frequency of this center is not instantaneous, or an addict attempting to leave drug through attendance of a rehabilitation center but does not want that others to know that he is an addict. Figure: 4 Time to accept service by beneficiaries

In providing service by NPOâ&#x20AC;&#x2122;s, beneficiaries are influenced by a variety of criteria where each of them has a certain level of significance. Benefits are the first criterion highly valued by beneficiaries, 94.9% of the NPOs see as very important for the beneficiaries. 86% of NPOs estimate that the costs of providing the product are very important, but if we look at the averages (fig 5), costs of providing the product are less important than the benefits. Product cost providing include not only monetary costs, where beneficiaries provide for free or low price a product, but they also influenced by non-monetary costs, that is the benefit that beneficiary waives to provide the service of NPOs. 82% of NPOs think that beneficiaries are more influenced by other people, and then 81.1% by self-efficacy (confidence to change behavior, for example to drop out products that are harmful for health).

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Figure 5: The importance of criteria for beneficiaries in providing of the service

Marketing mix tools are used by for-profit businesses, to achieve marketing objectives. Do non-profit organizations use the tools of marketing mix and what is the importance of their use? From the findings show that 96.3% of NPOs surveyed state that type of offer is often used to attract beneficiaries, and if look at the averages of each of the marketing mix tools, type of supply is one of the most be used. But consider that a minimum percentage think that type of the offer is not used in attracting beneficiaries. This refers to those beneficiaries that the acceptance of the offer is accompanied with non-monetary costs, as may be renouncing of smoking, waiver of drugs, fears of what others will think if the beneficiary receives a service from non-profit organization. Figure 6: Level evaluation of the use of the marketing mix to attract beneficiaries

Price is a tool of marketing mix that influences the attraction of beneficiaries, declared by 56% of the NPOs, while 34% think it is very used. This relates to the fact that the service or product offered by an NPO may be provided free or at a price below cost. A small percentage declares that do not use price to attract beneficiaries because they offer service with a high price. Location considered as important in attracting beneficiaries, it relates not only to distance of NPO but with comfort. But 10% from NPOs interviewed declare that it is not important in attracting beneficiaries, because it depends on service that a NPO is offering. Advertising has an average level of use (fig 6) in attracting beneficiaries because it is too expensive, although achievement may be higher, it may not be very reliable or convincing. Public relations have a level of use above average to communicate with beneficiaries. They are not very expensive but more reliable. Sales promotion tools are seen by NPOs as tools with on average level of use to attract beneficiaries. But there are a number of nonprofit organizations that think that they are not used because of the high cost associated with and are not required to be used because beneficiaries can easily be obtained for some NPOs. Personal conviction is used to attract beneficiaries, because for some NPOâ&#x20AC;&#x2122;s the benefits are higher than the costs of using them. And a low percentage of 11% did not use because the beneficiaries are numerous and are notified through mouth to mouth communication.

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Direct marketing is characterized by an average level use because some of its tools are not used to communicate with beneficiaries.

CONCLUSIONS AND RECOMMENDATIONS

A high percentage of NPOs serve as individual beneficiaries and organizational beneficiaries, and a low percentage of them focus only on organizational beneficiaries. NPOs that operate in Albania serve both genders, although female gender dominates, which highlighted more in the North and South of the country where the economic dependence of this gender is more emphasized. NPOs aim at all age groups through the service provided, although dominates age group 26 -40 years old because this age is associated with many economic and social problems. Time that needs a beneficiary to accept a service provided by NPOs varies depending on the service. Beneficiaries other than benefits and costs that evaluate from the services provided by NPOs they are influenced by other criteria as other persons and self-efficacy. Marketing mix tools used to attract beneficiaries have a different level of importance compared to the tools used to attract donors. Offers and price are important to attract beneficiaries, but is used and the location which is important in terms of distance and convenience. Advertising and personal conviction are used by NPOs in attracting beneficiaries, while an average level of use have direct marketing tools and promotion of sales. Direct marketing tools are used by NPOs in attracting beneficiaries and this is related to the sensitivity of the market segments to marketing tools.

LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

Adrian Sargeant (2005) “Marketing management for nonprofit organization”, ( 2nd ed), Oxford University press pp 30-44 Albania Human Development Report 2000 UNDP Andreasen, A. R., and Kotler, P. (2003), “Strategic Marketing for Non-profit Organizations (6th ed.)”, Upper Saddle River, NJ: Prentice Hall. Arnold, M.J., & Yapp,S.R (2003) “Direct Marketing in nonprofit services” Journal of Services Marketing, pp141- 160 Dolnicar, S., Irvine, H. and Lazarevski K. (2008), “Mission or Money? Competitive challenges facing public sector nonprofit organisations in an institutionalised environment”, International Journal of Nonprofit and Voluntary Sector Marketing, Vol. 13, pp. 107 – 117. Ebrahim, A. (2003), “Making sense of accountability: Conceptual perspectives for northern and southern non-profits”, Non-profit Management and Leadership, Vol. 14 No. 2, pp. 191 – 212. Eikenberry, A. M., and Kluver, J. D. (2004), “The Marketization of the Non-profit Sector: Civil Society at Risk?”, Public Administration Review, Vol. 64 No. 2, pp. 132-140. Gonzalez, L. I. A., Vijande, M. L. S., and Casielles, R. V. (2002), “The market orientation concept in the private nonprofit organization domain”, International Journal of Nonprofit and Voluntary Sector Marketing, Vol. 7 No. 1, pp. 55 – 67. Kline Henley.T (2001) “Integrated marketing communication for local nonprofit organization: Communication tool and Method”. Journal of Nonprofit & Public Sector Marketing pp 157-168 Kline Henly, T. (2001) “Integrated marketing communication for local nonprofit organization: Developing an integrated marketing communication strategy: Journal of nonprofit & Public Sector Marketing, pp 141-155 Kotler, P. (1982), “Marketing for Non-profit Organizations (Second ed.)”, New Jersey: Prentice-Hall. Macedo, I. M., and Pinho, J. C. (2006), “The relationship between resource dependence and market orientation”, European Journal of Marketing, Vol. 40 No. 5/6, pp. 533 – 553. Padanyi, P., and Gainer, B. (2004), “Market Orientation in the Nonprofit Sector: Taking Multiple Constituencies into Consideration”, Journal of Marketing Theory and Practice, Vol. 12 No. 2, pp. 43 – 58. Philip Kotler, Alan R .Andreasen (2003) “Strategic marketing for nonprofit organizations” (6th ed) Pearson Prentice Hall Publication pp 442-480 Philip Kotler, Alan R.Andreasen (2003) “Strategic marketing for nonprofit organizations” pp 190-97 Sargeant, A., Foreman, S., and Liao, M. (2002), “Operationalizing the Marketing Concept in the Nonprofit Sector”, Journal of Nonprofit & Public Sector Marketing, Vol. 10 No. 2, pp. 41 –65.29 Scott, W. R. (2001), “Institutions and Organizations (Second ed.)”, Thousand Oaks, USA: Sage Publications. Sridhar Samu, Walter W.Wymer,Jr. (2003) Nonprofit-Business Alliance Model: Formation and outcomes. Journal of Nonprofit & Public Sector Marketing pp 45-62 Walter W. Wymer, (2003) ”Nonprofit and Business Sector Collaboration” pp23-34 Journal of nonprofit & Public Sector Marketing, pp 3-22 Walter W. Wymer, (2003) Dimensions of Business and Nonprofit Collaborative Relationships. Journal of nonprofit & Public Sector Marketing, pp 3-22 Walter Wymer, Patricia Knowles, Roger Gomes (2006) “Nonprofit Marketing. Marketing Management for Charitable and Nongovernmental Organizations” Sage Publication, pp 279- 292

DETAILS ABOUT AUTHOR: DR. XHILIOLA AGARAJ (SHEHU) PROFESSOR OF MARKETING UNIVERSITY OF VLORA FACULTY OF ECONOMY VLORE, ALBANIA xhiliagaraj@yahoo.com

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DRIVER QUALIFICATION IN THE TRANSPORT INDUSTRY – EMPIRICAL STUDY IN AUSTRIA MARIA DIEPLINGER SEBASTIAN KUMMER KATHRIN LENZ

ABSTRACT

Qualified employees contribute to the success of a company by using their specific skills and knowledge. Besides achieving a competitive advantage, the qualification of truck drivers is also very important to ensure road safety. The current shortage of qualified truck drivers in Austria is expected to worsen because of demographic change, increasing transport volumes, a damaged reputation of the industry and inferior working conditions. A loss in revenue and rising transport costs could be among the consequences. Some solution approaches to reduce the shortage already exist, though. The EU directive 2003/59/EG aims to improve road safety and to reduce the driver shortage by ensuring qualified training. Efficient human resource development is another opportunity to recruit and retain qualified drivers. Moreover, image campaigns designed to raise truck drivers’ reputation and to arouse young people’s interest to start a career in that industry were implemented by various members of the transport sector. In addition, this paper outlines the current legislative framework which applies to the qualification of professional drivers in Austria. Finally, this paper demonstrates that especially an improvement of the working conditions is necessary to make the profession more attractive for potential truck drivers. KEYWORDS: Driver qualification, Transportation sector, empirical study.

1. INTRODUCTION SRoad freight transport is essential for the economy, accounting for 75% of the total freight transport volume in Austria (Statistik Austria, 2012a). Trucks are highly flexible and the costs of transport are comparatively low. Door-to-door deliveries are possible. For short distances there is no better option than road transportation and for long distances trucks are often part of intermodal systems (Logistikbranche, 2012). In Italy, in January 2012, truck drivers demonstrated, amongst others, against higher fuel costs. Because of blocked roadways this action led to delays in delivery and caused damage running up to millions of Euros (Die Presse, 2012). That example shows that without road transportation the economy would not function. The qualification of the truck drivers is important as well. At the end of 2011 9,602 omnibuses, 19,748 tractor trucks and 54,382 medium and heavy-duty trucks were registered in Austria (Statistik Austria, 2012b). In addition, the country is highly affected by the transalpine traffic. In 2010 about 6 million trucks crossed the Alps via Austria, which was about 60% of the total alpine transit (VCÖ, 2012a). These trucks weigh up to 44 tons and may carry dangerous goods (KFG, 1967). The truck drivers should be well trained as they have a huge responsibility. In 2011 trucks (above 3.5 tons) were involved in 1,391 accidents in Austria – 1,791 people got hurt and 70 people lost their lives (Statistik Austria, 2012c). Insufficient knowledge of proper securing of cargo is one of the main reasons for such accidents (KFV, 2008). Although the transportation industry and the skills of the truck drivers are of vital importance, the industry is currently suffering from a shortage of qualified drivers and the demand for qualified truck drivers will even rise in the next few years (Wolf, 2012). There are already some attempts to reduce this shortage. The EU directive 2003/59/EG, which was adopted in 2003, forced the member states to implement a compulsory basic and advanced training for commercial truck drivers. It was introduced to reduce the driver shortage by ensuring a qualified training and to develop a modern image of the profession to arouse young people´s interest (EG-Richtlinie, 2003). This paper aims at highlighting the importance of employee qualifications and training opportunities in the transport industry. Furthermore, it was designed to discuss the various causes, effects and solution approaches concerning the current truck driver shortage in Austria. It also focuses on the question if the EU directive 2003/59/EG can reduce the driver shortage. The structure of this paper is organized as follows: After the introduction in section 1 and a literature review in section 2, section 3 presents some background information, followed by the presentation of the method and data in section 4 and the results in section 5. Finally, this paper is completed by a conclusion in section 6.

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2. BACKGROUND 2.1 Scientific literature review By investing in human capital – a term which refers to the knowledge and the competencies of each employee in a company – , through education and training it is possible to improve the quality of the workers, which in turn will improve productivity. Not investing in human capital continuously will consequently lead to a fall in value. (Böhnisch/Weissengruber/ Stummer, 2003, p.39f.). In 1776 already, in accordance with the dominant opinion, Adam Smith mentioned some human capital approaches in his major work “An Inquiry into the Nature and Causes of the Wealth of Nations“, writing that the human being with its knowledge and competencies belongs to the fixed capital of a company (Smith, 2009). Later on, the neoclassical theory showed some human capital approaches as well. In 1890, in his work “The Principles of Economics“, Alfred Marshall described the human capital as the most important capital of human beings (Marshall, 2012). In contrast to Smith, though, Marshall refrained from assigning a “market valuation“ to the human being (Pfahler, 2000,p. 19). About 70 years later, at the beginning of the 1960s, Gary Becker and Theodor von Schultz developed a modern version of the human capital approach. In his work, Schultz, among others, discussed the connection between the educational level and economic growth (Schultz, 1981). In 1964, Gary Becker published his work “Human Capital: A Theoretical and Empirical Analysis, with Special References to Education“, which was also based on Schultz’s work (Becker, 1993). For their research, both Schultz and Becker were awarded “The Nobel Memorial Prize in Economic Sciences“ (Spraul, 2006, p.58). In the late 1960s American researchers tried to create a method to measure human capital and to express it in monetary terms. This became known as “Human Resource Accounting” and was mentioned in the German-speaking region for the first time in the 1970s. Two basic principles of valuation were developed. The cost approach and the value approach. But eventually, an adequate quantification of human capital turned out to be very difficult - too many assumptions had to be made for the calculation, which led to the fact that the method suffered from subjectivity, uncertainty, and unreliability. An effective valuation was therefore not possible and apart from that, the financial reporting standards prohibited an integration of human capital. Following this failure, it took a few years until the adequate valuation of human capital once again became the subject of discussion in the 1990s (Böhnisch/Weissengruber/Stummer, 2003, p.59ff.). But this time, researchers did not try to concentrate on accounting methods to express human capital in monetary terms, instead, they rather focused on developing a specific indicator system to monitor changes and developments regarding the human capital. In the 1990s the “Balanced Scorecard” was introduced by Robert Kaplan and David Norton (1996), it comprises leading and lagging indicators and links the four different perspectives: learning and growth, business operation, customer as well as financial success and hence includes the valuation of intangible and intellectual assets as well. Later on, an attempt was made to apply this scorecard to human resources only. The HR scorecard was developed to monitor workforce indicators, identify workforce issues and track improvements (Walker/MacDonald, 2001). Looking back at the last decades, the “Human Capital Approach” and the meaning of education experienced a revival, especially after the Second World War for several reasons. First, the influence of the armed forces and the sputnik crisis led to an extensive improvement of the U.S. educational system. To catch up on the supposed advantage of the Soviet Union the U.S. government wanted to invest more in education to boost the nation’s education level. Moreover, the economic growth which the western industrial countries experienced at that time led to a higher need and demand for education. Finally, the development process of the developing countries had a major influence on the meaning and importance of education. To improve the living standard in the third world countries people started to focus on education policy and education investments and used them as an adequate measurement for improvement (Pfahler, 2000, p. 44). Today, the relevance of qualified employees is still gaining in importance. More and more companies are willing to invest in their employees and offer training opportunities in order to, for example, meet the increasing requirements due to the rapid development of technology or changing work processes (Wiehl, 2011). It also has been proven, that further professional training will reinforce the development of intangible assets, which includes the employee’s attitude, knowledge and aptitude and will, hence again, enable employees to be more productive (Vidal-Salazar/Hurtado-Torres/Matìas-Reche, 2012). Furthermore, businesses noticed that qualified workers are a competitive advantage considering the growing number of saturated markets with comparable products (DEKRA, 2012). Moreover, Globalization and low market entry barriers intensify competition. Competent and motivated employees and a continuing training are essential for a dynamic market environment (Oetker, 2001). In addition, employees maintain contact with customers. They characterize the corporate culture and represent a company to the outside world. Consequently employees influence the company’s image, which is of importance for the success of a company and the recruitment of new staff (Oertli/Rosenbaum, 2011). Employers who invest into their employees also invest into their company’s future.

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2.2 Legislative framework In 2003 the Council and the European Parliament introduced the EU directive 2003/59/EG. It forced the member states to implement an obligatory initial qualification and periodic training for truck drivers. The directive aims, among others, at improving road safety and reducing the driver shortage by ensuring a qualified training. The regulations apply to all truck drivers including self-employed or salaried workers. It is valid for drivers who drive vehicles for which a driving license of category D or C is required. Article 2 of the directive makes a list of vehicles which are not concerned by the regulations, including among others, vehicles used for non-commercial purposes, those that do not exceed 45km/h or which are under control of the armed forces or the fire brigade (EG-Richtlinie, 2003). The Austrian government implemented the directive and enacted an ordinance in 2008, which was called the “Grundqualifikations - und Weiterbildungsverordnung” (GWB). According to that regulation, drivers who received their license after 09 September 2008 (category D) or 09 September 2009 (category C, C1) have to pass a theoretical and practical driver qualification test before they are allowed to work as commercial drivers. The initial qualification costs around 270 Euros. Within a five-year period the drivers have to undergo an advanced training to update and deepen their knowledge. This concerns drivers who received their initial driving qualification before or after September 2008/2009. Drivers who received their qualification before 09 September 2008/2009 have to complete their training before September 10 2013/14. This training includes 35 hours within 5 years. It consists of 28 hours of a given subject and 7 hours of an optional subject which focuses on the specific license category (Vida/WKÖ/WKO, 2009). The courses include subjects such as advanced training in rational driving based on safety regulations, health, road and environmental safety, optimization of fuel consumption, economic environment and the application of regulations (GWB, 2008). The drivers only have to attend the advanced training courses without having to pass tests. Furthermore, only authorized training centers are allowed to conduct the training. The new regulation has brought about negative consequences and problems. Since the introduction of the obligatory qualification in Austria the number of new licenses has declined. In 2008 about 1,000 licenses of category C were granted in Austria. That number has dropped to 500 in 2010 and to only 384 in 2011 (Statistik Austria, 2012g). The costs for the license and the training are financial burdens, especially for young people. Employers, too, suffer from the new regulation. According to the wage agreement “Kollektivvertrag für Arbeiter im Güterbeförderungsgewerbe vom 01.01.2012” (regarding transport companies) the employer has to pay for the compulsory training. The time, however, is not considered as working time, which means that the training has to be done during the employees’ leisure time. According to the “Kollektivvertrag für Arbeitnehmer in den privaten Autobusbetrieben” (regarding bus companies), the time is considered as working time and consequently the employer has to pay for the time provided. In line with this, employers have to organize substitute drivers. Moreover, they have the burden of additional administrative costs. Furthermore, the implementation of the training is criticized by the ÖAMTC Fahrtechnik. The compulsory courses do not integrate enough practical training, even though they are a lot more efficient than just theoretical knowledge - especially regarding driving techniques, securing load, and saving fuel. The training centers need more detailed regulations in terms of the practical elements of the courses (ÖAMTC, 2012). In addition to the compulsory initial qualification and advanced training, it is possible to serve a three-year apprenticeship as a professional driver. This apprenticeship has existed in Austria since 1987 and offers several advantages. According to the wage agreement “Kollektivvertrag für Güterbeförderung- Arbeiter vom 01.01.2012” truck drivers who have undergone an apprenticeship receive higher minimum-wages and have better job opportunities. Furthermore, qualified drivers have the right to occupational protection (Berufsschutz) (Arbeiterkammer Wien, 2012). However, an apprenticeship does not replace the driver qualification according to the directive and GWB, but it is possible to set off against it the theoretical as well as the practical exam, if it is extended from 45 to 90 minutes (GWB, 2008).

2.3 Working climate index - March 2012 The official representation of Upper Austria and the social research unit SORA and IFES have published a working climate index in March 2012. It shows the workload and satisfaction of the employees in Austria. The index is a representative measure - every three months 900 employees across the country are interviewed and the index is the result of two interview rounds (Arbeiterkammer Oberösterreich 2012a). According to this index commercial drivers are the most discontented employees in the country. During the interview the interviewees mentioned a lot of straining work conditions. A fully employed driver works an average of 44h a week. 76% said that they have to work overtime “sometimes” or “often”. 28% have to do shift work and 11% have to work on demand. On a regular basis 28% work on Saturdays and 19% on Sundays. 21% have to work between 10pm and 6am. Moreover, 31% said that they think they are exposed to a higher danger of accident or injury and 19% mentioned bad health conditions. Furthermore, 41% said that they suffer from time pressure (Arbeiterkammer Oberösterreich 2012b).

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3. METHOD AND DATA In order to write this paper the author has done a comprehensive literature research - mainly focusing on articles of various journals, magazines and newspapers, as well as websites of relevant companies, chambers and associations. To discuss the legislative framework the author used the relevant legislative texts. Furthermore, the results of recent studies regarding the driver shortage, driver qualification and working conditions are presented. The Austrian transport industry was chosen for empirical study as it is highly affected by the current driver shortage. The Institute for Transport and Logistics Management, Vienna University of Economics and Business conducted a survey in 2012. A sample of 25 transport as well as bus companies across Austria participated in that study. Out of the participating transport companies 64% operate as hauliers only, 4% act as hauliers as well as third-party logistics providers (TPL), 8% belong to the TPL branch only, another 8% act as hauliers as well as forwarders and 16% operate in all three branches. Out of the participating bus companies 40% operate as short-distance public transport companies and another 40% as occasional passenger services only. The remaining 20% conduct business in both branches. The size of the sample companies is balanced and ranges from small businesses to large enterprises. Both industries, the transport as well as the bus companies, received a questionnaire adapted to the special requirements of the particular industry. It was assumed that the industries suffer from the current driver shortage and that the recently introduced statutory driver qualification would result in some changes. Thus, the corresponding questionnaire comprised questions regarding the current driver situation and the recruitment policies. Moreover, the challenges and chances of the statutory driver qualification were surveyed.

4. RESULTS OF THE EMPIRICAL STUDY 4.1 Recruitment policy and labour force availability The comparison of the numbers of recruited and retired drivers in the last few years and the forecast for the next few years show that the demand for drivers has increased and is expected to keep rising in the future, even though the demand in the bus industry will not be as high as in the transport industry. Furthermore, the results reveal that in both industries around 60% of the interviewees said that finding and recruiting new qualified drivers is “difficult” resp. “very difficult”, 17% of the interviewees of the transport companies and only 6% of the bus companies said that the recruitment is “easy” Additionally, according to the whole sample, only one applicant in three is qualified enough to be considered for a vacant position. However, the study also indicates that currently most of the companies do not have any trouble finding suitable employees within a short period, but the average duration of recruiting new drivers is somewhat higher in the bus industry. The results also indicate that both industries prefer Austrian citizens, primarily experienced drivers and externally-trained candidates. However, in contrast to the transport companies, one third of the bus companies is willing to recruit newcomers. The average age of the drivers is 44 years (transport company) resp. 46 years (bus company) and in both industries, the average retirement age is 61 years.

4.2 Recruitment criteria The study outlines that professionalism and social skills are the most important recruitment criteria, followed by the ability to cope with stress, command of language, work experience and technical understanding. Age and remuneration are considered as less important. Furthermore, in contrast to the transport companies which consider the main place of residence as less important, bus companies regard that criterion as very important.

4.3 Training and development The study indicates that the companies are closely involved in the planning process of the compulsory initial qualification and further training of their employees. In addition, the survey revealed that most of the drivers have already completed the compulsory training and that about 50%/30% of the transport/bus companies offer their employees extra training. Transport companies do so mainly in the field of securing cargo, handling dangerous goods as well as crane driving whereas the bus companies attach importance primarily to communication, customer service and foreign languages. Regarding the chances and challenges of the compulsory initial qualification and periodic training (EU directive 2003/59/ EG) the results reveal that the costs and time consumption are considered as problematic. According to the sample, the training fees are a financial burden. Furthermore, when the drivers attend the training courses and are thus absent from work, the companies suffer revenue loss or have to organize a replacement driver. On the other hand, the interviewees can

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see some advantages as well. 79% of the transport companies think that they will benefit from an economic advantage e.g. because of less fuel consumption or truck damage. Moreover, 63% believe that it will reduce road accidents and about half of the interviewees think it will reduce Co2-emission. It is believed by about 50% that the new regulation will lead to a better reputation of the industry. The results of the bus companies are slightly different. Around 70% of the interviewees reckon that they can expect an economic advantage and approx. 40% see the training as an opportunity to reduce road accidents. The reason why a lot more transport companies believe in a reduction of road accidents could be the fact that many of the traffic accidents in Austria are caused because of wrongly secured cargo. An efficient training in securing cargo could therefore lead to higher road safety. In addition, half of the interviewees believe that the new regulation will reduce Co2-emission. Apart from that, almost 90% think it will help to improve the image of the industry. Bus drivers have a lot more contact to their customers than truck drivers, consequently an improvement of the driver qualification will be more easily recognized, which could be the reason why the percentage is so much higher. (Kummer/Dieplinger/Lenzbauer, 2012)

5. DISCUSSION 5.1 Driver shortage – causes Driver shortage has various causes. The Modal Split of freight transport volume in Austria shows that road transport has by far the biggest share. With a share of 75% road transport is the dominant mode (Statistik Austria, 2012a). According to the 2030 European Energy and Transport report the transport volume in the EU-27 states will even increase within the next few years (Capros, P. et al, 2008, p.33f.). This will lead to a higher demand for qualified drivers. Furthermore, the demographic change is affecting all economic sectors. The current Austrian age pyramid shows an increasing number of old people and a decreasing number of young people and the working population as a whole (Statistik Austria, 2011). In Austria about one third of the truck drivers are over 45 years old, which means that more and more drivers will retire in the next few years (Arbeiterkammer Oberösterreich, 2012b). The shrinking number of potential workers in consequence of the demographic change will heat up the competition for qualified employees, not just between companies of the same industry, but there will even be a fight for workers between companies of different industries (Lohre, 2012, p.27). According to a study which was conducted by the FH Furtwangen and which included an interview of 1,000 truck drivers at German highway service areas, truck drivers suffer from a lack of motivation to do their job. The results show that only around 11% of the interviewees enjoy their job, whereas about 50% said that they “never” or “not very often” enjoy their job. Moreover, the results show that only about 6% of the interviewees said that they would recommend the job to young people and 39% would not recommend it at all (Baier, 2012, p.17f). In addition, the study reveals that most of the truck drivers do not receive a fair and adequate salary. Most of the interviewees (63%) work more than 50 hours a week. 37% earn between 1500€ and 2000€ a month and almost 30% earn less than 1500€ (Baier, 2012, p.8). Considering the working hours, the responsibility and the stress the drivers have to cope with, the salary they receive is not high enough. In Austria the minimum wage is regulated by the wage agreement “Kollektivvertrag für das Güterbeförderungsgewerbe-KV für Arbeiter” the hourly rate currently ranges between 7,64€ and 9,45€, depending on qualification and period of employment (Vida/WKÖ, 2012, p.17ff.). Another problem that influences the driver shortage is the bad image of the industry. Truck drivers suffer because of their bad reputation in the society. A lot of people do not realize how important trucks are. They associate them with emission, dirt, noise, irresponsible road behavior, accidents and congested roads (ProLkw, 2012a). The drivers themselves are often classified as unskilled workers, even though they may have undergone a three year professional driver apprenticeship (Schröpel, 2012, p.8). According to the already mentioned FH Furtwangen study, about 50% of the truck drivers think that their image in the society is “bad” und 23% even think they have a “very bad” reputation (Baier, 2012, p.4). Furthermore, poor working conditions contribute to the driver shortage. Truck drivers suffer from physical and mental stress. Sleep deficit and sleep disturbances not just strain their bodies, they also increase the danger of accident - after a sleepless night the driving performance is worse than with a blood alcohol level of 0,08 percent (Bergrath, 2008a, p.4). Around 25% of all road accidents in Austria are caused by overtired drivers. Especially micro sleep is dangerous - at a speed of 80km/h a truck covers around 22 meters per second (VCÖ, 2012b). It happens that drivers do not stick to their driving and rest schedule, despite knowing that in case they get caught they are charged between 200€ and 500€ if they extended their driving period for more than one hour. To make sure they are able to stick to the working and rest period regulations it is important to offer sufficient parking spaces. But in Austria there are currently about 1,600 parking lots missing. Furthermore the quality of the motorway service areas is inadequate. Truck drivers should be able to use clean sanitary areas and a recreation room. It is also important to ensure that they are able to park their trucks in a way that the driver´s cab does not look towards the motorway to reduce traffic noise during sleep. Because of these problems the ASFINAG is planning to build six new big parking areas till 2020 (Eurotransport, 2012). In addition, the responsibility of unloading and reloading trucks at the loading docks is problematic. Quite often truck drivers have to help unloading to reduce waiting time, even though it is not their responsibility. Moreover there are not enough places to park at loading docks, which means that the drivers have to wait in a stop and go queue, which makes it difficult to distinguish between driving and rest time (BGL e.V., 2011, p. 161). Besides that, drivers suffer from mental stress, caused by constant time pressure. Apart from that, they have a big responsibility on the road and constant safety concerns. Furthermore, bad traffic conditions, weather conditions, traffic

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jams and irresponsible behavior of other traffic participants are a strain. In addition, a lot of truck drivers are on the road for several days. The distance to their family and friends and the lack of social contacts because of the isolated workplace can be problematic to some (Bergrath, 2008a, p.4ff.).

5.2 Driver shortage – consequences The shortage of qualified drivers can have consequences for everyone. Companies which are not able to deliver their goods on time or not at all have to reckon on losing costumers and consequently face a decline in profit. They may also have to pay a contractual fine (Klee, 2008, p.7). Furthermore, the driver shortage could lead to a reintegration of an independent transport fleet because organizing transport capacity on the spot market might be difficult. But that would not eliminate the problem - it would just shift the uncertainty of finding drivers to the independent company. The costs and quality of the transport service, however, would be easier to control and the drivers are more likely to identify with the business. Moreover, drivers could expect a higher salary because employers need to offer better incentives to recruit personnel. However, it is doubtful if a higher salary would be enough to tie them to the company because besides the salary, the social environment and recognition, reputation as well as good working conditions are important for the attractiveness of the job (Lohre, 2012, p.21ff). A higher salary would also cause higher transportation costs, which would probably lead to higher product costs to be paid by the end consumer in the future.

5.3 Driver shortage – solution approaches Some solution approaches have already been made. The EU directive 2003/59/EG, which was already mentioned above, was one attempt to reduce the driver shortage. As this compulsory qualification is associated with costs, a nationwide sponsorship scheme should be considered to make it more attractive and was therefore part of the claim program of the “Bundessparte Transport und Verkehr” of the Austrian Federal Economic Chamber in September 2011 (WKO Bundessparte Transport und Verkehr, p.22). Besides that, the association Logcom “Lkw – friends on the Road” is trying to promote a positive image of the transport industry and truck driving. According to their constitution their overall goal is to improve the image of the transport industry, to raise awareness of their concerns and to increase road safety and communication (Arbeitsgemeinschaft Logcom, 2012a). Their latest road show “Kein Leben ohne Lkw” (No life without trucks), which was presented across the country between April and October 2012, was designed to provide a better understanding of the transport industry (Arbeitsgemeinschaft Logcom, 2012b). The pilot project “Euro trucker” initiated by the SVG Hamburg in Germany is another promising measure to reduce the driver shortage. The project was mainly designed to address people with a migration background and people with language problems. German language skills play an important part in the recruitment process and insufficient language skills are quite often the reason why applicants fail to get a job as a truck driver. The project was introduced for the first time in Hamburg in 2012. To apply for the program, applicants have to be at least 21 years old, hold the driving license category B, have German language skills of category B1 (according to the Common European Reference Framework for Languages) and be in good health. The “Euro trucker” training takes 6 months. A sixweek language class which is specific to the transportation industry can be taken beforehand. The actual truck driver training takes four and a half months. At the end of the training the course participants will be tested at the IHK. The next step is a six-week internship with their future employer. During the training the participants will receive the following: a German language certificate, license category C/CE, SVG-examined truck driver certificate, ADR-license, forklift license, securing of load training and a perfection driver training (SVG-Hamburg, 2012b, p.5ff). Because of the success of the project the SVG Hamburg is already planning the third course and SVGs (road traffic associations) in other parts of Germany introduced a similar program (SVG-Hamburg, 2012a). The same project would probably be successful in Austria as well. About one million non-Austrians are registered in Austria, which is about 11.5% of the total population (Statistik Austria, 2012e). In 2011 the unemployment rate of foreign nationals amounted to about 9.4% (Statistik Austria, 2012f). As insufficient language skills are a main barrier to get a job, the “Euro Trucker” training could be an option for these people to find a job and at the same time reduce the driver shortage in the country. Another opportunity to make sure that the individual business does not suffer too much from the driver shortage, is to offer apprenticeship positions to train one’s own personnel and to tie them further to the company. Some companies even have their own training center, e.g. like the Austrian transportation company “Friskus”. This is how they can ensure a qualified training (Schröpel, 2012, p.6f.). Of course that requires investments and is hence not an option for smaller companies. Smaller businesses, however, could closely cooperate with other training centers. In addition, it is important to promote loyalty among the employees and to be able to retain them for a long time. Employers have to provide strong incentives, which could be tangible or intangible rewards. Tangible rewards could include a good salary, employee benefits or the assumption of the cost of extra training and qualifications. Career opportunities would be efficient intangible incentives. It is also important that employees can identify with the company. In addition, the corporate culture plays an important part. Mutual esteem, respect and trust are also very important and add to a satisfactory working atmosphere (Bröckermann/Pepels, 2004, p.113ff.).

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CONCLUSION It has been shown that driver shortage is a major problem and a challenge for the economy. On the one hand the rising freight transport volume increases the demand for drivers and on the other hand the demographic change, a lack of motivation, low income opportunities and poor working conditions exacerbate the shortage of drivers. The WU study revealed that currently companies are still able to fill vacant positions within a short period of time, but that the process of finding and recruiting qualified drivers is difficult. Solution approaches to reduce the shortage already exist. The strategy of the program “Euro trucker” to reduce the shortage with better qualified personnel has proven to be successful. Nowadays, competent employees are among the main factors of success and it pays for employers to invest in the qualification of their employees. This paper also demonstrated that truck drivers suffer from a bad reputation. Companies and drivers agree that an improvement of the image is essential to arouse young people’s interest and combat the shortage. The EU directive 2003/59/EG, which was adopted in 2003, forced the member states to implement a compulsory initial qualification and periodic training for commercial truck drivers. The directive aims, among others, at developing a modern image of the profession to attract young people and reduce the driver shortage by ensuring a qualified training. The case study showed that companies see some chances for improvement of the current situation. However, considering the decreasing number of driving licenses of category C in Austria since the introduction of the new regulation, the opposite is the case. Finally it has to be said that the directive alone will not increase the number of truck drivers. First and foremost an improvement of the working conditions is necessary. The work climate index of March 2012 revealed that truck drivers are the most discontented workers in Austria. The interviewees mainly criticized the poor working conditions. Therefore, the employers of the transport industry should do everything they can to ensure an improvement of the working conditions in order to win the future fight for the few potential qualified employees. Otherwise they are going to lose the battle and that would have consequences not only for themselves but also for society as a whole because without truck drivers the shelves in our supermarkets will remain empty. LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

16. 17. 18. 19. 20. 21.

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Arbeitsgemeinschaft Logcom (2012a): ARGE Logcom-Lkw Friends on the Road Satzung, in: http://www.logcom.org/fileadmin/ REDAKTION/ DOWNLOAD/Logcom_Satzung.pdf (22.04.2012) Arbeitsgemeinschaft Logcom (2012b): Transporteure starten Roadshow 2012: „Kein Leben ohne Lkw!“, in: http://www.logcom.org/index. php?id=8&tx_ttnews[tt_news]= 125&cHash=d181457d8d900bc084f5b2bf629f7e98 (08.10.2012) Arbeiterkammer Oberösterreich (2012a): Der Österreichische Arbeitsklima Index, in: http://www.arbeiterkammer.com/online/warum-arbeitsklima-index-61124.html (22.04.2012) Arbeiterkammer Oberösterreich (2012b): Arbeitsklima Index März 2012, in: http://www.arbeiterkammer.com/online/arbeitsklima-index-maerz-2012-66216.html (22.04.2012) Arbeiterkammer Wien (2012): Grundqualifikationsprüfung, in: http://wien.arbeiterkammer.at/online/grundqualifikationspruefung-59537.html (26.03.2012) Baier, (2012): Trends im Straßengüterverkehr – Aktueller Status und Meinungen der Berufskraftfahrer in Deutschland, in: http://www.hsfurtwangen. de/fileadmin/user_upload/Marketing_PR/Dokumente/ Webredaktion/ Studie_Berufskraftfahrer_2011.pdf (07.10.2012) Becker (1993) Human Capital – A Theoretical and Empirical Analysis with Special Reference to Education, Third Edition, The University of Chicago Press, USA Bergrath, (2008a): Arbeitsplatz Lkw - Wenn Arbeit krank macht, in: bewegen ver.di, Nr. 06-07 (2008), S. 4 -6 BGL e.V. (2011): Bundesverband Güterkraftverkehr Logistik und Entsorgung e.V. Jahresbericht, VARIOplus Druck + Medien GmbH, Frankfurt am Main, 2011 Böhnisch, W./ Weissengruber, P./ Stummer, H. (Hrsg.) (2003): Human Capital und Wissen - Mitarbeiter als Wettbewerbsvorteil der Zukunft, Universitätsverlag Rudolf Tauer, Linz, 2003 Bröckermann/Pepels (2004): Personalbindung – Wettbewerbsvorteile durch strategisches Human Ressource Management, Erich Schmidt Verlag, Berlin, 2004 Capros, P. et al (2008): 2030 European Energy and Transport – Trends to 2030 Update 2007, Office for official Publications of the European Communities, Luxembourg, 2008 DEKRA (2012): DEKRA Personenzertifizierungen - Qualifizierte Mitarbeiter sind ein entscheidender Wettbewerbsvorteil, in: http://www.dekrapersonenzertifizierung.de/ (28.04.2012) Die Presse.com (2012): Lkw-Streik: Fiat muss 3900 Arbeiter heimschicken, in: http://diepresse.com/home/wirtschaft/international/726999/LkwStreik_Fiat-muss-3900- Arbeiter-heimschicken (26.03.2012) EG-Richtlinie 2003/59/EG: Rat/Europäisches Parlament (Hrsg.): Richtlinie 2003/59/EG des Europäischen Parlaments und des Rates vom 15. Juli 2003 über die Grundqualifikation und Weiterbildung der Fahrer bestimmter Kraftfahrzeuge für den Güter- oder Personenkraftverkehr und zur Änderung der Verordnung (EWG) Nr. 3820/85 des Rates und der Richtlinie 91/439/EWG des Rates sowie zur Aufhebung der Richtlinie 76/914/ EWG des Rates, Amtsblatt Nr. L 226 vom 10/09/2003 Eurotransport (2012): Parkplatzmangel – In Österreich fehlen 1600 Lkw Stellplätze, in: http://www.eurotransport.de/news/parkplatzsuche-inoesterreich-parkplatzsuche-inoesterreich-500458.html (22.04.2012) GWB (2008): Grundqualifikations- und Weiterbildungsverordnung 2008, BGBl. II Nr.139/2008 Kamaras (2003): Humankapital Grund des Wachstums?, Tectum Verlag, Marburg, 2003 Kaplan/Norton (1993): The balanced scorecard: translating strategy into action, USA KFG 1967: Kraftfahrgesetz 1967, BGBl. Nr. 267/1967, idF. BGBl. I Nr. 117/2005 KFV (2008): Rollendes Risiko, in: http://www.kfv.at/verkehrmobilitaet/ unfallursachen/mangelnde-ladungssicherung/ (10.10.2012) Klee (2008): Fahrermangel in der Region Stuttgart und in Baden-Württemberg- eine Untersuchung des IAW Tübingen im Auftrag der IHK Region Stuttgart, in: http://www.logistik-bw.de/fileadmin/BENUTZERDATEN/Dateien-fuer- Seiten/Veranstaltungen/Logistikkongress2008/LK2008Impuls1-IAW-Tuebingen.pdf (07.10.2012)

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22. Kummer/Dieplinger/Lenzbauer (2012): Endbericht „Reale oder Virtuelle Herausforderung Lenkerknappheit“, WU Wien, Institut für Transportwirtschaft und Logistik, 2012 23. Leitl (2007): Was ist…Humankapital?, in: http://www.harvardbusinessmanager.de/heft/artikel/a-622148.html (28.04.2012) 24. Logistikbranche (2012): Vor- und Nachteile des LKW, in: http://www.logistikbranche.net / dossier/vorteile-nachteile-lkw.html (10.04.2012) 25. Lohre (2012): Ursachen und Auswirkungen des Fahrermangels - Einflussgrößen auf 26. Fahrpersonal und –bestand, in: http://www.tuv.com/media/germany/20_mobility/truck/2012_1/01_Prof_Dirk_Lohre_-_Fahrermangel_Bestandsaufnahme_Lage_und_Ausblick.pdf (05.10.2012) p.27 27. Marshall, (2012) Principles of Economics, Verlag Author House 28. ÖAMTC (2012): ÖAMTC Fahrtechnik kritisiert Umsetzung und fehlende Kontrollen in der Berufskraftfahrerweiterbildung, in: http://www.oeamtc. at/?id=2500%2C1382075%2C%2C%2CY2Q9Mw%3D%3D (23.04.2012) 29. Oertli/Rosenbaum (2011): Strukturierte Personalentwicklung – Die Mitarbeiter als entscheidenden Wettbewerbsvorteil positionieren, in: http:// www.kmumagazin.ch/pdf/0007756150196fc60b2149bff82e3662/KMU_0411/52-55_KMU04_11.pdf (28.04.2012) 30. Oetker, A. (2001): Zukunftsaufgabe Qualifikation – Schlüssel zum Erfolg mittelständischer Unternehmen, in: http://www.wkr-ev.de/unternehmertagung/oetker.pdf (28.04.2012) 31. Pfahler (2000): Humankapital und Effizienz – Eine ordnungstheoretische Analyse, Verlag Paul Haupt, Bern/Stuttgart/Wien, 2000 32. ProLkw (2012a): Wieviel Bock gibt’s auf’m Bock?, in: http://www.prolkw. de/neuigkeiten-leser/items/wieviel-bock-gibts-aufm-bock.html (07.10.2012) 33. Schröpel (2012): Der Countdown läuft, in: Blickpunkt Lkw & Bus, 28. Jrg., Nr. 3 (2012), S. 6-8 34. Schultz, Theodore William (1982) Investing in People The Economics of Population Quality University of California Press , Berkeley Los Angeles, London 35. Smith (2009) An Inquiry into the Nature and Causes of the Wealth of Nations , Digireads.com 36. Spraul (2006): Bildungsrendite als Zielgröße für das Hochschulmanagement, Berliner Wissenschafts-Verlag, Berlin, 2006 37. Statistik Austria (2011): Bevölkerungsprognose, in: http://www.statistik.at/web_de/statistiken/bevoelkerung/demographische_prognosen/be voelkerungsprognosen/index.html (07.10.2012) 38. Statistik Austria (2012a): Entwicklung des Transportaufkommens nach Verkehrsträgern von 1995 bis 2011, in: http://www.statistik.at/web_de/ services/ wirtschaftsatlas_oesterreich/ verkehr/056189.html (07.10.2012) 39. Statistik Austria (2012b): Kraftfahrzeuge Bestand - Tabelle Kfz Bestand 2011 pdf, in: http://www.statistik.at/web_de/statistiken/verkehr/strasse/ kraftfahrzeuge_- _bestand/index.html (26.03.2012) 40. Statistik Austria (2012c): Unfallgeschehen mit schweren Lkw nach Bundesländern, in: http://www.statistik.at/web_de/statistiken/verkehr/strasse/unfaelle_mit_personenschade n/019875.html (23.10.2012) 41. Statistik Austria (2012e): Statistik des Bevölkerungsstandes, in: http://www.statistik.at/web_de/statistiken/bevoelkerung/bevoelkerungsstruktur/bevoelk erung_nach_staatsangehoerigkeit_geburtsland/022498.html (08.10.2012) 42. Statistik Austria (2012f): Beim AMS vorgemerkte Arbeitslose und Arbeitslosenquote, in: http://www.statistik.at/web_de/statistiken/arbeitsmarkt/arbeitslose_arbeitssuchende /arbeitslose_nationale_definition/023413.html (08.10.2012) 43. Statistik Austria (2012g): Führerscheinneulinge 2006-2011, in: http://www.statistik.at/web_de/statistiken/verkehr/strasse/fuehrerscheine_lenkberechtig ungen/052516.html (24.10.2012) 44. SVG Hamburg (2012a): Pressemitteilung-SVG-Hamburg zieht positive Bilanz für Pilotprojekt gegen Fahrermangel, in: http://www.svghamburg. de/Aktuelles/Pressemitteilung-SVG-Hamburg-zieht-positive-Bilanz-fuer-Pilotprojekt-gegen-Fahrermangel (08.10.2012) 45. SVG Hamburg (2012b): Euro Trucker, in: http://www.vernetzung-migrationhamburg. de/fileadmin/user_upload/zentrale-pdf/Pressemappe_Euro-Trucker_070812-1.pdf (08.10.2012) p.5ff 46. VCÖ (2012a): VCÖ-Untersuchung: Brenner Alpenpass mit stärkstem Lkw-Verkehr-19.01.2012, in: http://www.vcoe.at/de/presse/aussendungenarchiv/ details/ items/ Ausgabe_2012-12 (10.04.2012) 47. VCÖ (2012b): VCÖ-Untersuchung: In Österreich 20 bis 25 Verkehrstote pro Jahr wegen übermüdeter Lkw-Fahrer, in: http://www.vcoe.at/de/ presse/aussendungenarchiv/ details/items/2010-118 (22.04.2012) 48. Vida/WKÖ (2012): Kollektivvertrag für das Güterbeförderungsgewerbe – Kollektivvertragfür Arbeiter, in: http://portal.wko.at/wk/ format_detail. wk?angid=1&stid=660298&dstid=2200 Download Kollektivvertrag Arbeiter 2012 (23.04.2012) 49. Vida/WKÖ/WKO, (2009): Grundqualifikation- und Weiterbildung für Lkw- und Buslenker, in: http://wien.arbeiterkammer.at/bilder/d140/ Sozialpartner_ Merkblatt_Berufskraftfahrer.pdf (26.03.2012) 50. Vidal-Salazar/Hurtado-Torres/Matìas-Reche, (2012): Training as a generator of employee capabilities, in: The International Journal of Human Resource Management, Vol.23, Issue 13, p.2680-2697, 2012, Granada, Spain 51. Walker, MacDonald (2001): Designing and implementing an HR Scorecard, in: Human Resource Management Journal, Vol. 40 Issue 4, S. 365-377, Wiley Periodicals Inc., Hoboken, USA 52. Wiehl (2011): Mitarbeiterqualifikation: Welche Talente schlummern in den eigenen Reihen?, in: http://www.personalplanung-der-zukunft.de/ mitarbeiterqualifikation-welche-talente-schlummern-in-den-eigenen-reihen/ (26.03.2012) 53. WKO Bundessparte Transport und Verkehr (2011): Forderungsprogramm der Bundessparte Transport und Verkehr September 2011, Wien, 2011, p.22 54. Wolf (2012): Österreich braucht Generalverkehrsplan – Transportbranche dringend auf der Suche nach qualifizierten Lenkern, in: http://portal. wko.at/wk/format_detail.wk?angid=1&stid=666488&dstid=0 (26 DETAILS ABOUT AUTHORS: MARIA DIEPLINGER maria.dieplinger@wu.ac.at SEBASTIAN KUMMER KATHRIN LENZ FOR ALL AUTHORS: VIENNA UNIVERSITY OF ECONOMICS AND BUSINESS WU (WIRTSCHAFTSUNIVERSITÄT WIEN) WELTHANDELSPLATZ 1 1020 WIEN

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DEVELOPMENT OF A HEURISTIC RATING MODEL FOR THE CLASSIFICATION OF KNOW-HOW-INTENSIVE AND TECHNOLOGYORIENTED START-UPS (KITSS) IN AUSTRIA SABINE JUNG

ABSTRACT

The paper provides an insight into a doctoral thesis at the Vienna University of Economics and Business. Objective of this work was to analyse the reasons for success of know-how-intensive and technology-oriented Start-ups (KITSs) and to assess the potential for success at an early point of time in the companies’ life cycle development. By demonstrating factors for success and failure and using them for the categorisation of start-ups, information asymmetries should be reduced and the success rate of these companies increased. First, an explanatory model of the success of KITSs was developed, describing success factors as a cause for subsequent company success (effect). Success factors, relevance systems and interactions were identified in expert interviews, providing empirical cause-effect relationships based on experience. Second, a descriptive decision model (rating model) was derived which enables the categorisation (“Stars”, “High potential for success”, “Low potential for success”) of a single case (specific KITS) through the application of the “general rules” identified in the success factors analysis. Success factors research (strategic management theory), rating theory (and practice) as well as model theory (heuristics) provide the theoretical framework for this work. A qualitative research design allowed the generation of a deeper understanding of the complex problem area. Furthermore, the lack of studies focusing on KITSs providing an up to date variable pool lead to a qualitative-explorative approach. 36 poblem-centered interviews were conducted with founders of young, established but also failed know-how-intensive and technology-oriented companies from different industry fields and experts of technology-intensive markets and companies (venture capitalists, business angels, representatives of funding agencies and incubators, start-up coaches, serial entrepreneurs). Factors for success and failure were identified in the domains of “team”, “finance” and “market-technology-fit”. For the rating model, the success factors are viewed as the “rating criteria”, factors for failure as “warning signals”. The weight of each rating criteria relates to the respective relevance identified in the success factors model and varies in dependence of the distinguishing features applicable to the specific KITS. For the evaluation of the KITS, the classification heuristics for evaluation and selection of alternatives “tallying” and “take-the-best” were identified. As one further result of the interviews, a “rating heuristic” was developed for the evaluation (rating) of a specific KITS. KEYWORDS: heuristic rating model, classification, know-how-intensive, technology-oriented, start-ups, KITSS, Austria Note: With support of Hon. Prof. Dkfm. Dr. Rainer Hasenauer (department for Marketing-Management, Vienna University of Economics and Business), ao.Univ.Prof.Dr. Dietmar Rößl (department for Small Business Management and Entrepreneurship, Vienna University of Economics and Business)

1. OBJECTIVES Many studies refer to the positive effects from foundation and growth of KITSs on a dynamic economic development1. Nevertheless, these companies face specific problems in fundraising on the (Austrian) capital market due to the high risk resulting from the lack of marketable securities, company history and company key figures as well as the high technical risk and information asymmetries2. Objective of this work is to analyse the reasons of the success of KITSs and to assess the potential for success at an early point of time in the companies’ life cycle development3. By demonstrating factors for success and failure and using them for the categorisation of start-ups (“Stars”, “High potential for success”, “Low potential for success”), information asymmetries should be reduced and the success rate of these companies increased4. In this thesis first, an explanatory model of the success of KITSs was developed, describing success factors as a cause for subsequent company success (effect). Success factors, relevance systems and interactions were identified in expert interviews, providing empirical cause-effect relationships based on experience. Second, a descriptive decision model 1 2 3 4

Vetschera & Gillesberger, 2007, S.12, Meka et al., 2005, S.21, Metzger et al., 2008, S.1, Lueghammer et al, 2005 Machart et al, 2008, S. 39, Jörg, Schibany, Nones, & Gassler, 2006, S. 11, 89, Carpenter & Petersen, 2002, S. 54ff, Engelen, 2007, S. 35ff in the seed and start-up pase according to the life cycle deleopment modell (Grabherr 2000) This paper summarizes the work conducted in the doctoral thesis of the author.

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(rating model) was derived which enables the categorisation of a single case (specific KITS) through the application of the “general rules” identified in the success factors analysis.

2. LITERATURE REVIEW Success factors research (strategic management theory), rating theory (and practice) as well as model theory (heuristics) provide the theoretical framework for this work. The neo-institutional finance theory emanates from information asymmetries, diverging interests and uncertainty and thus emphasizes the necessity of ratings in order to increase transparency and to reduce information costs5. „Rating is a method for the categorisation of facts, objects or individuals. Usually, rating is understood as the result of an assessment procedure. Ratings are applied, among others, in finance and banking, sociology, psychology and marketing.”6 Rating systems consist of rating criteria (weighted), warning signals, a rating scale and a rating result7. A distinction can be made between internal and external ratings, depending on which data is being used for the rating (public versus internal data). Furthermore, quantitative (“hard facts”) and qualitative (“soft facts”) rating criteria are used in existing rating systems, aiming at maximum transparency of strengths and weaknesses of a company.8 This study does not differentiate between internal and external data. Success and thus rating factors were identified on a meta-level in expert interviews, not limiting possible results by predetermining categories (internal vs. external, quantitative vs. qualitative data) in advance. As start-ups cannot provide key figures (quantitative data) usually gathered from well established companies, the rating is rather based on “soft factors” (qualitative data)9. Banks do not develop specific rating models for start-ups but modify existing models according to practicability10. Heuristic models in particular are considered appropriate for the rating of start-ups 11. Success factors theory is based on the assumption of few essential influencing variables, which significantly determine success or failure of a company12. Only few studies focus on the success of young technology-oriented companies. Due to the restrictions of this paper, a detailed literature review cannot be provided here. Relevant points of criticism address the methodological approach of studies in success factors theory. It is claimed that many studies neglect the multi-causal and multi-dimensional character of the phenomenon “success” in their analytical approach13. Nicolai & Kieser (2002) and Homburg & Krohmer (2004) postulate a lack of qualitative analyses in the success factors research. These points of criticism are taken into account in this study through the application of qualitative methods and heuristic procedures. Due to the high complexity (multicausality, multidimensionality, and dynamic transformation of success factors) this work deals with poorly structured decision problems which lead to the application of heuristic procedures for the development of open models. The concept of „bounded rationality“ has found widespread acceptance in the analysis of human decision-making14. According to Simon (1976), human behaviour is „intendedly rational, but only limitedly so“. Consequently individuals want to act rational, but are limited in their capability to make objectively rational decisions due to cognitive limitations (limited information procurement and information processing capacities), incomplete information etc15. This study is based on the assumption, that the assessment of KITSs’ potential for success is necessary for some stakeholder groups (start-up coaches, investors, funding agencies, incubators) in spite of limited information (lack of company history and key figures). Business angels are viewed as a particularly relevant stakeholder group as they provide capital in the early stage phase and they depend on the accurateness of their evaluation of KITSs personally (otherwise they could not be active over a longer period of time). Heuristic models methodologically try to gain new insights based on experience values16, which have their origins in 17,18: • subjective practical experience and observations • presumed economic relationships • economic theories for specific partial aspects 5 6 7 8 9 10 11 12 13 14 15 16

Boué, 2005, S.86 und Prigge, 2004, F.179 http://wirtschaftslexikon.gabler.de/Definition/credit-rating.html, translated from german into english by the author Lorenz, 2004, S.61ff Karglmayer/ Böhm, 2004, S. 113 Binevitch, 2009, S.2f OENB, 2004, S.20 OENB, 2004, S.21 Fritz, 1995, S.594, Jünger, 2008, S. 18 Werner, 2000, S.17 Descriptive decision theory March / Simon 1958, S. 136; Simon 1976, S.39f Gigerenzer, 2011

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The selection and application of a specific heuristic principle is based on the context-dependent degree of value proof (indicated by frequent use in context-dependent areas)19, not the logical character of the problem area20. Therefore, application examples of heuristics in similar areas of study (heuristic procedures for stock valuation) as well as different areas of study with similar problem structure (e.g. medical diagnosis) were identified. Based on these considerations, heuristics were selected and used as a reference framework for the qualitative interviews with investors.

3. APPROACH/METHOD A qualitative research design allows generating a deeper understanding of the complex problem area. Furthermore, the lack of studies focusing on KITSs, providing an up to date variable pool requires a qualitative-explorative approach21,22: 1. Literature search: findings from „success factors theory“, „entrepreneurship theory“, „model theory“ and „rating theory“ were used to integrate the work into a theoretical framework. It supported the development of the research design, the conceptualization of the empirical study and the development of the interview guide (inductivedeductive theory construction). 2. Development of the success factors model (explanatory model): in order to gather success factors of KITSs empirically and to illustrate them in a general success factors model, problem-centred interviews with relevant stakeholders were conducted. Through the involvement of different perspectives on the problem area, the validity of the survey was ensured23: a. Operative practical knowledge about factors for success and failure was gathered in 14 interviews with founders of young, established but also failed know-how-intensive and technology-oriented companies from different industry fields, focusing on company-specific promoting and hindering factors for success. b. Knowledge on a meta-level about factors critical for success and their interaction was raised in 11 problemcentred interviews with experts of technology-intensive markets and companies (venture capitalists, business angels, representatives of funding agencies and incubators, start-up coaches, serial entrepreneurs). c. The gathered data was analysed (qualitative content analysis24) and described in an explanatory model. 4. Development of the rating model (decision model): a. Objective of this survey phase was the identification of methods and models used in practice for selecting and rating KITSs. Furthermore, the success factors model was validated in the interviews. Additionally, interrelationships between the identified factors as well as their relevance (in dependence of life cycle development stage25 and technology/industry sector) of each factor were collected. This was achieved in the course of 11 problemcentred interviews with Business Angels investing in Austrian KITSs.26 b. Results and findings from literature analysis and interviews were brought together and resulted in the development of the heuristic rating model. c. A final validation of the rating model is achieved through a retrospective rating of former companies of an Austrian public incubator27.

OENB, 2004, S.33 Newell et al. 1962, S.78, Minsky 1963, S. 407 Anm. 1, Feigenbaum und Feldman 1963, S. 7ff, Reitman 1965, S.153ff, Kirsch, 1970, S. 94 19 Dt.: „Bewährungsgrad” 20 Scheuch, 1977, S. 48 21 Schmalen, Kunert, & Weindlmaier, 2006, S. 5 22 20-30 qualitative interviews need to be conducted for the development of a typology (Lueger, 2000, S.53) 23 The selection of interview partners was based on the „snowball system“ (recommendations) as well as internet research (Przyborski/ Wohlrab-Sahr, 2008, S. 72). 24 Mayring, 1990 25 Grabherr 2000 26 Selection of this stakeholder group: in Austria mainly business angels act as potential investors for KITS in the Early Stage Phase apart from family&friends, incubators and public funding. Unlike the other stakeholder groups, Business angels have long-time experience on a meta-level, could not be active over a longer time period if they are not able to assess the success potential accurately and have a personal interest in the success of KITS they invest in. 27 Work in progress 17 18

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4. RESULTS/FINDINGS 1. Success factors model (explanatory model) Distinguishing features: Distinguishing features influence the relevance of success factors. As a result of the qualitative interviews, the following distinguishing features lead to different characteristics and relevance of specific success factors. A categorization in technology/industry fields did not approve of major importance. To a greater degree, the following categories were perceived as relevant distinguishing factors:

• • • • • • • •

Life cycle development stage High versus low technology intensity/-complexity Basic research versus applied research Market-driven versus technology- driven development B2B versus B2C Experience of the team (first timer versus serial entrepreneur) Teamleader versus no teamleader Support from a business Angel / Smart Money versus no support

Success factors: Factors for success and failure were identified in the domains of “team”, “finance” and “market-technology-fit”. Within these domains different critical factors exist which influence the success or failure of KITSs at a later point of time. They were illustrated in a table together with the factor-specific relevance (relevance of factors varies according to distinguishing features – see above) and interdependencies between different factors (this table cannot be displayed here due to restrictions of words in the present paper). Under specific circumstances some of the factors can be compensated. 2. Rating model (decision model)

Ratingheuristic

The rating model provides an application of the general rules developed in the “success factors model” for the classification of one single case (one specific KITS). The success factors are viewed as the “rating criteria”, factors for failure as “warning signals”. The weight of each rating criteria relates to the respective relevance identified in the success factors model and varies in dependence of the distinguishing features applicable to the specific KITS. For the evaluation of the KITS, the classification heuristics for evaluation and selection of alternatives “tallying” and “take-the-best” were identified. As a result of the interviews, the following “rating heuristic” was developed for the evaluation (rating) of a specific KITS: Starting-situation

Search rule / rating rule

Stop rule

Decision

Choose an object (KITS), whose potential of success should be estimated

Assign the estimated value between 1 and 0 (1; 0,8; 0,6; 0,4; 0,2; 0) to each weighted rating criteria

Finalize the assignment after estimation/evaluation of all rating criteria and assess the sum of all positive values multiplied with each weight for the object (start-up).

Predict, to which of the following categories (rating scale) the object (KITS) belongs to, according to the rules below this table: “Star”, “High potential for success” or “Low potential for success”

The assignment (rating result) of one specific KITS to a category of the rating scale depends on the following rules derived from the interviews: 1. “Star”: all rating criteria apply fully to the rated KITS. 2. “High potential for success”: all rating criteria with high weight apply to a great extent (1-0,8) to the rated KITS. Low values are allowed if compensated according to the rules identified in the success factors model or if the respective rating criterion has a low weight (relevance). 3. “Low potential for success”: one (or more) rating criterion with high weight (relevance) shows a low value and cannot be compensated.

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5. IMPLICATIONS AND VALUE • Scientific interest

Results of this work help to cover the research gap in success factors research with regards to KITSs in Austria. The methodological criticism (no consideration of multicausality, multidimensionality and dynamic transformation of success factors) is taken into account by use of qualitative methods and application of heuristic procedures. With regards to rating theories, there are no scientific models for the categorization of KITS. Conventional methods are based on key facts that are not applicable to start-ups without company history. Also this research gap should be covered in this study by revealing practice of company selection and the development of a rating model. The separate consideration of KITSs seems appropriate due to the lack of company history and key figures as well as information asymmetries and the innovative character, high initial investments, high knowledge requirements, short technology cycles and the dynamic market development.

• Economic interest

High uncertainty with regards to technological and thus commercial success leads to a market failure for KITSs in Austria28. This is why a widespread governmental funding system was established. Through an early identification of factors critical for success and the categorization of start-ups through a rating model: • Information asymmetries between investors and parties seeking capital (KITSs) can be diminished and thus the provision of higher capital availability could be achieved. • A decision support for potential investors could be provided which helps to recognize problems and risks at an early point in time and to prepare against them accurately timed. • Could support KITSs, start-up coaches, business angels, venture capitalists etc. to take early measures for the diminishment of error rates and the increase of the probability of success. Limitations and outlook:

• Biases due to a lack of awareness (experts are not aware of all factors that lead to success) as well as the possibility

of intentional withholding of information cannot be excluded but reduced in the survey29. In order to consider these threats, a lot of different perspectives were taken into account. The impression of authenticity of the interviewees was gained in the personal interviews (authentic behaviour, high interest in the results of the study, provision of additional information per mail after the interviews, disposition for additional interviews, long duration of the interviews). The descriptive models developed in this survey are based on experience and knowledge of experts. Therefore, statistical causal relationships need to be tested in a quantitative survey. This is seen as an important follow-up work. Nevertheless, problems may arise with regards to the operationalization of the factors identified. The validation of the rating model should be conducted in a long-term study, observing the accurateness of the model over time. Due to time restrictions, a retrospective validation of the rating model was chosen. Regional focus of the study lies on Austria. Therefore, results mainly apply to Austrian KITSs active in the Austrian innovation system with its political, socio-cultural, legal and funding framework. Nevertheless, results may apply - to a certain extent - to KITSs in other countries as well. The study is not completely finalised. The last step of validation (retrospective rating) is still in progress and will be finalised in June 2013.

• • • •

28 29

Jörg, Schibany, Nones, & Gassler, 2006, S. 13 Jörg, Schibany, Nones, & Gassler, 2006, S. 13

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REFERENCES 1.

Binevitch, A. (Juli 2009). Wissenschaftliche und praxisrelevante Ansätze der Unternehmensbewertung in dynamisch wachsenden Märkten. Hamburg: Diplomica Verlag

Bortz, J., & Döring, N. (2006). Forschungmethoden und Evaluation für Human- und Sozialwissenschaftler. Heidelberg: Springer Medizin Verlag.

Boué, A. (2005). Der Einfluss von antizipiertem Value Added auf die Entscheidung zu Gunsten einer Venture-Capital-Finanzierung. Wien: Betriebswirtschaft der Klein- und Mittelbetriebe, Wirtschaftsuniversität Wien. Dissertation.

Carpenter, R. E., & Petersen, R. C. (2002, February). The Capital Market Imperfections, High-Tech Investment, and New Equity Financing. The Economic Journal , p. F54±F72.

Engelen, A. (2007). Marktorientierung junger Unternehmen. Wiesbaden: Deutscher Universitäts-Verlag, GWV Fachverlage GmbH, Gabler Edition Wissenschaft.

Feigenbaum, E., & Feldman, J. (1963). Computers and Thought. New York: McGraw-Hill.

Gabler Wirtschaftslexikon, http://wirtschaftslexikon.gabler.de/Definition/credit-rating.html

Gigerenzer, G., & Brighton, H. (2011). Homo Heuristicus: Why Biased Minds Make Better Inferences. In G. Gigerenzer, R. Hertwig, & T. Pachur, Heuristics. The Foundations of Adaptive Behavior (pp. 2-32). New York: Oxford University Press.

Grabherr, O. (2000, Dezember). Lexikon der Beteiligungsfinanzierung. Retrieved 04 11, 2012, from Risikokapitalinstrumente im unternehmerischen Wachstumsprozess: http://www.grabherr.at/index.php/Risikokapitalinstrumente_im_unternehmerischen_Wachstumsprozess

10. Jörg, L., Schibany, A., Nones, B., & Gassler, H. (2006). Zwischenevaluierung der aws-Technologieprogramme - Endbericht. Wien: Bundesministerium für Wirtschaft und Arbeit. Abteilung C1/11 - Innovation und Transfer. 11. Jünger, M. (2008). Internes Unternehmenswachstum. Ulm: Herbert Utz Verlag GmbH. 12. Karglmayer, A., & Böhm, C. (2004). Überblick Ratingkriterien. In F. Bonitz, & P. Ostermann, Handbuch zur Ratingvorbereitung und Ratingverbesserung (pp. 113-160). Wien: Linde Verlag. 13. Kirsch, W. (1970). Entscheidungsprozesse. Verhaltenswissenschaftliche Ansätze der Entscheidungstheorie. Wiesbaden: Betriebswirtschaftlicher Verlag Dr. Th. Gabler. 14. Lorenz, M. (2004). Überblick Ratingsysteme. In F. Bonitz, & P. Ostermann, Handbuch zur Ratingvorbereitung und Ratingverbesserung (pp. 61112). Wien: Verlag Linde. 15. Lueger, M. (2000). Grundlagen qualitativer Feldforschung: Methodologie – Organisierung – Methoden. Kap. 3: Elemente der Organisierung von Feldforschung. Wien: Wiener Universitätsverlag. 16. Lueghammer, W., Schneider, H., & Schindler, J. (September 2005). International Good Practices in der steuerlichen F&E-Förderung - Unter besonderer Berücksichtigung junger und innovativer Unternehmen. Wien. 17. Machart, J., & Url, T. (2008). "Hemmnisse für die Finanzierung von Frühphasen- oder Venture Capital-Fonds in Österreich". Retrieved 3. 1, 2011, from Wien: http://www.avco.at/upload/medialibrary/ventcap_(12.06.08).pdf 18. March, J. G., & Sutton, R. (1997). Organizational performance as a depent variable. Organizations Science, S.698-706. 19. Mayring, P. (1990). Einführung in die qualitative Sozialforschung. München. 20. Meka, R., Schultz, B., Anclam, S., & Beaucamp, A. (2005). Bestandsaufnahme zum wissens- und technologiebasierten Gründungsgeschehen und zu Unterstützungsangeboten für potentielle Gründerinnen und Gründer in Deutschland. Bonn, Berlin. 21. Metzger, G., Niefert, M., & Licht, G. (2008). High-Tech-Gründungen in Deutschland - Trends, Strukturen, Potenziale. Mannheim. 22. Minsky, M. (1963). Steps Toward Artificial Intelligence. In E. Feigenbaum, & J. Feldman, Computers and Thought (p. 406ff). New York - San Francisco - Toronto - London - Sydney. 23. Newell, A., Shaw, J., & Simon, H. (1962). The Process of Creative Thinking. In H. Gruber, G. Terrel, & M. Wertheimer, Contemporary Approaches to Creative Thinking (p. 63ff). New York. 24. OENB/FMA. (2004). Leitfadenreihe zum Kreditrisiko – Ratingmodelle und –validierung. Wien 25. Prigge, S. (2004). Grundkonzeption der Finanzierungstheorie – Neoinstitutionalistische Investitions- und Finanzierungstheorie. Retrieved März 18, 2011, from Foliensatz Uni Hamburg: http://www1.uni-hamburg.de/Kapitalmaerkte/download/GrundkonzeptionenSoSe2004FolieCI.pdf 26. Przyborski, M., & Wohlrab-Sahr, M. (2008). Qualitative Sozialforschung. München: Oldenbourg Wissenschaftsverlag GmbH. 27. Scheuch, F. (1977). Heuristische Entscheidungsprozesse in der Produktpolitik. Berlin: Duncker und Humblot. 28.

Schmalen, C., Kunert, M., & Weindlmaier, H. (2006). Erfolgsfaktorenforschung: Theoretische Grundlagen, methodische Vorgehensweise und Anwendungserfahrungen in Projekten für die Ernährungsindustrie. In Schriften der Gesellschaft für Wirtschafts- und Sozialwissenschaften des Landbaues e.V., Band 41 (pp. 351-362). Münster-Hiltrup: Landwirtschaftsverlag.

29. Vetschera, R., & Gillesberger, E.-M. (2007 ). Venture Capital und Private Equity für das österreichische Innovationssystem. Wien: RFTE. DETAILS ABOUT AUTHOR: MAG. SABINE JUNG sabine.jung@brimatech.at

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USABILITY AND FUNCTIONALITY EVALUATION OF THE MOST PROFITABLE CROATIAN COMPANIES’ WEB SITES ANTUN BILOŠ IVAN RUŽIĆ IVAN KELIĆ

ABSTRACT

The most commonly used form of Internet presence for a company is its official web site. Business web sites have been used since the beginning of Internet development in its early stages. As the Web space has been changing over time in quality, quantity and capabilities, so have its business web sites as well. It is a known fact that web site quality varies as well as its usability and functionality. Having that in mind, there is an obvious need to systematically analyze and evaluate business oriented web sites. Both theoreticians and practitioners agree on the basic evaluation components of web site analysis in general. However, there is no single widely accepted performance evaluation model of business web sites. The aim of the paper is to analyze and evaluate web sites of 190 most profitable Croatian companies in different economic sections (sectors). The paper is focused on web site usability and functionality from the user perspective. Usability and functionality is measured in order to compare business web sites and assess their performance. KEYWORDS: web site evaluation, usability, functionality, Croatian business web sites.

1. INTRODUCTION The most common means of Internet presence for companies is the official web site. Official business web sites are an area which has been developed the most in business Internet presence. It is an undeniable fact that the quality of an official web site significantly varies and that special attention should be given to its analysis. Theoreticians and practical experts in this area generally agree about the most significant components of the analysis, but there is no generally accepted model of official web site success evaluation. Sporadic research of foreign web site analysis practice has shown that there are no simple and all-encompassing solutions, but that analysis models were almost always adjusted to the peculiarities of individual research situations. However, it is important to point out that every analysis model has a certain number of generally accepted standards.

2. WEB SITE USABILITY AND FUNCIONALITY EVALUATION Although a large number of significant e-marketing research does exist, the biggest number of existing empirical research papers connected with official web site success are only preliminary. Although, a large number of older and more recent models exist which suggest a certain aspect of official web site success (less frequently of a more complete success of e-marketing efforts), until today a standard frame or systematic benchmark which defines official web site efficiency has not been established.1 Most research on this topic is facing a limited number of quality factors or is aimed at a specific web service. Although, there should be a significant number of factors connected with official web site success, there is a fairly small number of research papers that analyze the combination of all factors and services. In the last twenty years, research and studies have generated different approaches and models for the assessment of official web site quality and efficiency. We should mention that the specific characteristics of a business field from which the subject comes are a frequent influential factor on the choice of evaluation parameters. According to the already mentioned data, we can suggest a rough categorization of official web site types which come from specific business characteristics (e.g. business or commercial official pages, educational, banking, government or government organization web sites).2 Business and commercial official web sites were studied from different perspectives. Some researchers studied official web site factors which are crucial to e-business success and called them critical success factors.3 4 5 6 Other researchers point to key problems, ideas and Hasan, L., Abuelrub, E. (2008) Assessing the Quality of Web Sites, INFOCOMP Journal of Computer Science. 7,4, pp. 11-20. Hasan, L., Abuelrub, E. (2008) Assessing the Quality of Web Sites, INFOCOMP Journal of Computer Science. 7,4, pp. 11-20. 3 Delone, W., Mclean, E. (2003) The DeLone and McLean of information systems success: a ten-year update, Journal of Management Information Systems, pp. 9-30. 4 Liu, C., Arnett, K. (2000) Exploring the factors associated with web site success in the context of electronic commerce, Information and Management. 38, pp. 23-33. 5 Madeja, N., Schoder, D. (2003) Designed for success: empirical evidence on features of corporate web sites, 36th Hawaii International Conference on System Sciences. 6 Molla, A. Licker S.P. (2001) e-commerce systems success: an attempt to extend and respecify the Delone and Maclean of IS success, Journal of Electronic Commerce Research. 2,4, pp. 131-141. 1 2

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strategies which are necessary to take into account from a user satisfaction perspective when managing online businesses and evaluating the focus on user goals during the official web site set up process.7 8 9 10 A separate group of researchers has studied the abilities of web designers to pinpoint factors that they consider important during design and development of official web sites.11 12 Other researchers have developed generic tools or specific frames which grade the quality of official web sites.13 14 15 16 17 18 19 Certain researchers have focused their attention to important characteristics or have suggested frames for measuring important characteristics of official web sites. Very often, they have used previous models in order to disclose to which extent official web sites, which implement e-business solutions, contain those important characteristics. Other researchers have focused on web site usability.20 21 22 Heimlich and Wang23 have proposed key web site structure problems, while Cao and Zhang24 have studied factors which affect web site design with implemented e-shops. Heimlich25 has studied the evaluation of business web site content, Husin et.al.26 have studied the extent in which companies include ethical and credible elements in their pages. Fogg et.al.27 have researched how different web site elements affect its credibility according to the perception of the user.28 The aim of this paper is to study to which extent users are satisfied with the functionality of business web sites, i.e. to which extent will the official web site fulfill user’s expectations according to functionality and usability.

2.1 Sample The used sample and the primary data in this paper is part of the research for the doctoral thesis Electronic marketing of business subjects in the Republic of Croatia which was conducted during the period between May and November 2012. The focus of this research are the most profitable companies in the Republic of Croatia, while taking into account the business field they belong to. Using the National classification of businesses (NKD2007) and the 21 business fields it recognizes, the first 10 subjects from each business field for the year 201029 were taken as the basic sample. Two fields were omitted from the sample as they did not contain a significant number of subjects. The final sample contained 190 subjects arranged according to business field. The existence and availability of their official web sites was tested in the next step. The classification of official web site existence was determined primarily according to size and number of pages it contains, as is shown in Table 1. Chanaron, J. (2005) Evaluating e-learning: the case of automative small-medium suppliers, 1st International Conference on e-Business and Elearning (EBEL), Amman, Jordan, pp. 13-25. 8 Heimlich, J., Wang, K. (1999) Evaluating the structure of web sites, Environmental Education and Training Partnership Resource Library, Ohio State University Extension, USA. 9 Srivihok, A. (2000) An assessment tool for electronic commerce: end user evaluation of web commerce sites, Technical Report, Faculty of Science, Kasetsart University, Bangkok, Thailand, 2000. 10 Zhang, P., Dran, G. (2001) Expectations and ranking of web site quality features: results of two studies on user perceptions, 34th Hawaii International Conference on System Sciences. 11 Chanaron, J. (2005) Evaluating e-learning: the case of automative small-medium suppliers, 1st International Conference on e-Business and Elearning (EBEL), Amman, Jordan, pp. 13-25. 12 Tan, F., Tung, L. (2003) Exploring web site evaluation criteria using the repertory grid technique: a web designers’ perspective, 2nd Annual Workshop on HCI Research in MIS, WA. 13 Barnes, S., Vidgen, R. (2001) Assessing the quality of auction web sites, 34th International Conference on System Sciences, Proceedings. 14 Barnes, S. Vidgen, R. (2002) An integrative approach to the assessment of e-commerce quality, Journal of Electronic Commerce Research. 3,3, pp.114-127. 15 Fitzpatrick, R. (2000) Additional quality factors for the World Wide Web, 2nd World Congress for Software Quality, Japan. 16 Gledec, G. (2005) Evaluating web site quality, 7th Internet Users Conference (CUC2005), Croatia 17 Lin, F., Huarng, K., Chen, Y., Lin S. (2004) Quality evaluation of web services, IEEE International Conference on e-Commerce Technology for Dynamic eBusiness. 18 Mich, L., Franch, M., Gaio, L. (2003) Evaluating and designing web site quality, IEEE Multimedia, IEEE Computer Society. 19 Signore, O. (2005) A comprehensive model for web sites quality, 7th IEEE International Symposium on Web Site Evolution (WSE’05). 20 Basu, A. (2002) Context-driven assessment of commercial web sites, 35th Hawaii International Conference on System Sciences. 21 Lim, K. (2002) Security and motivational factors of e shopping web site usage, Decision Sciences Institute 2002 Annual Meeting, pp. 611-616. 22 Singh, M., Fisher, J. (1999) Electronic commerce issues: a discussion of two exploratory studies, Electronic 3rd Annual Conference on Electronic Commerce, Victoria University, New Zeeland. 23 Heimlich, J., Wang, K. (1999) Evaluating the structure of web sites, Environmental Education and Training Partnership Resource Library, Ohio State University Extension, USA. 24 Cao, M., Zhang. Q. (2002) Evaluating e-commerce web site design: a customer’s perspective, Decision Sciences Institute 2002 Annual Meeting, pp. 11861191. 25 Heimlich, J. (1999) Evaluating the content of web sites, Environmental Education and Training Partnership Resource Library, Ohio State University Extension, SAD. 26 Hussin, H., Suhaimi, M., Mustafa M. (2005) ecommerce and ethical web design: applying the BBBOnline guidelines on Malaysian web sites, The International Arab Journal of Information Technology. 2,3, 218-226. 27 Fogg, B.J., Marshall, J., Laraki O., Osipovich A., Varma C., Fang N., Paul J., Rangnekar A., Shon J., Swani P., Treinen M. (2001) What makes web sites credible? a report on a large quantitative study, Computer Human Interaction. 3,1, pp. 61-68. 28 A detailed overview of the official web site success analysis is available as part of the doctoral thesis by the author, Biloš A. (2012) Elektronički marketing poslovnih subjekata u Republici Hrvatskoj, Ekonomski fakultet u Osijeku, Sveučilište J.J.Strossmayera 29 Poslovna.hr business database was used. Mayring, 1990 7

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Table 1. Classification of official web sites according to size and availability GROUP

DESCRIPTION

Nr OF PAGES

Web site

More than 5

Microsite

2 â&#x20AC;&#x201C; 5 pages

Part of a corporate portal

2 and more pages

Homepage

1 page

Listing within the corporate portal/web site

1 page

None

0 pages

Source: authorsâ&#x20AC;&#x2122; research.

In the group A we have every functional30 official business web site which has at least 5 pages. Group B contains so called microsites i.e. very small official web sites that, apart from the home page, have very few other pages (2 - 5 pages). If the official web site has only a home page, it is placed in group D. Cases where the company has bought a domain (domain name), but has not set up a page or there is only an information page from the hosting company, were not included in the group D. Group C contains companies which don't have official web sites, but exist within a corporate portal with more than one page (subportal). If the company is only mentioned or listed within one page of the corporate portal, it is placed in group E. In case the company does not have an official web site or does not belong in any of the mentioned groups, it is placed in group F. All companies i.e. their web sites are classified into one of these categories. An additional limitation was noticed in several cases where different subjects have the same official web site. Although, legally these are different subjects, they are mostly connected at a certain level (owner structure etc.). It is important to point out that almost 3/4 (75%) of companies from the sample have a group A official web site. However, a significant number of companies (32 or almost 17%) do not have any form of official web site and belong in group F. All the groups were incorporated in further functionality analysis, except groups E and F. Group E (listed on a corporate web portal) was not used in the research since such a form of Internet presence can't be treated as significant enough in the sense of managing Internet marketing activities. All possible analytic procedures would apply to the official group web site which is not the subject of this analysis. Official web sites of companies from group F were not analyzed for logical reasons (because they, of course, do not exist). The research was conducted on 143 official web sites. Since the primary research goal was not to study the online population in Croatia, but the official web sites of business subjects, it was not necessary to ensure a representative sample of Internet users in Croatia. Instead, we needed educated users who can adequately stand in for typical target group representatives of the business web sites users. Having all of this in mind, it was agreed that the functionality analysis of the sample is conducted on the available student population of the Faculty of Economics Osijek. A group was created from the available student population with the goal of objectively analyzing 143 business web sites. The student population consisted predominantly (98%) of 3rd year undergraduate and 1st year graduate students of the Faculty of Economics, Osijek. It was assumed that the mentioned student population can give a valid evaluation of usability and functionality levels of official web sites from a user's perspective. However, before the testing took place, brief instructions were given to the participants, with the goal of avoiding possible flaws and ensuring a standardized approach to each test. 158 students took part in this stage of the research and they tested 143 official web sites.

2.2 Data collection Data collection was conducted in 4 iterations i.e. with 4 student groups during a period of 15 days in June 2012. Four lecture halls with computers were used for testing purposes. All computers had roughly the same characteristics and had broadband Internet connections. Each computer was tested beforehand and different browsers of similar or almost the same characteristics were made available. The questionnaire had 4 parts. The most significant was the second part in which the functionality and usability level of the observed official web site was tested in 20 questions. The questions were mostly conceived using the Likert scales with one open ended question asking about flaws in the web site. The used seven degree Likert scales was transformed into numerical scales and mean values were calculated (with all the limitations that occur during this transformation) in order to enable easier comparison.

Functionality in this context describes an official web site that can be accessed regardless of content quality. It is only important to establish that the web site represents the studied business entity (company).

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The questionnaire focuses on the following official web site characteristics that the users have tested:

• • • • • • • • • • • • •

homepage and inner page design, web site purpose and purpose oriented web site design, web site visibility, web site navigation, web site search engine, web site speed, influence on user distraction, data timeliness, language quality, web site content scope, web site content usability, ease of use, total satisfaction.

Each respondent has tested 10 official web sites during testing. The page was observed for 5 minutes after which the questionnaire was completed. The testing pace was adapted to the more complex web sites. 158 respondents have completed 1448 questionnaires. Some of the questionnaires were discarded because of incomplete or formulaic answers which gave reasonable doubt about the accuracy and truthfulness of the answers. 1430 questionnaires were taken for analysis, 10 questionnaires per individual official web site from the sample.

2.3 Survey analysis Further on, we analyzed the average for all 143 official web sites which represent web locations of the most profitable companies according to business field. Figure 1 gives a complete graphic representation of the research results. The results obtained through individual questions are discussed below. It made sense to first test the user satisfaction degree of the home page, since it is the first thing users see when they access an official web site. We can see that most users (more than 60 %) are satisfied with the home page, among which dominate those who are very satisfied (25%). The number of those who are not satisfied at all is very small (5%). Overall, the average home page satisfaction value is 4.79 (on a scale between 1 and 7 where 1 is completely dissatisfied and 7 is completely satisfied). After the home page testing, the respondents tested several content pages on the observed official web sites. User satisfaction is similar to home page satisfaction, even a little higher. Again, the highest number is of those who are very satisfied (27%) and the lowest of those who are not satisfied at all (5%). The average value for this criterion is 4.81. We can conclude that the purpose of most of the tested web sites can be established based on the home page. This can be done fairly easily on 70% of the web sites. The average value is 5.24. A similar average attitude is apparent when testing design in establishing the purpose of the web site. It has a value of 4.99. Based on the home page and related graphic elements, we can conclude that the official site purpose can be fairly easily established. Graphic elements which are relevant to the purpose and goal of the web site help greatly. If we include all those who are satisfied to a certain extent with the web site visibility (those who are partially satisfied and very satisfied) we can conclude that they, with 68%, are the dominant group. The average value for web site visibility satisfaction i.e. the ease of content reading is 4.98. The web site navigation satisfaction degree is similarly evaluated and a generally positive attitude prevails with an average value of 5.00. Most respondents are satisfied (30%). The smallest group are the respondents who are not satisfied at all (4%). The web site search engine satisfaction degree is also positively rated with an average value of 4.93. The obtained results show that more than 75% of the respondents are to a certain extent satisfied regarding web site search engines (30% are satisfied and 16% completely satisfied). The web site speed satisfaction degree is the best rated factor with an average value of 5.46. 25% of the respondents are completely satisfied, 37% satisfied and 18% partially satisfied, which makes almost 80% of those who are satisfied to a certain extent with the web site speed. The fact that all used computers had a broadband Internet connection certainly contributes to the results. In order to interpret the influence on the user distraction factor, it is necessary to explain the significance and testing approach. The goal was to identify if the observed official web site has specific elements which, for some reason, divert the user's attention. Since a negative effect was tested with this criterion, when transposing the scales, the maximum score was placed with the complete lack of the effect, and the minimal with the highest degree of the effect, although the opposite orientation was used in the questionnaire. Using this method it was calculated that the average mean score for this factor is 5.33, which indicates a very small presence of irritating elements which divert the user's attention from the purpose of the web site i.e. the

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content. The research results show that most of the respondents graded the effect as very low (37%) and non-existent (24%). The respondents are generally satisfied with the data timelines i.e. the official web site content. The average value is 5.03. The web site testing has confirmed that the quality of the used language on business web sites mainly fits users' expectations: 19% are partially satisfied, 36% are satisfied and 19% are very satisfied: The average score is 5.29. The satisfaction degree of the web site content scope was also tested in this research. As with the previous criteria, an overall positive user satisfaction is present here. Almost half of the respondents were satisfied or completely satisfied with the content scope of tested official web sites. The average value is 5.01. Apart from the content scope, the content usability satisfaction was also tested and a generally positive attitude towards this criterion was noticed. The average value is 5.13. 19% of the respondents are very satisfied with the ease of use of official web sites in the sense of web site user orientation, 31% are satisfied. We can also add 24% of those who are partially satisfied to this group. The average ease of use score of 5.16 is a little higher than the content scope value. The final question connected with the observed web site components was concerned with total satisfaction. Like with the other tested criteria, most respondents react generally positive to the total satisfaction question. The average value is 4.91. We should point out that 64% of the respondents were to a certain extent satisfied with official web sites, although a fairly significant percentage (15%) gave a neutral answer. A more even distribution of answers was noticed with questions concerning recommending web sites to other users and revisiting the tested web site. 22% of users think that there is a high probability that they would recommend the tested web sites to others, 11% are certain they would recommend the sites. The average recommendation probability value is 4.39. The revisit probability score of tested official web sites is the lowest rated of all, with an average value of 4.14. Although we are still discussing a generally positive attitude, this indicator is the closest to a neutral value (the closest to the value 4). We can now conclude that the respondents are IT literate individuals, competent for testing the quality components of functional items and the usability of official web sites, who don't significantly visit some of the tested web sites. Figure 1. Summary results of web site functionality and usability testing

Source: authorsâ&#x20AC;&#x2122; research.

For the purpose of easier comparison, Figure 2 shows only the mean scores for all tested official web site criteria

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Figure 2. Mean score of survey factors

Source: authorsâ&#x20AC;&#x2122; research.

According to the mean scores the highest rated factors are web site speed, influence on user distraction (inverted scale) and language quality. The lowest rated factors are revisit probability and recommendation probability. An overall mean score of 4.98 was calculated based on all factors. It indicates that the official web sites from the sample mainly satisfy the observed criteria according to user perception. It will be possible to establish more significant finds for individual official web sites/ business subjects.

2.3.2 Demographic profile of web site users The respondents where 74% female and 26% male which is consistent with the overall male/female ratio at the Faculty of Economics, Osijek. The age structure corresponds with the sample creation method. Since the largest number of respondents are 3rd year undergraduate students and 1st year graduate students, the dominant age group among them is 21-24 (87%), 11% of the respondents belong to the age group 25-30, 60% of the respondents were 1st year graduate student and 38% were 3rd year undergraduates.

2.3.3 Sample profile by company Table 2 shows the list of all 143 companies with their average mean scores based on the complete test. The mean score is the quantified representation of the official web site success and enables comparison between companies. It can generally be concluded that a large number of tested companies has a satisfactory average mean score. In other words, all the mean scores which are above 4 are positively evaluated official web sites i.e. there is a general positive attitude towards the web site by the users. 124 business subjects have this score, which makes 87% of tested official web sites and it represents a significant majority. Furthermore, it is apparent that as many as 76 companies (53%) have the average mean score above 5. These are the subjects which have a higher criteria satisfaction level. We should point out those companies whose web sites have achieved an average mean score of 6 or higher. These scores represent excellent web sites which have the highest testing criteria satisfaction level. This group is made of 10 companies and is, interestingly, led by three joint-stock companies: Dukat d.d., Privredna banka Zagreb d.d. i Turisthotel d.d.

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Table 2. Mean scores of individual official web sites Nr

COMPANY

WEBSITE

SCORE

Dukat d.d.

www.dukat.hr

6.5

PBZ d.d.

www.pbz.hr

6.3

TURISTHOTEL d.d.

www.zaton.hr

6.2

Globalna hrana d.o.o.

www.mcdonalds.hr

6.2

Zagrebačka pivovara d.o.o.

www.ozujsko.com

6.2

METIS d.d.

www.metis.hr

6.2

STOMATOLOŠKA POLIKLINIKA ZA ORALNU KIRURGIJU, ORTODONCIJU, RADIOLOŠKU DJELATNOST - ORTOPAN I ZUBOTEHNIČKI LABORATORIJ RIDENT

www.rident.hr

6.1

Specijalna bolnica Svjetlost

www.svjetlost.hr

6.0

ERSTE & STEIERMÄRKISCHE BANK d.d.

www.erstebank.hr

6.0

KLEMM SIGURNOST d.o.o.

www.klemmsecurity.hr

6.0

PZ Osatina

www.osatina.hr

5.9

UNILINE d.o.o.

www.uniline.hr

5.9

HRT

www.hrt.hr

5.9

BLITZ - CINESTAR d.o.o.

www.blitz-cinestar.hr

5.9

KAMGRAD d.o.o.

www.kamgrad.hr

5,9

ILIRIJA d.d.

www.ilirijabiograd.com

5,9

HOTEL DUBROVNIK d.d.

www.hotel-dubrovnik.hr

5,9

Poliklinika Šlaj-Anić

www.slaj-anic.com

5,8

MEDICINSKO BIOKEMIJSKI LABORATORIJ DR. SC. DARIJA BREYER

www.lab-breyer.hr

5,8

Pag 91 d.o.o.

www.pag91.hr

5,8

PLAVA LAGUNA d.d.

www.plavalaguna.hr

5,8

MARINE KAŠTELA d.o.o.

www.marina-kastela.com

5,8

Pliva Hrvatska d.o.o.

www.pliva.hr

5,8

CENTAR ŠKOJO d.o.o.

www.kruna.hr

5,8

GRADSKA PLINARA ZAGREB d.o.o.

www.plinara-zagreb.hr

5,7

PLINACRO d.o.o.

www.plinacro.hr

5,7

HP d.d.

www.posta.hr

5,7

AGRAM YACHTING d.o.o.

www.agramservis.hr

5,7

ZAGREBAČKE OTPADNE VODE d.o.o.

www.zov-zagreb.hr

5,7

ZRAČNA LUKA DUBROVNIK d.o.o.

www.airport-dubrovnik.hr

5,7

Hrvatska Lutrija d.o.o

www.lutrija.hr

5,6

VALALTA d.o.o.

www.valalta.hr

5,6

ACI d.d.

www.aci-club.hr

5,6

AGROKOR d.d.

www.agrokor.hr

5,6

MASLINICA d.o.o.

www.maslinica-rabac.com

5,6

ZAGREBAČKA BANKA d.d

www.zaba.hr

5,6

POLIKLINIKA ZA STOMATOLOŠKU PROTETIKU, PARODONTOLOGIJU I ORTODONCIJU SA ZUBOTEHNIČKIM LABORATORIJEM DR. JELUŠIĆ

www.jelusic.com

5,6

VIPnet d.o.o.

www.vipnet.hr

5,6

Business.hr d.o.o.

www.business.hr/hr/

5,6

ZAGREBAČKA ŠKOLA EKONOMIJE I MANAGEMENTA

www.zsem.hr

5,6

SLOBODNA DALMACIJA d.d.

www.slobodnadalmacija.hr

5,5

NP Plitvička jezera

www.np-plitvicka-jezera.hr

5,5

PBZ CARD d.o.o.

www.pbzcard.hr

5,5

TANKERSKA PLOVIDBA d.d.

www.t-com.hr

5,5

HBOR

www.hbor.hr

5,5

SPEKTAR-PUTOVANJA d.o.o.

www.spektar-putovanja.hr

5,5

Končar-energetski transformatori d.o.o.

www.koncar.hr

5,5

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TDR d.o.o.

www.tdr.hr

5,5

KATARINA LINE d.o.o.

www.katarina-line.hr

5,4

HYPO ALPE-ADRIA BANK d.d.

www.hypo-alpe-adria.hr

5,4

KONZUM d.d.

www.konzum.hr

5,4

MUCIĆ & Co d.o.o.

www.mucic.hr

5,4

ALGEBRA d.o.o.

www.algebra.hr

5,4

PBZ CROATIA OSIGURANJE dioničko društvo za upravljanje obveznim mirovinskim fondom

www.pbzco-fond.hr

5,4

SOKOL MARIĆ d.o.o.

www.sokol-maric.hr

5,4

SUPER SPORT d.o.o.

www.supersport.hr

5,4

Hep proizvodnja d.o.o.

www.hep.hr/proizvodnja/

5,4

NEW YORKER CROATIA d.o.o.

www.newyorker.de/hr/

5,4

Hep d.d.

www.hep.hr

5,3

MBM-COMMERCE d.o.o.

www.mbm-commerce.hr

5,3

TRINOM d.o.o.

www.trinom.hr

5,3

dm-drogerie markt d.o.o.

www.dm-drogeriemarkt.hr

5,3

ELDRA d.o.o.

www.eldra.hr

5,3

AUTO HRVATSKA d.d.

www.autohrvatska.hr

5,3

Visoko učilište Algebra

www.racunarstvo.hr

5,2

MICROSOFT HRVATSKA d.o.o.

www.microsoft.hr

5,2

ATLANTSKA PLOVIDBA d.d.

www.atlant.hr

5,2

HEP-Operator distribucijskog sustava d.o.o.

www.hep.hr/ods

5,2

Hrvatske šume d.o.o.

www.hrsume.hr

5,1

ULJANIK d.d.

www.uljanik.hr

5,1

ALLIANZ ZB d.o.o.

www.azfond.hr

5,1

POLIKLINIKA PRO VITA

www.poliklinika-provita.hr

5,1

ZRAČNA LUKA SPLIT d.o.o.

www.split-airport.hr

5,1

IVORA - ŠKOLA INFORMATIKE

www.ivora.hr

5,1

LUXOR SERVIS d.o.o.

www.luxor-grupa.hr

5,1

Leopold Jordan GmbH

www.jordan.hr

5,1

BIOMAX d.o.o.

www.biomax.hr

5,0

Ina d.d.

www.ina.hr

5,0

Ledo d.d.

www.ledo.hr

5,0

CENTAR ZA VOZILA HRVATSKE d.d.

www.cvh.hr

5,0

Ribnjačarstvo Poljana d.d.

www.ribnjacarstvo-poljana.hr

4,9

TROMONT d.o.o.

www.tromont.hr

4,9

ING-GRAD d.o.o.

www.ing-grad.com

4,9

SOCIETE GENERALE-SPLITSKA BANKA d.d.

www.splitskabanka.hr

4,9

TERMOPLIN d.d.

www.termoplin.com

4,9

VISOKA POSLOVNA ŠKOLA LIBERTAS

www.vps-libertas.hr

4,9

ULJANIK PLOVIDBA d.d.

www.uljaniksm.com

4,9

ATLANTIC GRUPA d.d

www.atlantic.hr

4,8

Karlovačka pivovara d.o.o.

www.karlovacko.hr

4,8

JANAF d.d.

www.janaf.hr

4,8

IBM HRVATSKA d.o.o

www.ibm.com/hr/hr/

4,8

PORSCHE LEASING d.o.o.

www.porscheleasing.com.hr

4,8

CE-ZA-R d.o.o.

www.cezar-zg.hr

4,7

PODZEMNO SKLADIŠTE PLINA d.o.o.

www.psp.hr

4,7

HUP-ZAGREB d.d.

www.hup-zagreb.hr

4,7

HT d.d.

www.tankerska.hr

4,7

Veleučilište Velika Gorica

www.vvg.hr

4,7

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Raiffeisen mirovinsko društvo za upravljanje obveznim mirovinskim fondom d.d.

www.rmf.hr

4,6

APIS IT d.o.o.

www.apis-it.hr

4,6

100

METRO Cash & Carry d.o.o.

www.metro-cc.hr

4,6

101

Visoka škola za sigurnost s pravom javnosti

www.vss.hr

4,6

102

RAIFFEISENBANK AUSTRIA d.d.

www.rba.hr

4,6

103

STUDENAC d.o.o.

www.studenac.hr

4,6

104

AGENCIJA ZA LIJEKOVE I MEDICINSKE PROIZVODE

www.almp.hr

4,6

105

GEORAD d.o.o.

www.georad.hr

4,6

106

ERSTE d.o.o., društvo za upravljanje obveznim mirovinskim fondom

www.ersteplavi.hr

4,5

107

TEHNOINVEST ZAGREB d.o.o.

www.winterhalter.hr

4,5

108

Kaming d.d.

www.kaming.hr

4,5

109

Hrvatska kontrola zračne plovidbe d.o.o.

www.crocontrol.hr

4,5

110

C.I.O.S. d.o.o.

www.cios.hr

4,4

111

Sarađen d.o.o.

www.saradjen.hr

4,4

112

Hrvatski operator tržišta energije d.o.o.

www.hrote.hr

4,4

113

ALD Automotive d.o.o.

www.aldautomotive.com

4,4

114

MARINA PUNAT d.o.o.

www.marina-punat.hr

4,4

115

OMV Hrvatska d.o.o.

www.omv.hr

4,3

116

MA. CO. T. d.o.o

www.macot.hr

4,3

117

Pioneer-sjeme d.o.o.

www.croatia.pioneer.com

4,3

118

Jamnica d.d.

www.jamnica.hr

4,3

119

Đuro Đaković Montaža - Centar za zavarivanje d.o.o.

www.argonac.hr

4,2

120

TEHNO-ZAGREB d.o.o.

www.tehno-zagreb.hr

4,2

121

HEP-Operator prijenosnog sustava d.o.o

ops.hep.hr

4,2

122

HATTRICK d.o.o.

www.hattrick.hr

4,2

123

Solana Pag d.d.

www.solana-pag.hr

4,1

124

UNIJA NOVA d.o.o.

www.unija-nova.hr

4,1

125

IMPORTANNE d.o.o.

www.importanne.hr

4,0

126

ELEKTROMODUL-PROMET d.o.o.

www.elektromodul.hr

4,0

127

SPECTRA - MEDIA d.o.o.

www.spectra-media.hr

4,0

128

ZAGORJE-TEHNOBETON d.d.

www.gpzagorje.hr

3,9

129

SN HOLDING d.d.

www.snholding.hr

3,9

130

ADRIS GRUPA d.d.

www.adris.hr

3,9

131

HERZ d.d.

www.herz.hr

3,8

132

Baker Tilly Discordia d.o.o.

www.discordia.hr

3,8

133

Poliklinika Prim. dr. PETAR NOLA

www.ordinacija-nola.hr

3,7

134

Galapagos istraživački centar d.o.o.

www.glaxosmithkline.hr

3,6

135

TRIUS d.o.o.

www.trius.hr

3,6

136

Antenal d.o.o.

www.antenal.hr

3,6

137

Poliklinika OXY

www.oxy.hr

3,5

138

MMM Agramservis d.o.o.

www.agram-yachting.hr

3,5

139

EMPORION d.o.o.

www.emporion.hr

3,2

140

Koka d.d.

www.vindija.hr

3,1

141

Vupik d.d.

www.vupik.hr

2,5

142

ANTONIO TRADE d.o.o.

www.antonio-trade.hr

2,0

143

KERUM

www.kerum.hr

1,8

Source: authors’ research.

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On the other hand, the bottom of the list make mostly sites which were in construction during testing, microsites or only have a homepage. Because of that, the respondents could not react positively, as all available information was placed on the home page with only brief contact information. We should point out that out of the 3 web sites in category D (those which only had a home page at the time of testing in May 2012), all 3 showed no improvement by October and they still exist in that form. The above discussed average mean scores are based on all tested factors. It is also interesting to observe the situation according to individual criteria and the mean scores for each of them. This is shown in Table 3. Table 3. The best mean scores according to individual tested official web site factors TESTING CRITERIA

COMPANY

WEBSITE

AVG MEAN SCORE

Home page design

Zagrebačka pivovara d.o.o.

www.ozujsko.com

6.7

Inner page design

PBZ d.d.

www.pbz.hr

6.6

Web site purpose

Globalna hrana d.o.o. Zagrebačka pivovara d.o.o.

www.mcdonalds.hr www.ozujsko.com

6.8 6.8

Purpose oriented web site design

BLITZ - CINESTAR d.o.o. NEW YORKER CROATIA d.o.o.

www.blitz-cinestar.hr www.newyorker.de/hr/

6.5 6.5

Web site visibility

Dukat d.d.

www.dukat.hr

6.6

Web site navigation

METIS d.d.

www.metis.hr

6.5

Web site search engine

Dukat d.d.

www.dukat.hr

6.6

Web site speed

Dukat d.d. PLINACRO d.o.o.

www.dukat.hr www.plinacro.hr

6.7 6.7

Influence on user distraction

KERUM

www.kerum.hr

7.0

Data timeline

BLITZ - CINESTAR d.o.o.

www.blitz-cinestar.hr

6.7

Language quality

Dukat d.d.

www.dukat.hr

6.7

Web site content scope

Dukat d.d.

www.dukat.hr

6.9

Web site content usability

TURISTHOTEL d.d.

www.zaton.hr

6.5

Ease of use

Dukat d.d.

www.dukat.hr

6.5

Total satisfaction

TURISTHOTEL d.d.

www.zaton.hr

6.7

Total satisfaction

Dukat d.d.

www.dukat.hr

6.3

Revisit probability

PBZ d.d.

www.pbz.hr

6.4

Source: authors’ research.

The best average value of 6.7 for home page design has Zagrebačka pivovara and the best inner page design has Privredna banka with a mean score of 6.6. The first place for web site purpose share Globalna hrana and Zagrebačka pivovara with the same mean score of 6.6. Blitz-Cinestar and New Yorker Croatia also share the first place for purpose oriented web site design with an average mean score of 6.5. The latter site is interesting because it is a corporate official web site within which there is a subportal of the Croatian subsidiary. This confirms the thesis that a web site can do a good job in this form. The Dukat web site has the highest scores in most factors (7). In 6 factors it sits alone at the top. It shares the first place with Plinacro (mean score 6.7) in the web site speed factor. The official web site of the company Metis is first according to web site navigation criteria with an average score of 6.5. The Kerum company has the maximum score 7 in the influence on user distraction criteria. This company sits at the bottom of the overall list with its average mean score, but is at the top according to this criteria because it's home page has no irritating elements which distract the user (it is a mostly empty home page with very little information). Blitz-Cinestar has the best web site according to the data timelines factor (mean score 6.7). The official web site of the company Turisthotel has the best position in 2 criteria: web site content usability (6.5) and total satisfaction (6.7). The Privredna banka Zagreb web site has the best score in the revisit probability factor (6.4).

2.3.4. Sample profile by business section (sector) As it was explained earlier, the whole sample was created and segmented according to the business field of the companies. Out of 10 companies in each of the 19 business fields, only those were tested which had functional web sites or subportals within corporate sites. However, in order to analyze the situation in individual fields, it was necessary to take into account those which don't have an official web site or it isn't functional. The average mean score of such examples had to be 0 as they were not analyzed. The fact that they could not be analyzed because of objective reasons should be taken into ac-

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count. The other specific visible influence was with 2 business subjects within one field that had the identical web site (they were legally connected). The average mean score for these cases was taken separately for both subjects. In this way, all 10 web sites in individual business fields had an impact on the average mean score which is shown in Table 4. Table 4. Mean scores of tested official web sites according to business fields Table 4. Mean scores of tested official web sites according to business fields BUSINESS FIELD (SECTION)

AVG MEAN SCORE

AGRICULTURE, FORESTRY AND FISHING

2,6

MINING AND QUARRYING

3,1

MANUFACTURING

5,3

ELECTRICITY, GAS, STEAM AND AIR CONDITIONING SUPPLY

3,5

WATER SUPPLY; SEWERAGE, WASTE MANAGEMENT AND REMEDIATION ACTIVITIES

2,9

CONSTRUCTION

3,5

WHOLESALE AND RETAIL TRADE; REPAIR OF MOTOR VEHICLES AND MOTORCYCLES

4,3

TRANSPORTATION AND STORAGE

5,2

ACCOMMODATION AND FOOD SERVICE ACTIVITIES

5,2

INFORMATION AND COMMUNICATION

4,3

FINANCIAL AND INSURANCE ACTIVITIES

5,5

REAL ESTATE ACTIVITIES

1,3

PROFESSIONAL, SCIENTIFIC AND TECHNICAL ACTIVITIES

2,9

ADMINISTRATIVE AND SUPPORT SERVICE ACTIVITIES

4,8

PUBLIC ADMINISTRATION AND DEFENCE; COMPULSORY SOCIAL SECURITY

2,0

EDUCATION

4,9

HUMAN HEALTH AND SOCIAL WORK ACTIVITIES

4,6

ARTS, ENTERTAINMENT AND RECREATION

3,7

OTHER SERVICE ACTIVITIES

3,7

Source: authorsâ&#x20AC;&#x2122; research.

It can be concluded that the best mean scores according to fields has field K - Financial and insurance activities with a score of 5.5 which is a reflection of their official web site quality according to business field i.e. the testing criteria satisfaction, but also of the fact that all representatives from this field have a web site. Field C - Manufacturing is very close with the mean score 5.3. The same effect is present in field L - Real estate activities with the score 1.3, but with an apparent counter-effect (6 of the subjects do not have a web site, more than half that represent this field). A clear conclusion imposes itself. When it comes to functionality and usability of web sites, there are significant differences between business fields because of the lack of official web sites, but also because of a lack of quality functionality components and usability by those companies which have sites.

CONCLUSION Out of 190 official web sites of the most profitable companies in the Republic of Croatia distributed according to business field, the research could be conducted on 143 of them. Based on the testing of 143 web sites of companies, it can be concluded that they mainly satisfy the testing criteria with an average score of 4.98 (on a scale from 1 to 7). It should be pointed out that there are differences between the individual factors in the achieved average mean scores. According to the average mean scores the highest rated factors are web site speed, influence on user distraction (inverted scale) and language quality. The lowest rated tested factors are revisit probability and recommendation probability. The situation can be more precisely depicted in the individual web site analysis. It can generally be concluded that a large number of tested business subjects have a satisfactory average mean score. All mean scores which are above 4 are in a way considered positive, since there is an overall positive attitude of the users. 124 companies i.e. 87% of the tested web sites which belong to this group represent a significant majority. Having in mind the achieved mean scores, companies whose score is 6 or above should be distinguished from the others. This score indicates outstanding official web sites which have the highest criteria satisfaction level. The group consists of 10 companies. Significant differences between average mean scores were noticed during analysis of individual business fields. There are two main reasons for this: certain companies have no official web site which has affected the average mean score in some fields, but the quality functionality components and usability, which were the focus of the testing, also had a significant impact. The best mean score according to business field has field K - Financial and insurance activities.

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REFERENCES 1.

Barnes, S. Vidgen, R. (2002) An integrative approach to the assessment of e-commerce quality, Journal of Electronic Commerce Research. 3,3, pp.114-127. (References from Journals)

Basu, A. (2002) Context-driven assessment of commercial web sites, 35th Hawaii International Conference on System Sciences. (References from Proceedings and Books)

Biloš A. (2012) Elektronički marketing poslovnih subjekata u Republici Hrvatskoj, doctoral thesis, Faculty of Economics in Osijek, J.J.Strossmayer University of Osijek (References from Other Literature)

Cao, M., Zhang. Q. (2002) Evaluating e-commerce web site design: a customer’s perspective, Decision Sciences Institute 2002 Annual Meeting, pp. 1186-1191. (References from Proceedings and Books)

Chanaron, J. (2005) Evaluating e-learning: the case of automative small-medium suppliers, 1st International Conference on e-Business and Elearning (EBEL), Amman, Jordan, pp. 13-25. (References from Proceedings and Books)

Delone, W., Mclean, E. (2003) The DeLone and McLean of information systems success: a ten-year update, Journal of Management Information Systems, pp. 9-30. (References from Journals)

Fitzpatrick, R. (2000) Additional quality factors for the World Wide Web, 2nd World Congress for Software Quality, Japan. (References from Proceedings and Books)

Fogg, B.J., Marshall, J., Laraki O., Osipovich A., Varma C., Fang N., Paul J., Rangnekar A., Shon J., Swani P., Treinen M. (2001) What makes web sites credible? a report on a large quantitative study, Computer Human Interaction. 3,1, pp. 61-68. (References from Other Literature)

Gledec, G. (2005) Evaluating web site quality, 7th Internet Users Conference (CUC2005), Croatia. (References from Proceedings and Books)

10. Hasan, L., Abuelrub, E. (2008) Assessing the Quality of Web Sites, INFOCOMP Journal of Computer Science. 7,4, pp. 11-20. (References from Journals) 11. Heimlich, J., Wang, K. (1999) Evaluating the structure of web sites, Environmental Education and Training Partnership Resource Library, Ohio State University Extension, USA. (References from Other Literature) 12. Hussin, H., Suhaimi, M., Mustafa M. (2005) ecommerce and ethical web design: applying the BBBOnline guidelines on Malaysian web sites, The International Arab Journal of Information Technology. 2,3, 218-226. (References from Journals) 13. Lim, K. (2002) Security and motivational factors of e shopping web site usage, Decision Sciences Institute 2002 Annual Meeting, pp. 611-616. (References from Proceedings and Books) 14. Lin, F., Huarng, K., Chen, Y., Lin S. (2004) Quality evaluation of web services, IEEE International Conference on e-Commerce Technology for Dynamic e-Business. (References from Proceedings and Books) 15. Liu, C., Arnett, K. (2000) Exploring the factors associated with web site success in the context of electronic commerce, Information and Management. 38, pp. 23-33. (References from Journals) 16. Madeja, N., Schoder, D. (2003) Designed for success: empirical evidence on features of corporate web sites, 36th Hawaii International Conference on System Sciences. (References from Proceedings and Books) 17. Mich, L., Franch, M., Gaio, L. (2003) Evaluating and designing web site quality, IEEE Multimedia, IEEE Computer Society, 2003. (References from Other Literature) 18. Molla, A. Licker S.P. (2001) e-commerce systems success: an attempt to extend and respecify the Delone and Maclean of IS success, Journal of Electronic Commerce Research. 2,4, pp. 131-141. (References from Journals) 19. Signore, O. (2005) A comprehensive model for web sites quality, 7th IEEE International Symposium on Web Site Evolution (WSE’05). (References from Proceedings and Books) 20. Singh, M., Fisher, J. (1999) Electronic commerce issues: a discussion of two exploratory studies, Electronic 3rd Annual Conference on Electronic Commerce, Victoria University, New Zeeland. (References from Proceedings and Books) 21. Srivihok, A. (2000) An assessment tool for electronic commerce: end user evaluation of web commerce sites, Technical Report, Faculty of Science, Kasetsart University, Bangkok, Thailand, 2000. (References from Journals) 22. Tan, F., Tung, L. (2003) Exploring web site evaluation criteria using the repertory grid technique: a web designers’ perspective, 2nd Annual Workshop on HCI Research in MIS, WA. (References from Proceedings and Books) 23. Zhang, P., Dran, G. (2001) Expectations and ranking of web site quality features: results of two studies on user perceptions, 34th Hawaii International Conference on System Sciences. (References from Proceedings and Books) DETAILS ABOUT AUTHORS: ANTUN BILOŠ PHD, ASSISTANT UNIVERSITY OF J.J STROSSMAYER FACULTY OF ECONOMICS IN OSIJEK GAJEV TRG 7, 31000 OSIJEK, CROATIA abilos@efos.hr IVAN RUŽIĆ PHD, AGROKOR WINES ZAGREB, CROATIA ivan.ruzic@agrokorvina.hr IVAN KELIĆ UNIV.SPEC.OEC., ASSISTANT UNIVERSITY OF J.J STROSSMAYER FACULTY OF ECONOMICS IN OSIJEK GAJEV TRG 7, 31000 OSIJEK, CROATIA ikelic@efos.hr

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IT-FACILITATED INDUSTRIES AND COMPETITIVE SPACES: THE DANCE OF THE ELEPHANTS MARK KRIGER ALMA LEORA CULÉN

ABSTRACT

Something very interesting is happening in the information-technology (IT) facilitated global economy: companies in industries that were previously quite separate are now rapidly converging on the same competitive spaces. This is resulting in a ‘dance of the elephants – firms such as Amazon, Facebook, Google, eBay, Apple and Microsoft, that did not even exist 30 years ago or were a small start-ups and quite agile, have become large and increasingly hobbled in their agility by the sheer size and scope of their products and/or services. The intent of this paper is two- fold: (1) to try to identify the forces behind the convergence of these once largely noncompeting firms (with some obvious exceptions in some segments of their businesses such as Apple and Microsoft in operating systems), and (2) to show how developments in the field of interaction design, and in particular, design thinking are facilitating or hindering this convergence process. KEYWORDS: Exploration Strategies, Competitive Spaces, IT-intensive Industries, Industry Convergence, Technology Design, Design Thinking

1. INTRODUCTION Information technology is one of the key enablers of renewed and sustainable economic growth. It has become an essential element of the infrastructure of competitive economies. IT no longer evokes images of supercomputers, or computers for that matter, but rather images of ubiquitous server farms and pervasive computing. The vision of Brynjolfsson and Hitt (Brynjolfsson & Hitt, 2000) has come true: “As computers become cheaper and more powerful, the business value of computers is limited less by computational capability and more by the ability of managers to invent new processes, procedures and organizational structures that leverage this capability. As complementary innovations continue to develop, the applications of computers will expand well beyond computation for the foreseeable future.” Computational ability is indeed something very few think of these days. The relation between economic growth of a nation and how close the nation is to the technological frontier was clear for a while. In (Acemoglu, Aghion, & Zilibotti, 2003), the authors have built on this relationship and analyzed a range of issues related to technological progress and economic growth. They conclude that economies that are far from the technological frontier, favor investment-based growth strategies, while closer to the frontier, the value of innovation based strategies increases. Cairncross (Cairncross, 2001) takes a different road, claiming that technology may accomplish one thing globally: it may reduce distances and enable truly global businesses, and ultimately, a true global economy. Technologies are, and will, continually evolve and improve, but they, according to Cairncross, were already at the beginning of this century good enough to enable speculations around their potential to influence whole economies and societies. The world is now networked, at least, physical and fiber-optic cables enabling digital data transmissions have been laid out globally. The digital divide at the very start of the 21st century was no longer based on access to the World Wide Web and, thus, to the information and communication technologies. Yet, some authors have claimed, see (Gurstein, 2003; Warschauer, 2002), that a more sophisticated divide, based on social inclusion and effective use of digital technology is still very real. While that remains true today, we also see a globalised economy finally beginning to emerge. From our standpoint, we observe that something very interesting is happening in the information-technology (IT) facilitated global economy: companies in industries that were previously quite separate are now rapidly converging on the same competitive spaces. In this paper, we try to identify the forces behind this convergence of these once largely noncompeting firms. In particular, we discuss the role of design thinking as one factor in this convergence. Since this work is produced by authors working respectively in the fields of strategy and human-computer interaction, we have encountered many of the problems typical for multidisciplinary research. Multidisciplinary discussions are difficult, and this paper is a testimony to that fact. Our views in this paper are not yet entirely integrated and our discourse and methods are very different. Yet, some new insights have emerged and we hope that they will be of interest to the wider multidisciplinary community. The paper is structured as follows: in section 2, we present thoughts on how design of technology and design thinking are

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important for IT-facilitated industries. In section 3, we look into factors that influence long-term success of such industries and provide some examples using large now well-known companies including Apple, Google, Facebook, eBay, Amazon and Microsoft – firms that dominate information, media, knowledge and other digital spaces. In section 4, we consider what happens when micro and macro-economic forces collide within the IT-driven global economy. Finally, we provide our conclusion.

2. DESIGN, DESIGN THINKING AND THE COMPETETIVE ADVANTAGE By investing in human capital – a term which refers to the knowledge and the competencies of each employee in a comHuman-computer interaction is no longer a field whose main concern is the interaction between a human and a computer, with the goal of making a better fit between the two (Sharp, Rogers, & Preece, 2007). It is no longer simply about humans and computers; it includes interactions with ubiquitous and pervasive technologies. Ubiquitous technologies include all mobile and personal computing, such as tablets and smart phones. Pervasive, embedded sensor, technologies enable interactions with the environment, e.g. smart cards, light and sound sensors etc. Thus, in computer science and engineering, as well as in design-oriented disciplines such as the arts, architecture and the like, the field that is concerned with shaping digital technologies for the use by people, is referred to as interaction design. Interaction design focuses on a broader aspect of interaction, including the design of digital products, services, environments, ecologies and systems. As a discipline, it is relevant for all IT-facilitated companies, although they may differ in how it is applied within the company. For example, how Apple Inc. and Microsoft design their operating systems is in a stark contrast: while Microsoft makes good use of users’ feedback and users’ experience, Apple is secretive about how their products are tested and improved (Jobs, Press, & Press, 2011). Personal computers, laptops and mobile devices are no longer novel technologies. People have learned how to operate them and are harnessing the power that these technologies give them. We are all becoming savvy users of digital technologies and to increasing degrees also demanding users. It is now not enough to own a piece of technology, it needs to be “cool” (Culén & Gasparini, 2012; Holtzblatt, 2011). The “cool” was suggested, see (Holtzblatt, Rondeau, & Holtzblatt, 2010), as a driver for design of innovative products. It implies that such innovative products provide great design, great user experience and great opportunities for creative usage. However, with this approach, the technology is placed in the center. In (Wagner & Compton, 2012), the authors are looking the other way, placing people in the center and asking the question: How can we make people be more creative and innovative? A natural follow up question becomes: can creativity be learned? The later question is answered positively and authors state: “The DNA of innovators might be considered a set of skills that are essential elements in design thinking”. Design thinking, see (T. Brown & others, 2008), refers to a way of thinking which requires combination of empathy for the context of a problem, creativity in the generation of insights and solutions to the problem, and capacity to analyze and adapt solutions to the situated context. Design thinking has recently been connected to the growth of innovation based economy (Tim Brown, 2009), design of leadership (Maeda & Bermont, 2011), knowledge (Rylander, 2009), and to the gain of a competitive advantage (Martin, 2009). The later explicates that in order to become a design thinker one needs a stance, tools and experience that facilitate design thinking. The stance is related to one’s worldview and the role one has in it, tools are the mental models used to understand the world and organize thinking, while experience is needed for building of skills and sensitivities. In agreement with (Wagner & Compton, 2012), Martin states that everyone can work on becoming a design thinker, a keen observer and finder of opportunities for design that could help reduce complexities of large, global problems, often referred to as wicked problems. Kolko, see (Kolko & Austin Center for Design, 2012), provides an explicit relationship between design thinking and wicked problems : “A wicked problem is a social or cultural problem that is difficult or impossible to solve for as many as four reasons: incomplete or contradictory knowledge, the number of people and opinions involved, the large economic burden, and the interconnected nature of these problems with other problems. Poverty is linked with education, nutrition with poverty, the economy with nutrition, and so on. … These problems can be mitigated through the process of design, which is an intellectual approach that emphasizes empathy, abductive reasoning, and rapid prototyping.” Design thinking is also seen as fundamental for successfully addressing issues of sustainability (Bonn & Fisher, 2011; Dourish, 2010; Spangenberg, Fuad-Luke, & Blincoe, 2010). The sustainable technology design has become one of the major issues in the fields of interaction design. On one hand, one should design innovative technology; on the other hand, much of this activity is actually having negative influences on the environment through rapid prototyping and unnecessary uses of resources, with all the consequences this may have, needed for design activities. Researchers within interaction design are trying to understand why we keep some things and discard others (Odom, Pierce, Stolterman, & Blevis, 2009), and asking questions such as: do we need all this technology? (Baumer & Silberman, 2011). Clearly, the “for profit” orientation of today’s economy is not the best motivator for sustainable design. It is here that creation of more enduring values than profit is of large importance.

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In conclusion of this section, we point out that some lines between interaction design, design thinking, innovation, leadership, knowledge and values have been established. This presentation is drawn only as a very broad outline, but hopefully it is sufficient to establish design thinking as an emerging factor in considerations of long term health of corporations.

3. FACTORS BEHIND GAINING LONG TERM COMPETETIVE ADVANTAGE uncertainty in the social and economic environments, increasing globalization and evolution in capability to use digital technologies effectively, it is of importance to consider factors contributing to the long-term health of corporations. Innovation, leadership, knowledge work, vision and values are all known to be factors influencing the long term health and effectiveness of corporations (S. L. Brown & Eisenhardt, 1997; Burgelman, 2002; Kriger & Hanson, 1999; Larwood, Falbe, Kriger, & Miesing, 1995). Todayâ&#x20AC;&#x2122;s most influential IT players are those providing ubiquitous technologies enabling anytime, anywhere access to information and communication. Apple and other smart phone makers e.g. Samsung, HTC, Nokia on one end, operating systems producers e.g. Apple, Microsoft, Google (android) and Google, Skype, Facebook on the other, are examples of IT-companies who are major players. Based on the discussion presented in Section 2, we propose design thinking as an important new factor for individual players to achieve a long-term competitive advantage. Figure 1 is a diagram showing the factors that are significant in achieving a long-term competitive advantage. The factors are not mutually exclusive; creative leadership may already be using design thinking, innovative solutions may be perceived as an end result of design thinking etc. The list not complete either, but we perceive the five factors provided bellow as the most important ones. Figure 1: Technology, design thinking and open innovation have become important factors, alongside leadership, knowledge, values and others, in obtaining a long-term business advantage.

Source: Kriger & CulĂŠn

Some of these major IT-players, Amazon, Facebook, Google, eBay, Apple and Microsoft, did not even exist 30 years ago or were a small start-ups and quite agile. With time, they become large and increasingly hobbled in their agility by the sheer size and scope of their products and/or services. Until recently, these companies have been largely noncompeting, each dominating some digital environment. For example, Apple and Microsoft were developing operating systems, occupying digital presentation space (p-space). Google, started with search and advertising, thus occupying information space (ispace). Now, through its acquisition of the android operating system, Google is also moving into p-space. Facebook, as the largest social networking site, is now encountering competition from Google and Twitter in the social arena space (s-space). Figure 2 shows some of the salient competitive spaces.

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Figure 2. IT-facilitated industries are seeking the competitive advantage by moving into variety of spaces, thus competing in the arenas they do not dominate.

Source: Kriger &Culén

Increasingly we observe a collision taking place between the aforementioned firms and the overall macro-economic forces that are needed to create a healthy global economy. This is evident in the recently stated intention of Facebook, Google and other key IT players to get a smart phone into the hands of every citizen of the world. The financial advantages for Facebook, Google and Apple are obvious. However, there are currently over 4 billion people on the planet who do not have adequate water, shelter or food! To give them smart phones before such basic necessities is to create a potential moral and social tragedy. Some lessons pertinent to this goal of key IT-players could be learned from “one laptop per child” (OLPC) project, see (Kraemer, Dedrick, & Sharma, 2009), where various factors relevant for that project are discussed. Authors state: “The vision is being overwhelmed by the reality of business, politics, logistics, and competing interests worldwide.” Further, they note: “However, it is also clear that the PC industry cannot profitably reach millions of the poorest children, so the OLPC objectives might never be achieved through the commercial market alone.” Considering the historical development of the IT-facilitated industries and looking at the current situation, we observe currently competing forces among e-businesses at micro-economic level. At the same time, at macro-economic level, large and complex issues such as climate changes and hard resources e.g. water and food compete for attention of states and nations, see Figure 3. In the light of the above, we raise a question of what may happen when macro-economic forces collide with IT-driven world economy. Micro-economic competitive forces seem to be creating opportunities that are obvious for incumbent IT players such as Google, Amazon, Apple, and Microsoft to invest in and to exploit. What is not so obvious is how the world’s riches should be spent to create opportunities for all and for a decent standard of living of for the majority of the people on this planet, whether in the developed or the developing world.

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Figure 3: What happens when micro and macro-economics forces collide with the IT-driven world economy?

Source: Kriger & Culén

The moral dilemmas facing the executives and shareholders of the major incumbent IT players, the ‘elephants’, is enormous. These dilemmas are further exacerbated by the increase of competition and social and technological aspects of ‘clockspeed’ that are arising on numerous levels of social and technological order. These factors arose in force beginning in the late 1990s but remain even more important to address in today’s IT-facilitated global economy (Cairncross, 2001; Christensen, 1997; Gleick, 1999; Nalebuff & Brandenburger, 1996; Veliyath & D’Aveni, 1996).

CONCLUSION In conclusion, awareness of the increasing convergence of IT industries and their relevance to macro economy is crucial. We believe that design thinking provides a major opportunity to apply original ways to address the social, economic, political, environmental, technological and legal challenges facing the under-classes of the world. Only truly creative out-of-thebox thinking by the ‘creative class’ will result in the possibility of adequate solutions for the long term of both society and individuals in all spheres. LITERATURE Acemoglu, D., Aghion, P., & Zilibotti, F. (2003). Vertical integration and distance to frontier. Journal of the European Economic Association, 1(2-3), pp. 630–638. 2. Baumer, E. P., & Silberman, M. (2011). When the implication is not to design (technology). In Proceedings of the SIGCHI Conference on Human Factors in Computing Systems, pp. 2271–2274. 3. Bonn, I., & Fisher, J. (2011). Sustainability: the missing ingredient in strategy. Journal of Business Strategy, 32(1), pp. 5–14. 4. Brown, S. L., & Eisenhardt, K. M. (1997). The Art of Continuous Change: Linking Complexity Theory and Time-Paced Evolution in Relentlessly Shifting Organizations. Administrative Science Quarterly, 42(1), pp. 1–34. 5. Brown, T., & others. (2008). Design thinking. Harvard Business Review, 86(6), pp. 84. 6. Brown, Tim. (2009). Change by design: how design thinking can transform organizations and inspire innovation. New York, NY: HarperCollins Publishers. 7. Brynjolfsson, E., & Hitt, L. M. (2000). Beyond Computation: Information Technology, Organizational Transformation and Business Performance. Journal of Economic Perspectives, 14(4), pp. 23–48. 8. Burgelman, R. A. (2002). Strategy is destiny: how strategy-making shapes a company’s future. New York: Free Press. 9. Cairncross, F. (2001). The death of distance: how the communications revolution is changing our lives. Boston: Harvard Business School Press. 10. Christensen, C. M., & Raynor, M. E. (2010). The innovator’s solution: creating and sustaining successful growth. Boston, Mass: Harvard Business School Press. 11. Culén, A. L., & Gasparini, A. (2012). Situated Techno-Cools: factors that contribute to making technology cool and the study case of iPad in education. PsycNology Journal, 10(2), pp. 117–139. 12. Dourish, P. (2010). HCI and environmental sustainability: the politics of design and the design of politics. In Proceedings of the 8th ACM Conference on Designing Interactive Systems, pp. 1–10. 1.

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13. Gleick, J. (1999). Faster: the acceleration of just about everything. New York: Pantheon Books. 14. Gurstein, M. (2003, December 1). Effective use. First Monday, ISSN 1396-0466. text. Retrieved February 10, 2013, from http://ojphi.org/htbin/ cgiwrap/bin/ojs/index.php/fm/article/ viewArticle/1107/1027 15. Holtzblatt, K. (2011). What makes things cool?: intentional design for innovation. interactions, 18(6), pp. 40–47. 16. Holtzblatt, K., Rondeau, D. B., & Holtzblatt, L. (2010). Understanding “cool.” In Proceedings of the 28th of the international conference extended abstracts on Human factors in computing systems pp. 3159–3162. 17. Jobs, Q. by S., Press, C. S. V., & Press, S. by E. of C. S. V. (2011). Steve Jobs: His Own Words and Wisdom (Steve Jobs Biography). Cupertino Silicon Valley Press. 18. Kolko, J., & Austin Center for Design. (2012). Wicked problems problems worth solving. Austin, Texas: Ac4d. 19. Kraemer, K.L., Dedrick, J., Sharma, P., 2009. One laptop per child: vision vs. reality. Commun. ACM 52, pp. 66-73. 20. Kriger, M. P., & Hanson, B. J. (1999). A value-based paradigm for creating truly healthy organizations. Journal of Organizational Change Management, 12(4), pp. 302–317. 21. Larwood, L., Falbe, C. M., Kriger, M. P., & Miesing, P. (1995). Structure And Meaning Of Organizational Vision. Academy of Management Journal, 38(3), pp. 740–769. 22. Maeda, J., & Bermont, B. (2011). Redesigning leadership. Cambridge, Mass.: MIT Press. 23. Martin, R. L. (2009). The Design of Business: Why Design Thinking is the Next Competitive Advantage. Harvard Business Press. 24. Nalebuff BJ, Brandenburger AJ. 1996. Co-opetition. HarperCollinsBusiness: London. 25. Odom, W., Pierce, J., Stolterman, E., & Blevis, E. (2009). Understanding why we preserve some things and discard others in the context of interaction design. In Proceedings of the SIGCHI Conference on Human Factors in Computing Systems, pp. 1053–1062. 26. Rylander, A. (2009). Design thinking as knowledge work: Epistemological foundations and practical implications. Design Management Journal, 4(1), pp. 7–19. 27. Sharp, H., Rogers, Y., & Preece, J. (2007). Interaction Design: Beyond Human-Computer Interaction (2nd ed.). Wiley. 28. Spangenberg, J. H., Fuad-Luke, A., & Blincoe, K. (2010). Design for Sustainability (DfS): the interface of sustainable production and consumption. Journal of Cleaner Production, 18(15), pp. 1485–1493. 29. Veliyath, R., & D’Aveni, R. A. (1996). Hypercompetition: Managing the Dynamics of Strategic Maneuvering. The Academy of Management Review, 21(1), pp. 29–294. 30. Wagner, T., & Compton, R. A. (2012). Creating innovators: the making of young people who will change the world. New York: Scribner. 31. Warschauer, M. (2002, July 1). Reconceptualizing the digital divide. First Monday, ISSN 1396-0466. text. Retrieved February 10, 2013, from http:// firstmonday.org/htbin/cgiwrap/ bin/ojs/index.php/fm/article/viewArticle/967/888 DETAILS ABOUT AUTHORS: MARK KRIGER PROFESSOR, STRATEGIC MANAGEMENT NORWEGIAN SCHOOL OF MANAGEMENT BI N-0442 OSLO, NORWAY mark.kriger@bi.no ALMA L. CULÉN ASSOCIATE PROFESSOR, DESIGN OF INFORMATION SYSTEMS DEPARTMENT OF INFORMATICS, UNIVERSITY OF OSLO N-0373 OSLO, NORWAY almira@ifi.uio.no

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A MULTIPLE-FARE MULTI-PERIOD AIRLINE REVENUE MANAGEMENT MODEL SANG-WON KIM

ABSTRACT

Airlines sell similar seats on an air flight at different fares by revenue management disciplines, and the demand for any given fare class depends on the demand for the other fare classes. Demand is affected by customer buying behaviors: 1) when customers buy other fare class tickets if the originally requested fare were unavailable and 2) when customers delay a purchase until some point in the future and wait in anticipation of reopening of the lower fare. Customer buying behaviors have a considerable profit implication, which was ignored in many earlier studies. We consider an extension of the two-fare, two-period seat inventory allocation model to multiple-period, multi-fare airline seat inventory allocation decisions with customer buying behaviors. We develop heuristic models for multiple-period, multi-fare airline seat inventory allocation and an efficient computer algorithm to reduce computation time. For comparisons, numerical results are shown along with those from the expected marginal seat revenue approach, an exhaustive search and a simulation approach. KEYWORDS: Airline Revenue Management, Optimization, Seat Inventory Allocations, Multi-fare Model, Multi-period Model, Heuristics

1. INTRODUCTION Revenue management (RM) has improved the profitability of service industries such as airlines. Seat inventory control is concerned with decisions on allocating finite flight seat capacity across a set of fare classes. The first published research by Littlewood (1972) provided an analysis of a two-fare model of seat inventory allocation on a single flight leg. Belobaba (1989) developed a heuristic approach called, expected marginal seat revenue (EMSR), in which Littlewood's (1972) rule is applied sequentially in increasing fare order for more than two fare classes. Belobaba also developed a variant of the EMSR method, known as EMSR-b (Belobaba, 1992). The EMSR-b heuristic model provided seat protection levels closer to optimal values than those from the EMSR, which are calculated jointly for all high fare classes relative to a given low fare class based on a weighted combination of all classes above the one for which a booking limit is calculated. Methods for obtaining optimal booking limits with more than two fare classes were provided in Curry (1990), Brumelle and McGill (1993), Wollmer (1992) and Robinson (1995), in which these authors proposed different algorithms to find the optimal allocation. Curry (1990) used continuous demand distributions to find the optimal booking limits for a network of flights, providing an approach to apply his method to origin-destination itineraries instead of to single flight legs. Brumelle and McGill (1993) provided a modified EMSR for nested seat allocation problems. They addressed the problem of determining optimal booking policies for multiple fare classes that shared the same seating pool on one leg of a flight when seats were booked in a nested fashion and when lower fare classes were booked before higher ones. Wollmer (1992) used discrete demands and provided a method for computing both the optimal protection level and the expected revenue. He also used recursive summation instead of integration to derive the optimality condition. Robinson (1995) developed an optimal multi-period approach by using Monte Carlo integration, relaxing the condition that low-fare customers arrived before high-fare ones and assuming that demands across periods were independent of each other. All of these studies above were performed independently, and the demands between fare classes were assumed to be independent under single-period settings. However, demands are actually dependent; many flexible travelers who are willing to pay full price will take a full-fare seat if discount fares are unavailable. This type of customer behavior is called diversion (Pfeifer, 1989). Brumelle et al. (1990) derived optimality conditions with two dependent booking classes by assuming that the demands were independent initially and by considering the effect of diversion. Pfeifer (1989) examined a single-period, two-fare airline seat allocation problem. He assumed that a customer might buy a more expensive ticket if less expensive tickets were not available. Bodily and Weatherford (1995) developed a decision rule for the airline seat inventory allocation problem with customer diversion. From Bodily and Weatherford (1995), Weatherford (1996) developed a heuristic algorithm with a generic decision rule for general perishable asset revenue management models. Weatherford, Bodily and Pfeifer (1993) developed Bayesian models for airline revenue management problems with customer diversion by using simulations. A single-period model yields valuable implications for managers. However, revenue management models that can decide perishable inventory allocations for several periods are desirable and advantageous. With respect to multi-period models in the general operations management area, inter-temporal substitution describes delaying a purchase until some point in the future. We will use the term strategic customer behavior to refer to inter-temporal substitution for airline seat inventory allocations. The EMSR heuristic model can be repeatedly applied to allow for multiple periods. The traditional revenue management literature has mostly neglected this issue. In the last few years, however,

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relevant research on consumersâ&#x20AC;&#x2122; strategic behavior issues has been published e.g., Lai et al. (2010), Su (2010), Zhao et al. (2012-b), Li and Tang (2012), Vaggen et al. (2011). Many studies of airline seat inventory allocation assume that demand is realized in sales or permanently lost, and that there is no opportunity for customers to wait for future purchasing opportunities. However, customers are becoming more familiar with the pricing and booking structures employed by airline companies, and their buying behavior is becoming more complex. Customers may postpone their purchase decisions in anticipation of an offer of the originally requested fare ticket in the future if they cannot currently buy the tickets at the originally requested fare. Therefore, diversion and strategic customer behavior have important profit implications for airline seat inventory allocation. Anderson and Wilson (2003) presented a simulation study for multi-period seat inventory allocation problems with diversion and strategic customer behavior, in which protection levels were set by EMSR. Extending the work of Sen and Zhang (1999), Wilson et al. (2006) developed a two-fare, two-period seat inventory allocation model that considers diversion and strategic customer behavior; strategic customer behavior is specifically denoted for situations in which low-fare customers postpone their purchase decisions because they anticipate a reopening of a lower fare in the next period. Wilson et al. (2006) generates optimal booking limit using an algorithm which has a dynamic-program-like framework. Though Wilson et al.â&#x20AC;&#x2122;s (2006) work considers both strategic customer behavior and diversion and provides a theoretical solution procedure for two-fare, two-period problems, and finding optimal solutions takes considerable time. The computational complexity of their algorithm when extended to multiple-fare problems increases exponentially. For operations research problem solving, Khouja et al. (1996), Sen and Zhang (1999), Tang and Yin (2007) and Zhao et al. (2012-a) considered substitutability, which was equivalent to diversion in the airline revenue management literature. Sen and Zhang (1999) considered a newsboy problem with diversion, which can be applied to airline seat inventory allocations. Diversion was modeled by assuming that a fixed portion of the unsatisfied lower-fare demand would join the higher-fare demand in this research. On the basis of a continuous demand function, Sen and Zhang (1999) provided analytic solutions along with numerical analysis for a single period problem. However, extending their work using continuous demand functions to multiple-fare-class and multi-period problems requires complex time-consuming calculations. In this study, we consider a heuristic model for solving multi-fare multi-period problems, which is an extension of Wilson et al. (2006), and develop a heuristic algorithm for implementing the heuristic model, in which demands are realized sequentially. The purpose of this study is to extend the two-fare, two-period airline seat inventory allocations to larger problems and to develop heuristic algorithms that require less time-consuming computation. We investigate the impact of diversion and strategic customer behavior on optimal solutions and total expected revenues. For comparisons via numerical examples, we solve three-fare-class, three-period problems using the heuristic approach. The numerical results of the heuristic models are compared with those obtained from EMSR, an exhaustive search and a simulation approach.

2. MATHEMATICAL MODEL Throughout the paper, we use the following notations.

C: capacity of total seat at the beginning of period 1 c: remaining capacity of total seat at the beginning of period 2 c': remaining capacity of total seat at the beginning of period 3 rj: unit revenue from fare class j dij: fraction of diversion customers who cannot buy fare class j will buy fare class j+1 in period i wij: fraction of waiting customers who cannot buy the lowest fare class will wait for the next period reopening of the same class in period i Dij: demand for fare class j in period i D*ij: sales for fare class j in period i fij(Dij): p.d.f. of Dij Fij(Dij): p.d.f. of Dij lij: booking limit for fare class j in period i E(Dij): expected demand for fare class j in period i E(D*ij ): expected sales for fare class j in period i ER2(l21(c), l22(c), l23(c),... l2, n-1(c)): expected revenue in period 2 without waiting customers ER2(l21(c, l11), l22(c, l11), l23(c, l11),... l2,n-1(c, l11)|w): expected revenue in period 2 with waiting customers and waiting fraction w

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2.1. The first heuristic model: single-period, multi-fare model We first extend the basic two-fare model to a multi-fare model in a single-period using discrete demand. We decide the booking limit for each fare class to maximize the total expected revenues and assume that a fraction of customers who cannot buy a less expensive ticket will purchase a more expensive ticket. Because customer buying behavior is far more complex in a multi-fare problem, the mathematical expression will be much more complex. The sales in any given class depends recursively on the sales in all lower-fare classes. Therefore, we restrict our focus to a simple model; we assume that, if customers who initially request the lowest fare cannot currently buy the lowest fare, a fraction of them will buy only the second-lowest fares. As for unsatisfied customers who initially request the second-lowest fare and customers diverting from the lowest fare, if they cannot buy a ticket at the second-lowest fare, a portion of them will buy only the third-lowest fares, and so on. Therefore, if customers who initially request the second-highest fare and the customers diverting from the third-highest fare class cannot buy the second-highest fare, a subset will buy a ticket at only the highest fare. In this study, it is assumed that the demands are discrete. are initially defined as continuous variables and redefined hereafter as integer-valued discrete random variables with corresponding discrete probability functions P(D11), P(D12), P(D13), ..., P(D1n), where P(Dij ) is defined as follows.

P(Dij ) = Fij (Dij + 0.5) â&#x2C6;&#x2019; Fij (Dij â&#x2C6;&#x2019; 0.5) Let n be the number of fare classes and l11, l12, l13, ... , and l1, n-1 be the booking limits for each n-1 fare class from the lowest. The capacity at the beginning is C, and the fare class j is ordered from the lowest to the highest fare. Without loss of generality, we assume that the per-unit selling price or fare in class j is rj with r1< r2< rj<...< rn; i.e. rn is the most expensive fare while r1 is the lowest possible fare. The first arriving demand in any period is class 1 or the lowest-class fare. The actual sales in each fare class in period 1, D*11, D*12, D*13, ... , D*ln are illustrated in Appendix. Let ER1(l11, l12, l13,... l1, n-1, C) be the expected revenue of the one-period model. The total expected revenue is then expressed as:

where the expected sales are:

[1]

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For the single-period model, we easily obtain optimal numerical solutions by conducting an exhaustive search for a three-fare problem. However, it is time-consuming to obtain optimal solutions even for the single-period model for a relatively large n. We suggest an alternative method of obtaining heuristic solutions for single-period, multi-fare models. For the single-period, two-fare problem, the optimal booking limit is the smallest value of l11 for which:

where

If we increase the booking limit from l11 to l11+1, where l11 is increasing from 0, the additional gain from the expected revenue from the saver fare increases, and that from the full fare decreases probabilistically because we lose capacity for the full fare and have fewer diverting consumers. We obtain the optimal l11 to maximize the expected revenue. We can use this marginal approach with demand aggregation to obtain heuristic solutions when n is large, e.g

2.2. The second heuristic model: Extension to more-than-two-period models Let l21(c), l22(c), l23(c),... l2, n-1(c) be the booking limits in period 2 for each fare (from the lowest) where the remaining capacity is c at the end of period 1, and let ER2(l21(c), l22(c), l23(c),... l2, n-1(c)) be the corresponding expected revenue in period 2. If D11 ≤ l11, then there are no waiting customers from period 1 (a case of uncensored demand), and the optimal booking limit in period 2 is affected only by the remaining capacity at the end of period 1. However, in the case of D11 > l11, there are waiting customers. Let l21(c, l11), l22(c, l11), l23(c, l11),... l2, n-1(c, l11) be the booking limits in period 2, where the remaining capacity is c at the end of period 1 and there are waiting customers from period 1 (a case of censored demand). ER2(l21(c, l11), l22(c, l11), l23(c, l11),... l2,n-1(c, l11)|w) is the corresponding expected revenue at a given c, and l11 in period 2 with booking limits l21(c, l11), l22(c, l11), l23(c, l11),... l2, n-1(c, l11) and waiting customers with a fraction, w1. Then the expected revenue obtained from n fares during multiple periods is:

[2]

The total expected revenue of period 1 can be calculated in (1), which is a part of total expected revenue (2). For solving more-than-two-period problems, by conducting an exhaustive search, it requires a great deal of time. For the case of uncensored demand in period 2, the expected revenue can be obtained similarly. For the cenored demand case, the ac-

ˆ be the original demand tual demand in period 2 is the original demand plus the waiting customers from period 1. Let D 21 ˆ = D + w (D − l ) Then the total for the lowest fare in period 2 plus the customers waiting from period 1 (i.e., D 21 21 1 11 11 expected revenue for the censored demand case where there are waiting customers in period 2 is:

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[3]

where the expected sales Z1 to Z7 are defined as follows:

For the case of censored demand in period 2, ER2(l21(c, l11), l22(c, l11), l23(c, l11),... l2,n-1(c, l11)|w) is calculated in (3) because the demand for the lowest-fare in period 2 has changed on account of the waiting customers from period 1. For example, for the two-period, two-fare problem, the optimal booking limit is the smallest value of l11, for which:

where ERT(.) is the total expected revenue from both periods:

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where We, thus, obtain the optimal booking limits for the first period to maximize the total expected revenue. For more-thanthree-period problems, we obtain heuristic solutions instead of optimal booking limits via demand aggregation with averaged prices. The averaged price is weighted by the mean demands:

2.3. Numerical Examples We evaluate the applicability of the two heuristic algorithms using computational experiments. The test results are compared with solutions obtained by EMSR, an exhaustive search, a simulation approach. For single-period problems and multi-period problems, (for the sample problems with same parameters) comparative solutions are obtained by simulation and an exhaustive search. We, thus, gauge heuristic accuracy through these comparisons, and running time to obtain those solutions. We test the first heuristic model and consider a three-fare problem for which each class is designated as full, saver, and super-saver, from the highest to the lowest fare. The unit revenues for the three fare classes are 1, 2 and 3. The original demand, which has a continuous demand distribution, is assumed to follow a normal distribution with a mean of 15 and a standard deviation of 3 for each fare class in each period. We perform simulations by considering different period situations. The software program @Risk was used to run the simulations on a personal computer with a Pentium quad-core processor. For given parameters, multiple simulations were performed, and each run was performed for a large number of iterations (10,000) to ensure that steady state results were obtained. Table 1 summarizes the computational results of the single-period model, and the heuristic results are compared with those of the exhaustive search and simulation results. In the tables, D.F represents the fraction of diversion, whose range is 0.1 (10%) to 0.4 (40%). If D.F. is 0.1, 10% of the customers who initially request but cannot buy a ticket at the super-saver fare buy a ticket at the saver fare. In addition, 10% of the customers who initially request but cannot buy a ticket at the saver-fare buy one at the full fare. These customers (10%) include the customers diverting from the super-saver class. The booking limits calculated by EMSR are 8.98 for the super-saver class and 26.31 for the saver class when the initial capacity is 40. As the fraction of diversion increases, the optimal booking limits of the heuristic algorithm decrease from 7 to 0 for the saver fare, 25 to 17 for the super saver fare, and they decrease more than those calculated through an exhaustive search and simulation. The difference between the solutions produced by the heuristic approach and exhaustive search increases as D.F. increases. The expected revenues obtained by the heuristic algorithm, an exhaustive search, and simulation are very similar in the single-period model. Table 1. Numerical results of a single-period, three-fare problem (capacity = 40) Inputs

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Demand

Unit revenue

Full

N(15,3)

Saver

N(15,3)

S. Saver

N(15,3)

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Optimal booking limits Class

EMSR

Heuristic*

Exhaustive Search

Simulation

D.F.1

Saver

26.31

0.12

S. Saver3

8.98

0.14

Saver

26.31

0.2

S. Saver

8.98

0.2

Saver

26.31

0.3

S. Saver

8.98

0.3

Saver

26.31

0.4

S. Saver

8.98

0.4

Full

diversion fraction diversion fraction from saver to full (= d12) 3 super-saver fare class 4 diversion fraction from super-saver to saver (= d11) * This model uses demand aggregation and d11 = d12 1 2

Table 2 presents the total expected revenue and optimal booking limits produced by the heuristic algorithm for the two-period, three-fare problem, and Table 3 presents the optimal results for the three-period, three-fare problem, which are extensions for the two-fare, two-period models in Wilson et al. (2006). Comparative solutions are obtained by simulation and exhaustive search. In both tables, W.F. represents the fraction of customers waiting, for which the range is 0.1 (10%) to 0.4 (40%). If W.F. is 0.1, 10% of the customers who initially request a ticket at the super-saver fare in period 1 and cannot buy one at that fare will wait until a super-saver fare is offered again in period 2. For any D.F. and W.F. in either table, the optimal booking limits for the super saver fare in period 1 are 0. Significant differences exist between the heuristic solutions and EMSR solutions. If no strategic customer behavior or diversion is assumed, then EMSR would suggest a booking limit (for the super saver fare) of 13.56 and 21.26, and a booking limit of 46.32 and 70.29 for the saver fare, respectively. However, less significant differences arise among heuristic solutions, exhaustive search solutions and the results of simulations. Because of demand aggregation, the differences in the optimal booking limits between the heuristic algorithm and exhaustive search (or simulation approach) tend to increase as the fraction of diversion increases. The fraction of diversion has a greater effect than does the fraction of waiting on the optimal booking limits. Consequently, as the problems becomes larger (for more-than-three-fare problems), the differences will increase. The expected revenues obtained by the exhaustive search and simulation are similar, and the optimal booking limits by the exhaustive search and simulation are nearly the same. In table 3, it takes a few days time for finding the optimal solutions through the computational procedure by exhaustive search (The optimal solutions and the computational time by exhaustive search do not display). Our heuristic algorithm does not require a long computation time to obtain heuristic solutions. The total computation time to obtain the heuristic solutions for each example is shown in Table 1, 2 and 3. If we use exhaustive search approach, then the computation time to obtain optimums will increase exponentially. Table 2. Numerical results of a two-period, three-fare problem (capacity = 75) Inputs

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Class

Demand in Period 1

Demand in Period 2

Unit Fare

Full

N(15,3)

Saver

N(15,3)

S. Saver

N(15,3)

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EMSR

Heuristic*

Exhaustive Search

Simulation

D.F.

W.F.1

Saver

46.32

0.1

S. Saver

13.56

0.1

0.11

Saver

46.32

0.1

S. Saver

13.56

0.1

0.2

Saver

46.32

0.1

S. Saver

13.56

0.1

0.3

Saver

46.32

0.1

S. Saver

13.56

0.1

0.4

Saver

46.32

0.2

S. Saver

13.56

0.2

Saver

46.32

0.3

S. Saver

13.56

0.3

Saver

46.32

0.4

S. Saver

13.56

0.4

Full

Full 0.1

Full

0.1

1 waiting fraction, w1

* This model uses demand aggregation, and assumes that d11 = d12 = d21 = d22.

Expected revenues (continued) D.F.

W.F.

EMSR

Heuristic (% Gain)

Simulation (% Gain)

Exhaustive Search (% Gain)

0.1

147.20

157.59(7.06%)

161.15(9.48%)

162.46(10.37%)

0.1

0.2

147.20

157.85(7.21%)

161.53(9.74%)

162.81(10.60%)

0.1

0.3

147.20

158.05(7.37%)

161.95(10.0%)

163.09(10.79%)

0.1

0.4

147.20

158.45(7.64%)

162.39(10.32%)

163.65(11.07%)

0.2

0.1

147.20

160.35(8.93%)

164.55(11.79%)

165.60(12.50%)

0.3

0.1

147.20

163.41(11.01%)

168.11(14.21%)

169.23(14.97%)

0.4

0.1

147.20

166.74(13.27%)

172.07(16.90%)

173.24(17.69%)

Revenue losses between exhaustive search and heuristic solutions D.F.

W.F.

Heuristic

Exhaustive Search

Revenue loss

0.1

157.59

162.46

4.87

0.1

0.2

157.85

162.81

4.96

0.1

0.3

158.07

163.09

5.02

0.1

0.4

158.45

163.65

5.20

0.2

0.1

160.35

165.60

5.25

0.3

0.1

163.41

169.23

5.82

0.4

0.1

166.74

173.24

6.50

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Revenue losses between simulation and heuristic solutions D.F.

W.F.

Heuristic

Simulation

Revenue loss

0.1

157.59

161.15

3.56

0.1

0.2

157.82

161.53

3.68

0.1

0.3

158.05

161.95

3.90

0.1

0.4

158.45

162.39

3.94

0.2

0.1

160.35

164.55

4.20

0.3

0.1

163.41

168.11

4.60

0.4

0.1

166.74

172.07

5.33

Table 3. Numerical results of a three-period, three-fare problem (capacity = 113) Inputs Class

Demand in Period 1

Demand in Period 2

Demand in Period 3

Unit Fare

Full

N(15,3)

Saver

N(15,3)

S. Saver

N(15,3)

Optimal booking limits Class

EMSR

Heuristic*

Exhaustive Search

Simulation

D.F.

Saver

70.29

0.1

S. Saver

21.26

0.1

Saver

70.29

0.1

S. Saver

21.26

0.1

Saver

70.29

0.1

S. Saver

21.26

0.1

Saver

70.29

0.1

S. Saver

21.26

0.1

Saver

70.29

0.2

S. Saver

21.26

0.2

Saver

70.29

0.3

S. Saver

21.26

0.3

Saver

70.29

0.4

S. Saver

21.26

0.4

W.F.

Full 0.1

Full 0.2

Full 0.3

Full 0.4

Full 0.1

* This model uses demand aggregation and d11 = d12 = d21 = d22 = d32, w1 = w2.

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Expected revenues (continued) D.F.

W.F.

EMSR

Heuristic (% Gain)

Simulation (% Gain)

0.1

220.20

237.89(8.03%)

243.46(10.56%)

0.1

0.2

220.20

238.18(8.17%)

243.90(10.76%)

0.1

0.3

220.20

238.54(8.33%)

244.52(11.04%)

0.1

0.4

220.20

239.17(8.61%)

245.33(11.41%)

0.2

0.1

220.20

240.62(9.27%)

247.37(12.33%)

0.3

0.1

220.20

246.28(11.84%)

254.52(15.58%)

0.4

0.1

220.20

253.03(14.90%)

263.20(19.53%)

Revenue losses between exhaustive search and heuristic solutions D.F.

W.F.

Heuristic

Simulation

Revenue loss

0.1

237.89

243.46

5.57

0.1

0.2

238.18

243.90

5.72

0.1

0.3

238.54

244.52

5.98

0.1

0.4

239.17

245.33

6.16

0.2

0.1

240.62

247.37

6.75

0.3

0.1

246.28

254.52

8.24

0.4

0.1

253.03

263.20

10.17

The numerical examples show that the differences of expected revenues between the heuristic methods and exhaustive search by the optimal solutions are reasonably acceptable when considering the reduction in the computation time. The computation time when using the heuristic models is greatly reduced as compared to that when using exhaustive search. Naturally, the errors between the heuristic solutions and the optimal solutions are small when the fraction of customers pursuing diversion and the fraction of customers waiting are small. When the D.F. is big (in the first heuristic model), the errors between the heuristic solutions and the optimal solutions tend to become bigger. This indicates that the heuristic performance deteriorates only somewhat when the fractions of customers pursuing diversion and waiting increase. Therefore, we conclude that the proposed heuristic algorithms generate solutions that approximate the optimal solutions by exhaustive search and significantly reduce the computation time for generating solutions.

CONCLUSION Airline revenue management optimization has been one of the major research areas in Operations Research and the Management Science. The exploration of multi-fare or multi-period optimization models for airline seat inventory allocation has proven difficult to solve and time consuming. Allowing hypothetical demand of customers to divert to another fare or wait to see whether a cheaper fare will become available leads to complex and time-consuming modeling. Finding heuristic booking limits for multi-period models is a good alternative to finding optimal solutions from the heuristic models and the results of numerical experiments. The main contribution of this paper to the body of literature in airline revenue management is its extension of existing models to complex multi-fare, multi-period models. We develop heuristic models with efficient computer algorithms for the multi-fare, multi-period problems for reducing computation time. The numerical results show that the computation time when using the heuristic models is greatly reduced as compared to that when using exhaustive search and simulation.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

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Anderson, K., Wilson, G. (2003.) Wait or buy? The strategic consumer: Pricing and profit implications. Journal of the Operational Research Society 54, pp. 299 – 306. Belobaba, P. (1989.) Application of probabilistic decision model to airline seat inventory control. Operations Research 37, pp. 16 – 32. Belobaba, P., Weatherford, L.R. (1996.) Comparing decision rules that incorporate customer diversion in perishable asset revenue management situations. Decision Science 27, pp. 343 – 363. Bodily, S., Weatherford, L. (1995.) Perishable-asset revenue management: Generic and multiple-price yield management with diversion. OMEGA 23, pp. 173 – 185. Brumelle, L., McGill, I., Oum, H., Sawaki, K., Tretheway, W. (1990.) Allocation of airline seats between stochastically dependent demands. Transportation Science, 24, pp. 183 – 192. Brumelle, S., McGill, J. (1993.) Airline seat allocation with multiple nested fare classes. Operations Research 41, pp. 127–137. Curry, R. (1990.) Optimal airline seat allocation with fare classes nested by origins and destinations. Transportation science, 24, pp. 193–204. de Boer, S. Freling, R., Piersma, N. (2002.) Stochastic programming for multiple-leg network revenue management. European Journal of Operational Research 137, pp. 72-92. Khouja, M., Mehez, A., Rabinowitz, G. (1996.) A two-item newsboy problem with substitutability. International Journal of Production Economics 44, pp. 267 –275. Haerian, L., Homem-de-Mello, T., Mount-Campbell, A. (2006.) Modeling revenue yield of reservation systems that use nested capacity protection strategies. International Journal of Production Economics 104, pp. 340–353. Lai, G., Debo, L, Sycara K. (2010.) Buy now and match later: Impact of posterior price matching on profit with strategic consumers. Manufacturing & Service Operations Management 12(1), pp. 33–55. Li, J., Tang, O. (2012.) Capacity and pricing policies with consumer overflow behavior. International Journal of Production Economics 140, pp. 825–832. Littlewood, K. (1972.) Forecasting and control of passenger bookings, AGIFORS Symposium Proceedings 1972, Nathanya, Israel. Pfeifer, P. (1989.) The airline discount fare allocation problem. Decision Science 20, pp. 149 – 157. Robinson, L. (1995.) Optimal and approximate control policies for airline booking with sequential non-monotonic fare classes. Operations Research 43, pp. 252–263. Sen, A., Zhang, A. (1999.) The newsboy problem with multiple demand classes. IIE Transactions, 31, pp. 431 – 444. Su, X. (2010.) Optimal Pricing with speculators and strategic customers. Management Science 56(1), pp. 25–40. Tang, C.S., Yin, R. (2007.) Joint ordering and pricing strategies for managing substitutable products. Production and Operations Management 16(1), pp. 138-153. Vaggen, H., Wallace, S., Kaut, M. (2013.) Modelling consumer-directed substitution. International Journal of Production Economics 134(2), pp. 388–397. Weatherford, R.. Bodily, S., Pfeifer, P. (1993.) Modeling the customer arrival process and comparing decision rules in perishable asset revenue management. Transportation Science 27, pp. 12 – 25. Wilson, G, Anderson, K, Kim, S.-W. (2006.) Optimal booking limits in the presence of strategic consumer behavior. International Transactions in Operational Research 13, pp. 99 –110. Wollmer, D. (1992.) An airline seat management model for a single leg route when lower class book first. Operations Research 40, pp. 26–37. Yin, R., Aviv, Y., Pazgal, A, Tang, C. (2008.) Optimal markdown pricing: Implications of inventory display formats in the presence of strategic consumers. Management Science 55(8), pp. 1391 – 1408. Zhao, L., Tian, P. and Li, X. (2012.) Dynamic pricing in the presence of consumer inertia. OMEGA - International Journal of Management Science 40, pp. 137 – 148.

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APPENDIX

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DETAILS ABOUT AUTHOR: SANG-WON KIM ASSOCIATE PROFESSOR MANAGEMENT SCIENCE FACULTY OF COLLEGE OF BUSINESS ADMINISTRATION UNIVERSITY OF ULSAN 93 UNIVERSITY ROAD, NAM-GU ULSAN, SOUTH KOREA 680-749 studyksw@ulsan.ac.kr

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QUALITY COST MANAGEMENT SYSTEM AT CROATIAN AIRPORTS GABRIJELA ŠPOLJAR MIROSLAV DRLJAČA DIANA PLANTIĆ TADIĆ

ABSTRACT

Quality cost management presents significant challenge for managers at Croatian and other airports. The former way of measuring business perfomance was based on passenger traffic, cargo traffic, aircraft traffic and financial results, without the analysis of impact of quality costs on business results. The cost which was produced due to (non)quality has not been recorded at all, and the lack of managers’ knowledge of the content and structure of quality costs and the possibility of applying modern methods of quality cost tracking presented a considerable problem, which in turn prevented a satisfactory quality cost management. As a specific type of cost, the quality costs represent a certain financial reserve that we can define and direct to business activities. These can then contribute to competitiveness, which is very important in the present recession period. It is recommended to improve characteristics of airport management system by the implementation of ISO 9001 norm requirements, which are the necessary infrastructure for building a quality cost management system. The research, as the platform for this paper, is focused on the development degree of quality cost management systems at the Croatian airports. In the research we used scientific cognitive methods with emphasis on statistical method, comparative method, as well as on the methods of induction and deduction. Primary research was conducted at the seven airports in Croatia: Dubrovnik, Osijek, Pula, Rijeka, Split, Zadar and Zagreb. The research results show the implementation and certification phase of ISO 9001:2008 quality management system, as well as the development degree of quality cost management systems at the Croatian airports. KEYWORDS: Quality, Croatian airports, Quality costs, Quality cost management

1. INTRODUCTION The university library as an institution balances a fine line between being traditional and being innovative. The acquisiThe main objective of the management of airports in the current development model is the business excellence while ensuring required quality of rendered services. In doing so, one of interesting areas to explore is the area of quality costs which can be optimized through planned activities without adverse effects on the achievement of the mission, as well as short-and long-term management objectives. The activities of business processes as a result have usefull effects that contribute to the quality of service, but the result of business processes are also negative effects. Improving business processes through implementation of improvement measures which also include optimization of the quality costs is considered to be a logical decision. This approach is considered to be usefull for improvement of the current situation in the Croatian airports where the streamlining and optimization of the quality costs in business processes is not considered in appropriate manner.

2. QUALITY COST MANAGEMENT IN CROATIAN AIRPORTS It is necessary to reach the stage of quality cost management to fulfill the requirements of all stakeholders. On one hand, for the owners of airports it means achieving and securing profitable business, while on the other hand, users of airports expect a satisfactory level of service quality.

2.1. Conceptual definition of quality costs Quality costs are the costs incurred while ensuring satisfactory quality and gaining confidence in it, as well as losses suffered when the level of quality was not achieved. It is basically divided into: the costs for quality (with associated forms of prevention and appraisal costs) and the costs of non-quality (with associated forms of internal failure costs and external failure costs). Structural classification starts with basic division within the group of quality costs, and further subdivision into cost groups: TG 1 – Prevention costs, TG 2 – Appraisal costs, which comprise costs for quality, and TG 3 – Internal failure costs, TG 4 – External failure costs, which make the costs from (non)quality.1 1

Miroslav Drljača, Small Encyclopedia of Quality, Part V – Quality costs, Oskar, Zagreb, 2004, p. 44-49.

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2.2. ISO 9001:2008 quality system in Croatian airports Achieving the required quality, as an unavoidable concept in achieving competitive advantage, and achieving higher revenues than costs with the aim of ensuring profits is not an easy task for the management of airports. In order to prove quality, among others, the management may make a strategic decision to establish a quality management system in accordance with the requirements of the international standard ISO 9001:2008. The reason for this might be that this international standard promotes the acceptance of the process approach when development, application and improvement of effectiveness of the quality management system increases the satisfaction of customers/users by fulfilling their requirements, or by fulfilling required levels of service quality. From the aspect of quality cost management, one of the requirements of this International Standard is monitoring and measuring the quality costs in the organization as evidence of continuous improvement, through development of a system for quality cost monitoring. According to the research results, process-oriented domestic airports are a minority, with the exception of two airports which have, through an introduction and confirmation of the quality system in accordance with the requirements of ISO 9001:2008, proven the transformation of the business system to process orientation. Two certified airports in Croatia have attempted to determine the quality costs, although only one of them was able to determine and classify the structure of the quality costs. According to the responses, the reasons for the failure to establish and track quality costs are found in a lack of management education on quality costs. In circumstances when airport services market should go through the process of liberalization, that is, when the airport should accept competition, the lack of application of this managerial tool represents an untapped opportunity in the optimization of resources in order to optimize the quality costs, and thus to reduce total costs of an organization. To successfully manage the quality costs, airports should realize few assumptions:2 1. Implement and certify quality management system according to the International Standard ISO 9001:2008. 2. Develop and adopt a system of quality cost management. 3. Develop documentation infrastructure, with the established and accepted methodology system encompassing quality costs. 4. Implement a system of quality cost management. 5. Analyze system performance. 6. Continuously implement improvement measures. 7. Continuously educate management.

2.3. Normative base for encompassing quality costs International Standard ISO 8402:1994 in section 4.2 states that quality costs include all costs incurred by undertaken activities in making decisions about the quality. „The obligation of the business system is to choose a system and method of calculating costs, which will be most suitable for monitoring the quality costs, with the aim to ensure relevant information base for quality management.“ Each airport should classify quality costs in accordance with their specific operations while it can choose the model that seems the best solution for quality cost monitoring in that airport. International Standard ISO 10014:1995 is based on regulating the need to monitor the quality costs in all business processes and activities in an organization in such way that the quality costs are monitored during the research and product development, through the production or the provision of services process, to the sales process and the benefits expected the customer from products or services. Particular emphasis is placed on the guidelines prescribed by the International Standard ISO 9001:2008 which require that the top management integrates organizational strategy with the quality management, with a particular focus on business processes and on the increase in customer satisfaction. The organization must provide the necessary material, financial and human resources with the aim of development of the system and achieving total quality. Planning and supervising are regarded as feedback through developed communication with suppliers or customers, while rationalization through investment in systematic improvement of quality and cost reduction resulting from (non)quality. Unlike the ISO 9001:2008 standard, which refers to setting up and managing quality system, ISO 9004:2009 standard places an obligation on the reporting of the financial effects of quality management through the preparation of information on incurred quality costs in certain activities and business processes. Miroslav Drljača, Small Encyclopedia of Quality Part V – Quality costs, Oskar, Zagreb, 2004, p. 234. Quality management and quality assurance – Vocabulary: ISO 8402:1994; EN ISO 8402:1995 4 ISO/TR 10014 Technical report, Guidelines for managing the economics of quality 2 3

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In order to raise quality and reduce costs due to (non)quality, airports should manage quality costs, but such a positive managerial endeavor is unthinkable without trained staff and implemented system for encompassing quality costs. Experience with managing the quality costs in the Zagreb Airport shows that there was no data on the quality costs in the first phase of encompassing, although they are present in significant amounts. Afterwards, the phase of their recognition and classification in cost groups follows (TG1, TG2, TG3, TG4).5 After those first initiatives which recognize almost all existing quality costs, the development of documentation infrastructure will commence to enable their systematic monitoring and analysis. In the last phase, we come to the stage of quality cost management, using different methods, which will ensure necessary management information for decision-making with the aim of optimizing the quality costs.

3. AIRPORTS IN CROATIA Airports are organizations in which demand and supply of services meet while their market position is largely determined by the influence of historical, geographical and political factors.

3.1. Conceptual definition of airport Under the Croatian law, „airport is a space open to the public air transport, comprised of certain areas, with operational surfaces, facilities, equipment, machinery, installations and equipment, intended for movement, takeoff, landing and parking of aircraft, and handling of aircraft, passengers, baggage, cargo, mail and other materials.“ 6 Regulation on airport charges defines an airport as „an area on the ground specially adapted for the landing, taking off and maneuvering of aircraft, including associated facilities, equipment and devices designed for air traffic and the provision of services and facilities, resources and equipment to assist in the provision of commercial air transportation services.“7 The Republic of Croatia, according to the number of airports and ports open to international air traffic, is among most developed countries of the world. In Croatia, there are seven international airports in operation. The airports are: Zagreb, Split, Dubrovnik, Pula, Rijeka, Osijek and Zadar, among which the Zagreb Airport and Osijek Airport are located in the continental region, while the other five airports are located along the coast. There are about 1200 airports worldwide8 which mean that Croatian airports represent about 0.8% of all the airports in the World. On an annual basis, there are around 6 million passengers travelling through Croatian airports, while there are about 3.4 to 4 billion passengers worldwide. According to the size of the infrastructure, the number of passengers and the number of operations, the largest airport in Croatia is the Zagreb Airport, which is also the domicile airport of the national air carrier Croatia Airlines, as well as an air base of the Croatian Air Force. Airports, as well as other organizations, should be viewed as a management system, with all its structural elements.9 That is important for the understanding of the quality management system as well as subsystems and the process approach.

3.2. The ownership structure of airports in Croatia From the ownership perspective, the Republic of Croatia is 55% equity owner, while the county and local governments are owners in the following percentages:10

• Airport Zagreb Ltd. with headquarters in Zagreb: Zagreb County 5%, City of Zagreb 35%, City of Velika Gorica 5%. • Split Airport company with headquarters in Kaštela: Split – Dalmatia County 15%, City of Kaštela 15%, City of Trogir 10%, City of Split 5%.

• Dubrovnik Airport Company headquartered in Čilipi: Dubrovnik - Neretva County 20%, City of Dubrovnik 10%, the municipality Konavle 15%.

Miroslav Drljača, „The quality costs of airports,“ Collection of Papers XVIII. International Scientific Symposium Transport Systems 2011, Croatian Scientific Society for Transport, Vol. 1, Zagreb, Opatija, 2011, p. 116-123. 6 Law on Airports, NN 19/98 and 14/11. 7 Regulation on airport charges, NN 50/12. 8 www.hgk.hr/wp-conte/files_mf/promet.pdf 9 Miroslav Drljača, “Modeling of integrated management systems,“ Proceedings of the 11th Croatian Conference on Quality and 2th symposium innovative application quality, Croatian Society for Quality, Zagreb, Vodice, 2011. p. 31. 10 Law on Airports, NN 19/98 and 14/11. 5

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• Pula Airport Company with headquarters in Pula: Istria County 15%, City of Poreč 15%, City of Pula 8%, City of Labin 3%, City of Rovinj 2%, City of Pazin 1%, City of Buje 1%.

• Airport Rijeka –Kvarner Riviera Company with headquarters in Rijeka: Primorje - Gorski Kotar County 20%, City of Rijeka 10%, City of Krk 4%, City of Crikvenica 4%, City of Opatija 4%, Municipality of Omišalj 3%.

• Osijek Airport with headquarters in Osijek: Osijek – Baranja County 20%, City of Osijek 25%. • Airport Zadar with headquarters in Zadar: Zadar County 20%, City of Zadar 20%, Municipality of Zemunik Donji 5%. The owners are expecting a positive economic and social impact through activities of its airports. Interests that are in conflict with the goals of the airports are the absence of significant changes in the policies of the city councils in key areas related to air travel, and specific spatial constraints for expansion of airports to provide better quality of service. To many foreign visitors, airports are the first points of contact with Croatia and its culture, so modernization is one of the main interests of each airport, as well as transformation into an important strategic platform of economic and social development of the cities.

4. SUBJECT, METHODS AND OBJECTIVES OF RESEARCH The subject of research is the level of development of quality cost management systems in Croatian airports. Primary data was collected through the questionnaire method, while a way of communication with the respondents was an administration of a questionnaire answered by selected top experts and key quality managers (where applicable) employed at seven international airports in Croatia, which make the intended sample for this study: Zagreb Airport, Pula Airport, Zadar Airport, Split Airport, Dubrovnik Airport, Osijek Airport and Rijeka Airport. Data collection was carried out in July and August of 2013. The survey instrument was a questionnaire which included open-ended and closed-ended questions. The objectives of this research can be classified into two groups:

• Determining a degree of implementation and certification of quality management system ISO 9001:2008 in airports in Croatia.

• Determining the level of development of quality cost management systems at airports in Croatia. 4.1. Limitations of the survey For the conclusions of this study to be used effectively, it is necessary to specify certain limitations of the study which can be classified into several categories. One limitation was the size sample, since there are only seven airports in Croatia open to domestic and international traffic. Thus, it was not possible to have any effect on the size of the sample. Another limitation was that managers employed within different levels of organizational structure at domestic airports responded to the questionnaire. A third limitation was a fact that, depending on the managerial level, there was a different level of awareness of the quality management system, and consequently on the quality costs. The fourth limitation was related to the fact that some results were taken with some reserve because of partial answers to some questions. Notwithstanding the above limitations, collected data represent the entire population, and as such are useful for drawing conclusions about the assessment of the level of certification and implementation of International quality management system ISO 9001:2008, as well as determining the stage of development of the quality cost management system in the Croatian airports.

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5. RESULTS Based on the results of seven surveyed airports in Croatia, the survey shows that 29% (2 airports) implemented the quality management system ISO 9001:2008, 14% or 1 airport has partially implemented the system, and that remaining 57%, i.e. 4 airports have not implemented quality management system ISO 9001:2008 at all. Furthermore, only 29% (2 airports) have a certified quality management system ISO 9001:2008, while other 71% (5 airports) have not. Meanwhile, 29% certified airports in Croatia (2 airports) have attempted to determine the quality costs, although only one airport (14%) has managed to identify and determine the structure of the quality costs. It can be concluded that at the airports, that have a certified quality management system ISO 9001:2008, there is a greater degree of awareness on the importance of quality costs management system. In 86% of surveyed airports in Croatia (6 airports), the management does not have a full knowledge on different types of quality costs. The reasons for this, according to the answers of the survey, are found in insufficient education about the quality costs. „The purpose of quality cost management techniques is to provide tools that facilitate implementation of quality improvement activities.“11 This observation leads to the conclusion that the management of airports in Croatia are not sufficiently educated on the subject of quality costs, and consequently neither are the employees who participate in the „production“ of costs, and they do not use a system of quality cost management as a tool for management of the system. Quality costs have not been determined or have not been fully determined by 71% of surveyed airports in Croatia (5 airports). The fact that out of seven airports in Croatia, in only three (43%) there were attempts to determine the level of quality costs, and that in only one airport, or 14%, the management identified quality costs and their structure, and that they were not surprised with the established level of costs. According to the research conducted so far in Croatia, quality costs are on average 7.8% of the total annual expenditures, while the structure of total costs, according to the answers of surveyed participants is 60% due to the costs of quality, and 40 % due to the costs of (non)quality. These results show that most of the management in Croatian airports does not use quality costs as a system management tool. The goal towards which the airport management should strive to is optimization, or an achievement of a balanced relationship between quality costs and the level of quality of the results of business processes. Figure 1 shows the Characteristics of optimum quality costs in airports. Figure 1: Characteristics of optimum quality costs in airports.

Source: Miroslav Drljača, Small Encyclopedia of Quality, Part V – Quality costs, Oskar, Zagreb, 2004, p. 241. 11

Jack Campanella, Principles of Quality Costs, Third Edition, ASQ Quality Press, Milwaukee, Wisconsin, 1999, p. xvii.

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Figure 1 shows that the optimum point is located within the neutral zone. In this case, the airports in Croatia, in relation to the optimum point, are in the „mandatory improvements“ area since, according to the results of the research, the costs of quality amount to 60% on average, while the (non)quality costs amount to 40%. Thus, the optimum point has not yet been reached. After the optimum point, the airports will enter an area where the level of quality is good, but there is a potential risk that the costs for quality increase without control through excessive investments into prevention and testing, i.e. through high costs of implementation and maintenance of quality systems, as well as through high costs of testing and control. After the optimum point, it is no longer necessary to push for investments through quality costs without proper review, since this would mean that the costs for quality could turn into costs for (non)quality. In the case that the costs for quality would be reduced by 5% – 10%, and the costs for (non)quality would be less than 50%, the neutral zone would be reached. Since it is difficult to achieve the optimum point and a balanced relationship between the costs for quality and the costs from (non)quality at the level of 50%:50%, even a nearly balanced relationship can be considered a success. When a point of optimum quality costs is reached, the airport achieves extra profits. At the same time the optimum point represents a suitable time to start new projects, and in the event that there are none, the operations around the optimum point should be ensured through continued controls. Undesirable scenario is that when the costs of (non)quality increase to more than 70%, and the costs for quality are less than 10%. This is an area of minimum quality, or the area of mandatory improvements, which should be achieved by investing in the quality through costs for quality and through a reduction of costs from (non)quality, thus reducing the overall costs of quality.12

CONCLUSION Management of the airport system is a fundamental task of management. Since the airport management system is structured from necessary elements without which the system would not exist, and each of these structural elements depends on functioning of all other elements, the management is expected to be successful in coordinating the activities of all participants in the system. In doing so, the management must continually manage the organizational structure of the airport, the business processes and the human resources, in order to ultimately ensure a profitable business. In order to achieve established general and specific management objectives, a preference should be given to the processoriented organization of airport and to the process approach to management because this concept allows for better understanding of customer/user requirements and better fulfillment of those requirements. Such approach requires a transformation of functional to process-oriented organization of an airport whose structure is based on business processes, while proving a process structure and process approach of an organization is evidenced by meeting the requirements of the International standard ISO 9001:2008. Management of a process-oriented airport means for the airport management and the management of processes to establish a dominant control over all process parameters and management systems. Process structure as a structural element of management system cannot exist without coordinated management of numerous interactions between different types of business processes. In doing so, it is not enough just to manage core business processes even through the result is directly confirmed by the market, but also to manage support processes, and processes of measurements, analyses and improvements. To measure, analyze and implement improvements is impossible without qualitative and quantitative data which are produced by a developed system for capturing quality costs as a component of total costs in airports. To make this possible, an airport needs to establish and implement a quality costs management system which will ensure adequate information for the management of business processes, expresses in qualitative and quantitative terms, so that decisions are based on facts. On one hand, this complex process requires appropriate documentation infrastructure that will be adequate for the needs of the airports, while on the other hand, the competence of employees has a decisive role in management of the quality costs. In doing so, especially significant is a development of a quality costs accounting and quality costs controlling which have a task to provide relevant and timely information to the management of business processes and management of the airport. Normative base for monitoring the quality costs is found in international standards: ISO 8402:1994, ISO 9004 – 1:1994, ISO 10014:1995, ISO 9001:2008, ISO 9004:2009. Changes that will occur due to market liberalization of ground handling services will significantly affect the current way of operating airports, both in Croatia and in the EU member countries. Airports in Croatia should anticipate restructuring in a way that will enable an introduction of competition, particularly in the provision of ground handling services. In the newly found conditions of business operations, the competitiveness is manifested through the ability to meet the requirements of all stakeholders, while quality costs have a significant impact on the improvement of performance of the quality management systems through a measurement of the degree of reliability of business processes, customer/user satisfaction and consequently through better business results. 12

Miroslav Drljača, Small Encyclopedia of Quality Part V – Quality costs, Oskar, Zagreb, 2004, p. 240-241

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LITERATURE Campanula, J., Principles of Quality Costs, Third Edition, ASQ Quality Press, Milwaukee, Wisconsin, USA, 1999. Drljača, M., Small Encyclopedia of Quality Part V – Quality costs, Oskar, Zagreb, 2004. Drljača, M., “Modeling of integrated management systems,“ Proceedings of the 11th Croatian Conference on Quality and 2th symposium innovative application quality, Croatian Society for Quality, Zagreb, Vodice, 2011. 4. Drljača, M., „The quality costs of airports,“ Collection of Papers XVIII. International Scientific Symposium Transport Systems 2011, Croatian Scientific Society for Transport, Vol. 1, Zagreb, Opatija, 2011. 5. Central Bureau of Statistics, Croatian, statistical reports, Zagreb, 2012. 6. http://www.hgk.hr/wp-conte/files_mf/promet.pdf 7. ISO/TR 10014 Technical report, Guidelines for managing the economics of quality. 8. Quality management and quality assurance – Vocabulary: ISO 8402:1994; EN ISO 8402:1995. 9. Regulation on airport charges NN 50/12. 10. Law on Airports, NN19/98. 1. 2. 3.

DETAILS ABOUT AUTHORS: GABRIJELA ŠPOLJAR, MSc ZAGREB AIRPORT, LTD., ZAGREB, CROATIA gspoljar@zagreb-airport.hr MIROSLAV DRLJAČA, PhD ZAGREB AIRPORT, LTD., ZAGREB, CROATIA mdrljaca@zagreb-airport.hr DIANA PLANTIĆ TADIĆ, PhD VELEUČILIŠTE VERN, ZAGREB, CROATIA diana.plantic-tadic@vern.hr

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MARKETING DECISION MAKING UNDER CONDITIONS OF UNCERTAINTY AND RISK OTILIJA SEDLAK MARIJA CILEG TIBOR KIS IVANA CIRIC

ABSTRACT

Marketing decisions in modern-day business are made under conditions of growing uncertainty, which cannot be measured, and business risks, which are measurable. High uncertainty and risk levels result from disruptive innovations and great unexpected shocks (Kotler & Caslione, 2009, p. 3.). Marketing decisions have always been made under the conditions of uncertainty and risk, but modern-day pace of change and intensity of shock are more extreme than ever. For this reason, market decision makers should be qualified for appropriate assessment of acceptable risk level, so as to secure the best effects and control the damage from made marketing decision. Applying the fuzzy set theory is a good example of such approach to marketing decision making. Based on the concepts of core competences and strategic sourcing, this paper provides a structured and easy-to-follow procedure to develop sourcing decisions helping companies to focus on core activities and restore competitive advantages. Moreover, the application of the developed procedure in a real industrial case confirms the soundness of the whole procedure. KEYWORDS: Knowledge-based systems, Fuzzy logic, Marketing decision making process

1. INTRODUCTION In order to expound on the application of the fuzzy set theory in marketing decision making properly, it is necessary to start from the essence of marketing decision making. Marketing decision making is an integral part of marketing management, which is, in a sense, the art and science of choosing target markets and getting, keeping, and growing customers through creating, delivering and communicating superior customer value (Kotler & Keller, p. 6). Marketing decision makers include marketers, marketing managers, buyers, shopping centres, influential individuals, users, analysts, and also formal or informal authorities featuring in the process of choosing marketing alternatives. Thus, marketing decision makers feature both on the supply and demand side, given that a social and managerial process by which individuals and groups obtain what they need and want through creating and exchanging products and values with others (Kotler, Vong, Sonders, & Armstrong, 2007, p. 6.). Marketing decision making process is more often analysed from the supply aspect in professional literature, covering decision making on global or local marketing engagement, choice of target markets, methods of entering target markets, combining marketing mix elements and implementing, i.e. controlling marketing activities (Lee & Carter, 2009, p. 174). The make-or-buy decisions affect the overall performance of a manufacturing company and have a determining effect on its future survival. The produce or produce or purchase decision is one of the most difficult problems in the business strategy and all the departments of a company must be involved in order to devise a sound sourcing strategy. In most of the companies, the sourcing decisions are based on the accounting aspect of the problem, but the development of a sourcing strategy requires the consideration of a host of financial and non-financial factors. In most cases, marketing decisions are made under conditions of uncertainty and high risk. According to some authors (Kotler, & Keller, 2006, p. 33), this is most contributed to by:

• • • • • •

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a relatively high number of relevant variables; impossibility of controlling relevant variables; their instability and nonlinearity; stochasticity of relevant variables; difficult quantification and measurement of effects of relevant variables; shortage of marketing information.

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The decision maker’s expertise and appropriate assessment of tolerable risk levels (i.e. the subjective factor) is therefore of extreme importance for the final effects of decision made. The example below illustrates such a situation.

2. PROBLEM DEFINITION Making marketing decisions is aimed in two basic directions, i.e. towards solving problems on the one hand and using the benefits of business opportunities on the other. At any rate, marketing decision making enables a transition from the current state into a new, i.e. desired state, which marketing decision makers deem to be more favourable for the company. Professional literature presents the well-know opinion that different problems call for different types of decision making (Stoner, Freeman, & Gilbert, 2002, p. 221). To a great extent, types of marketing decisions also determine methods applied in making those decisions. Furthermore, marketing decision makers must be qualified for precise problem definition, primarily in terms of certainty or uncertainty of its outcome. Theoretically, marketing decision making process is structured differently, but the key phases of this process that can be singled out are the diagnostic phase or problem identification, action plan which implies defining the alternative avenues of undertaking marketing activities and choosing marketing aleternatives, and also implementation, including marketing control and revision. Marketing theory displays a great similarity of the decision making proces to the problem solving process, which nas even led some authors to equate their meaning. When viewing the areas of decision making in marketing, decision making in the business community and practice is often related to the issues of creating an optimum marketing programme, i.e. making decisions on the product, developing and launching a new product, pricing, marketing channels and marketing communication. In all instances of marketing decision making, companies that apply marketing orientation in business operations produce effects manifested in the operation of all business functions. The classical decision making operates with a set of alternatives over the space of decision, a set of states off affairs over the space of the state of affairs, relation pointing to states or outcomes expected from each of the alternative actions, and finally, the utility or the goal function, which arranges these outcomes in accordance with the desired outcome. Decision making is said to be performed under conditions of certainty, when the outcomes of any action can be precisely determined and arranged. In such cases, alternatives are chosen that lead to outcomes with maximum utility. On the other hand, a decision is made under conditions of risk, when the only knowledge available regarding the state of outcomes is their probability distribution. In any real-life situation, including the decision making and management fields – whether it is about setting goals and formulating strategies, or selecting, implementing and monitoring the selected strategy – many processes are unfit for mathematical modelling. In normal real-life situations in various areas of human activity, very often we do not know the equations for most non-linear processes and systems and therefore resort to approximation. Fuzzy systems approximate those equations. Fuzzy systems enable us to make optimum approximations of the non-linear universe. If it is possible to build a mathematical model, we shall use it. There is, however, always a question: how can we know that mathematical approximation corresponds to a process in reality? Fuzzy systems enable us to model the universe in linguistic terms, rather than forcing us to write a mathematical model of the universe. The technical term for it is model-free function approximation. A very common problem encountered by marketing decision makers in companies, also related to production, finance and purchase, is the dilemma whether a certain product, part or semi-manufactured product should be produced by engaging their own resources, at their own plants, or obtained from suppliers. This problem requires coordinated approach to solving, and can manifest itself in practice in three forms (Milisavljević, 1995, p. 248.):

• produce or purchase a product previously not used by the company; • independently produce the product previously purchased from suppliers; or • purchase the product currently produced by engaging their own resources at their own plants. Solving this problem demands meticulous approach and engaging experts of various profiles, where the marketing expert figures as the coordinator of all activities.

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3. PROBLEM SOLVING Resolving the given problem can be approached along three avenues: (a) by the classical method; (b) by applying the expert system and (c) by applying the fuzzy set theory. The “transaction cost” theory of the firm introduced by Coase (1937) has become a standard framework for the study of institutional arrangements. The Coasian framework helps explain not only the existence of the firm, but also its size and scope. Some firms are highly integrated. Others, are much more specialized. Why do some firms choose a vertically integrated structure, while others specialize in one stage of production and outsource the remaining stages to other firms? In other words, should firm make its own inputs, should it buy them on the spot market, or should in maintain an ongoing relationship with a particular supplier? Traditionally, economists viewed vertical integration or vertical control as an attempt to earn monopoly rents by gaining control of input markets or distribution channels. The transaction cost approach, by contrast, emphasizes that vertical coordination can be an efficient means of protecting relationship-specific investments or mitigating other potential conflicts under incomplete contracting. As transaction cost economics was developed in the 1970’s and 1980’s, a stream of empirical literature emerged explaining the “make-or-buy decision” using transaction cost reasoning. The basic characteristic of the classical approach to resolving a business dilemma is almost exclusive reliance on comparing the economic effects of both decisions. In other words, the total costs related to producing the given part/subset/product are compared with the total cost of purchasing the same item (provided that that there are suppliers where the given part/ subset/product can be purchased), and then the decision maker opts for the more cost-effective option. Only in rare cases (depending on the decision maker’s expertise) are additional criteria taken into account as well. The “make-or-buy decision” is about the choice of weather to carry out a particular process or activity within a business or to buy it in from a supplier. In recent decades, the “make-or-buy decision” shifted from the level of reactive clerical function to the centre of business strategy. It was realised that sourcing decision have a great effect on business strategy. It was realised that sourcing decision is have a great effect on a business future survival. Outsourcing is purchasing from someone else a product or service that have been previously manufactured internally. It is becoming an increasingly important element in strategic decision-making and an important way to increase efficiency and often quality. The sourcing decision can cover a wide range of goods and services ranging from manufactured components to semiprocessed materials and constancy services. The outcome of these decisions is influenced by a considerable number of factors and the soundness of assumptions. Traditionally, cost had been viewed as the main consideration in sourcing decision (Sedlak, 2013. p. 62-68). Almost unknown to the academic world, and to the general public, the application of intelligent knowledge-based systems is rapidly and effectively changing the future of the human species. Today, human well-being is, as it has been for all of history, fundamentally limited by the size of the world economic product. Thus, if human economic well-being (which I personally define as the bottom centile annual per capita income) is ever soon to reach an acceptable level (e.g., the equivalent of $20,000 per capita per annum in 2004), then intelligent knowledge-based systems must be employed in vast quantities. This is primarily because of the reality that few humanslive in efficient societies (such as the United States, Canada, Japan, the UK, France, and Germany, for example) and that inefficient societies, many of which are already large, and growing larger, may require many decades to become efficient. In the meantime, billions of people will continue to suffer economic impoverishment-an impoverishment that inefficient human labor cannot remedy. To create the extra economic output so urgently needed, we have only one choice: to employ intelligent knowledge-based systems in great numbers, which will produce economic output prodigiously, but will consume hardly at all. It is due to the importance of additional criteria that a prototype of the expert system was developed (including software solutions) (Kotler & Caslione, 2009, p. 100). As the economic model in Figure 1 shows, the number of attributes taken into account is far greater compared to the classical decision making method. The decision maker communicates with the expert system by choosing the domains of values for the attribute of the decision making leaf nodes. Using the built-in logarithm, the expert system proposes a solution with explanation based on these data. The risk of making a wrong decision is thus multiply reduced, which was the basic objective of developing the expert system. A solution to the given problem by applying fuzzy set theory, the economic model (Figure 1) can be supplemented with an oriented graph.

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Input variables occur at the first and second levels. The second level already contains four functions of two arguments; the third level also contains two functions of two arguments, but some of the arguments at the previous are level defined functions, i.e. complex functions. The fourth level is a function of two arguments defined at the third level, i.e. the obtained function at the fourth level is multiply complex, and its value is the solution to the problem. (If required, this model can be extended to more or reduced to fewer levels.) However, these are not functions and their arguments in the classical mathematical sense. The input variables (arguments) are linguistic variables (“high raw material costs”, “medium quantity of product”, “aggressive suppliers’ approach”, “status quo in the forthcoming 3-5 years, but development over the subsequent ten plus years”, etc. The same applies to output variables (functions), representing input functions for complex functions up to the last level, such as production costs, purchase price, foreseen technological change, production limitations etc. Such nature of input and output variables, i.e. value domains that cannot be accurately quantified, make the fuzzy set theory extremely convenient for problem solving in marketing decision making. Fuzzy logic is very often successfully applied for modelling problems where interdependences between individual variables are highly complex (Todorović & Kikuchi, 1991, p. 60-98). This is how resolving the above described problem was approached. Input and output variables were defined as different fuzzy sets, both continuous and discontinuous. Defining fuzzy sets intrinsically implies that the appropriate degree of belonging is ascribed to all possible values, followed by defining inference rules, which mandatorily includes the operation of logical implication with input conjunction and/or disjunction. Having determined the degree of belonging, values of output variables, with minimum but certain and guaranteed degrees of belonging, are chosen for every rule, considering all the input variables. After this, the observed output variable is still not unequivocally defined, for it has different values with different degrees of belonging at all points, depending on the number of used rules. The next step is choosing the output variable values with maximum degrees of belonging. An output variable is thus obtained and subsequently defuzzified, i.e. a specific numeric value is determined, which is either the input variable on the next, higher level, or the decision, i.e. solution to the problem, on the last level. Thus, the final decision is made by using multiple steps, taking into account all possible circumstances and all the possible variable values occurring in it. Such complete consideration and problem analysis would be impossible to do without fuzzy logic, relying only on experts’ knowledge, experience and intuition. Figure 1. Decision tree for problem solving: “Produce or purchase” DECISION � PRODUCE � PURCHASE PRODUCTION LIMITATIONS

ECONOMIC EFFECTS

� HIGH � AVERAGE � LOW

PRODUCTION COSTS

CAPACITY UTILISATION

EXPERTISE & WORKMANSHIP QUALITY

� HIGH � AVERAGE � LOW

QUANTITY OF PRODUCT � LARGE � MEDIUM � SMALL

SUBSTANTIAL FAVOURABLE UNFAVOURABLE DEVASTATING

� � � �

ENORMOUS SUBSTANTIAL NEGLIGIBLE NONE

� � � �

EXTERNAL FACTORS

PURCHASE PRICE

� HIGH � MODERATE � LOW SUPPLIER RELATIONS

PRODUCTION SCHEDULE

� FAVOURABLE � NEUTRAL � UNFAVOURABLE

FORESEEN TECHNOLOGICAL CHANGES � CONFINING � TOLERABLE � NEGLIGIBLE

� HIGH � AVERAGE � LOW

RAW MATERIAL COSTS

LABOUR COSTS

LONG TERM CHANGE

� HIGH � AVERAGE � LOW

WEEKLY MONTNLY QUARTERLY SEMI-ANNUAL

� AGGRESSIVE � MODERATE � PASSIVE

TRANSPORT COSTS

� EXCELLENT � GOOD � POOR

� � � �

SUPPLIERS' APPROACH

� DEVELOPMENT � STATUS QUO � ELIMINATION

MID-TERM CHANGE � DEVELOPMENT � STATUS QUO � ELIMINATION

Source: Mesaroš, K. (1992), Primena teorije fuzzy skupova u donošenju marketing odluka, XIX Simpozijum o operacionim istraživanjima, Beograd, 13-16. oktobar, Zbornik radova, p.145.

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The following is the overview of fuzzy variables with possible value domains. DECISION: produce, purchase; PRODUCTION LIMITATIONS: enormous, substantial, negligible, none; ECONOMIC EFFECTS: significant, favourable, unfavourable, devastating; EXTERNAL FACTORS: favourable, neutral, unfavourable; EXPERTISE: high, average, low; CAPACITY UTILISATION: high, average, low; PRODUCTION COSTS: high, average, low; PURCHASE PRICE: high, moderate, low; TECHNOLOGICAL CHANGES: confining, tolerable, negligible; SUPPLIERS’ APPROACH: aggressive, moderate, passive; QUANTITY OF PRODUCT: large, medium, small; PRODUCTION SCHEDULE: weekly, monthly, quarterly, semi-annual; RAW MATERIAL COSTS: high, moderate, low; LABOUR COSTS: high, moderate, low; SUPPLIER RELATIONS: excellent, good, poor TRANSPORT COSTS: high, moderate, low; LONG-TERM CHANGE: development, status quo, elimination; MID-TERM CHANGE: development, status quo, elimination. Table 1. The rules for making decisions Step 1 (a) QUANTITY OF PRODUCT Λ

PRODUCTION SCHEDULE =>

CAPACITY UTILISATION

large large large medium < large < large low

< quarterly quarterly semi-annual weekly monthly > monthly weekly

high average low high average low average

RAW MATERIAL COSTS Λ

LABOUR COSTS =>

PRODUCTION COSTS

high high average average < high low low

> low low high average low high average

high average high average low average low

SUPPLIER RELATIONS Λ

TRANSPORT COSTS =>

excellent excellent <excellent good good poor poor

high <high high average low average low

moderate low high moderate low high moderate

LONG-TERM CHANGE Λ

MID-TERM CHANGE =>

TECHNOLOGICAL CHANGES

>elimination development status quo elimination elimination

development status quo status quo development <development

negligible negligible tolerable tolerable confining

(b)

(c)

(d)

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Step 2 (a) EXPERTISE Λ

CAPACITY UTILISATION =>

PRODUCTION LIMITATIONS

high high high average average <high low low

high average low high average low high <high

none negligible substantial negligible substantial enormous substantial enormous

PRODUCTION COSTS Λ

PURCHASE PRICE =>

ECONOMIC EFFECTS

high high average average average low low low

high <high high moderate low high moderate low

unfavourable devastating favourable unfavourable devastating significant favourable unfavourable

TECHNOLOGICAL CHANGES Λ

SUPPLIERS’ APPROACH =>

EXTERNAL FACTORS

confining confining tolerable tolerable confining negligible negligible

>passive passive aggressive moderate passive aggressive moderate

unfavourable neutral unfavourable neutral favourable neutral favourable

PRODUCTION LIMITATIONS Λ

ECONOMIC EFFECTS =>

EXTERNAL FACTORS => DECISION

enormous enormous enormous substantial substantial substantial substantial substantial negligible negligible negligible negligible none none none none none

significant significant <significant significant significant favourable favourable <favourable >unfavourable unfavourable unfavourable devastating >unfavourable unfavourable unfavourable devastating devastating

favourable produce <favourable purchase * purchase >unfavourable produce unfavourable purchase favourable produce <favourable purchase * purchase * produce favourable produce <favourable purchase * purchase * produce >unfavourable produce unfavourable purchase favourable produce <favourable purchase

(b)

(c)

Step 3

The asterisk (*) marks that the attribute can take on any value from the domain in this rule Source: Mesaroš, K. (1992), Primena teorije fuzzy skupova u donošenju marketing odluka, XIX Simpozijum o operacionim istraživanjima, Beograd, 13-16. oktobar, Zbornik radova, p.147.

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According to their belonging functions, the above fuzzy variables in the observed problem can be observed as follows: • Group I: raw material costs, labour costs, production costs, transport costs, purchase price, quantity of product, capacity utilisation, external factors (Figure 2). The value interval (a,b) is determined in each specific case. The observed variables are measured in monetary units, excluding capacity utilisation, foreseen technological change and external factors expressed in percentage.

•

Figure 2. Group I

• Group II: long term change, mid-term change (Figure 3). The measurement unit is the degree of expected change. Figure 3. Group II

• Group III: production schedule (Figure 4). The measurement unit is time expressed in months. Figure 4. Group III

• Group IV: relations with suppliers, suppliers’ strategy (Figure 5). The measurement unit is assessment grade for suppliers. Figure 5. Group IV

• Group V: expertise (Figure 6). Presence of higher qualification is expressed in percentage. Figure 6. Group V

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• Group VI: production limitations, economic effects (Figure 7); measured in percentage, from the “produce” aspect. Figure 7. Group VI

• Group VII: decision (Figure 8); expressed in percentage, from the “produce” aspect. Figure 8. Group VII

The approximate reasoning algorithm for making the business decision whether to produce or purchase consists of three basic steps. Each basic step is divided into several interconnected steps. Each of these substeps, or steps, contains a logical inference rule defined by experts. As specified numeric values directly entered at the given moment of making the “purchase or produce” decision, the input data are as follows: expertise, quantity of product, production schedule, raw material costs, labour costs, supplier relations, transport costs, and long- and mid-term changes. As illustrated in Figures 2-8 above, fuzzy sets are already prepared at all levels. Direct entry of the above listed first- and second-level data activated the above defined algorithm. The algorithm is illustrated in graph 1 of Figure 9 (Mesaroš, 1992, p.146). Production costs are defuzzified by determining the centre of gravity using the known formula. Thus obtained numerical data is the input value for step 2. As specified numeric values directly entered at the given moment of making the “purchase or produce” decision, the input data are as follows: expertise, quantity of product, production schedule, raw material costs, labour costs, supplier relations, transport costs, and long- and mid-term changes. As illustrated in Figures 2-8 above, fuzzy sets are already prepared at all levels. Direct entry of the above listed first- and second-level data activated the above defined algorithm. The algorithm is illustrated in graph 1 of Figure 9 (Mesaroš, 1992, p.146). Production costs are defuzzified by determining the centre of gravity using the known formula. Thus obtained numerical data is the input value for step 2.

CONCLUSION This article has developed a heuristic diagram for making the “purchase or produce” business decision. The problem per se has all the characteristics of uncertainty. A serious problem, therefore, is determining input variables and forecasting all possible circumstances, which is only possible based on subjective estimate. An estimate with a degree of accuracy is much easier to obtain for a range of data than for an individual value. Fuzzy sets can be introduced into the existing decision making models in several ways. As an economic institution, a company bases its existence on the environment, both from the aspect of providing input and from the aspect of achieving and valorising input. Miscellaneous knowledge and experience, and also decision making in the areas of investment, market operations, financial function, production function or research and development, can be considered more fully and exactly applying fuzzy sets. The fuzzy set theory provides a solution to this. Individual steps of the algorithm are based on fuzzy logic rules. The algorithm was verified on multiple numeric examples, and development of an appropriate software product is in progress. The essential feature of this algorithm is that there is no possibility of “setting up” a desirable decision by tailoring input data.

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Figure 9. Decision making with defuzzification

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LITERATURE Kotler, P., & Caslione, J. (2009). Kaotika, upravljanje i marketing u turbulentnim vremenima. Zagreb: Mate. Kotler, P., & Keller, K. (2006). Marketing menadžment (12. izd.). Belgrade: Data status. Kotler, P., Vong, V., Sonders, J., & Armstrong, G. (2007). Principi marketinga (4th European ed..). Beograd: Mate. Kosko, B. (1992). Neural Networks and Fuzzy Systems, Englewood Cliffs: Prentice – Hall, New Jersey. Kosko, B., Satoru, I. (1993). Fuzzy Logic, Scientific American, July 1993. Kosko, B. (1993). Neural Networks and Fuzzy Systems – A Dynamical Systems Approach to Machine Intelligence, Englewood Cliffs: Prentice – Hall, New Jersey. 7. Lee, K., & Carter, S. (2009). Global Marketing Management (second izd.). Oxford: Oxford University Press. 8. Mesaroš. K., Sudarević, T., Sedlak, O., Sudarević, I. (1992) Primena teorije fuzzy skupova u donošenju marketing odluka, XIX Simpozijum o operacionim istraživanjima, Beograd, 13-16. oktobar, Zbornik radova, pp. 145-148. 9. Milisavljević, M. (1995). Marketing (15th ed.). Belgrade: Savremena administracija. 10. Sedlak, O., Ćirić, Z., Ćirić, I. (2013) Strategic Management Under the Conditions of Uncertainty and Indefiniteness, Strategic Management, International Journal of Strategic Management and Decision Support Systems in Strategic Management, ISSN 1821-3448, UDC 005.21:005.33, Vol.18 (2013), No. 1, pp. 62-68. 11. Stoner, J. A., Freeman, R. E., & Gilbert, D. R. (2002). Menadžment. Belgrade: Želnid. 12. Todorović, D. & Kikuchi, S. (1991) Fuzzy skupovi i primene u saobraćaju. Begrade: Saobraćajni fakultet Univerziteta u Beogradu. 1. 2. 3. 4. 5. 6.

DETAILS ABOUT AUTHORS: OTILIJA SEDLAK PROFESSOR zotisz@tippnet.rs MARIJA CILEG PROFESSOR mcileg@ef.uns.ac.rs TIBOR KIS PROFESSOR tkis@ef.uns.ac.rs IVANA CIRIC PHD STUDENT civana@eunet.rs FOR ALL AUTHORS: FACULTY OF ECONOMICS IN SUBOTICA UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA

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MARKETING OF ECOLOGICAL PRODUCTS IN OSIJEK-BARANJA COUNTY MARIJA TOLUŠIĆ ZRINKA TOLUŠIĆ ZDRAVKO TOLUŠIĆ

ABSTRACT

Marketing decisions in modern-day business are made under conditions of growing uncertainty, which cannot be meaNowdays, market shows more and more interest for organic products. Marketing of organic products is special because of specific characteristics of organic products, and so is its marketing mix, too. Statistic data analysis showed that OsijekBaranja county is leader in organic production in Republic of Croatia. Research showed that people know what organic products are, but also that they don't buy them very often. It's also shown that people think that organic products are costly and not promoted enough. Conclusion is that marketing of organic products can be improved in future. KEYWORDS: organic products, marketig, marketing mix, analysis, research, improvement

1. INTRODUCTION In order to expound on the application of the fuzzy set theory in marketing decision making properly, it is necessary to start In the last few years, there was an increase of demand for organically produced products, both worldwide and in our country. To meet the new demand for ecological products on market, manufacturers are passing from conventional to organic production. Conventional production is the one that is using various chemicals, while ecological farming seeks to maximize potential of certain ecosystem. Population around the world is turning to organically produced products precisely because of chemicals used in conventional production. Organic agriculture is rapidly developing and is used in countries all around the world. Consumers are turning to new, healthier products. Production of organic products around the world is rapidly growing, while in Croatia this type of production lags behind the world.

2. MATHERIJALS AND METHODS While preparing this paper methods of statistical data analysis and survey methods were used to collect primary data about knowledge and perception of organic products and their marketing. The survey was conducted over the Internet, on a sample of 104 respondents from the Osijek-Baranja County.

3. ECOLOGICAL PRODUCTION: DEFINITION, AIMS Under ecological, organic or biological farming it is generally thought production of so-called “healthy food”, ie agricultural production without the use of chemicals. Organic farming and food production is defined as a separate system of sustainable agriculture and forestry, which involves growing plants and animals, food production, raw materials and natural fibers as well as processing of primary products and it includes environmentally, economically and socially justified production methods, using the soil fertility and water availability, natural properties of plants, animals and landscapes, increasing yield and resistance of plants to the natural forces with prescriptive use of fertilizers and pesticides, in accordance with internationally accepted norms and principles.1 The general objectives of organic farming are: 1. establishment of sustainable management system in agriculture that:

• respect natural systems and cycles and maintains the conservation of soil, water, plants, animals and their mutual balance, contributing to the high level of biodiversity, responsible using of energy and natural resources such as water, soil, organic matter and air, comply with the high standards of animal welfare and particularly meets the needs of animals in relation to their type; production of high quality, production of a wide range of food and other agricultural products that meet consumer demands for procedures that doesn’t harm the environment, human health, plant or animal health and their welfare.2 Sign “eco-product” is a

• • • • • 1 2

https://www.hrcak.srce.hr/file/93071, 23.03.2013 http://www.zakon.hr/z/427/Zakon-o-ekolo%C5%A1koj-proizvodnji-i-ozna%C4%8Davanju-ekolo%C5%A1kih-proizvoda, 23.03.2013

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guarantee that the product is produced in accordance with regulations on organic production. The label is granted for a period of one year and together with the declaration it confirms the quality of product. Getting a label is associated with the entire system, production, supervision and certification. The rights to use the label “eco-product” are having manufacturers who have obtained a document, certificate, from a legal person.3

4. COMPARISON OF ORGANIC AGRICULTURE IN OSIJEK-BARANJA COUNTY WITH THE SITUATION IN THE REST OF THE REPUBLIC OF CROATIA This section will analyze the following parameters: • The number of subjects enrolled in the register of companies in organic production by countries, • Area of organic production in hectares per county From the following table it can be noted that in the period from 2008 to 2011 the number of subjects enrolled in the register of companies in organic production has increased more than 4 times. It can also be seen that the Osijek-Baranja County is the first by number of registered entities in the Republic of Croatia, and makes slightly less then 25% of the total number of enrolled subjects (one fourth of the total number of entities in the Republic of Croatia). Compared to the second county in the number of registered entities, Sisak-Moslavina County, Osijek-Baranja County has almost 2,5 times as many registered entities, and in comparison with the city of Zagreb, which is the third in the number of registered entities, OsijekBaranja County has over 4,5 times as many registered entities. Table 1: Number of subjects enrolled in the register of companies in organic production STANJE PO ŽUPANIJAMA

Broj proizvođača 2008.

Broj proizvođača 2009.

GRAD ZAGREB

107

ZAGREBAČKA

SPLITSKO-DALMATINSKA

OSJEČKO-BARANJSKA

116

290

365

ISTARSKA

POŽEŠKO-SLAVONSKA

ŠIBENSKO-KNINSKA

KOPRIVNIČKO- KRIŽEVAČKA

BJELOVARSKO-BILOGORSKA

MEĐIMURSKA

KARLOVAČKA

VUKOVARSKO-SRIJEMSKA

VARAŽDINSKA

LIČKO-SENJSKA

Broj proizvođača 2009.

BRDSKO POSAVSKA

VIROVITIČKO-PODRAVSKA

SISAČKO- MOSLOVAČKA

123

128

148

ZADARSKA

KRAPINSKO-ZAGORSKA DUBROVAČKO-NERETVANSKA PRIMORSKO-GORANSKA UKUPNO

632

817

1125

1494

Source: http://www.mps.hr/default.aspx?id=6184 (27.3.2013.)

From the following table it can be concluded that the total area of organic production from 2008 to 2011 has nearly been quadrupled. It is also observed that the Osijek-Baranja County has the highest ecological farmland, measured in hectares, and makes a little less than 28% of the total area of the Republic of Croatia. Compared with Virovitica, which is the second county in the number of acres, Osijek-Baranja county has a little more than twice the organic agricultural land. Compared with the Brod-Poslavina County, which is third in the number of hectares, Osijek-Baranja County has 2,5 times more acres.

http://www.agroklub.com/eko-proizvodnja/certifikat-za-ekoproizvod/2910/,02.04.2013. 27.03.2013.

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Table 2: Areas in organic production STANJE PO ŽUPANIJAMA

Površina (ha) 2008.

GRAD ZAGREB

Površina (ha) 2009.

Površina (ha) 2010.

Površina (ha) 2011.

26,6281

23,8112

967,4363

853,483

880,23063

1150,3869

561,0374

567,1238

195,0891

105,5829

174,9263

455,233

2337,3366

3693,6164

7911,5191

8935,221

98,4827

133,9108

173,2620

389,12

POŽEŠKO-SLAVONSKA

1019,028

1240,2588

1324,3494

1781,348

ŠIBENSKO KNINSKA

139,5002

160,6035

304,6372

417,2

ZAGREBAČKA SPLITSKO-DALMATINSKA OSJEČKO-BARANJSKA ISTARSKA

KOPRIVNIČKO KRIŽEVAČKA

66,2351

82,5971

144,0941

170,55

BJELOVARSKO-BILOGORSKA

201,7772

623,1563

812,4374

1695,14

MEĐIMURSKA

67,2603

323,3867

358,3461

544,889

KARLOVAČKA

365,8178

717,9304

887,7821

815,092

VUKOVARSKO-SRIJEMSKA

212,4309

303,3748

867,4565

1515,425

VARAŽDINSKA

79,94012

73,6046

57,9989

64,17

LIČKO-SENJSKA

283,8505

311,6763

325,5835

1298,43

BRDSKO-POSAVSKA

860,6771

1329,6210

2364,3260

3596,65

VIROVITIČKO PODRAVSKA SISAČKO- MOSLOVAČKA ZADARSKA KRAPINSKO-ZAGORSKA DUBROVAČKO-NERETVANSKA PRIMORSKO GORANSKA UKUPNO

305,2724

395,7174

2490,0690

4148,99

2401,7599

2525,8573

1995,1430

2709,829

356,6569

863,8441

1003,6838

854,6478

11,5375

19,6289

53,3807

74,62

5,29

17,0018

69,7017

245,86

96,0503

98,1402

435,2036

902,78

10010,85

14193,7051

23282,3741

32035,8016

Source: http://www.mps.hr/default.aspx?id=6184 (27.3.2013.)

Concluding remarks: It can be concluded that the Osijek-Baranja County is the most active county in the Republic of Croatia in terms of organic farming, because it is the county with the largest number of registered entities and most organic farmland with an upward trend.

5. AGROMARKETING AND MARKETING MIX No matter which terms you use, marketing, agromarketing, agri-food production or agri-industry marketing, it can be defined as a set of economic activities that begin researching consumer agro-industrial needs (or, in the strict sense of agrifood) products and undertake other business activities that will provide adequate consumer satisfaction and achievement of adequate income (Tolušić, 2011:75). Forms of agromarketing can be as follows:

• • • • • •

Agromarketing from the standpoint of the case studies, Agromarketing in terms of choice of raw materials, Agromarketing from the standpoint of reproductive system, Agribusiness marketing from the standpoint of agricultural and industrial products, Agribusiness marketing from the standpoint of traffic agro-industrial products, Marketing drinks that are considered food (Tolušić, 2011:80).

Marketing mix of organic products is customization of the traditional marketing mix according to the special characteristics of organic production. Product: eco products appear on the market in two forms: as a basic product (eg blackberry) or as a processed product (eg blackberry jam, blackberry wine, vinegar blackberries…). Price: the price of organic products is higher than the proce of conventional products due to high costs of production adjustments. Distribution: distribution of organic products is usually direct; manufacturers are often sellers of goods. Common methods of distribution and of organic products are fairs. It applies to both the principles of distribution of and distribution to themselves. Promotion: advertising is an important way of promoting organic products. Environmentally friendly products are often promoted at trade shows, through direct marketing, personal communication with costumers and tasting.

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6. ANALYSIS OF RESEARCH ON MARKETING OF ECOLOGICAL PRODUCTS IN OSIJEK-BARANJA COUNTY In order to study marketing of organic products in Osijek-Baranja County, an online survey was conducted on a sample of 104 respondents from Osijek-Baranja County in a period of two weeks. Chart 1: Gender of respondents

Source: Own Research

From Chart 1 it can be seen that 62% of respondents were female and 38% were male. Chart 2: Age of respondents

Source: Own Research

Chart 2 shows that most of respondents are in the age group of 19 to 30 years (49%), followed by respondents aged from 31 to 45 years (19%) and the age group of 46-60 years (16%). Smallest percentage of respondents was in the age group -18 and +60 (8%). Chart 3: Incombe per household

Source: Own Research

Chart 3 shows that most respondents have income per household from 1001 to 2000 HRK (total 48%), and there was an equal number of respondents who have income per household less that 1000 HRK and more than 4000 HRK (19%), while 14% of respondents have income from 3001 to 4000 HRK. Chart 4: The concept of ecological products

Source: Own Research

Chart 4 shows that 97% of respondents had heard of the concept of ecological products, which is very satisfactory rate.

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Chart 5: Purchase of organic products

Chart 5 shows that over three quarters of respondents (76%) have purchased organic products, which is very positive. Chart 6: Frequency of buying organic products

Source: Own Research

Chart 6 shows that the largest number of respondents, 26% buy organic food more than once a month, while 60% of respondents buy organic food less than once a month, or do not buy. Only 3% of respondents buy organic products on a weekly basis or more often. This shows that the organic products are not sold so often and attention should be paid on that for the future. Chart 7. The taste of organic products

Source: Own Research

Chart 7 shows how the flavor characteristics of organic products are important for 96% of respondents, and that we should work on it in order to retain customers. Chart 8. The price of organic products

Source: Own Research

Chart 8 shows that a total of 87% of the respondents said that their price is an important feature of ecological products, which means that consumers are price-sensitive, and the price policy must be such that it doesnâ&#x20AC;&#x2122;t threaten the demand for products.

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Chart 9. Place of purchase of organic products

Source: Own Research

Chart 9 shows that the sale of ecological products is important for 51% of respondents, while 18% think it is irrelevant characteristic. 31% of respondents said that place of purchase if not important nor unimportant. From this it can be concluded that the place of purchase is not a decisive criterion in the selection of organic products, but it shouldn’t be neglected. Chart 10. Adequacy of the price of organic products

Source: Own Research

Chart 10 shows that 70% of respondents think that organic products don’t have suitable prices, which is another warning for manufacturers. Consumers are price-sensitive and manufacturers should be cautious with the policy rate. Chart 11. Promotion of organic products

Source: Own Research

Chart 11 shows that almost 96% of respondents thought that organic production is not promoted enough. Promotion is necessary element in today’s marketing mix which shows the presence on the market and without promotion it is very difficult to survive and succeed. The conclusion of the survey: the survey showed that the vast majority of people are familiar with the concept of organic products, that they have bought it at least once, but that environmentally friendly products are not sold very often. That also led to the conclusion that the most important criteria when buying organic products is their taste and price, and that consumer are price-sensitive. There is also conclusion that organic products are not promoted as much as it’s necessary, which leaves space for improvement.

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CONCLUSION Organically produced food is the new trend both in the world and in our country. Although the data in the world shows that more people are turning to healthy food, it is not the situation in Croatia. It can be said that citizens are familiar with organic food and they know what it is, but do not consume the goods. There are many reasons for that. Unlike conventionally produced food, organic one is much more expensive; there is lack of information and ignorance of the importance of the quality of the food we consume daily; as well as too small promotion of organically produced food. We can say that organically produced food is better than conventional food, because it preserves all the natural nutrients typical for such a product. Organic food will have increase of demand, but unfortunately it faces too expensive investments, so as a results there is more expensive final price. Purchasing power therefore will determine what we will eat, so we hope that it will change one day. REFERENCES 1.

Tolušić, Z. (2011): Tržište i distribucija poljoprivredno-prehrambenih proizvoda, Poljoprivredni fakultet u Osijeku, Osijek

https://www.hrcak.srce.hr/file/93071, 23.03.2013.

http://www.zakon.hr/z/427/Zakon-o-ekolo%C5%A1koj-proizvodnji-i-ozna%C4%8Davanju-ekolo%C5%A1kih-proizvoda, 23.03.2013.

http://www.agroklub.com/eko-proizvodnja/certifikat-za-ekoproizvod/2910/, 02.04.2013.

http://www.mps.hr/default.aspx?id=6184, 27.3.2013.

DETAILS ABOUT AUTHORS: TOLUŠIĆ MARIJA, MAG. OEC. LECTURER UNIVERSITY OF JOSIP JURAJ STRSSMAYER IN OSIJEK, DEPARTMENT OF CULTUROLOGY, OSIJEK, CROATIA tolusicmarija@gmail.com TOLUŠIĆ ZRINKA, UNIV. BACC. ING. AGR. STUDENT FACULTY OF AGRICULTURE IN OSIJEK. STUDENT: SCHOOL OF BUSINESS AND MANAGEMENT "BALTAZAR ADAM KRČELIĆ, ZAPREŠIĆ, CROATIA PROF. DR. SC. ZDRAVKO TOLUŠIĆ PROFESSOR UNIVERSITY OF JOSIP JURAJ STRSSMAYER IN OSIJEK FACULTY OF AGRICULTURE IN OSIJEK OSIJEK, CROATIA

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MAKING AND CONSUMING CHARACTERS MASAE KANAI YORITOSHI HARA HAJIME KOBAYASHI MASAAKI TAKEMURA

ABSTRACT

This paper shall introduce a new phenomenon about consumption. This is related to consumption of characters like Mickey Mouse and Hello, Kitty. The phenomenon appears prominently in Japan. In order to examine consumption of characters and the strategies for creating characters, we conducted a case study on a set of marketing strategies of a toy manufacturer in Japan. Traditionally, consumption research is asserted using the uni-methodological paradigm. The uni-methodological paradigm here means that researchers have a methodological exclusiveness stance to any other research approaches. Hirschman and Holbrook (1992) distinguish five non-interchangeable research approaches on consumer research. For instance, from an economic point of view, consumption could be assumed as a problem solving method to increase utility. Baudrillard (1968, 1970) criticized this type of functional consumption. Researchers have often denied the other approaches competitive to their own approaches rather than incorporating them. Character consumption cannot be revealed by such an insulated research stance because consumers would like to consume characters for multidimensional reasons. They consume characters to enhance their utilities. In addition, characters stimulate consumers' sentiments. The possession desire is satisfied by consuming characters. Possessing character goods can create small interest groups and stimulate communication among the group members. Consuming characters is assumed to involve multidimensional aspects: functional, conspicuous, and semiotic consumption. As a result, once we try to understand character consumption, we have to employ the multi-disciplinary approach in contrast to the unimethodological paradigm. Through our case study, we revealed the distinctive marketing strategies in the business of characters. It is necessary for marketers of character goods to regard character consumption as having functional, conspicuous, and semiotic aspects. We can find distinctive characteristics in the market research, product development, advertising, and communication strategies in the process of creating characters. KEYWORDS: Characters, Character universe, Multidimensional Consumptions, Character Development

1. INTRODUCTION The purpose of this paper is to show, still unusual phenomena except in Japan or somewhere in Asia countries, on character consumption. Before our definition of the character, it must be useful that we give some example to understand what character is. They are Mickey Mouse, Donald Duck, Hello, Kitty, Angry Birds, and Pokemon, and so on. Character is defined as an imaginary entity which has specific traits. Character consumption is defined as a buying behavior which tends to buy a specific theme of characters as well. These characters can be transformed into anything, animations, books, dolls (figures), moppets, stationaries, T-shirts, fashion goods, and so on. This trait is very important to understand character business practice. Certain estimation for these products was JPY 2,307.5 billion (2012, EUR 17.48billion). Compared to the other industries, for instance, beer has around JPY 3 trillion, utility (Gas) has JPY 3.8 trillion, restaurants have JPY 4 trillion, and housing has JPY 6 trillion, character consumption is not a small industry in Japan. To understand character consumption must influence to the marketing thoughts. The reason why we focus on character consumption is that there are several interesting characteristics of character consumption. Some consumer sometimes buys character goods as a functional something. Some consumer sometimes buys a character with the memory. In other case, a consumer bought it as collection goods. We can analyze this by conventional marketing methods, modern consumer research techniques (Aaker et al. 2009), and even postmodern consumer research ways (Holbrook 1995). To understand this type of consumption, we do know that it is difficult to understand, but we do not hesitate to use any type of analyzing methods, which is multidisciplinary approach. This paper is consisted by following organizations. First, we will briefly introduce character and character businesses. Specifically, as we will discuss the case of â&#x20AC;&#x153;Capibara-sanâ&#x20AC;? later, we show it in detail. Capibara-san is a character which is originated

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from Capibara. Capibara is a mammal belonged to the mouse species. Second, we will briefly review on character and its business. In this work, we set our discussion background. Third we show our case study. Indeed, it is not based on a rigorous research methodology, but case study tells us a lot of important points on character business. Forth and it will be main body of our paper, we introduce character consumption and development. This case study is mainly based on semi-structured interview of the late project leader of “Capibara-san”. Fifth and the last, we will discuss a meaning of the case and derive some conclusion of character consumption.

2. CHRACTER AND ITS BUSINESS In this section, we will introduce character and its business. An abstract thought is very important in academic studies. But in this case, an example or actual picture is helpful to understand character.

2.1. Character Character is one of the most meaningful concepts. It is literally and fundamentally defined as special something which can be identified by itself and distinguish from something else. Its main meaning refers to features and traits of something; it can describe what that something it is. Character sometimes refers to figures. For example, Japanese language has three ideograms, two Japanese syllabaries (hiragana and katakana) and Chinese characters (kanji). All of them have own unique figures, which can discriminate from the other ideograms. And two Japanese syllabaries do not have meanings by themselves, just sounds, but Chinese character has meanings. Compared to above literal meanings, Foster (1927) explained character in the novel. In general, a novelist tried to pursuit the value of human experiences by developing the characters in the story. Against this kind of understandings, Forster (1927) emphasized that characters were not necessarily the existing real people; rather they are like real people. Characters’ lives were not only different from real lives, but also no need to be similar. Rather sometimes character is described as a person who has overwhelmingly biased traits. There have been a lot of characters in novels. Chandler (1939) created a toughness detective, Philip Marlowe; Fitzgerald (1925) fostered Gatzby and expressed his world; and Salinger (1951) described Holden Caulfield as an icon for teenage rebellion in "Cather in the Rye." These were all characters. As Foster (1927) indicated, characters sometimes could seem to be more real than the people around us, and this was because a novelist was able to reveal the character's hidden life. In daily life we never understand each other, neither complete clairvoyance nor complete confessional exists. But people in a novel can be understood completely by the reader, if the novelist wishes; their inner as well as their outer life can be exposed. We cannot understand each other in real lives. But in the novel we can perfectly know character in detail. For example, Chandler (1939) made Philip Marlowe, a toughness detective. Chandler left many notes about Philip. Philip was 33 years old, when he investigated elderly General Sternwood’s case in The Big Sleep in 1936. He was born in Santa Rosa, California. He had a couple of years at college and some experience as an investigator for an insurance company and the district attorney's office of Los Angeles County. Marlowe was slightly over 6 feet (180 cm) tall and weighed about 190 pounds (86 kg). He first lived at the Hobart Arms, on Franklin Avenue near North Kenmore Avenue (in The Big Sleep), but then moved to the Bristol Hotel, where he stayed for about ten years. By 1950 (in The Long Goodbye) he had rented a house on Yucca Avenue and continued at the same place till early 1952 in Playback. His office, originally on the 7th floor of an unnamed building in 1936, was at #615 on the sixth floor of the Cahuenga Building by March/April 1939 (in Farewell, My Lovely), which was on Hollywood Boulevard near Ivar. Even he was a detective, but he generally refused to take divorce cases. He smoked and preferred Camels. At home he sometimes smoked a pipe. A chess adept, he almost exclusively played against himself, or played games from books. He drank whiskey or brandy frequently and in relatively large quantities. In psychological effect, this detail, and somewhat unusual setting around the characters, makes us to have sympathies to the character. This sympathy sometimes played important role in our interpretations of the novel and story. Once we had sympathy to character, we often complemented even there were several lucks in terms of characters' settings. This effect is sometimes called atmosphere, or universe. The atmosphere affects our understanding for the reality of characters, as if they are real human beings. Once a novelist could create this atmosphere or universe well, characters drove their realities by themselves. At that time, the novelists may not tell us all they know, but they will give us the feeling that though the character has not been explained, it is explicable. We define character as a morpheme with an imaginary entity which can be metamorphosed into any media.

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Now, we understood a character and its effect; character affects our understandings and sympathetic understanding his/ her environment. And then, we shall show character business in next section.

2.2. Character Business In this section, we will briefly review character business in several aspects. Character business is, actually not unusual, rather cliché. That is to say, companies sometimes develop, it sometimes is called a mascot, characters. For instance, Michelin Tire has Bibendum. Uncle Sams Foods has Uncle Sam. Planters, a division of Kraft Foods, has Mr. Peanut as a mascot. Some companies have characters, however, these character cannot be character business. Character business means to sell character itself, not use characters for promotion or advertising tools. In character business, character shall be sold as a product. Consumers buy characters as products which have utilities, functions, qualities, and meanings and so on. Then, we are going to look up character business.

2.2.1 Character Business As we indicated, something that can be sold as goods is needed in character business. And this "something" must have figure, meanings, atmosphere and universe. Indeed brand is a kind of characters. It has meanings, atmosphere, and even universe, and consumer rather buys brand. So, we have said character business is unusual. Even though, character business is not easy because it is difficult to establish characters. Philip Marlowe is the character, but few tried to sell him as the character, except in the books. Some example of successful character businesses can be indicated as follows. They are Walt Disney and Sanrio. Without any doubt, Mickey Mouse and his friends are most successful characters in the world and ever. They are actually everywhere. Mickey Mouse appears not only in the movie, theme park, books, and animations, but also products of T-shirts, dishes, cups, and even cookies and candies. Compared to Mickey Mouse, Hello, Kitty (by Sanrio) is not so famous globally, but she is going to invade into everything. Walt Disney and Sanrio definitely have characters. They develop, sell, and maintain their characters for their businesses.

2.2.2. Character Business in Japan As Mickey Mouse can be found all around the world, character business literally can be developed by anyone who once wanted. Even though there are some unique aspects in Japanese character consumptions. There are many characters in Japan. Some of them can be business, the others cannot be that. Japanese character business is around JPY 2,307.5 billion (2012, EUR 17.48 billion). Figure 1 indicates market volume of character market in Japan. It is lesser compared to the last year, but it is still negligible size. The revenues of The Walt Disney Company resulted over USD 42,278 million (42billion278million). From the company financial report 2012, we can conjecture the sales revenue of character business mainly from licensing. It stated “Our Consumer Products segment generates revenue from licensing characters from our film, television and other properties to third parties for use on consumer merchandise, publishing children’s books and magazines and comic books, and operating retail stores, English language learning centers and internet shopping sites.” It resulted 3,252 million, in 2012. The sales performance of Sanrio, Hello, Kitty, is over JPY 46.6 billion (2012, EUR 358 million). There are tremendously many characters in Japan. Japanese manufactures often generate characters. Even local governments sometimes own original characters.

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Figure 1. Market Volume of Character Market in Japan 2,650 2,600 2,550

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3. RESERACH QUESTION AND THE CASE We have briefly review definition of character and character business in Japan. Compare to the organization of orthodox research paper, the reason why we choose this format was to share knowledge about character and character business in Japan. We supposed there was little recognition in terms of character business in Japan. And then, we will take a new turn on our research question as follows.

3.1. Research Question in Our Study In our paper, not only we would like to introduce Japanese character business, development and consumption, but also develop some analytical framework to understand them. In this section, we will state to Capibara-san case on both development and consumption. Before in detail of the case, we confirm brief history of the case. Capibara-san is developed by Banpresto Co. LTD (Banpresto, hereafter). The company was established in 2008. Before 2008, it was a subsidiary of Bandai Co. LTD (Bandai, hereafter). It is one of the largest toy manufactures in Japan. Sales of Bandai in 2012 was JPY 132.35 billion (EUR 1.02 billion). Number of employees is 1,188. As Banpresto is not public company, little information was disclosed. This project started in 2002. The project was first organized by two full-time workers and nine part-time workers. It was called Try Team. Ms. Hinako Endo became a project leader. Our information in terms of development and consumption of Capibara-san were from her. The purpose of Try Team was to do something new and market research. The team was expected to investigate and grasp the consumer behavior of Japanese high school girls. Because, Japanese high school girls influence trend and were constructed with a big character market in Japan. They are main customers, indeed. Parent company of Banpresto was Bandai, which had no character of their own, whereas it was good at product commercialization by licensing other companiesâ&#x20AC;&#x2122; characters. Then, Banpresto was given the issue to clear the problem to have characters of their own companyâ&#x20AC;&#x2122;s, and the team preceded it. As for an original character development, one member in the team was good at drawing, so she drew more than 100 characters and the team did consumer preference research of them. Capibara-san was one of them. From the early stage, Capibara-san got great popularity, so the team tried to make some limited trial products such as stuffed animal. Such trial products got great popularity, so the team got to convince that it would be assured to commercialize them. The first product of Capibara-san was small stuffed toy. They were sold out in an instant, so the members of the team gradually got to convince the success of the character-Capibara-san. Now, Capibara-san has 10 categories of

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the products; consumer merchandising, sundries, stationeries, puppets and moppets, toys, snacks and treaties, lottorey, Gacha-Gacha, and magazines and books. From upper left side to clockwise, they are iPhone cover, porch, swimming bag, notebooks and stickers, mechanical pencils, and paper clips. Our research question is focused upon character marketing; character development and consumption. Some character can be goods, but some cannot be that. What is crucial to making and consuming character? We will consider them through our interview of project leader.

3.2. Character Development As we indicated before, Capibara-san received highly reputation at the consumer research in the early stage around 2003. Surprisingly, first drawing of Capibara-san was just doodle. A designer drawn many drafts, including Capibara-san, but she did not know real Capibara well. Ambiguous drawing made a roundish gentle character at this time. Then, Capibara-san was born. Ms. Endo and her team made a concept of Capibara-san. However at that time, Capibara-san was not a formal product of Banpresto. It was just prototype and limited item. There was still a long way to go to commercialization because Bandai was good at licensed commercialization, not original character development. It was difficult to decide what type of toy might be suited to first character goods. After two years later, Try Team decided to develop first items of Capibara-san. They were book and moving stuffed doll. Try Team had successful experience introducing book. In 2005, Try Team contracted test marketing opportunity with 11 stores in Tokyo. Capibara-san was sold out every store within only two weeks. Ms. Endo had strong confidence on Capibara-san business at that time. Even though she and Try Team deliberated carefully about next product developments. As first introduction of Capibara-san was succeeded, many licensees asked Try Team to develop new products by own. Ms. Endo, however, did not accept with these offerings. She stickled to design and develop Capibara-san items by own, for not only quality control, but also maintaining Capibara-san universe. Ms. Endo confessed retrospectively about successful of this character business. First, character must have universe, and its story, then, commercialization. Second, she and Try Team banned to develop Capibara-san goods freely. They limited the number and amount of quantity of Capibara-san goods. Once she refused to make Capibara-san mules because they were not suited to Capibara-san universe. She could not imagine that Capibara-san was under the foot. And third, she did not have any commitment of revenue. Her mission was to make something new, not manage new products. So she and Try Team were not assigned any obligation in terms of financial performances.

3.3. Character Consumption In consumer research at the early stage of Capibara-san, it received the highest evaluation in Japan. It was â&#x20AC;&#x153;kawaii (so cute and pretty).â&#x20AC;? Capibara-san always got such applauses well. Ms. Endo suggested tow more important points of character consumption. First, consumers have several expectations to buy and own characters. In this paper, we know that consumers find at least three factors in their expectations; role, intrinsic, and figure (Odagiri 2010). Role refers to a function which generates a reason by which consumer to connect with characters. Some consumer would like to make character as a friend. Another would like to make character as a father. A good character can morpheme anything consumer wants. Intrinsic is sometimes called core of character. It is a kind of identifiers. Intrinsic figures out character identity. This factor influences consumer's attitude to characters. Figure is a shape of character. Some character in comic books does not have three-dimensional figure, it is drawn on the papers as a two-dimensional shape. This factor is very important for character business. Rather figure is a crucial for the business because this figure essentially becomes many products of characters. Consumer prefers to the figure first, anything else. Ms. Endo told us one impressive episode. One day, Try Team planned a picnic to watch real Capibara at the zoo with Capibara-san. A young lady who was anthropophobia attended this picnic with her mother. Ms. Endo did not know that. And a young lady enjoyed the picnic. After picnic, her mother sent a letter to Ms. Endo with deeply appriciation. She said that her daughter had such a kind of sick, but she knew this picnic through Capibara-san website, and she asked her mother to take to the picnic with Capibara-san. A young lady could open her mind just to Capibara-san, but anything else.

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Second, consumer can be classified at least three categories in character consumption. Figure 2 describes these categories. This figure 3 is implicitly constructed with two dimensions. First dimension is referred to degree of love to characters. There may be three categories. There is an enthusiastic customer at the top of the level. These kinds of customers are sometimes called “Nerd” and buy every goods and comprehends character’s universe very well. Against top of the level, there are consumers who pay small attention to character goods at the bottom of the level. Although they sometimes bought character goods, they had never collected them. This attention customer buys character goods because they are fad. We can label them as just “Consumer.” Between Nerd and Consumer, there is a moderate customer. It can be called “Fun.” Fun often buys character goods, and sometimes collects them. In contrast, horizontal axis means size of the market. Of course, this market size has not been evaluated quantitatively and statistically in any way. This figure is just notification, but this figure is not nonsense, we have some confidence that this roughly represents distribution of the character customers. In Figure 3, there are still some legends, but we will explain them later. Figure 2. Classification of Character Customers

Degree of Love Narrative story world

Nerd

Enthusiastic

Line extension

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Attention

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Market Size

4. ANALYTICAL FRAMEWORK Character development and consumption somewhat different from conventional marketing, that prevailingly means 4P marketing (Kotler, P. and Keller, K.L. 2011). So, we believe that it is better to develop another way of though for understanding character marketing.

4.1. Previous Studies on Consumer Behavior Traditionally, consumer behavior research has been conducted by taking interdisciplinary approaches composed of economics, psychology, anthropology, sociology, and social psychology although economic approach was taken for the research at first. Katona (1951), a precursor of an interdisciplinary approach to consumer behavior, took the economic psychological approach. Bourne’s (1957) study on reference groups, Martineau’s (1958) study on social classes, and Lazersfeld’s (1959) study on personal influence can be classified into the economic sociological approach. After the 1960s, a lot of studies on the relationships between consumers’ behavior and their life styles were developed. Howard and Sheth’s (1969) work significantly contributed on building a comprehensive model for decision making of consumers. Bettman’s (1977) model of consumers’ information processing had a meaningful contribution on the development of consumer behavior theory. In the 1980s, a competitive approach against the traditional approach was introduced by Holbrook and Hirschman (1982), and Hirschman and Holbrook (1982). They focused on the experiential aspect of consumption and hedonic consumption. They also criticized the traditional consumer research perspective based on positivism, and took an interpretivist approach. Hedonic consumption is defined as those facets of consumer behavior that relate to the multisensory, fantasy and emotive aspects of product usage experience (Hirschman and Holbrook, 1982). In traditional consumer behavior theory, consumers are assumed to satisfy their needs and wants and to improve their utilities by consuming products and services. Products and services are objective entities regardless of whether they are tangible or intangible in the traditional consumer behavior perspective. In the hedonic consumption perspective, however, products are viewed as subjective symbols (Hirschman and Holbrook, 1982). In addition, while traditional consumer research tends to focus on package goods and durables as research objects, hedonic consumer research’s objectives are many kinds of arts (e.g., opera, ballet, modern dance, painting, photography, movies, rock concerts, fashion apparel) (Hirschman and Holbrook, 1982).

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Consumer behavior perspectives have tended to be mutually exclusive. The researchers have had a kind of methodological exclusiveness stance against other methodology. Character consumption, however, cannot be revealed by such a methodological exclusiveness stance because it means consumption of tangible goods while containing the aspect of hedonic consumption.

4.2. Character Consumption as multidimensional Consumption Focusing on character consumption, we would recognize that we should have an integrated perspective to investigate character consumption. The previous perspectives of consumer behavior research are not mutually exclusive but complementary each other. Figure 3 illustrates a tentative conceptual framework to investigate character consumption. Consumers improve their utilities through consumption of character products; interact with each other and express themselves by possessing and carrying on the goods; and experience the stories where the characters are living. We consider that character consumption should be observed from multidimensional views. In the conceptual framework, characters play a significant role as symbols. Figure 3. Analytical Framework of Character Consumption

5. CONCLUSION We have worked some tasks on character marketing; making and consuming character. In this section, we will summarize our findings and opinions from our case study and analysis. First, we will unfold some discussion points and some research topics now we are doing. And then, second, we will suggest managerial and theoretical implications.

5.1. Discussions In this case study, we would like to suggest that character marketing is not unusual, but it is not easy. There are several notifications to develop characters. First, the figure is the most important factor for making characters because consumers buy figure, not anything else. Second, however, character universe must be needed. Enthusiastic consumer tried to comprehend characters' background. This background told us what the character is and why they exist and are beside consumers. The case of Capibara-san, the consumer who had anthropophobia found friendship with them. Capibara-san story can be derived when characters had universe. From this case, and from utility school perhaps, a causal relation can be derived. That is to say, Capibara-san had such factor to solve anthropophobia problems. So, include such a kind of factors into the character when a company makes a certain character. Against this type of utility perspectives, interpretation school suggests that no one can find any influential factor before consumer encountered characters. Rather consumer proactively gives meanings on characters. In this case, there

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is an interaction between consumer and character universe rather causal relation. It is easily recognized that which school could give us better understanding of consumer behavior. Just we can say both can be useful. In regard to making characters, one important thing was narrow focus on character marketing. Ms. Endo strongly emphasized to limit the number of products when her project team introducing per a year. From this case, one implication can be derived, that is to say, to stimulate consumer desires. So, character goods which were produced in limited numbers can be useful marketing method. Unfortunately, this is a contradicted implication. Why limited number can stimulate consumer desire? Any product can stimulate consumer desires. If so, it is natural thought that many product introductions stimulate consumer desire much. But we do not decide which a better marketing technique is so far.

5.2. Implications In this paper, we explored character business in Japan. Our main claim is that it had better to employ multidisciplinary approach for understanding character business. Especially, consumer research should employ multidisciplinary approach. According to this consumer research, as we illustrated in Figure 3, marketing might be changed. At least, there are three categories of character consumers. Then, we can suggest different marketing practices to these different consumers. Indeed, we do not have an appropriate analytical method so far. We continue to explore character business in the future. In this paper, we have just introduced to develop and consume characters. There is still long way to go. We know it is not easy, but we will do it, not because it is easy, but because it is hard. LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Aaker, D. A., Kumer, V., Day, G. S., and Leone, R. (2009), Marketing Research, (10th Edition), John Wiley, New York, NY, USA. Baudrillard, J. (1968), The System of Objects, (Translated by James Benedict), Verso, Brooklyn, NY, USA. Baudrillard, J. (1970), The Consumer Society: Myths and Structures, (Translation by Chris Turner ), Sage Publishing, London, UK. Bettman, J. R. (1979), An Information Processing Theory of Consumer Choice, Addison-Wesley Publishing Company, Reading, MA, USA. Bourne, F. S. (1957), “Group Influence in Marketing and Public Relations,” R. Likert and S. P. Hayers, Jr. eds., Some Applications of Behavioural Research, pp.207-257. Chandler, R. E. (1939), The Big Sleep, Alfred A. Knopf, New York, NY, USA. Fitzgerald, F. S. K. (1925), The Great Gatsby, Charles Scribner’s Sons, New York, NY, USA. Foster, E.M. (1927), Aspects of the Novel, Edward Arnold, London, UK. Gabler, N. (2007), Walt Disney: The Triumph of the American Imagination, Vintage Books, New York, NY, USA. Hirschman, E. C. and Holbroook, M. B. (1982), “Hedonic Consumption: Emerging Concepts, Methods and Propositions,” Journal of Marketing, Vol. 46, No. 3, pp. 92-101. Holbrook, M. B. (1995), Consumer Research: Introspective Essays on the Study of Consumption, Sage Publications, Thousand Oak, CA, USA. Holbrook, M. B. and Hirschman, E.C. (1982), ”The Experiential Aspects of Consumption: Consumer Fantasies, Feelings, and Fun,” Journal of Consumer Research, Vol. 9, No. 2, pp. 132-140. Howard, J. A. and Sheth, J. N. (1969), The Theory of Buyer Behavior, John Wiley & Sons, New York, NY, USA.

Katona, G. (1975), Psychological Economics, Elsevier, New York, NY, USA. Kolter, P. and Keller, K.L. (2011), Marketing Management, (14th Edition), Prentice-Hall, Upper Saddle River, NJ, USA. Martineau, P. (1958), “Social Classes and Spending Behavior,” Journal of Marketing, Vol. 23, No. 2, pp.121-130. McCraken, G.D. (1990.) Culture and Consumption: New Approaches to the Symbolic Character of Consumer Goods and Activities, Indiana University Press, Bloomington, IN, USA. 19. Lazersfeld, P. F. (1959), “Reflection on Business,” American Journal of Sociology, Vol. 65, No. 1, pp. 1-31. 20. Odagiri, H. (2010), What is Character? (in Japanease), Chikuma Shobo, Tokyo, Japan. 21. Salinger, J. D. (1951), The Cather in the Rye, Little Brown and Company, New York, NY, USA. DETAILS ABOUT AUTHORS: MASAE KANAI ASSOCIATE PROFESSOR FACULTY OF ECONOMICS, OSAKA UNIVERSITY OF ECONOMICS AND LAW OSAKA, JAPAN masae@keiho-u.ac.jp

HAJIME KOBAYASHI PROFESSOR MEJI UNIVERSITY, SCHOOL OF COMMERCE TOKYO, JAPAN hkoba@kisc.meiji.ac.jp

YORITOSHI HARA ASSOCIATE PROFESSOR MEIJI UNIVESITY, SCHOOL OF COMMERCE TOKYO, JAPAN hara@kisc.meiji.ac.jp

MASAAKI TAKEMURA PROFESSOR MEIJI UNIVERSITY, SCHOOL OF COMMERCE TOKYO, JAPAN takemura@meiji.ac.jp

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EATING HABITS OF YOUNG PEOPLE AS THE BASIS FOR NEW PRODUCT DEVELOPMENT JADRANKA IVANKOVIĆ MAJA DAWIDOWSKY MAMIĆ MARTINA MAJIĆ

ABSTRACT

Market-oriented companies that operate in a highly competitive environment pay particular attention to adjusting their offer to the needs and wants of the selected market segment. At the same time, these needs, wants, and expectations of the targeted segment change along with the changes in living conditions, life styles, and gained experiences. For these reasons, in order to survive, maintain and/or improve their market position in relation to competitors, companies continually strive to introduce to the market new, innovative, or at least modified products. Companies in the food industry are devoting more and more time and attention to studying the needs and desires of existing and potential consumers and involving them in the process of new product development. For the purposes of this paper eating habits of young people were explored. The study was conducted on a sample in the age group from 15 to 30 years. A quantitative survey on a sample of 200 participants aged from 15 to 26 was done by a questionnaire. Qualitative research was conducted in three focus groups with respondents aged between the ages of 18 and 30. Research results have indicated the existing habits of young people when using food products as well as their experience in the preparation and consumption of food. As a result of this research, new ideas and suggestions for development of food products were collected; this was also one of the goals of this study. KEYWORDS: food companies, new product development, market research, consumer habits, consumer experience.

1. INTRODUCTION In today’s competitive surroundings, market orientation is extremely important for the survival and growth of a company. “Market oriented companies are those that consistently apply marketing concepts” (Nefat, Belullo, 2000, p. 1210). Orientation to the needs of the buyer is the central element of the marketing concept. Besides the buyer, some definitions also stress the importance of competition, so marketing concept is defined as a “philosophy in which planning and coordination of all activities goes towards the primary goal of satisfying the needs of the buyers and also the most functional means for achieving a competitive advantage and reaching company goals (Boyd, Walker, 1990, p. 70). Kohli and Jaworsky (1990, p.6.) define market orientation as “ the flow of information about the market, present and future needs of the customers, which is spread through the entire organisation, spread of the information among the departments, and proper reaction of the entire organisation.” The information gathering does not refer only to market research but also to information about other events in the surroundings, including competition. Market orientation in a wider sense is defined by Narver and Slater (Narver, Slater, 1990, p 21) as the “organisational culture which very effectively establishes behaviour needed for creating superior values for consumers and thus continually superior business results.” Many similarities found in definitions by different authors were summarized by Dlačić in the following way: 1. orientation towards consumers and creation of value for consumers, 2. importance of the spread of knowledge (information), 3. coordination of marketing and other functional activities 4. readiness to react and take specific actions, 5. orientation towards the environment and influences of interest groups1 Based on the above-mentioned, it is obvious that market oriented companies that conduct business in a competitive environment have to pay particular attention to adjusting their offer to the needs and wishes of the selected/targeted market segment.

Dlačić J. (2005): Customer orientation in Croatian Companies, University of Ljubljana, Faculty of Economy, Master’s thesis

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At the same time, the needs, wishes, and expectations change along with changes in lifestyle or living conditions, or based on the acquired experience of present and potential consumers. At this time of continual changes on the market and introduction of new products and technologies as well as new ways of consumer-thinking, it is necessary to continually follow the changes and adopt to the market trends. For this reason, in order to survive, keep and/or improve their position relative to competition, companies continually try to bring to the market completely new, innovative or at least modified products from the existing assortment. According to the research project Innovation 2010 conducted by Boston Consulting Group on a sample of 1 590 managers from all over the world 72% of the surveyed people believe that innovation falls under the three leading priorities of a company (compared to 64% in 2009); a total of 84% of surveyed persons believe innovation is important in order for companies to profit at times of economic recovery. Further, 61% respondents claim that their companies plan to increase their investment into innovation. The research also indicated the connection between investments into innovations and business results. Innovative companies, based on the business results of the past three years achieve on the average 12.4% better business results than companies that do not introduce innovations2. In Croatia, similar research was conducted in 2013 and included 135 production and programming companies. Of those, 35% of companies stated they had no intention of increasing their investments in research and development in spite of the crisis3. The process of development and improvement of an existing product passes through seven key developmental stages4: (1) generation of ideas, (2) selection of ideas, (3) development and testing of the concept, (4) development of the marketing strategy, (5) business analysis, (6) test marketing, and (7) commercialisation. Correctly defined consumer wishes and needs are the basis of the entire process of developing a new or modifying an existing product. Therefore there is an increasing interest in applying the so-called “tailor-made” specific market research projects. Keeping in mind the process of developing a new product demands considerable resources (staff, equipment, funds, time), the market research methods are used not only to collect data but also as a corrector during specific phases of product-development. Market research thus cannot, in total, eliminate the risk from new product development process, but it can help by reducing it significantly. According to the conducted research (Prester et al., 2012.) Croatian companies selected launched an average of four (4) modified and three (3) completely new products a year. Product development in Croatian companies lasts more than seven (7) months while modification of an existing product lasts over five (5) months.

2. RESEARCHING DIET HABITS OF THE YOUTH IN THE REPUBLIC OF CROATIA Development of a new product in the food industry is a continual process to which peculiar attention is paid as it determines profits, organisational and business survival of economic subjects. The food industry is specific as food production companies pay increasing attention and time to potential and existing customers, stressing their role in the development of new products. Croatia is a country with strong influences of different cultures, a country with excellent cuisine and diverse eating habits (especially if age differences among the population are observed). For this reason it is difficult to discuss eating habits of Croats under one roof. In order to portray eating habits of young people and thus create a picture of existing and potential needs of the market, research on the youth was conducted. Focus was put on youth between 15 and 30 years of age, i.e. high school and university students, as well as young people who live alone and start earning their own living. Qualitative and quantitative reasearch was conducted with the goal of detecting certain eating habits, trends, as well as the reasons for such behaviour. Qualitative research was conducted using the focus group method, and based on the achieved results a questionnaire for the quantitative part of the research was prepared. In total there were three (3) focus group with young people between the ages of 18 and 30, while the quantitative part of research was conducted using a sample of 200 examined persons aged between 15 and 26.

ndrew, J.P. and others (2010.): Inovation 2010, The Boston Consulting Group, (http://www.bcg.com/documents/file42620.pdf), (24.04.2013.) Prester J. i drugi, (2012.): Menadžment inovacija 2012., Katedra za organizaciju i menadžment, Sveučilište u Zagrebu, Ekonomski fakultet Zagreb, (Innovation Management, Chair for organization and management, University of Zagreb, School of economics) (http://web.efzg.hr/dok/OIM/jprester//menadzment%20 inovacija/Menadzment%20inovacija%202012%20izvjestaj.pdf) (10.04.2013.) 4 Kotler P., Keller, K. L., (2007.): Marketing Management- 12th edition, MATE, Zagreb 2 3

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3. RESULTS OF THE QUALITATIVE RESEARCH OF THE EATING HABITS OF YOUNG PEOPLE IN THE REPUBLIC OF CROATIA In qualitative research using the focus-group method (three focus groups were questioned) a total of 23 persons aged between 18 and 30 were examined. In focus groups common factors that influence the eating habits of young people in Croatia were defined. The main factors are as follows: fast pace of life with many obligations, which leads to skipping breakfast and other meals and consuming fast food; life outside of the native region where young people only start adapting to independent life and accordingly only then start thinking about own nutrition; as well as the lack of financial means, which influences choosing cheaper products. Women pay slightly more attention to their meals and diversity of nutrition than men, who are slightly more oriented toward ready-made food. Due to the fast pace of life and numerous obligations, the beginning of independent life of young people is often marked by irregular eating and lack of food-preparing experience. It is common that young people living alone skip meals, eat fast food, food from bakeries, half-prepared or prepared pre-cooked food bought in supermarkets. The examined young people also frequently mention lack of enthusiasm for cooking and preparing meals for just themselves. Another important factor is financial means. During this time of crisis young people often have limited income or limited financial support of parents. Limited financial means make them turn towards cheaper food products and cheaper brands. They are familiar with many brands of food products and they perceive them as being of higher quality. They, however, find them too expensive for their financial situation.

4. RESULTS OF QUANTITATIVE RESEARCH OF THE EATING HABITS OF YOUNG PEOPLE IN THE REPUBLIC OF CROATIA The quantitative part of research was conducted using an on-line survey. Questions were asked based on the qualitative part of research, in order to gain more detailed information about the behaviour of young people in particular situations. Two-hundred (200) young people between the ages of 15 and 26 participated in the survey, out of which 58 were male and 142 female. Sixty-nine (69)% of respondents were in the age bracket 15 to 20 and 131 were in the bracket of 21 to 26 years of age. The quantitative part of the research confirmed the results of the qualitative research in the segment of how much attention is paid to nutrition. Sixty-one (61)% of the surveyed persons do not eat breakfast every day, but skip it either sometimes or always. Out of those who do eat breakfast, 43% often eat it “on the go,” something from the bakery or fast food. Fifty-five (55)% of respondents replace a skipped meal with fast food; 83% very often and 7% even daily consume some type of fast food. A large percentage (87%) of the surveyed persons in the age group between 21 and 26 sometimes consume fast food, while in the age bracket of 15 to 20 the percentage is slightly less high (74%). (See Table 1) That finding was confirmed with a hypothesis equality (z-test) where the z-value was 2.315 , which is a statistically significant difference among the respondents. Table 1. Frequency of “fast food” consumption (in %) Total

Gender

Age

Male

Female

15-20

21-26

Never

6.5

10.3

4.9

8.7

5.3

Sometimes

82.5

79.3

83.8

73.9

87.0

Every day

7.0

8.6

6.3

8.7

6.1

Do not know

4.0

1.7

4.9

8.7

1.5

Source: authors’ survey

Further results indicate that 26% of surveyed young people rarely eat fruit (Table 2) while 18% does not eat vegetables (not including potatoes) at all. An interesting fact is fruit consumption, which is a daily thing among the younger age group, up to 20 years old, while the older age group consumes fruit mostly 2 to 3 times a week (Table 3). A reason might be living with parents (15 to 20 years old), where parents still take care of buying and providing food, and thus have influence on the se5

For data to be statistically significant and have 95% reliability, the z-value should be 1.96 or higher. To have 99% reliability and statistically significant data, the z-value should be at least 2.58

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lection of food products. The older (21 to 26 ) population, when it starts living alone, has different areas of interest, different new obligations and challenges, and is only working on re-defining their behaviour patterns outside of the parents’ home. Table 2. Frequency of fruit consumption (in %) Total

Gender

Age

Male

Female

15-20

21-26

Every day

24.5

22.4

25.4

33.3

19.8

2-3 times a week

43.0

39.7

44.4

29.0

50.4

Very rarely

26.0

27.6

25.4

29.0

24.4

I do not eat fruit

6.5

10.3

4.9

8.7

5.3

Source: authors’ research

The collected z-values were calculated in order to verify if significant statistical differences between the two age groups exist, but the differences among the respondents were the same as in the first two answers. Table 3. Frequency of fruit consumption - z-value according to the age brackets z-value 15-20 vs 21 – 26 years old Every day

2.0996

2-3 times a week

-2.8907

Very rarely

0.695

I do not eat fruit

0.910

Source: authors’ research

Further, 43% of surveyed young people consume sweets on a daily basis, and among those who do not consume sweets at all there are significantly more men than women (17 vs. 3%; z-value=3.63). When thirsty, the respondents most often drink water and fruit juices (Table 4). Women drink more water than men, while men drink more fruit juices than women (Table 5). Table 4. Beverage consumption (in %) Total

Gender

Age

Male

Female

15-20

21-26

Water

67.5

53.4

73.2

60.9

71.0

Fruit juices

21.0

34.5

15.5

21.7

20.6

Carbonated drinks

9.0

12.1

7.7

13.0

6.9

Other

2.5

0.0

3.5

4.3

1.5

Source: authors’ research

Based on the results z-values (z-scores) were calculated in order to verify if a significant difference according to gender exists. The previously mentioned statement about differences between male and female population in consumption of water and fruit juices was confirmed.

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Table 5. Beverage consumption - z-values according to gender z-values male vs female Water

-2.7118

Fruit juices

2.9929

Carbonated drinks

0.969

Other

-1.447

Source: authors’ research

Most surveyed persons (58.5%) have always or mostly the same diet, while 41.5% introduce some novelties to their diet. As much as 65% of those surveyed believe that eating habits of young people must be changed.

CONCLUSION The conducted research indicated eating habits of the young, their usage of specific food items, their experience with food preparation and consumption, and possibilities of developing new products; it has thus met the set goals. Based on the research results it could be concluded that young population, living at a fast pace and having numerous obligations often neglect healthy eating habits. Meals, most often breakfast, are substituted by fast food and/or bread, and at the beginning of their independent life, many do not pay sufficient attention to the importance of quality and regular nutrition. Limited financial means are often used for other purposes, rather than on purchasing quality food products. Although research indicates young people are aware of the deficiencies in their nutrition (65% of surveyed persons believe the young population has to change their eating habits). focus groups indicate that it is difficult to put in the additional effort and make those changes. Based on the above-mentioned, it could be concluded that there is room on the market for the selected marketing segments for developing and offering food products adapted to the needs of the younger population, their purchasing power, as well as their lifestyle. REFERENCES 1. 2. 3. 4. 5. 6. 7. 8. 9.

Boyd, H. W., Jr. i O. C. Walker, Jr. (1990.) Marketing Management: A Strategic Approach, Richard D. Irwin, Inc., str.70. Andrew, J.P., Manget, J., Michael, D.C., Taylor, A., Zablit, H., (2010.) Innovation 2010, The Boston Consulting Group, (http://www.bcg.com/documents/file42620.pdf) (24.04.2013.) Dlačić J., (2005.) Orijentacija prema potrošačima u hrvatskim poduzećima, Sveučilište u Ljubljani, Ekonomski fakultet Ljubljana, magistarski rad Knapić Salamon Đ, (2009.) Važnost istraživanja potrošača i distribuiranog R&D u ranim stupnjevima razvoja novog prehrambenog proizvoda, Hrvatski časopis za prehrambenu tehnologiju, biotehnologiju i nutricionizam 4 (3-4), str. 69. - 76. Kohli, A. K., Jaworski, B., J., (1990.) Market Orientation: The Construct, Research Propositions, and Managerial Implications, Journal of Marketing, 54, April, str. 1. - 18. Kotler P., Keller, K. L. (2007.) Upravljanje marketingom, 12 izdanje, MATE, Zagreb Narver, J. C., Slater, S.F., (1990.) The Effect of a Market Orientation on Business Profitability, Journal of Marketing, October, str. 20. - 35. Nefat, A., Belullo A., (2000.) Utjecaj stupnja usvojenosti marketing koncepcije na profitabilnost poduzeća, Ekonomski pregled, 51 (11-12), str. 1210 – 1228. Prester J., Podrug, N., Načinović, I., Aleksić, A., Slišković, T., Daraboš, M., Mešin, M., (2012.) Menadžment inovacija 2012., Katedra za organizaciju i menadžment, Sveučilište u Zagrebu, Ekonomski fakultet Zagreb, (http://web.efzg.hr/dok/OIM/jprester//menadzment%20inovacija/Menadzment%20inovacija%202012%20izvjestaj.pdf) (10.04.2013.)

DETAILS ABOUT AUTHORS: JADRANKA IVANKOVIĆ, PHD PODRAVKA D.D., KOPRIVNICA, CROATIA jadranka.ivankovic@gmail.com

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MAJA DAWIDOWSKY MAMIĆ PRIVREDNA BANKA ZAGREB, CROATIA maja.dawidowsky@gmail.com

MARTINA MAJIĆ, PROF. CHAIR OF TOURISM STUDIES VERN' UNIVERSITY OF APPLIED SCIENCES ZAGREB, CROATIA martina.majic@vern.hr

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PREFERENCE-BASED FUNCTIONAL FOOD MARKET SEGMENTATION USING CONJOINT AND CLUSTER ANALYSIS NENAD DJOKIC INES MESAROS SUZANA SALAI

ABSTRACT

The functional food market is characterised by dynamic growth, and one of the prerequisites for maintaining such a trend is further acceptance of the functional food concept by consumers. What is also particularly important to this end is research into functional food consumer profile. Marketing research dealing with this issue often produces contradicting results, among other reasons, due to difference in products that are studied, differences in sampling, different variables that are measured, and, last but not least, different approaches to research into the issue, in terms of methods and techniques. This article looks into the potential benefits from preference-based functional food market segmentation using conjoint and cluster analysis. The authors describe the procedure of applying this approach and the reasons for choosing preferences according to individual levels of product attributes as the basis of segmentation. The conclusion is that multiple benefits of the chosen approach can be identified, which is accompanied by a detailed analysis of identified benefits. KEYWORDS: Functional food, Preference-based market segmentation, Conjoint analysis, Cluster analysis

1. INTRODUCTION Although a unified definition of functional food does not exists, the usual description is, “A food can be regarded as ‘functional’ if it is satisfactorily demonstrated to affect beneﬁcially one or more target functions in the body, beyond adequate nutritional effects in a way that is relevant to either an improved state of health and well-being and/or reduction of risk of disease” (Diplock et al., 1999). The functional food market has been recording impressive growth on a global scale. According to 2010 Leathead market report “Future Directions for Functional Foods” the global functional food market has grown by 150% from 2003 till 2010, with a 14% compound annual growth rate. Global sales in 2010 reached USD 24.2 bn (compared to USD 22.9 bn in 2009, USD 17.4 bn in 2006, USD 16.1 bn in 2005, and USD 9.9 bn in 2003.) The forecast compound annual growth rate for the period 2010-2014 is 22.8%, thus reaching USD 29.8 bn in 2014. Acceptance of the functional food concept by consumers is essential for further market development. The prerequisite for achieving this is knowledge and comprehension of the functional food consumers’ profile. In this sense, Frewer et al. (2003) argue that consumer behaviour is a significant factor affecting the outcomes of efforts to promote public health through technological processes (i.e. accepting and consuming functional food), and that market segmentation should be used in order to inform consumers on specific health-related benefits of functional food. Marketing research into the profile of functional food consumer (i.e. functional food market segmentation) is also essential when this issue is considered from the aspect of the producers and distributors of this food.

2. FUNCTIONAL FOOD MARKET SEGMENTATION IConsidering that the main topic of this paper is researching advantages and implications of proposed methodology for functional food market segmentation – preference-based market segmentation conducted by conjoint and cluster analysis, in this part of the paper will first be given literature review regarding researches into functional food market segmentation, then proposed methodology will be described, and finally, advantages and impications of such an approach will be discussed.

2.1. Literature review Marketing researches into functional food consumers’ profile conducted so far have produced partly contradictory results. The assumptions and results of such researches are presented below.

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De Jong et al. (2003) conducted research on a representative panel of the Dutch population regarding the relation between their demographic characteristics and lifestyle on the one hand and their consumption patterns when purchasing and consuming various functional products and dietary supplements on the other. They conclude that the correlation between different demographic characteristics and lifestyles and consumption patterns differs depending on individual products, and the characteristics of consumers of different products should therefore not be generalised. Consumption of one or several products can be predicted based on gender, age, education levels, vegetable intake, alcohol intake, smoking and subjective health or well-being. Ares & Gambaro (2007) conducted research in Uruguay into perceived healthiness and willingness to try functional foods depending on gender, age and motive. They conclude that these criteria do make an impact, considering motives more specifically: feeling good and safety, sensory appeal, health and nutrient content, but depending on the carrier product and the enrichment. The greatest impact on the perceived healthiness and willingness to try functional foods is made by the carrier product, especially in interaction with the enrichment, when the enrichment was a functional ingredient inherent in the product. Urala et al. (2003) studied whether the health claims on functional products in Finland are perceived as advantageous or disadvantageous. The research was conducted on 958 consumers, who evaluated the benefits of health claims regarding 6 functional components and 2 controls. In general, all health claims are perceived as neutral or advantageous. They also studied whether the strength of the claim (level 1 – mere information that the product includes the functional component; level 2 – in addition to information, suggestion that the functional component may reduce risk of a disease; level 3 – the functional component reduces risk of a disease; level 4 – disease prevention), gender, age, education levels, trust in information related to the product and the frequency of use of functional food affected the perceived benefit of the health claims positively. Age and education levels did not make an impact, but women, consumers trustful of product related information, and respondents frequently using functional food perceived the benefits of the health claims to a significant extent. The strength of the claim did not automatically affect the perceived benefit of the health claim; rather, it depended on personal motivation – when the functional components are less well known, the strength of the claim makes a positive impact, and vice versa. Verbeke (2005) provides an overview of socio-demographic, cognitive and attitudinal determinants of consumer acceptance of functional food on a sample of Belgian consumers surveyed in 2001. The most crucial factors affecting the consumers’ acceptance of functional foods are belief in the health benefits of functional foods and the presence of an ill family member. On the other hand, another significant factor is claimed knowledge or awareness of the concept of functional food, but this factor negatively affects the acceptance of functional food, although this adverse impact of high awareness decreases with increasing consumer age. It is particularly important to note that these three factors outweigh the significance of socio-demographic components, contrary to previous research. Having collected data from two socio-demographically comparable samples in Belgium in 2001 and 2004 using personal interview method, Verbeke (2006) investigated the socio-demographic and attitudinal determinants of consumer willingness to compromise on taste to health pertaining to functional food. He concludes that consumers no longer believe that there should be a trade off between good taste and healthiness of food. Whereas females and the elderly were more ready to compromise on taste for health in 2001, these consumer segments no longer differ from the others as regards this issue. Both in 2001 and 2004, the pivotal determinant of consumer willingness to compromise on taste in favour of health was belief in health benefit from functional foods, although this determinants level and predictive power of this determinant declined. The perceived importance of food for health significantly rose over the observation period. Among others, issues pertaining to the functional food market in several Western Balkans countries (including Serbia) were dealt with by researchers in the FOCUS-BALKANS project (2010). In this project, however, the functional food consumer profile was considered based on experts’ opinions, obtained by in-depth interviews, or, consumer perception of which profile of people consume functional food, obtained by focus group method. The importance of research method into food consumers’ profile was considered by Djokic et al. (2012) on the example of organic food market, and having completed several marketing research projects using the approach described in this article, the author Djokic will also present empirical results pertaining the profile of functional food consumers in Serbia as well. Reviewing the research results sheds light on identifiable discrepancies. The causes of these contradictions can be found in different products studied, choice of sample, different variables measured, and, last but not least, in different approaches to researching the issue, i.e. methods and techniques. In this sense, it would be vital to increase the comparability of results of various studies to the possible extent. It is to this end that the subject of this article is considering the possibilities and advantages of applying preference-based functional food market segmentation conducted by conjoint and cluster analysis.

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2.2. Preference-based market segmentation and conjoint and cluster analysis Diversity of preferences, attitudes and values perceived by different consumers are definitely the most significant cause of market segmentation (Kardes, 1999). Respondents’ dietary outcomes can be predicted based on their preference for food (and on reported frequencies of food consumption as well) (Drewnowski & Hann, 1999). However, consumers’ preferences are not used for market segmentation in a large number of studies (Wedel & Kamakura, 1998). Preference-based market segmentation can be performed by employing conjoint analysis combined with cluster analysis. Green et al. (2004) argue that conjoint analysis is used in cases where the question to be answered by the by the decision maker is whether to chose option X or option Y, where X has a better attribute A, and Y has a better attribute B, which pertains to a range of attributes. It concerns daily decisions made by consumers, and data can be collected on hundreds, and even thousands of respondents. In addition, consumers’ preferences and their purchase intentions are measured, so as to predict how they would respond to changes on existing products, or new product launches. Thus, conjoint analysis is a technique used in situations when the decision maker is expected to choose between options where two or more attributes vary simultaneously. There is a whole range of areas where this analysis is employed (Gustafsson et al., 2007):

• • • • • • • •

for determining the preferences of innovation effects when planning new products; for enhancing the existent achievements; for pricing policies; for advertising; for distribution; for controlling; for market segmentation; for stimulating purchase decisions with the focus on competitive response.

Furthermore, there are several different conjoint analysis techniques. Different conjoint analysis techniques constitute a permanent segment of researchers’ interest, notably in terms of comparison by various criteria (e.g. Vriens et al., 1996; Moore, 2004). Full agreement is lacking not only among theoreticians, but especially in applied research, even as regards of choosing the most appropriate market segmentation technique. On the other hand, cluster analysis is a concept used for describing a family of statistical procedures designed for detecting classification within a complex data set with the aim to group objects into clusters in such a way that objects within clusters have more mutual characteristics among themselves that with objects outside clusters (Gore, 2004). There are several stages in conducting cluster analysis: choosing a distance measure between individual operations, choosing the cluster algorithm, defining distance between clusters, determining the number of clusters and analysis evaluation (Everitt et al., 2001). Employing conjoint and cluster analysis for market segmentation would include appropriate steps to take. The first one is selecting a suitable product to be used in the questionnaire and determining the attributes of this product. The attributes can be defined by using focus groups, in-depth interviews with consumers or internal corporate analysis (Green et al., 2004), and care must be taken to make attribute levels descriptive, independent, focussed, realistic and balanced (Kuzmanović, 2004). The above implies that one level of one attribute does not exclude a level of another attribute, that attribute levels must be defined within a dimension, that the interval or range defined by attribute levels has a direct impact on the significance of attribute, and that there is no substantial difference in the number of levels between individual attributes. In case in which ratings-based conjoint analysis (as described in this article) is opted for, cards must be created containing combinations of product attributes and their levels, and then these combinations should be given to respondents for valuation (e.g. on a scale of 1 to 9 or 0 to 100) based on how much they prefer each combination, which, in facts, represents a product. The number of combinations obtained this way is often high. For instance, if the product were represented by five attributes, one of which with two levels, three with three levels each, and one with four levels, then the total number of combinations would be 2x3x3x3x4, i.e. 216 combinations. However, giving such a number of cards to respondents to valuate is both senseless and pointless. Actually, given that conjoint analysis can be regarded as a multiple regression issue, the number of parameters to valuate (i.e. the number of cards given to consumers) can be calculated by subtracting the total number of attributes from the total number of levels of all attributes, then adding 1 to the difference, and then multiplying the result 1.5 to 3 (http://www.sawtoothsoftware.com/download/techpap/caexcel.pdf). In this specific case, the result obtained by the operation 2+3+3+3+4-5+1 should be multiplied by 1.5 to 3, which is between 17 and 33. These combinations should be in orthogonal design, which can be achieved by appropriate operations in different versions of the SPSS statistical program. Before distributing the questionnaire to the selected respondent sample, it is necessary to conduct preliminary tests.

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Once the cards have been valuated by the consumers, it is possible to obtain analysis results based on all respondents, also by using the SPSS program. This will result in the relative importance of each attribute, identified by the program as importance value, and the order of preferences according to individual attribute levels, stated in the program as utility estimate. The highest importance value indicates which of the product attributes is the most significant, whereas the highest utility estimate indicates which of the attribute levels is the most preferred respectively. These results can also be used for defining the favourite combination of product attribute levels. Furthermore, attention must be paid to correlation values between observed and estimated preferences – Person’s R and Kendall’s tau, which confirms that the conjoint model described the respondents’ ratings well. Given that the questionnaires consist not only of cards but also mostly of questions that may refer to consumers’ sociodemographic characteristics, conjoint analysis can also be conducted separately by segments thus obtained (e.g. separately for male and female respondents, etc.). However, what this article aims to highlight is that the analysis can also be performed starting from individual preferences of each respondent according to the attribute levels of the chosen product. This would result in a classification of respondents into market segments by means of cluster analysis, based on each respondent’s preference for attribute levels of the chosen product. Such cluster analysis enables preference-based market segmentation. The significance of this possibility can be regarded in the context of the above stated assertion about preferences being one of the key causes of market segmentation (Kardes, 1999), and the possibility to predict food consumption based on consumer preferences (Drewnowski & Hann, 1999). Cluster analysis can also be completed in the SPSS program, using, for instance, squared Euclidean distance as the distance measure, and Ward’s method, one of two most frequently used approaches in cluster analysis (Gore, 2000). This results in a dendogram and relevant tables that can point to the existence of a certain number of market segments, which needs to be stated in the subsequent iteration. The program denotes the membership of each respondent in a particular cluster, based on the fact that its preferences for individual cluster levels are more similar to the preferences of respondents who are in the same cluster than the preferences of respondents in (аn)other cluster. The procedure can then also be completed by using alternative approaches and the obtained results can be compared. The obtained clusters (i.e. market segments) differ by the level of importance of individual attributes, and the order of preferences across attribute levels. In addition, the obtained market segments can also be compared by the characteristics contained in the questionnaire. Different statistical tests are used for the above mentioned comparisons, depending from case to case, e.g. Chi-Square, Independent Samples t-Test, Mann-Whitney, One-way ANOVA, Kruskal-Wallis, Tukey HSD, etc. In this specific case, pertaining to functional products, the described approach would imply that one of the attributes of the chosen products relates to its functional property (e.g. if yoghurt were selected, the attribute related to the functional properties would need three levels: probiotic, added calcium, and without functional supplements). However, when assessing, the consumer would regard the presence or absence of the functional supplement as only one of the product attributes, and evaluate the combinations of all attribute levels. In addition to the results of conjoint analysis at the aggregate levels, which would provide information on the overall importance of the attribute related to the product’s functional properties, and the overall order of preference for the levels of that attribute, cluster analysis could also be conducted starting from preferences for all attribute levels. This would result in market segments with, among others, differences in the level of importance of the attribute related to the product’s functional properties, as well as different orders of preference for the levels of this attribute. Identification of the market segment with the highest importance level of the attribute relating to the product’s functional property (in comparison with the level of importance of this attribute in other segment), followed by preference for the level of this attribute relating to the presence of functional supplements, with their absence only in the last place, would result in a segment particularly interesting for research, as the respondents classified into this market segment would, in fact, most obviously prefer a functional product. In addition to comparing to the level of importance of other product attributes and preferences to their individual levels, this market segment could be compared, for instance, by relevant socio-demographic characteristics contained in the questionnaire, resulting in the description of a profile of consumers with the most expressed preference for the functional product.

2.3. Discussion: Advantages and implications of the proposed approach As stressed before, by employing preference-based market segmentation, it is possible, if one of the attributes relates to the presence or absence of functional supplements in the product, to identify a market segment with the highest level of that attribute importance and with a preference for the level related to the presence of functional supplements. Such a market segment can be compared by the level of importance of all attributes and preferences for their individual levels, as well as other characteristics, with other market segments. This would, in fact, result in producing the description of a

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consumer profile with the most expressed preference for the functional product. However, the key issue in this article is whether such an approach has advantages and what constitutes them. As for considering the advantages of preference-based market segmentation by means of conjoint and cluster analysis which Djokic et al. (2012) research on the example of organic products, these could partly be identified in the case described in this article as well, notably in the possibility to:

• formulate the questions in a manner appropriate to the choices in the customers’ real-life purchasing situations; • reduce the ratio of socially desirable answers, which is a significant problem in marketing research (Salai & Božidarević, 2009);

• test the significance of various other (socio-demographic, psychographic and/or behavioural) market segmentation criteria for describing the identified segments;

• increase the comparability of the results of various research; • use in planned product launches on emerging and developing markets; • study the difference between expressed preferences and purchases, in terms of translating preferences to purchases. Questions formulated in the described manner would not be based on generalised formulations about functional food and its acceptance; the existence or non-existence of functional supplements would be only one of the product attributes. This is in accordance with the results of research suggesting that consumers do not see functional food as a single homogeneous group of different product categories, but rather perceive functional products as a member of general product category and only secondarily as a functional food (Urala & Lähteenmäki, 2003). In addition, avoiding question focussing primarily on functional food reduces giving socially desirable answers. This is also in agreement with literature which identifies that the perceived reward for consuming functional food, i.e. health benefits or efforts to make a positive impression in the eyes of other people, is at the same time the best indicator of willingness to consume functional food (Urala & Lähteenmäki, 2003). The chosen approach would enable testing the importance of various other (socio-demographic, psychographic and/or behavioural) market segmentation criteria for describing the market segment in which consumers prefer the functional product most. This would contribute to shedding light on the importance of these variables, which is subject to disagreement in literature, as already stated in the review of literature. The significance of the above described approach could also be considered in terms of contribution to formulating theories attempting to explain consumer behaviour in the choice of functional food. Actually, there are several psychosocial models explaining consumer behaviour in choosing food including functional food (Cox et al., 2004). One of the often used ones is the Theory of planned behaviour established by Ajzen, which predicts consumer behaviour based on the intention to perform behaviour and perceived behavioural control. Furthermore, intention to perform behaviour is determined by attitude towards the behaviour, subjective norms and perceived behavioural control. Attitudes arise from the relationship between beliefs and their evaluation, and have their cognitive and affective component; subjective norms feature as social pressure on individuals to behave or not to behave in a certain manner, whereas perceived behavioural control is the perception of one’s own ability to perform certain behaviour. When it comes to the consumption of dietary fat, fruit and vegetables, however, these models usually account for approximately 30% of the variance in the intention to perform behaviour or the behaviour itself (Baranowski et al., 1999). Including the elements of different models or earlier untested element on the example of several products would also open the possibilities of theoretical explanation of the consumers from the market segment which significantly prefers functional products. A more frequent application of the above described approach would increase the comparability of the results of different researches – on different products, in different parts of the world, and in different time periods. Particular advantages of this approach would also stem from application on developing markets, characterised by partial existence of the awareness of functional products and preference to these, but due to inappropriate distribution, slow product development or lower consumers’ purchasing power, the sales of such products cannot be monitored. This approach could also be used in planned launches of new products, and on emerging and developing markets. Finally, the managerial implications of applying this approach should be mentioned as well. Having identified the segment where consumers are the most likely to show preference for a functional products, apart from identifying other important attributes and their preferred levels for the members of this segment and creating the product accordingly, there are relevant implications for other marketing instruments as well – price, distribution and promotion. Addition information on the profile of these consumers must also have implications for the marketing mix. In addition, managers will also find it vital to research the difference between expressed preferences and purchases, in terms of discovering obstacles to translating preferences into purchases.

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5. CONCLUSION The functional food market has been showing impressive growth, having grown by 150% from 2003 till 2010, with a 14% compound annual growth rate. The forecast compound annual growth rate for the period 2010-2014 is 22.8%, thus reaching USD 29.8 bn in 2014. Acceptance of the functional food concept by consumers is essential for further market development, with knowledge and comprehension of the functional food consumer profile as a prerequisite. Marketing research into functional food consumers often produces contradicting results, due to difference in products studied, differences in sampling, different variables that are measured, and, last but not least, approaches to research into the issue, in terms of methods and techniques. Opinions identifiable in the literature range from the claim that the consumption of one or more functional products can be predicted based on socio-demographic and lifestyle factors to the assertion that the factors of belief and knowledge of functional food surpass the influence of socio-demographic components. This article proposes preference-based functional food market segmentation using conjoint and cluster analysis as an approach to research into functional food consumer profile. These techniques, whose theoretical tenets and application procedure are briefly presented in the article, would enable identifying the market segment that particularly prefers the functional product. In addition to comparison by the importance of product attributes and preferences for different attributes’ levels, the studied market segment could also be compared with the others in terms of other features that the questionnaire would contain, resulting in a description of the profile of consumers particularly preferring the functional product. Multiple advantages of this approach have been identified, notably in terms of enabling: formulation of questions in a manner appropriate to the choices in the customers’ real-life purchasing situations; reduction in the ratio of socially desirable answers; testing the significance of various other (socio-demographic, psychographic and/or behavioural) market segmentation criteria for describing the identified segments; increasing the comparability of the results of various research; use in planned product launches on emerging and developing markets, and studying the difference between expressed preferences and purchases, in terms of translating preferences to purchases. REFERENCES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

Ares, G., & Gámbaro, A. (2007.) Influence of gender, age and motives underlying food choice on perceived healthiness and willingness to try functional foods. Appetite, 49(1), pp. 148-158. Baranowski, T., Cullen, K. W., & Baranowski, J. (1999.) Psychosocial correlates of dietary intake: Advancing dietary intervention. Annual Review of Nutrition, 19(1), pp. 17–40. Cox, D. N., Koster, A., & Russell, C. G. (2004.) Predicting intentions to consume functional foods and supplements to offset memory loss using an adaptation of protecting motivation theory. Appetite, 43(1), pp. 55-64. De Jong, N., Ocké, M. C., Branderhorst, H. A. C., & Friele, R. (2003.) Demographic and lifestyle characteristics of functional food consumers and dietary supplement users. British Journal of Nutrition, 89(2), pp. 273-281. Diplock, A. T., Aggett, P. J., Ashwell, M., Bornet, F., Fern, E. B., & Robertfroid, M. B. (1999.) Scientiﬁc concepts of functional foods in Europe: Consensus document. British Journal of Nutrition, 81(suppl. 1), pp. S1–S27. Djokic, N., Salai, S., & Mesaros, I. (2012, September.) Approaches to organic produce market segmentation. Paper presented at the 1st WSEAS International Conference on Economics, Political And Law Science (EPLS '12), Zlin, The Czech Republic Drewnowski, A., & Hann, C. (1999.) Food preferences and reported frequencies of food consumption as predictors of current diet in young women. American Journal of Clinical Nutrition, 70(1), pp. 28-36. Everitt, B.S., Landau, S., & Leese, M. (2001.) Cluster analysis. London, UK: Arnold. Frewer, L., Scholderer, J., & Lambert, N. (2003.) Consumer acceptance of functional foods: issues for the future, British Food Journal, 105(10), pp. 714 – 731. FOCUS-BALKANS (2010.) Study report on consumer motivations and behaviours for products with health claims. Belgrade, Serbia: FOCUS-BALKANS, Food Consumer Sciences in the Balkans Gore, P., A. (2000.) Cluster analysis. In H. E. A. Tinsley & S. D. Brown (Eds.), Handbook of applied multivariate statistical and mathematical modeling (pp. 297–321). New York, USA: Academic Press Green, P., Krieger, A. & Wind, J. (2004.) Thirty Years of Conjoint Analysis: Reflection and Prospects. In Y. Wind, & P Green (Eds.), Marketing Research and Modeling: Progress and Prospects. (pp. 117-141). Berlin, Germany: Springer Verlag Gustafsson, A., Herrmann, A., & Huber, F. (eds.) (2007.) Conjoint Measurement: Methods and Applications. Berlin, Germany: Springer Verlag Kardes, F., R. (1999.) Consumer Behaviour: Managerial Decision Making. Reading, M.A.: Addison-Wesley Kuzmanović, M. (2004, September.) Razvoj poslovnih rešenja pomoću conjoint analize. Paper presented at the IX International Conference “Menadžment - ključni faktori uspeha – SymOrg, Zlatibor, The Republic of Serbia Moore, W. L. (2004.) A cross-validity comparison of rating-based and choice-based conjoint analysis models. International Journal of Research in Marketing, 21(3), pp. 299-312. Salai, S., & Božidarević, D. (2009.) Marketing istraživanje. Subotica, Srbija: Ekonomski fakultet Subotica Urala, N., & Lähteenmäki, L. (2003.) Reasons behind consumers’ functional food choices. Nutrition & Food Science, 33(4), pp. 148–158. Urala, N., & Lähteenmäki, L. (2004.) Attitudes behind consumers’ willingness to use functional foods. Food Quality and Preference, 15(7-8), pp. 793-803. Urala, N., Arvola, A., & Lähteenmäki, L. (2003.) Strength of health-related claims and their perceived advantage. International Journal of Food Science and Technology, 38(7), pp. 815-826. Verbeke, W. (2005.) Consumer acceptance of functional foods: socio-demographic, cognitive and attitudinal determinants. Food Quality and Preference, 16(1), pp. 45-57.

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22. Verbeke, W. (2006.) Functional foods: Consumer willingness to compromise on taste to health. Food Quality and Preference, 17(1-2), pp. 126131. 23. Vriens, M., Wedel, M., & Wilms, T. (1996.) Metric Conjoint Segmentation Methods: A Monte Carlo Comparison. Journal of Marketing Research, 33(1), pp. 73-85. 24. Wedel, M., & Kamakura, W., A. (1998.) Market segmentation: Conceptual and Methodological Foundations. London, UK: Kluwer Academic Publishers 25. http://www.nutritionaloutlook.com (accessed: July 1, 2012) DETAILS ABOUT AUTHORS: NENAD DJOKIC TEACHING ASSISTANT HIGHER SCHOOL OF PROFESSIONAL BUSINESS STUDIES NOVI SAD NOVI SAD, SERBIA nenad.djokic.vpsns@gmail.com INES MESAROS TEACHING ASSISTANT FACULTY OF ECONOMICS SUBOTICA SUBOTICA, SERBIA mines@ef.uns.ac.rs SUZANA SALAI PROFESSOR FACULTY OF ECONOMICS SUBOTICA SUBOTICA, SERBIA sazu@ef.uns.ac.rs

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IMPULSIVE CONSUMER BEHAVIOR RUŽICA KOVAČ ŽNIDERŠIĆ DRAŽEN MARIĆ ALEKSANDAR GRUBOR

ABSTRACT

Research into consumer behaviour features as the foundation of all the planned and implemented marketing activities of a company. Consumer behaviour is determined by numerous factors, and is therefore characterised as highly complex and difficult to predict. A particular challenge for marketing science and practice is to research impulse consumer behaviour in shopping – a behaviour that occurs when consumers experience a sudden, powerful and persistent urge to buy something immediately. This article addresses some of the factors that cause consumers’ impulsive or impulse-driven behaviour, and also to point out some possible directions of thinking and future research, based on the experience from Serbia. KEYWORDS: consumer, consumers’ impulsive buying behaviour, situational factors, personality

1. INTRODUCTION The marketing concept of business behaviour focuses on consumers, their preferences, wishes, needs and expectations that need to be met and exceeded so that the company can achieve business success quantified by the levels of revenue, profit, market share and loyal customer basis. Marketing as a science, with all its derived disciplines, has been striving ever since its emergence to investigate the causes, factors, action mechanisms and consequences of consumer behaviour, and despite the fact that much has been discovered and achieved in this aspect, marketing theory and practice are still far from having explained all the aspects of consumer behaviour. Consumer behaviour is the most complex issue of marketing theory and practice, due to its marked heterogeneity and a multitude of factors exerting a combined impact on it, in more or less diverse ways, depending on the occasion. One of the highly specific manifestations of consumer behaviour on the market is impulsive behaviour resulting in unplanned purchases. Marketing researchers have been trying to ascertain all the aspects of consumers’ impulsive buying behaviour, for decades now, during which period the research focus was redirected from researching the types and categories of products inducing impulsive buying and defining the companies’ marketing offer accordingly, to current research into the broad range of factors affecting and shaping consumers’ impulsive buying behaviour and setting marketing strategies based on these findings. Most marketing researchers offer their views of which factors affect consumers’ impulsive buying behaviour to which extent, but they all tend to agree that these factors can be viewed in terms of external environment factors and internal factors characteristic of each individual consumer such as personal character, internal conditions, demographic characteristics, etc. This article aims to elucidate the phenomenon of impulsive behaviour by pointing to determining factors and by clarifying the essence of urge-driven behaviour, in order to enable companies to predict impulsive buyers’ behaviour to a certain extent, and adjust and define their marketing strategies and activities accordingly. The main aims of the article are:

• to identify factors affecting consumers’ impulsive buying behaviour; • to distinguish between impulse-driven and compulsive buying consumer behaviour • to establish the existence and extent of the influence of gender as a specific demographic factor of impulse-driven behaviour.

The research question that the authors will try answer is: is there a difference between male and female consumers in relation to impulsive buying behaviour?

2. LITERATURE REVIEW For a long time, the basic starting tenet of economic science was Homo Economicus, i.e. the economic consumer, whose behaviour is expressly cognitive and rational, and whose shopping habits are always guided by their interests and con-

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sideration in order to achieve maximum benefits with minimum invested resources. Reality, however, has refuted such a narrow view of consumers, as they very often buy products and services not only to satisfy their physiological and other rational needs, but also to satisfy some personal psychological needs and desires that other consumers may find irrational. A purchase decision can be and very often is prompted by aesthetic and symbolic motives, or simply, desire for entertainment. Such deviation from standard and rational consumer behaviour is referred to as impulse buying. Generally, there are numerous examples of various products and services that can ascribe their sales levels to such shifts away from rational consumer behaviour. It is therefore not a rare occurrence; on the contrary, impulsive buying is a unique, but ubiquitous phenomenon, one that might even be classified as a routine form of consumer behaviour. Dholakia (2000) argues that impulsive buying behaviour is a moment during the shopping trip occurring at the retail outlet, so that the greatest interest in the study of this phenomenon and the initial body of knowledge about it originate from retailing sources, where factors such as shelf arrangement, product packaging and point-of-sale promotion significantly increased the consumers’ impulsive buying behaviour. Researching the relationship between gender and material symbols in relation to impulsive buying, Dittmar, Beattie and Friese (1995) argue that the level of impulse intention characterises every individual consumer, different from one consumer to the other, but directly determine the real impulsive purchase. Although it is the consumers that manifest impulsive behaviour, it is triggered by products and services, i.e. the latter two are the main marketing stimulus of impulsive buying behaviour available to companies. Products such as clothing and accessories, music, and product categories that imply social and personal visibility and involvement, as well expressing one’s personal image, tend to encourage consumer impulsive buyer behaviour. One of frequently cited authors dealing with consumer impulsive behaviour, Rook (1987) defines it as unexpected purchases unplanned before entering a retail outlet, resulting from rapid purchase decision, preceded by sudden and strong urge to possess a noticed product or service. Impulsive purchase is an unplanned purchase decision made at the point of sale, which is, in most cases, a consumer’s emotional, or cognitive, or combined response to a sudden stimulus. Tendai and Crispen (2009) devote the most attention to researching the element of point of sale on consumers’ impulsive buying behaviour, underlining that it is, basically, a purchase decision made at the retail outlet, so that it is necessary for marketing theory and practice to constantly investigate which retail outlet elements may produce impulsive buying behaviour and satisfy the consumers’ need innovatively. Product display, packaging design, relaxing interior and atmosphere at the retail outlet make a positive impact on consumers’ impulsive buying behaviour. Tendai and Crispen (2009) specify that the retail outlet ambience and atmosphere have two positive impacts on impulsive buying (p. 103):

• promotion effect, as a combination of information and economic effect produced by stimuli such as price reductions, coupons, gifts, etc.

• involvement effect, where the atmosphere causes a high level of customer involvement, positive agitation and pleasure by means of appearance and interior decoration, music, sales promotions, sales staff attitude, etc.

Solomon (2002) defines consumers’ impulsive buying behaviour as behaviour that “occurs when a consumer a sudden irresistible urge to buy” (p.301). Most frequently, impulse purchases occur in situation when the consumer deems impulsive buying behaviour totally appropriate, such as buying a present for someone else. Salomon further categorises consumers according to the degree of manifestation of impulsive buying behaviour (p.303):

• planning consumers, who always decide in advance what, how much and which brands they will buy; • partially planning consumers, who either choose only the category, or only the amount of product to buy; and • impulsive buyers, without any prior shopping plan Hanna & Wozniak (2001) opine that consumers’ impulsive buying behaviour is a common occurrence on the market, and consider it to be within the consumer’s non-programmed problem resolution pattern during the purchase decision making process. Impulsive behaviour and purchases imply very little time used for decision-making, limited presence or total absence of cognitive effort in decision making, where emotional appeals make a decision-making impact on the consumers. Mowen (1993) defines impulsive purchases as “hedonically complex impulses to buy that may stimulate emotional conflict.” (p. 381). Impulsive purchases tend to appear in situations when the consumer’s consideration and the significance of consequences of these purchases diminish. Impulsive purchases occur when consumers have no prior perception of any problem or consequences of these purchases, or prior intention to buy. Mowen claims that between 39 and 67% of purchases are completely unplanned and impulse-driven. Impulsive buys happen automatically and without control, but always entail strong affective conditions in consumers. Maričić (2011) regards what he terms affects as specific acts of manifesting consumer buying behaviour. An affect or emotion refers to consumers’ feelings, whereas cognition or consideration refers to consumers’ planned behaviour, and both

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these extremes are, in fact, consumers’ psychological responses to stimuli and events in the environment. Affects are almost always responsive behaviour, which means that they reflect the consumers’ immediate and automatic response to stimuli they are exposed to. Maričić (2011) lists the following types of consumers’ affective responses, their effect on behaviour, and characteristics of response to it (p.133):

• Types of consumer’s affective responses:

•

- emotions; - specific and subjective feelings; - moods; - assessments Effect of affects on consumer behaviour: - positive mood accelerates the consumer education process and shortens the decision-making time when choosing products or services; - invigorated mood favours products with positive connotations; - emotions activate consumers’ motivation to buy Characteristics of affect-driven response: - affect is always an immediate and automatic response to an external stimulus, which cannot be planned; - affect-driven responses are either beyond or under negligible control of the consumer; - intensive affective conditions also include consumers’ physiological responses; - most affect-driven responses are learnt.

Maričić (2011) argues that consumers’ affective and cognitive systems are mutually dependent and related, and continuously influence each other, which often results in unplanned and impulsive purchases. These purchases are characterised by sudden spontaneous urge to buy, which can be completely contrary to the consumer’s earlier behaviour, followed by a state of psychological imbalance and loss of control over the consumer’s own behaviour, occurrence of psychological conflict caused by the analysis of satisfaction and consequences, decrease in the consumer’s cognition, and finally, manifestation of impulse-driven behaviour. There are five types of impulsive purchases (Maričić, 2011, p. 143):

- pure impulsiveness; - suggestion effect - planned impulsiveness: - recall effect; and - planned purchase of a category, but not also a brand of product and service.

Making an impulsive purchase requires certain mood, i.e. excitement, and the consumer’s positive attitude. The most common impulsive purchases are those caused by hedonic urges and comprise the so-called hedonic consumption; these purchases, however, also cause emotional conflict, so that impulsive purchases are often also termed ‘emotional purchases’ (Maričić, 2011, p. 144). Although impulsive purchases include a situation where the consumer cannot resist the marketing stimulus, this does not mean that impulsive purchases do not also include cognitive consumer behaviour. On the contrary; often a cognitive analysis of, for instance, excellent offer in a retail outlet is the trigger of impulsive purchase.

2.1. The specific features of impulse-driven in comparison to compulsive consumer behaviour In marketing research, impulse-driven and compulsive consumer behaviour are regarded as two adjacent and common phenomena in consumers’ lives. As specific behaviour forms deviating from normal and usual consumer behaviour, impulse-driven and compulsive behaviour draw significant attention of both scholars and practitioners. Marketing researchers, psychologists and sociologists agree that both these types of behaviour are affected by three decisive determinants – consumers’ inner states and moods, personal characteristics, and environment factors. The degree of purchase probability which is unintended, immediate and unconsidered by individual consumers represents the tendency of impulsive buying. Impulse-driven consumers have very flexible shopping lists; compared to other consumers, they are much more open to sudden and unexpected shopping ideas, and much more prone to spontaneous responses to marketing stimuli from the environment. Shahjehan, Quereshi, Zeb & Saifullah (2012.) regard compulsive behaviour as an abnormal form of individual consumer behaviour, characterised by chronic purchases where the consumer feels unable to stop or adjust it. Although this deviant behaviour form can also cause a certain form of short term pleasure, viewed in the long run, compulsive behaviour tends to usurp the consumer’s normal life and cause highly negative consequences. The authors quote the American Psychiatric As-

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sociation’s definition, stating that compulsive behaviour is “repetitive and apparently purposeless activity that an individual performs according to strict rules in a stereotypical manner” (2012, p. 2188). A manifestation of compulsive behaviour in marketing implies purchases that a consumer cannot control, which are excessive, persistent, and become a part of everyday life. Although compulsive purchases appear to be a consequence of the product and service that are the object of devotion, which is a characteristic of impulse purchases, the primary urge and drive of compulsive purchases is disturbed feeling of delight in and because of shopping. Ridgway, Kukar-Kinney & Monroe (2006.) point out that the basic distinction of compulsive purchases in relation to impulsedriven ones is the consumer’s inability to control and influence the urge to buy, and markedly negative consequences of this type of purchases, which is not present in impulsive buying (p. 131). Compulsive behaviour definitely leads to highly unpleasant consequences for the consumers, i.e. their private and social lives, career, and financial standing. Compulsive behaviour is a behavioural disorder with a growing incidence in society, causing disturbing consequence for it. Dittmar (2005, p. 468) presents compulsive behaviour in three dimensions – irresistible desire to buy something, total lack of control over behaviour, and incessant excessive shopping despite all the negative consequences for the consumers and their families. Workman & Paper (2010, p. 89) state that as many as 18 million Americans suffer from this behavioural disorder, i.e. compulsive buying disorder. The authors cite various theories attempting to clarify the mechanisms of consumers’ compulsive buying behaviour, entering an in-depth analysis of its factors, and conclude that females are inclined to compulsive behaviour than males, that individuals of weak self-confidence, prone to fantasises, obsessions and depressions often buy compulsively. The authors also refute the critique of marketing, labelling it as the main culprit for compulsive buying. Compulsive behaviour is a negative extreme of impulse-driven behaviour and can be regarded as an individual consumer’s illness. The main problem of research into compulsive disorder is that it is based on surveying consumers who admit and are aware of their own behavioural disorder, which is seldom the case; most compulsive consumers negate the inability to control their shopping urge, accepting only the fact that they are impulse buyers who enjoy shopping without any dangers or consequences. However, unlike impulse-driven, compulsive behaviour is laden with addiction, materialism, negation, depression, low self-esteem and self-confidence, seeking justification and understanding, and loss of control. Compulsive consumers are basically neurotic and require the help of their families, social environment and companies. Both impulse-driven and compulsive consumer behaviour are based on the loss of control of urge to buy, but differ in the degree and intensity of this loss of control. Impulse-driven behaviour is characterised by a much lower degree and does not entail serious negative consequences, whereas in the case of compulsive, it is all much more compelling and serious.

2.2. Factors influencing impulse-driven consumer behaviour Impulse-driven consumer behaviour is not rare on the market, so that marketing theory and practice have invested significant efforts in clarifying it as much as possible, in order to reach certain knowledge that companies could use in practice. Over the past decades, many marketing researchers have attempted to identify factors encouraging impulsive buying behaviour. Karbasivar & Yarahmadi (2011.) investigate the effect of external marketing stimuli on impulsive buying behaviour. The authors state that impulsive purchases are situations where the consumer does not evaluate or even identify all the shopping alternatives, nor does he evaluate the consequences of his/her decision. Consumers are only focussed on instant gratification of their strong need, not thinking of the real problem, which is to be resolved in a higher-quality manner. Impulsive purchases are always instant, affective and hedonic. The authors state numerous forms of impulsive purchases – rationally unplanned, emotionally impulsive, objectively impulsive and many others, but devote special attention to factors influencing impulse purchases and consumer behaviour (p. 175):

• External impulsive purchase factors are under full control of companies, which try to use them to incite the impulse

•

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buying mechanism, i.e. strong urge to buy something that consumers cannot resist: - store apparent characteristics; - in-store displays; - the in-store shopping environment – music, scents, colours, sales staff etc.; - price discounts and point-of-sale promotions Internal impulsive purchase factors are related solely to the consumer, and the company can influence them to a minor

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extent, but cannot control them: - the consumer’s personality traits; - the consumer’s emotional and affective state; - demographic factors; - situation factors – time, purpose of the purchase and disposable income.

Coley & Burgess (2003, p. 283) claim that simultaneous effect of external and internal stimuli results in positive shopping emotions and guides consumers’ moods, followed by strong urge and desire to buy that the consumer cannot resist, resulting in the emergence of impulse-driven behaviour and, eventually purchase. The authors have also identified significant differences in the impulse-driven behaviour of males and females, depending on product categories. Virvilaite, Saladiene & Bagdonaite (2009.) argue that impulsive buying behaviour occurs as a consequence of action of diverse marketing stimuli in the retail outlet, focussed on low prices and appealing promotions, resulting in unplanned purchase. In their opinion, factors influencing consumers’ impulsive buying behaviour:

- characteristics of a consumer; - peculiarities of purchase environment; - characteristics of the product or services; and - situation factors

Pleasant and stimulating atmosphere in the sales outlet, appealing prices, friendly sales staff, product displays, products and services with a strong effect of expressing the consumer’s personality etc. have a powerful effect on the strong manifestation of the consumers’ impulsive buying behaviour. Factors with a stronger experiential, entertaining and hedonic effect also have a comparatively stronger effect on the consumers’ impulsive buying behaviour. Chen (2008) deems that impulsive purchase add hedonic value to the act of shopping itself, and consequently, products and services with a high level of hedonic dimension provoke higher level of emotion and the consumer affective response, eventually resulting in impulsive purchase. The same author lists a range of factors influencing the impulsive buying behaviour (p. 155):

- the product’s characteristics; - the consumer’s mood or emotional state; - the shopping task; - availability of time and money; etc.

The combination of these factors influences the consumers’ impulsive buying inclination spontaneously, immediately and kinetically, and, at the same time, determines the consumers’ involvement, which is dependent on the interest and significance of purchase for the consumer. The author deems that the most frequent objects of impulsive purchases are “consumer goods which appear to have potential for self-presentation, self-expression, mood adjustment, diversion and entertainment” (p. 156). Yang, Huang, & Feng (2011) study the factors affecting the impulsive purchases of cosmetic products, terming them as consumers’ “weakness of will” (p. 275). The authors claim that impulse-driven behaviour, i.e. the intensity of its manifestation is individually determined by the inclination to it, affected by the company’s marketing stimuli and the situation itself. The factors of economic, personal, temporal and cultural nature affecting impulsive purchases are (p. 276)

- external stimuli – display of products in the retail outlet, promotion, atmosphere, purchasing frequency of the product category, etc.; - internal perceptions – lifestyle, the customer’s personality traits, emotions, disposable money and time; - buying behaviour – price, payment terms and conditions, and time of purchase; - demographic characteristics – age, gender, income; - profession, education level, marital status, social position etc.

Yang, Huang, & Feng (2011) conclude that there is a significant correlation between gender structure and impulsive buying intention, but this correlation did not turn out to be significant enough in terms of real impulsive buying behaviour. Maričić (2011, p. 144) highlights that unplanned and impulsive purchases stand in “close correlation with the consumers’ income and overall economic situation”. The rise in the number of impulsive purchases is directly related with the increase in the consumers’ discretionary income and vice versa.

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Gasiorowska (2011) focuses the major part of her research into consumers’ impulsive buying behaviour on the analysis of differences between genders on encouraging and manifesting impulsive behaviour. The author points out that females regard impulsive purchases as a game of chance that offers them a high level of stimulation and the feeling of sensational, while impulsive purchases made by males are in most cases the result of action of companies’ marketing stimuli and unwanted situation of information overload that they wish to avoid by accelerating the purchase decision. Furthermore, the author states that females spend much more time shopping, which arises the feeling of pleasure and delight in them. Male consumers, on the other hand, make purchase decision much faster, and are less prone to unplanned purchases. However, male consumers devote more attention to companies marketing stimuli, placing themselves under higher probability of impulsive purchase. Females’ impulsive purchases are determined by emotions and materialism, whereas the same is of instrumental character in males’ case, that is, gratifying the sudden urge as soon as possible. Generally speaking, the correlation between gender and consumer behaviour is one of the most discussed topics in marketing theory and practice. A notably detailed overview of significant analyses of correlation between gender and consumer behaviour was given by Professor Kay M. Palan from Iowa State University (2001), who was the first one to point out the importance of differentiating between the notions of biological sex and gender identity – “the fundamental, existential sense of one’s maleness or femaleness” (p.1). Palan notes that there are numerous studies confirming some hypotheses on differences in behaviour, but also that most of them have no major scientific relevance, for instance a 1980 study claiming that the biological sex is a better predictor of consumer behaviour in terms of their categorisation of products and services as males’ and females’ than gender identity. He lists a couple of significant studies that proved scientifically that sexual identity in males much better accounts for purchase intention than biological sex, that female gender identity results in higher involvement level in purchasing votive candles at Christmas time, that promotional appeals about financial services are much better responded to by females with male personality traits, and that males remember benefits of the presents they got, whereas females remember more who the gift came from. Tifferet & Herstein (2012) study gender difference and their influence on brand commitment, impulsive buying, and hedonic consumption. These authors prove in their research that females as consumers are more inclined to hedonic consumption and impulsive purchases. The authors find a partial explanation in females’ personality structure and the fact that they are more prone to depression, and regard these impulsive purchases as a means of improving their own mental state (p. 178). Kovač Žnideršić & Marić (2013) look into the gender differences and their correlation with consumer behaviour in terms of the application of ethical standards, and highlight all the complexity of this aspect, as female consumers are more prone to using double standards when assessing their behaviour. Despite the immense body of research into impulsive buying behaviour, the need to study it has not diminished; on the contrary, any change in the marketing environment results in new consumer behaviour patterns, and thus new forms of expressing impulse-driven behaviour and impulsive purchases.

3. RESEARCH METHODOLOGY A research project completed in order to support or reject the defined hypothesis was conducted on a random sample of 312 respondents in the cities of Novi Sad and Subotica. The sample was stratified by gender, and it is important to point out that 65% of the respondents were females, and 35% were males. Empirical data was gathered by means of an anonymous questionnaire comprising questions and statements about consumer intentions and behaviour related to the analysis of the respondents’ impulsive buying behaviours. The respondents were asked to express the degree or agreement or disagreement on a 5-degree Likert scale. The main limitation was the sample size, and the fact that the research was based on the consumers’ sincerity in answers, without verifying their actual behaviour and actual purposes. The defined null and alternative hypotheses are: H0: Gender as a demographic determinant does not affect consumer behaviour and impulsive purchases H0: Gender as a demographic determinant affects consumer behaviour and impulsive purchases The set hypothesis was tested by means of non-parametric chi squared (χ2) statistical test, i.e. characteristic function test for conditional independence, according to the following formula: χ02 = ∑i=1m (ƒi – ƒi(t))2 / ƒi(t) with the number of degrees of freedom r and probability of 95%, i.e. error risk α = 0.05% that the characteristic independence hypothesis is rejected if χ02 > χ2.

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4. ANALYSIS, LIMITATIONS, AND FINDINGS Due to the limitations in the size of the article, not all tables will be shown, but the essential results, i.e. respondents’ replies to main statements are given in the tables below. Table 1. I often buy totally spontaneously and depending on how I feel

TOTAL

STRONGLY DISAGREE DISAGREE

NEUTRAL

AGREE

STRONGLY AGREE

MALES

204

FEMALES

108

TOTAL

110

312

Chi squared χ2 = 34.00205112; p value = 0.00000074; the hypothesis is rejected. As p value 0.00000074 is lower than α error (0.05%), hypothesis H0 is rejected, so that we can conclude that there are statistically significant differences between genders in terms of manifesting impulsive buying behaviour, i.e. spontaneous purchases guided by current emotions. As 57% females and only 31% males confirmed that emotions and spontaneity, as indicators of impulsive buying, determine their behaviour, it was concluded that females are much more prone to impulsive buying, i.e. spontaneous and emotional. It is interesting to note that an identical percentage of males and females gave negative answers (28%), and that females are much more determined in this statement, as only 15% of them were neutral, whereas this percentage was much higher in males, amounting to 41%. Table 2. I often buy something and reconsider it afterwards

TOTAL

STRONGLY DISAGREE DISAGREE

NEUTRAL

AGREE

STRONGLY AGREE

MALES

204

FEMALES

108

TOTAL

109

312

Chi squared χ2 = 46.26531971; p value = 0.00000019; the hypothesis is rejected. As p value 0.0000001 is lower than α error (0.05%), hypothesis H0 is rejected, so that we can conclude that there are statistically significant differences between genders in terms of manifesting impulsive buying behaviour, i.e. that the purchase is often made without having completed cognitive process. As 57% females and only 24% males confirmed that they often buy without prior consideration, which indicates impulsive buying behaviour, it is concluded that females are much more impulse-driven when shopping, i.e. they purchase with decreased or eliminated cognitive processes. Males are very decided in the statement that they first consider ad only then buy (52%), whereas this share in females is only 25%. 24% males and only 18% females gave a neutral response. Table 3. I often regret buying something

TOTAL

STRONGLY DISAGREE DISAGREE

NEUTRAL

AGREE

STRONGLY AGREE

MALES

100

204

FEMALES

108

TOTAL

114

312

Chi squared χ2 = 64.71753123; p value = 0.00000001; the hypothesis is rejected. As p value 0.0000001 is lower than α error (0.05%), hypothesis H0 is rejected, so that we can conclude that there are statistically significant differences between genders in terms of manifesting impulsive buying behaviour, i.e. the feeling of regret often appears after the purchase. As many as 74% females and only 17% males reported post-purchase consumer regret, which points to impulsive buying behaviour, and the fact that females are significantly more impulse-driven when shopping. Only 19% females claim that they seldom regret the purchases they made, whereas the same is claimed by 54% males. Females are highly determined in this statement, as only 7% have no opinion, whereas the percentage of neutral males is more than four times higher (29%).

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Table 4. I often buy because it makes me happy.

TOTAL

STRONGLY DISAGREE DISAGREE

NEUTRAL

AGREE

STRONGLY AGREE

MALES

204

FEMALES

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TOTAL

102

312

Chi squared χ2 = 50.91643212; p value = 0.00000001; the hypothesis is rejected. As p value 0.0000001 is lower than α error (0.05%), hypothesis H0 is rejected, so that we can conclude that there are statistically significant differences between genders in terms of manifesting impulsive buying behaviour, i.e. that often the motive for purchase is the feeling of happiness and gratification, identified in the literature as one of the basic drives of impulsive buying. As many as 59% females and only 20% males confirmed that their purchases are often motivated by the feeling of satisfaction and happiness¸ which points to impulsive buying behaviour, and the fact that females are significantly more impulse-driven when shopping. A negative reply was given by 25%, and more than half the surveyed males, i.e. 57% stated the same. Females are much more determined in this statement, as only 15% of them were neutral, whereas this percentage was much higher in males, amounting to 41%. Females are highly determined in this statement as well, as only 16% have no opinion, i.e. opted for neutral, whereas the percentage of neutral males is 23%. Table 5. I carefully plan my shopping, and make and stick to my shopping list.

TOTAL

STRONGLY DISAGREE DISAGREE

NEUTRAL

AGREE

STRONGLY AGREE

MALES

204

FEMALES

108

TOTAL

312

Chi squared χ2 = 72.4433464; p value = 0.00010820; the hypothesis is rejected. As p value 0.0000001 is lower than α error (0.05%), hypothesis H0 is rejected, so that we can conclude that there are statistically significant differences between genders in terms of manifesting impulsive buying behaviour, i.e. that the purchase is often previously planned and shopping list is made, which is an indicator of rationality in shopping, curbing and controlling impulsive buying behaviour. The results are reversed, and show that men are more rational shoppers and consumers, because as many as 54% of surveyed males regard themselves as such. Only 30% females claim to be rational shoppers. As many as 52% accounts for women who go shopping without previous planning or making a list, compared to 26% males. The percentage of neutral is similar, amounting to 20% males and 18% females. Table 6. My rationality in shopping would increase with an increase in income.

TOTAL

STRONGLY DISAGREE DISAGREE

NEUTRAL

AGREE

STRONGLY AGREE

MALES

204

FEMALES

108

312

TOTAL

Chi squared χ = 73.01352694; p value = 0.00258826; the hypothesis is rejected. 2

As p value 0.0000001 is lower than α error (0.05%), hypothesis H0 is rejected, so that we can conclude that there are statistically significant differences between genders in terms of manifesting impulsive buying behaviour. Very often, research into impulsive buying behaviour confirms its directly proportionate correlation with income levels. The actual purpose of this statement is to gain insight into consumers’ intended impulsive buying behaviour (disguised as a question about the opposite, i.e. rational behaviour) conditioned by expected growth in income. 31% of females who regard themselves as impulsive buyers in the survey believe that a future increase in income would not increase rationality of their behaviour, while 39% of them believe that a rise in income would cause a fall in impulsive purchases, i.e. increase in rationality, and 30% of females express no opinion on this statement. The structure of responses shows that females are equally distributed across the three groups, and it cannot be inferred with certainty whether an increase in income also causes an increase in rationality and reduction in impulsive buying behaviour in female consumers. As for males, only 20% of them answered that increased income will cause a rise in their rationality, whereas as many as 51% answered negatively, and a significant

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segment of 29% gave a neutral response. This can be explained by males’ thinking pattern, i.e. the fact that they already perceive themselves as rational, so that it will not change even with an increased income, i.e. does not confirm the claim stated in some studies that increased income results in increased impulsive buying behaviour.

5. CONCLUSION Through its social, cultural, political, legal, economic and even technological dimension, the contemporary marketing environment changes traditional behaviour patterns of both males and females. The trends in women’s emancipation, their growing involvement in education, corporate management, politics and public life are extending globally from developed to developing markets. With legal regulation and departure from earlier rigid moral standards related to the individual’s gender identity in society, we are witnessing a growing relativisation of differences in consumer behaviour stemming from differences in biological sex. However, despite the above mentioned trends and tendencies, consumers’ impulsive buying behaviour still maintains significant differences regarding male and female consumers. Companies will undoubtedly keep basing a noteworthy segment of their marketing plans and strategies on consumers’ impulsive buying behaviour, where it is necessary to develop different approaches to male and female consumers. Companies must keep investing efforts and resources into studying the phenomenon of loss of control over the shopping urge in general, and especially monitor any change that can affect it, in terms of certain sociological and psychological processes in the consumer world, such as online gender swapping, change of gender identity, and related shopping behaviour patterns. Finally, it is also important to highlight that consumer behaviour in all the stages of shopping can only be studied and explained through interdisciplinary approach, where the results of geographic and demographic analysis are used in the initial stages of research. This is followed by economic and sociological explanations regarding the research into external stimuli of consumer behaviour, and their interpersonal relations and communications. The final stage comprises psychological rationales, which are intrinsically internal in character, and is conducted with the aim of comprehending the intra-personal determinants, which powerfully shape consumer behaviour, in interaction with the effect of external factors. REFERENCES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Chen T., (2008.), “Impulse Purchase Varied by Products and Marketing Channels”, Journal of International Management Studies, Vol. 3., No. 1., 2008. Pp. 154-161. Coley A., Burgess B., (2003.) “Gender Differences in Cognitive and Affective Impulse Buying”, Journal of Fashion Marketing and Management, Vol. 7., No. 3., pp. 282 - 295 Dholakia U.M., (2000.), “Temptation and Resistance: An Integrated Model of Consumption Impulse Formation and Enactment”, Journal of Psychology and Marketing, Vol. 17., No. 11., pp. 955-982. Dittmar H., Beattie J., Friese S., (1995.), “Gender Identity and Material Symbols: Objects and Decisions Considerations in Impulse Purchases”, Journal of Economic Psychology, Vol. 16., No. 3., pp. 491-511. Dittmar H., (2005.), “Compulsive Buying – A Growing Concern? An Examination of Gender, Age, and Endorsement of Materialistic Values as Predictors”, British Journal of Psychology, Vol. 96., No. 4., pp. 467-491. Gasiorowska A., (2011.), “Gender As Moderator Of Temperamental Background Of Impulse Buying Tendency”, Journal of Customer Behavior, Vol. 10., pp. 119-142. Hanna N., Wozniak R., (2001.), Consumer Behavior, Prentice-Hall. Karbasivar A., Yarahmadi H., (2011.), “Evaluating Effective Factors on Consumer Impulsive Buying Behavior”, Asian Journal of Business Management Studies, Vol. 2., No. 4., pp. 174-181. Kovač-Žnideršić R., Marić D., “Razlike između polova i uticaj na etičko ponašanje potrošača”, Marketing, Vol.44, No.1, 2013. Maričić B., (2011.), Ponašanje potrošača, Centar za izdavačku delatnost Ekonomskog fakulteta u Beogradu. Palan K.M. (2001.), “Gender Identity in Consumer Behavior Research: A Literature Review and Research Agenda”, Academy of Marketing Science Review, Vol. 2001., No. 10, pp. 1-24. Ridgway N.M., Kukar-Kinney M., Monroe K.B., (2006.), “New Perspectives on Compulsive Buying: Its Roots, Measurement, and Physiology”, Advances in Consumer Research, Vol. 33., pp. 131-133. Rook D.W., (1987.), “The Buying Impulse”, Journal of Consumer Research, Vol. 14., No. 2., pp. 189-199. Schiffman G. L., Kanuk L.L., Consumer Behavior, Prentice-Hall, 2004. Shahjehan A., Qureshi J.A., Zeb F., Saifullah K., (2012.), “The Effect of Pesonality on Impulsive and Compulsive Buying Behaviors”, African Journal of Business Management, Vol. 6., No. 6., pp. 2187-2194. Solomon M.R., (2002.), Consumer Behavior, Prentice-Hall. Tendai M., Crispen C., (2009.) “In-Store Shopping Environment and Impulsive Buying”, African Journal of Marketing Management, Vol. 1., No. 4., pp. 102-108. Tifferet S., Herstein R., (2012.), “Gender Differences in Brand Commitment, Impulse Buying, and Hedonic Consumption”, Journal of Product and Brand Management, Vol. 21., No. #., pp. 176-182. Virvilaite R., Saladiene V., Bagdonaite R., (2009.), “Peculiarities of Impulsive Purchasing in the Market of Consumer Goods”, Inzinerine Ekonomika – Engineering Economics (Commerce of Engineering Decisions), Vol. 2., pp. 101-108. Yang D.J., Huang K.C., Feng X., (2011.), “A Study of the Factors that Affect the Impulsive Cosmetics Buying of Female Consumers in Kaohsiung”, International Journal of Business and Social Science, Vol. 2., No. 24., pp. 275-282.

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DETAILS ABOUT AUTHORS: DETAILS ABOUT THE AUTHORS: PROF. RUŽICA KOVAČ ŽNIDERŠIĆ, PHD, FULL PROFESSOR FACULTY OF ECONOMICS IN SUBOTICA, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA znikor@ef.uns.ac.rs PROF. ALEKSANDAR GRUBOR, PHD, FULL PROFESSOR FACULTY OF ECONOMICS IN SUBOTICA, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA agrubor@ef.uns.ac.rs DRAŽEN MARIĆ, MSC, ASSISTANT LECTURER FACULTY OF ECONOMICS IN SUBOTICA, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA drdrazen75@yahoo.com

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ANALYSIS OF SPORTS CLUBS’ MARKETING STRATEGIES WITH SPECIAL REFERENCE TO ONLINE MARKETING RINO MEDIĆ MARIJO STRAHONJA BRANKA ŠUPUT

ABSTRACT

For a long time now sport has been much more than a game. It has become big business. According to some data sports industry is worth between 350 and 450 billion US dollars and everybody involved attempts to get their piece of the pie. Taking into consideration the value of the market and the globalisation, the ways in which sports clubs try to increase profit are becoming more and more sophisticated. They have long gone beyond the scope of functioning as sports organizations and nowadays, they have come closer to the business model of large companies. This paper attempts to provide an answer to how efficient the marketing strategies used by sports clubs are in achieving the competitive advantage from both aspects, business as well as sport, and in what way and how much the two goals depend on each other. Taking into account the growing role of the Internet in advertising, a special overview of online marketing is given and the way sports cubs use online marketing as a marketing strategy to achieve their goals. For the purpose of this paper a market research has been carried out using a questionnaire as an instrument of research, apart from collecting secondary data available on foreign and Croatian sports clubs’ websites. This paper partly refers to the work of sports clubs that have very successfully developed marketing strategies and have become a benchmark for Croatian clubs. Additionally, it analyses the position of marketing strategies of Croatian clubs and compares them with clubs abroad. Further, the analysis deals with the extent to which marketing strategies contribute to the clubs’ success in the field of sport and how and to what extent different ways of using online marketing contributes to that. KEYWORDS: marketing strategies, sports clubs, online marketing

1. INTRODUCTION In the second half of the 20th century sport outgrew the framework of a recreational activity and became a serious business with a big turnover. According to some data the total value of the world sports industry is between €350 and €450 billion1. This involves sports infrastructure, sporting goods, licensed products and sports events. The sports events market itself is worth approximately €45 billion. The largest part constitutes the revenue from football related sports events totalling over €20 billion2. The example of England shows the social and economic impact of sport in some countries. In 2010 sport contributed to the economy with £20 billon, which accounted for 1.9 % England’s GDP3. Additionally, sports and sports related industries employed over 400 000 people in 2010, which accounted for 2.3% of the total number of employed in England4 . What is important to point out is that regardless of the current recession in the world, the value of the sports market has been growing continually in the last five years. This in particular referrers to football whose revenues in 2012 increased by 11% compared to the previous year5. Especially interesting and impressive growth in sports market value has been seen in BRIC countries (Brazil, Russia, India and China) where the strong growth of the sports market has been following the strong economic growth. This particular fact opens up numerous opportunities and possibilities for the organization of various sports events as well as the opportunities for clubs and individuals.

2. THE SITUATION ON THE CROATIAN SPORTS MARKET The situation on the sports market is closely related to the economy of its country and therefore if often a reflection of the state of the economy. It is especially true of smaller economies (local and regional) where the sport subject are oriented towards domestic markets due to their size and regional character and hence are very susceptible to the conditions of their economic environment. Precisely due to that the situation on the Croatian sports market cannot be compared to the AT Kearney; http://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/the-sports-market/10192, accessed September 10th, 2013. Ibid, accessed September 10th, 2013. 3 Sport England; http://www.sportengland.org/research/benefits-of-sport/economic-value-of-sport/, accessed September 10th, 2013. 4 Ibid, accessed September 10th, 2013. 5 Poslovni dnevnik; http://www.poslovni.hr/svijet-i-regija/prihodi-europskih-nogometnih-klubova-premasili-19-milijardi-eura-244212, accessed September 10th, 2013. 1 2

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situation on the world sports market. The sports organizations in Croatia (clubs and individuals) are smaller in size and are oriented toward smaller local and regional target groups in their own environment. Given the fact that in the last few years the situation in the Croatian economy has been unfavourable due to the recession, it is also reflected on the sports market in Croatia. Sports organisations, clubs and individuals find it harder to find ways to raise funds (lack of sponsors, fewer spectators of sports events) and with that their functioning and competitiveness is suffering, both in business and sports fields. Despite this, some sports subjects in Croatia are trying to follow the world trends in doing business and although often incomparable with world clubs, they manage to find ways to gain success both in business and sport. A good example is Medveščak Hockey Club. In spite of the recession and the fact that hockey is a relatively marginal sport in Croatia and it does not achieve particularly good sports results, it has succeeded in finding a model that works and results in a high number of spectators at the games, a big interest of supporters and consequently sponsors. Medveščak is an evident example that despite the obstacles it is possible to achieve both business and sport success with a good business model.

3. MARKETING STRATEGIES OF SPORT CLUBS Previously stated figures show that sport has long stopped being a recreational activity (especially in the last 20 years) and has grown into a serious business with huge market value. This has motivated sports organisations and sports clubs (as well as individuals) to approach sport as a serious business. Majority of business functions are being applied to sport so today’s large professional clubs act and operate on the market like companies. Sport sector has recognised the benefit of business functions and has started applying them. Some researches believe that sport sector has no choice and that if it does not apply business functions through its actions it will become completely uncompetitive. This transfer from amateurism to professionalism as well as the complete commercialisation of sport leads to a conclusion that it is necessary for sport subjects to apply business functions in order to be competitive on the market, both on the business and sports markets an the two are interrelated. A good business result also leads to the possibility of development in the sport area, which consequently has an impact on sports results. Precisely because of this many clubs have opted for entering the growing markets (China, India etc.) in order to achieve good business results. For instance, Manchester United is a sports club with the largest number of supporters in the world. According to the data, in 2011 Manchester United had 354 million supporters, 70 million of which from China6. For this reason it is not strange that apart from English, it has a website in Chinese, Korean and even Arabic. The second club in the world according to the number of supporters is Barcelona Football Club followed by Real Madrid and Chelsea. Because of this every year before the season starts, Manchester United and other leading European clubs go on tour to the Far East and North America in order to retain and win over a larger number of supporters/consumers. What is especially interesting is that the ranking of sports teams according to their value is very similar. In 2012 the most valuable sports team was Real Madrid (3.3 billion USD), immediately followed by Manchester United (3.165 billion USD) and Barcelona (2.6 billion USD)7. Considering that these clubs have achieved remarkable sports results in the past few years (Manchester United and Barcelona have won 3 out of 6 European Champions Leagues) it can be concluded that the sports and business results are greatly connected8. “One of the business functions that sports subject have been applying more and more actively is marketing in order to reach a larger number of consumers. “The sports industry exists to satisfy the needs of three distinct types of consumers: spectators, participants and sponsors”9. “The fundamental aim of the sport marketing activity is to satisfy the right sport customer needs with sport products or services that offer benefits in excess of all other competitor offerings whilst making the maximum sustainable profit”10. Sports clubs have recognized the importance of strategic marketing planning and have implemented it to satisfy the consumers’ needs in order to achieve competitiveness and meet the challenges of the times and the environment.

4. ONLINE STRATEGIES OF SPORTS CLUBS “Online marketing can be defined as threefold role of the internet in commerce and government as a new media (communication) tool, knowledge media tool (the organisation learning about customers and employees, as well as customers and employees learning about the organisation), and a marketing channel (online transactions)”11. Internet became one of the most important communication tools. Due to technological developments and the Internet online advertising has become Jutarnji list; http://www.jutarnji.hr/manchester-united-ima-najvise-navijaca-na-svijetu--ali-dobar-dio-njih-stize-iz---kine-/1023028/, accessed September 12th, 2013. 7 Dalje.com; http://dalje.com/hr-sport/real-madrid-najvrijedniji-klub-na-svijetu/476134, accessed September 12th, 2013. 8 UEFA; http://www.uefa.com/uefachampionsleague/history/champions/index.html, accessed September 12th, 2013. 9 Shank, M. D. (2009.), Sports Marketing: A Strategic Perspective (4th. ed.), Pearson Education, page 11. 10 Beech, J., Chadwick, S. (2004.), The Business of Sport Management, Prentice Hall, page 129. 11 Beech, J., Chadwick, S. (2007.), The Marketing of Sport, Prentice Hall, page 252. 6

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an integral part of business for most companies as well as sports clubs. Geography is no impediment for business nowadays as the world has become a global market. It is especially prominent in sports clubs since until recently they were limited to narrow markets in which they acted. Electronic commerce, online retailing, advertising and broadcasting are just some of the opportunities for clubs and sports organisations. Nowadays, clubs use the advantages of technology in order to attract a vast number of supporters through online advertising. Also, clubs are using internet technology for generating big amount of their revenue through online advertising. Online advertising is a tool that enables clubs to connect with their supporters in any part of the world and to meet and satisfy their needs. This tool helps sport marketers to get more information about their potential customers and it to get knowledge about their needs. The main goal of using online marketing for sports clubs is to attract a large number of potential consumers and to realise the best business result possible through satisfying their needs.

5. RESEARCH RESULTS Secondary research has been conducted for the purpose of this paper. Data have been collected from the Internet on marketing activities of different clubs in various sectors (sports). The sample consists of 112 sport clubs (56 foreign and 56 Croatian clubs). The research encompasses 7 different sports (football, basketball, handball, water polo, tennis, hockey, volleyball) and 16 clubs per sport have been researched. The research focused on the presence of clubs in online advertising in 11 categories (e-mail address, website, Facebook, Twitter, YouTube, Instagram, Google+, Pinterest, newsletter, TV channel and an online fan shop). The aim of this research was to find out to what extent and how sports clubs use online advertising to achieve business and sport success. According to the research results all clubs (both Croatian and foreign) have their websites and contact e-mail addresses. The situation is similar regarding Facebook pages. 90% of surveyed sports clubs have Facebook profiles. This fact is an indicator that the clubs have recognised that having their own websites, contact e-mail addresses and Facebook profiles has become a necessity when doing business today. When it comes to other less common and widespread types of advertising the situation is somewhat different. Only every second surveyed sports club in Croatia has a Twitter profile, while 80% of foreign clubs have one. Every third Croatian club has a YouTube channel compared to 70% of foreign clubs. If we look at advertising through Instagram, Google+, Pinterest or having oneâ&#x20AC;&#x2122;s own TV channel it gets even worse. A very small number of clubs in Croatia advertise through Instagram (7 %), Google+ (2 %) and Pinterest (2 %), while in case of foreign clubs the situation is far better (Instagram 21 %, Google+ 39 % and Pinterest 16 %). This is an indicator that clubs have not fully accepted these ways of advertising and are opting for websites, email addresses and Facebook profiles since these services are so widespread that being in business without them is impossible. Additionally, no large investments are required in order to use services of the above-mentioned networks, just a trained and professional person to update the information and take care of the presence in individual categories. Regarding advertising through a club's own TV channel the situation is disastrous in Croatia. Not even one surveyed sports club in Croatia has its own sports channel while 23% of surveyed foreign clubs do have their own sports channels. The reason for this is the fact that large financial investments are required to own a TV channel, and if we take into account the present financial situation in our sports clubs, this fact is more than understandable. If we look the advertising structure by types of sport, the situation is as follows. The graph below shows online advertising regarding football in surveyed Croatian and foreign clubs. Graph 1: Football club advertising

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In football all surveyed Croatian and foreign sports clubs have a website, email address, Facebook and Twitter profile. All foreign football clubs have a YouTube channel and their own fan shop compared to 50% of Croatian clubs (YouTube channel) and 63% (online fan shop). The surveyed Croatian football clubs do not use Google+ or Pinterest while 75% of foreign clubs use them. Instagram is used by 38% of Croatian football clubs and 25% of foreign football clubs. As regards their own TV channels, 73% of foreign football clubs own one, compared to no Croatian clubs. The situation is similar to football when it comes to basketball and handball. Both Croatian and foreign clubs have websites, email addresses, Facebook and Twitter profiles. Regarding the usage of Google+, Instagram and Pinterest the case is similar to the one of football clubs while not even one basketball or handball club owns their own TV channel. 38% of surveyed foreign basketball clubs and 13% of handball clubs own their own sport channels. The case is different with less popular sports (hockey, volleyball and water polo), as well as individual sports (tennis). The presence in individual categories is proportional to the popularity of each individual sport. All foreign volleyball clubs have an email address, website, Facebook and Twitter profile compared to 75% of Croatian clubs. Not even one surveyed Croatian club has a profile on Twitter. What is interesting, none of the surveyed foreign or Croatian volleyball clubs use the services of Google+, Pinterest, Instagram, and none of them have a private TV channel, an online fan shop or a newsletter. The graph below depicts water polo online advertising. Graph 2: Water polo advertising

The situation is interesting regarding water polo. Online advertising services are used far more by Croatian water polo clubs than the surveyed foreign ones. All surveyed Croatian water polo clubs have websites, email addresses and Facebook and Twitter profiles, while 63% of foreign clubs have websites and email addresses, 38% have Facebook profiles and 25% Twitter profiles. The indicator that 37% of surveyed foreign water polo clubs do not have a website tells us that online advertising in individual categories is proportional to the popularity of that particular sport. Out of all surveyed sport clubs the sport club that has best-developed online advertising and is present in all categories is Barcelona Football Club. Following right next to Barcelona is Manchester United. These clubs utilize all available means of online advertising in order to reach their supporters. Since the whole world is a market and given the fact that they are especially oriented towards the Asian market, these clubs have their websites in Chinese, Japanese and Arabic in order to be more accessible to their supporters in those parts of the world. In terms of doing business these clubs are structured like top ranking corporations, and in accordance with their financial power they develop and implement marketing strategies including online advertising strategies at a very high level. Medveščak Hockey Club has the most developed online advertising in Croatia. Medveščak is present in all surveyed categories of online advertising, however it does not own a TV channel, which is understandable considering the economic situation. Apart from a website in Croatian, the club also has a website in Russian since it will be taking part in the Russian hockey league in the season of 2013/2014.

CONCLUSION Today's sports clubs are increasingly run like business systems. It is especially prominent in top clubs whose sport results greatly depend on successful implementation of business functions, and above all marketing strategies. Long ago foreign clubs recognised the necessity of using marketing strategies and connected them to the actions in the area of sports with the aim of becoming more competitive. It especially refers to online marketing where top sport clubs use the most sophisticated ways of attracting “consumers”. As it has been stated in this paper, the value of individual sport club, the numbers of supporters and sports results are very often directly connected.

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Croatian clubs try to develop their marketing strategies in accordance with their budget. In the past few years there has been an increase in sport clubs that have recognized the importance of strategic marketing planning and the usage of online marketing in order to achieve competitiveness. In the future sport clubs will be forced to use online marketing not just with the aim of achieving competitiveness but also in order to do business at all. REFERENCES 1. 2. 3. 4. 5. 6. 7. 8. 9.

AT Kearney; http://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/the-sports-market/10192, accessed September 10th, 2013. Beech, J., Chadwick, S. (2004.), The Business of Sport Management, Essex: Prentice Hall, page 129. Beech, J., Chadwick, S. (2007.), The Marketing of Sport, Essex: Prentice Hall, page 252. Dalje.com; http://dalje.com/hr-sport/real-madrid-najvrijedniji-klub-na-svijetu/476134, accessed September 12th, 2013. Jutarnji list; http://www.jutarnji.hr/manchester-united-ima-najvise-navijaca-na-svijetu--ali-dobar-dio-njih-stize-iz---kine-/1023028/, accessed September 12th, 2013. Poslovni dnevnik; http://www.poslovni.hr/svijet-i-regija/prihodi-europskih-nogometnih-klubova-premasili-19-milijardi-eura-244212, accessed September 10th, 2013. Sport England; http://www.sportengland.org/research/benefits-of-sport/economic-value-of-sport/, accessed September 10th, 2013. Shank, M. D. (2009.), Sports Marketing: A Strategic Perspective (4th. ed.), New Jersey: Pearson Education, page 11. UEFA; http://www.uefa.com/uefachampionsleague/history/champions/index.html, accessed September 12th, 2013.

DETAILS ABOUT AUTHORS: RINO MEDIĆ, MM rino.medic@vern.hr MARIJO STRAHONJA, bacc.oec. BRANKA ŠUPUT branka.suput@vern.hr FOR ALL AUTHORS: VERN' UNIVERSITY OF APPLIED SCIENCES ZAGREB, CROATIA

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ANALYSIS OF MARKETING COMMUNICATIONS ON CROATIAN MARKET OF CARD BUSINESS MATEJA ČOP BORIS JURIČ KARMEN PRELEC

ABSTRACT

Business card market is one of the most dynamic and fastest growing, that is primarily a result of ever more rapid development of modern information technologies are finding their place in that industry. Their use has led to the acceleration in retail sales processes, and especially particular payment of goods and services through non-cash payment methods in which the card products are increasingly gaining in importance and take the lead in the form of cash payments. The paper attempts to answer the question of how communication strategies used by the card issuer in daily communication with existing and potential customers are effective in achieving the desired level of differentiation from the competition. Also, the paper wishes to answer the question of what are the factors that influence consumers when making decisions about the use of credit card services in general, as well as their final choices of providers offer. For the purpose of market research card products in Croatia, as well as the impact of marketing communications card issuers on consumer behavior, the survey method was used with the questionnaire as a research instrument. Differentiation of supply is essential for achieving growth in the today dense card products market, both in the world and in Croatia. However, it must be adequately communicated to the target market. Consumers in Croatia today can hardly spot the differences between credit issuers in their communication strategies. This problem is the main focus of this research process. KEYWORDS: marketing communication, card business, differentiation.

1. INTRODUCTION Business card market is one of the most dynamic and fastest growing, which is primarily the result of the fast development of modern information technology that finds its place in the industry. Their use has led to the acceleration of sales processes in retail, especially collection of goods and services through non-cash means of payment card products which are increasingly gaining in importance and take the lead over the cash form of payment. The direct impact of these trends is evident in the rapid and competitive development of a large number of different products and services in the card industry, some of them less than ten years were totally unknown or they didn’t exist. So the card products are available for people of different ages, and on the other hand offer of card products is growing for people of different lifestyles and affinity. Card issuer are daily adapting its range of services the current trends in the market of financial and credit card services. So today with the basic services of raising cash, installment payments and raising consumer loans, the range of most providers of card-based products and services enriched with additional services such as insurance, global assistant, consulting services and planning the household budget, etc. Communication strategies used by the card issuer in daily communication with existing and potential customers have proven to be ineffective in achieving the desired level of differentiation from the competition. Specifically, consumers today are difficult to spot differences between credit card companies in their marketing communications. Precisely this issue is the main focus of this research. Today, banks are traditionally dealing with card operations, as well as non-bank card system, most notably are American Express and Diners Club. Besides them there are also issuers from other industries where the main activity is financial in nature, but in association with a bank or non-bank payment systems see a business benefit. Marketing in the card business is a specific area of marketing services, which are increasingly gaining importance in marketing theory and practice.

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As in the case of credit card product actually works on the market of financial services, the use of traditional marketing techniques and methods used to market items produced in their case is not sufficient. Due to their specific properties consumers on the service market behaves in a different way, which led to the necessary adjustment of marketing strategies, all with the aim of identifying and satisfying his desires, interests and needs.

2. MARKETING COMMUNICATION IN THE MARKET OF CARD PRODUCTS Today, the financial industry is deeply affected by political, economic, technological and demographic changes. The environment in which this system is leading a battle for market space is very turbulence every day more and more. Increasingly competitive financial market is result of a process of deregulation that allows both financial and non-financial institutions to perform tasks traditionally performed eg banks. In addition, more advanced and faster development of technology also brings more and more significant changes, and users are becoming more educated, sophisticated and secure a growing number of state laws that are made. In order to achieve successful growth and development, in the interests of the banks and other institutions engaged in credit card business to attract and retain potentially profitable customers. Aware of how they can help in the power of brand products, issuers have chosen to represent a certain world-famous brand and developed their own. Crowd on the market of credit card services is such that more issuer almost doesnâ&#x20AC;&#x2122;t have space for real growth in the market, but those who intend to grow, they do so mainly by consuming job current and potential competitors. Banks are increasingly realizing that to survive in the market is no longer enough just to keep track of the changes that are happening to him, and great efforts are made to detect the major existing and future competitors. Increasing attention is paid to the analysis of competition, their current activities and new plans, in order to create their own strategies. Answers to the questions of whether to defend or attack, how, when, where and how the basis for setting up their strategies.

2.1. Traditional forms of marketing communications on the market of card products Marketing communication process of transmitting information, ideas and emotions of the sender to the receiver through the media in order to achieve certain effects. It is clear that, due to its specific characteristics, marketing communication is major challenge for marketing professionals. Service users are not solely motivated by physical properties, but the benefits that these properties provide, which is why financial service providers need to focus on offering benefits, not the pure product terms ie services. Because of its complexity, financial (including credit card) services are not always clear to users, and the users often occurs uncertainty and distrust in their purchase. This abstract may be reduced a variety of promotional activities that are supposed to embody the benefits of services (for example, credit card illustration on items that amount can buy) and give them a visible form. For the same reason, the change range of financial services requires extra caution, because too often the changes can only cause confusion among users. Promotion wants to meet users with a range of service and their properties, but also affect the creation and maintenance of demand for them. With the ability of new credit card products to meet the perceptions, desires and needs of potential users, the success of its placement on the market is essential and a certain level of awareness of potential users of the existence of this product and its characteristics. Communication should be focus on encouraging potential customers to sign up for the card and start to use it through education about all the possibilities that it offers, as well as influencing their loyalty. Marketing communication with potential cardholders apply different types of promotions as well as their combinations. Among the most prominent are definitely advertising, direct marketing, sponsorship, sales promotion and public relations. The best and most widely used form of promotion services certainly is advertising, whose messages are of great importance focus on tangible elements associated with the service. Aim of advertising is to familiarize with the offer, attract potential customers and convince them that just presented services to help solve the problem. It is very popular in the card industry, and the promotion of credit card products and services are represented in all major public media, from television and radio, the press, cinema, to posters and billboards.

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Figure 1. MasterCard - Outdoor advertising

Source: Daily Billboard Blogspot, http://dailybillboard.blogspot.com/2012/03/bonus-day-citi-mastercard-google-wallet.html, (25.07.2013.)

Figure 1 example is the outdoor advertising in jumbo format usually positioned at locations of high frequency such as crossing major highways. However their use depends on the character of the campaign, the availability of a particular media in a given area, and financial capabilities of the vendor. Further, direct marketing is not limited to just one media but it’s successfully used in the fact that their combination is often achieved higher productivity than single media (synergism). It also provides the ability to measure the feedback and the number of received candidate or cards issued, and the costs much lower than they are in a very expensive public media. Besides, personal selling card products is used mainly in the banking sector, apart from where a key element of the promotional mix and is a critical element of distribution services, despite increasing automation, remains present and is a key factor in the success of the bank. Since it was observed that carriers with various promotional materials and display features in bank branches, which aim is to arouse the interest of clients, do not leave a significant impact, more attention is paid to the presentations, organized sometimes outside the bank, run by professional demonstrators, with the help of modern multimedia techniques. It turned out that this approach encourages a lot more interested users, and is increasingly applied to various market segments.1 Also, the main problem with the sales promotion services is the inability of exposure services point of sale and inability distribution of free samples.2 Used as a promotional form of communication with clients, but it can also be directed to an intermediary between the user and the service provider, as well as the employees who provide the service. In other words, it does not focus solely on the customers of banking services, but also includes the education and motivation of its staff in order that in the future more successfully sell bank services. Issuers use and rewards in the form of premiums on various types of purchased goods / services or coupons that are overrepresented in non-bank cards. For example, American Express celebrated 40 years in Croatia in cooperation with the weekly Story (in which they could find coupons for the realization of benefits), organized by American Express happy day (Figure 2), securing a 40% discount for paying American Express card at more than 300 outlets across the Croatian3.

Ozretić Došen, Đ. (2002). Osnove marketinga usluga, Zagreb: Mikrorad.str. 132 Ibid.str.132. 3 Story, http://www.story.hr/vrijeme-je-za-savrsen-shopping-samo-uz-story-90920 (accessed 05.07.2013.) 1 2

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Figure 2. Example of sale promotions American Express happy day

Source: Story.hr, http://www.story.hr/vrijeme-je-za-savrsen-shopping-samo-uz-story-90920 (accessed 05.07.2013.)

Frequently used tool in this industry are various types of lotteries, based on the monitoring of transactions incurred card. So recently Visa organized contest in term holiday consumer fever contest titled "Use - you'll love" (Figure 9), and in part by the participation of the user requested exclusive use of the card without any conditions such as a minimum, location, etc4. Figure 3. Visa give a way "Use you will love it"

Source: Bsd, http://www.bsd.hr/novosti/80-visa-nagradna-igra-koristite--svidjet-ce-vam-se (accessed 05.07.2013.)

On the other side, card issuers use a sales promotion aimed at dealers as there are no satisfied customers, if they are not satisfied and merchants on point of sale. Their dissatisfaction could lead to the conclusion of agreements with other acquirers, or completely refusing payment with credit cards, which is in an era of increasing popularization of these means of payment acceptable. Since cardholders can only buy with a customized infrastructure point of sale, and each issuer must provide training on how retailers selling the use of the card and the benefits that it brings to him, the proper use of equipment, the characteristics of the card etc. Besides necessary support in terms of ensuring all important information at any time, but the rewards of boosting customer. Issuers use different awards focused on the motivation of retailers, from reducing the agreed fee per transaction realized after a certain number of transactions, to gifts and cash awards to employees for the achievement of the objectives of the business.

Bsd, http://www.bsd.hr/novosti/80-visa-nagradna-igra-koristite--svidjet-ce-vam-se (accessed 05.07.2013.)

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Apart from these types of promotions, credit card industry is aware of the growing popularity of this form of marketing communications, enormous resources invested in the sponsorship of sporting events that attract millions of spectators worldwide. Benefits of sponsorship are reflected in the promotion of branded products, increasing its activation and usage, strengthening customer relationships and increase awareness of the product.5 Sponsorship by major payment systems is especially pronounced in football, where the big competitions like Champions League or the World Cup, is no longer imagine without the presence of brands Eurocard and MasterCard (Figure 4). Figure 4. MasterCard – Official sponsor of Champions League

Source: Lesponsoring, http://www.lesponsoring.fr/2012/02/mastercard-uefa-champions-league/, (accessed 05.07.2013.)

In mentioned types of promotions includes public relations that are used when the company is working on building its image, gain positioning services, or when you want to affect a certain segment of the public, etc. The banks, which have traditionally community institutions, and are therefore totally dependent on the confidence of its members, is an important element of marketing mix for decades. Unlike other forms of communication, public relations have clearly defined the task of building and supporting the bank's image, improving relationships with a diverse audience, and the fulfillment of social obligations. So, American issued a American Express card with a heart (Figure 5) whose use at each purchase, regardless of the amount and the sale, PBZ Card to donate 40 cents for the benefit of projects within the platform for humanitarian action "do good every day." Figure 5. American Express card with a heart

Source: Činim dobro, http://www.cinimdobro.hr/prikupljanje-sredstva.aspx, (accessed 09.07.2013.)

5 6

Šućur, I. (2000). Primjena strategije marketinga u kartičnom poslovanju. Magistarski rad. Zagreb: Ekonomski Fakultet., Op.cit.str. 56. Hrvatska udruga za odnose s javnošću (2013)., http://www.huoj.hr/files/o/File/dfcb0fb9-d6b5-4629-aba2-5eb696e7db20.pdf (accessed 13.08.2013.)

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More frequent form of promotion is also a word of mouth experience from user to user plays a key role in forming decisions about choosing a particular company. Transfer of positive experiences with the service goal of every company and should be encouraged, it should be borne in mind that the bad news spread faster than good. According to some studies, 64% of people before buying a product or service requires the advice of friends or family members. Word of mouth strategy companies based on how to provide people a reason to talk about their products and services, but also to do everything to talk about them is positive.7

2.2. The impact of new technology on marketing communications with customers card products The technological revolution has introduced changes in the distribution system and provision of services which the banks had to adapt (and they are still adapting) to maintain competitive advantage. A large part of the portfolio was to accept by some form of electronic banking, which, despite the opinion of many, is not a saving for the bank, since it requires a large fixed costs. However, the value of this form of direct marketing is to retain customers who are interested in new forms of use of banking services. Technological progress, including the widespread use of the Internet has influenced the development of the so-called. new economy in which mass marketing, product standardization, media advertising, retail and other common marketing strategies used and on, but in practice, developing new strategies and practices that are better adapted to current trends in the business. It basically means that companies that want to succeed in the new market conditions have, with most of the skills and practices that in the past have meant success, continuously acquire new skills and abilities. Development of the Internet and the marketing opportunities provided by modern digital technology and the internet, provides significant changes in traditional marketing activities.8 The latest research shows that Internet advertising in the U.S. preceded it in the print media. However, Croatian advertisers still believe that the newspaper ad more effective than ads on the Internet.9 Lately is a very popular form of internet marketing through the social networks. The reason for its growing popularity lies in the range, since it fulfills the dream of every marketing specialist that at one time might suddenly all residents of a country to send a specific message and it's free. The benefits that the company can have from marketing through social networks are as follows10: • increasing familiarity of the product or brand • increasing web traffic to their own sites and boosting e – trade • strengthen presence in the search engines (search engine optimization) • strengthen the loyalty and trust of customers, • successful launch of new products, etc. The advantage of this form of marketing is that companies can in a very short time collect feedback about their products and services, and in the short term may include specific target groups. This form of communication is popular in the card industry. So almost all issuers have open profiles on some of the networks (Facebook, Twitter ...)

3. ANALYSIS OF MARKETING COMMUNICATIONS ON CROATIAN MARKET OF CARD BUSINESS Card business in the Republic of Croatia has bloomed recently thanks to banks who started issuing millions primarily debit cards. Bank debit cards are the most common in the total number of cards issued with a share of 79%11 and 88.9% of the issued credit and debit cards were in the portfolio 28 banks.12

Ibid. Raza, I. (2006). Pune postelje: Marketing u turizmu, hotelijerstvu i ugostiteljstvu, Zagreb: Turizmoteka, str. 184. 9 Hadzic, J. (2010). U SAD-u po prvi puta vrijednost online oglašavanja premašila oglašavanje u klasičnim tiskovnim medijima (online), Poslovni Puls. http:// www.poslovnipuls.com/2010/12/20/online-oglasavanje/ (accessed 10.08.2013.) 10 Ibid. 11 HGK (2012), http://www.hgk.hr/sektor-centar/sektor-bankarstvo/smatrcard2012/ (accessed 09.08.2013.) 12 HINA (2012). U Hrvatskoj više od devet milijuna debitnih i kreditnih kartica (online). Novi list, http://www.novilist.hr/Vijesti/Hrvatska/U-Hrvatskoj-vise-oddevet-milijuna-debitnih-i-kreditnih-kartica (preuzeto 09.08.2013.) 7 8

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For the purpose of market research card products in Croatia, as well as the impact of marketing communication card issuers on consumer behavior, the survey method is used on a sample of 270 respondents in the period from 01.th of March till 01.th of May 2013 year. As a measuring instrument is selected questionnaire. Questionnaire as an instrument of research is divided into two parts: 1. the first part consists questions that are used to analyze the structure of the sample - age, sex, occupation, education and income as the most important determinants that affect the selection and use of card products. 2. the second part consists questions that are used in order to analyze the behavior of the sample in terms of card products/services and reach definite conclusions about the validity of the objectives. Results showed that all respondents are familiar with all brands of bank and non-bank cards on the market, and all have at least one debit or credit card. Figure 1 shows that in the case of a debit card most of the respondents, even 87.14%, has a Maestro debit card, while 38.57% have Visa Electron. Chart 1. Representation of certain brands of debt and credit card in the sample

Source: Authors research

As for ass credit cards are concerned, 75.71% of respondents has MasterCard, American Express 44.29%, 32.86% Diners Club and Visa Classic 24.29% of respondents. Chart 2. The sample structure of using cards

Source: Authors resarch

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Interestingly, despite the fact that all have the cards in the sample there is a small number (8.57% for debit cards and even 20.00% for credit cards - graph 2) of the respondents who identified themselves with non-users (so-called passive users) because they prefer to use cash. Chart 3. Number of credit cards by user

Source: Authors resarch

Also, respondents were asked to comment on how they access the information on these cards. Chart 4 shows that a significant number of users (27.45%) as a source of data noted sales staff issuing bank. Those are mostly respondents who own and use the card because it was released as part of the package and banking services and they are poorly informed about the benefits of the product other payment systems, and are not motivated to search for additional information. On the other hand, users who have multiple cards generally are familiar with a variety of benefits to market credit card products that seek to harness the combined use of cards. They mainly information about the benefits received through close channels such as relatives, friends, etc, which confirms the strength of WOM in communicating to the market of credit card services. Official website as the primary source of information used by only 5.88% of patients, leading to the conclusion that this channel of communication for informational purposes only which users are used to obtain technical information (such as terms and conditions). The results shows that the (already very low) advertising activity issuer completely failed in its function of informing the public. That show and answer the final question, in which the subjects were asked to recall the ads for any card that they were impressed. Most of the respondents chose the well-known series of ads for MasterCard emphasizing excellent slogan which use affective appeals to the sense of preciousness that individual experiences and moments in life is to individuals, and unlimited opportunities card, which may not be bought, but the experience can bring them closer moments the life that is in them, and emotions. One of the respondents commented on the sponsorship, particularly in the areas of personal interest, such as sports events. Most respondentsâ&#x20AC;&#x2122; considered advertisements card issuers as a tool of communicating the image, but no information about the products/services. For this purpose, it is useful to single out the answer of the subjects ... "They are here to remind us that they existâ&#x20AC;?.

4. CONCLUSION The main issue is based on the perceived shortcomings in the marketing communication issuer of credit card products on Croatian territory, which the audience does not achieve the desired effect differentiation offers the particular issuer in comparison to the competition. Based on the results of primary research can be concluded that the offer on Croatian card market is still trying to meet the needs of the broader market, although in recent times the market slowly but successfully introduced various programs created by pooling partners that are created for a specific segment of consumers.

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Taking into account the results of the primary and secondary research can be concluded that the issuers should focus on creating differentiated products that are tailored to the real needs of specific users, but also to ensure adequate communication methods and techniques that will raise awareness of audience and reach final positive differentiation in the minds of consumers.

LITERATURE 1.

Bsd, http://www.bsd.hr/novosti/80-visa-nagradna-igra-koristite--svidjet-ce-vam-se (preuzeto 05.07.2013.)

Činim dobro, http://www.cinimdobro.hr/prikupljanje-sredstva.aspx, (preuzeto 09.07.2013.)

Hadzic, J. (2010). U SAD-u po prvi puta vrijednost online oglašavanja premašila oglašavanje u klasičnim tiskovnim medijima (online), Poslovni Puls. http://www.poslovnipuls.com/2010/12/20/online-oglasavanje/ (preuzeto 10.08.2013.)

HINA (2012). U Hrvatskoj više od devet milijuna debitnih i kreditnih kartica (online). Novi list, http://www.novilist.hr/Vijesti/Hrvatska/U-Hrvatskoj-vise-od-devet-milijuna-debitnih-i-kreditnih-kartica (preuzeto 09.08.2013.)

HGK (2012), http://www.hgk.hr/sektor-centar/sektor-bankarstvo/smatrcard2012/ (preuzeto 09.08.2013.)

Hrvatska udruga za odnose s javnošću (2013), http://www.huoj.hr/files/o/File/dfcb0fb9-d6b5-4629-aba2-5eb696e7db20.pdf 13.08.2013.)

Daily Billboard Blogspot, http://dailybillboard.blogspot.com/2012/03/bonus-day-citi-mastercard-google-wallet.html, (preuzeto 25.07.2013.)

Lesponsoring, http://www.lesponsoring.fr/2012/02/mastercard-uefa-champions-league/, (preuzeto 05.07.2013.)

Ozretić Došen, Đ. (2002). Osnove marketinga usluga, Zagreb: Mikrorad.str. 132

(preuzeto

10. Story.hr, http://www.story.hr/vrijeme-je-za-savrsen-shopping-samo-uz-story-90920 (preuzeto 05.07.2013.) 11. Raza, I. (2006). Pune postelje: Marketing u turizmu, hotelijerstvu i ugostiteljstvu, Zagreb: Turizmoteka, str. 184. 12. Šućur, I. (2000). Primjena strategije marketinga u kartičnom poslovanju. Magistarski rad. Zagreb: Ekonomski Fakultet., Op.cit.str. 56. DETAILS ABOUT AUTHORS: MATEJA ČOP, MM cop.mateja@gmail.com BORIS JURIČ, MA boris.juric@vern.hr KARMEN PRELEC, MC karmen.bencek@gmail.com FOR ALL AUTHORS: UNIVERSITY OF APPLIED SCIENCES VERN' ZAGREB, CROATIA

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ANALYSIS OF CONSUMERS' ATTITUDES TOWARDS HOMEMADE AND INDUSTRIAL BRANDS: CASE OF OLIVE OILS ON CROATIAN MARKET IVANA STANEKOVIĆ DAVORIN ŠIMUNIĆ KATARINA LUKETA

ABSTRACT

With the increasing trend of the concern regarding food quality, the awareness and consumers’ interest for growing and processing food that they consume are increased as well. The aim of this paper is to examine consumers' attitudes towards homemade and industrial brands of olive oils as well as their habits regarding purchase of this product. The analysis aims to learn whether there are consumer preferences and general notions towards the homemade brands of olive oils as well as their attitudes when it comes to industrial brands. The paper identifies whether there are any preferences for a particular brand and what the other factors, influencing their purchase, are: price, quality assessment, consumer expectations, the impact of positioning at the point of sale and the impact of advertising. Furthermore, the purpose of this paper is to explore the frequency and place of purchase, the method by which customers evaluate different alternatives and the criteria which are the basis for their decision when purchasing olive oils, but the paper also aims to learn whether customers look for product information before purchasing and what determines the scope of their analysis. The study is based on the data collected within the research which is conducted both face-to-face and electronically, on a sample of 210 respondents of different age, gender, level of education and income level, which gives more representative picture of the actual situation on the Croatian olive oil market. The research results should indicate whether there are some specific consumers’ preferences, as well as the selection and buying habits. These results should enable companies and small producers (family farms) for easier and better targeting of consumer groups and to provide answers to the questions about (re)positioning their products on the Croatian olive oil market. KEYWORDS: Consumers' attitudes, Homemade brand, Industrial brand, Olive oils, Croatian market

1. INTRODUCTION In many Mediterranean countries, olive oil is a foundation of nutrition. The countries that are the largest producers are at the same time the biggest consumers of olive oil. For example, consumption per capita per year in Greece is 20 liters, in Italy 12.5 l, 10.6 in Spain and 7.5 in Portugal, while in Croatia it is about 2 liters per year. At the same time, significant regional variations are present. In Croatian coastal region the consumption is at similar level as in other Mediterranean countries, while in continental Croatia consumption is significantly lower. However, due to the increasing popularization of olives and olive oil, its consumption is constantly increasing in the last decade.1 There is a conventional common perception regarding the health benefits of olive oil. In order to prove this, researchers in Spain followed more than a thousand people for a period of six and a half years, and they have found that participants who were on the Mediterranean diet supplemented with olive oil had better scores on cognitive tests than the control group. The research results were published in the Journal of Neurology, Neurosurgery and Psychiatry2, and have proved that the Mediterranean diet with olive oil can reduce mild inflammatory changes in the walls of blood vessels which are associated with an increased risk of vascular disease and cognitive impairment.

2. OLIVES AND OLIVE OIL IN CROATIA According to data published by the Ministry of Agriculture, with around six million trees and 30,000 hectares of olive groves, Croatia is ranked as 19th world’s producer of olives and olive oil. Croatia has the potential and ability for several

1 2

Gospodarski list: http://www.gospodarski.hr/Publication/2012/21/agroekonomika-maslinovo-ulje/7718#.UfjoO6x7C_g (accessed 23.7.3013.) Martinez-Gonzalez M., Journal of Neurology, Neurosurgery and Psychiatry: „Mediterranean diet improves cognition: the PREDIMED-NAVARRA randomised trial“,; http://jnnp.bmj.com/content/early/2013/04/19/jnnp-2012-304792 (accessed 27.7.2013.)

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times higher production as well as consumption of olive oil, which makes potentially permanently secure placement and provides perspectives for further development of Croatian olive production.3 In Croatia, olive plantations are spread in Istria, the coastal area of Kvarner and Dalmatia and on the islands. In the past decade in the olive and olive oil production we are witnessing positive trends in, which are followed by the planting of new olive groves. Along increased consumer awareness about the nutritional and health value of olive oil, government programs and its financial support also contributed to this positive trend. The Croatian Chamber of Trades and Crafts, organized the project "Croatia a country of olive oil," whose goal is to build an image of Croatia as a country of excellent olive oil, education of population about the healing properties of olive oil and an increase in sale of Croatian olive oils in the domestic and foreign markets. The project was created as a response to the insufficient use of the great potential of olive and olive oil production. In order to achieve those objectives, the organizers have created a series of educational, promotional and entertainment events in Croatia and abroad with the aim to inform consumers about the importance of olive oil usage in everyday life.4 Regardless of the potential of Croatian olive growing, according to Ministry of Agriculture, half of the total olive oil quantities that were sold on Croatian market were imported olive oil. 5 amily farms are small producers with average 0.5 ha, i.e. 165 olive trees yield crops of 2,475 kg (346.4 l) of oil per year. These small producers are not inclined to mix their oil with oils from other small producers and sell it as a unique product in larger quantity; therefore they stick to direct sales on the farm because they are unable to offer higher quantities of finished product to the market. Farms that produce olive oil usually sell it through direct sale, without intermediaries, as well as through indirect sales (sales in retail and to restaurants). Direct sale reduces the cost of sale, often entails a lower price and consumers gladly take the product in bulk. On the “olive oil roads”, consumers, foreign tourists, assume that the oil in bulk has the similar quality as the oil in the bottle has, so they prefer to buy in bulk (and in the same time they do not have to pay for the packaging). Only a small number of family farms (those who are bottling their products) are present on the market through large grocery chains, trade organizations of retail sales associations and tourism and catering facilities. 6

3. ANALYSIS OF CONSUMERS’ ATTITUDES TOWARDS HOMEMADE AND INDUSTRIAL OLIVE OIL The study is based on the data collected within the research which is conducted both face-to-face and electronically, on a sample of 210 respondents of different age, gender, level of education and income level. The questionnaire was consisted of three parts. The first part of the questionnaire included questions related to all types of oils used in cooking, which oil is primarily used, what is the level of the awareness of the existence of certain industrial brands of olive oil, if the olive oil is common in household, and if not, what are the reasons. The second part of the questionnaire contained questions addressed only to consumers of olive oil, and the aim of the questions was to collect data on: olive oil brand which is most commonly bought, frequency of use of olive oil in the diet, preferences regarding the quality, frequency and place of purchase, method of use in food preparation, the way on which customers collect information about the product before purchase, and consumers’ attitudes toward olive oil compared to other oils. Second part of the questionnaire also analyzed the importance of factors such as price, quality, taste, smell, chemical composition, methods of fruit processing, products origin, availability of information, convenience for the purchase and the recommendations of friends and family. Throughout the case, the respondents also had to also express attitude toward domestic compared to industrial olive oil. Questions in this part of questionnaire have also examined the attitude towards Croatian and foreign olive oils and the perception of domestic prices compared to prices of industrial olive oil. Through this part of the questionnaire there were also questions that analyzed usage of the olive oil for some other purposes except in food preparation.

HGK: http: //www.hgk.hr/wp-content/blogs.dir/1/files_mf/hzmu_objava_za_medije.pdf (accessed 27.7.2013.) HGK: http://www.hgk.hr/djelatnost/gosp_poljoprivredaprehrana/hrvatska-zemlja-maslinovog-ulja (accessed 27.7.2013.) 5 Lider: http://liderpress.hr/arhiva/128157/ (accessed 31.7.2013) 6 Silvana A, Peršurić I., Juraković L.; „MASLINOVO ULJE – PROIZVODNI I MARKETINŠKI ASPEKTI“, Agronomski glasnik 3/2006 ISSN 0002-1954, 12.5.2006., pp 243-245, http://www.google.hr/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCoQFjAA&url=http%3A%2F%2Fhrcak.srce.hr%2Ffile%2F42003&ei =Fff4Ub36JeHh4QSMtYGgDw&usg=AFQjCNFYBcTItHcB-sJFab_gBCfYfvB-dg&sig2=nB5d-GnREc4l7pErzQxPAQ pp 243-245, (accessed 28.7.2013.) 3 4

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Last group of questions was related to the socio-demographic characteristics of respondents. The study included 149 female and 61 male persons. Age of participants was between 21 and 73 years and the average age was 40.34 years. Most of them were with a university (master) degree (35%), with high school degrees or lower level of education there were 32% respondents, and 33% with bachelor degree. 27% respondents were from the families with 2 members, 22% from the families with 3 members, 19% from the families with 4 members, 16% from families with 5 members, 10% from families with one member, and 6% from families with 6 and more members. By employment status, the study included 61% employed people, 9% unemployed, 18% of retirees and 12% of students

3.1 Interpretation of research results Sunflower oil dominates Croatian market. According to the research results 85% of all respondents sometimes use sunflower oil, 79% of them sometimes use olive oil. Vegetable oil is sometimes used by 25% of respondents, pumpkin seed oil 21%, 4% use sesame oil, 3% linseed oil and palm oil, 2% soy oil and 1% coconut almond oil. The results are also shown in Chart 1. Chart 1. Types of oils used in cooking

Although a large number of respondents occasionally use olive oil, only 30% of them use it as primary oil in food preparation (Chart 2). Results show that the most common reason for a rare use in comparison with other oils is a high price, but also the fact that olive oil is rarely used for cooking and frying (19%), which are common ways of food preparation in this part of the country. As primarily oil, 60% selected sunflower oil, 7% of respondents most often use vegetable oil, and 3% pumpkin seed oil (Chart 2). Chart 2. Primary oil in food preparation

Source: Authors research

According to the research results, 32% of consumers usually buy olive oil from family farms, while others buy some industrial brand. When it comes to consumer awareness of industrial brands of olive oil which are available on the market, from

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all brands Zvijezda is the best known olive oil and 96% respondents are familiar with it (Table 1). According to the results, Zvijezda is the primary brand to a 31% of respondents, followed by SMS (primary brand for 18%), Diamant, K-Plus (Konzum), Ol Istria and Ol Dalmatia (Agrolaguna), Clever (Bill), Premium Spar (Spar Croatia). Only a small number of respondents have heard for olive oil brands that have come from small family farms and family productions, and which are available in large retail chains. It can be concluded that this is due to lack of marketing activities, primarily promotions. Table 1. Consumer’s awareness of the olive oil brands Zvijezda

96%

Roko

Dijamant

43%

Brač

Ol Dalmatia

31%

Il Grezzo

Levanat

13%

Costa de Espana

SMS

66%

Borges

Olma

Sparta

Orgula

Trenton

18%

Epulon

Delphi

La Espanola

Brachia

Il Passignano

PZ Tribunj

Monini

Organic Oils S.P.A.

Ol Istria

30%

Fiorentini

Postira

Špar Premium

22%

Mala Vala

Clever

27%

PZ Marina

K-Plus

34%

Blato 1902

K-Classic

20%

PZ Lučica

S-Budget

19%

Do-It B.V

Mercator-Premium

18%

Source: Authors research

11% of all respondents never use olive oil. The main reasons for this are the price or the fact that olive oil is not a common food in their household. Of all the respondents who do not use olive oil in their diet, 18% of them do not like the taste of olives. When it comes to the consumption of olive oil, the study found that 27% of respondents consume olive oil every day. 28% of them consume it more than once a week, 12% once a week, 10% of them two or three times a month, and 15% less often than that. 8% of respondents consume olive oil only when eating in restaurants or at friends and family (Chart 3). Chart 3. Consumption of olive oil

Source: Authors research

The research also found that 32% of respondents are buying olive oil one to three times per month, 37% of respondents are buying it once every three months, 13% every six months, and 18% ones a year or less. Frequency of purchase is shown in Chart 4.

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Chart 4. Frequency of purchase

Source: Authors research

According to the study, consumers mostly prefer extra virgin olive oil (43%). 20% of the respondents prefer Virgin olive oil, 12% usually olive oil, mix olive oil 5%, 1% sansa oil (oil from olive pomace). 19% of respondents did not know what type of olive oil are they buying or does not matter to them (Chart 5). Chart 5. Preferred types of olive oil

Source: Authors research

27% of respondents are purchasing directly from the manufacturer. 5% are purchasing from manufacturers but through orders via Internet or through another person. 59% of respondents are purchasing olive oil in the grocery store where they buy the rest of the supplies. 6% of respondents buy it at the green market and 3% in specialized stores oil shops (Chart 6.) Chart 6. Place of purchase

Source: Authors research

The study also showed that the olive oil is most commonly used fresh (78% of respondents), it is often used boiled or fried by 19% of people, and 3% in combination with other oils or fats. When it comes to product information, 31% of respondents are searching the information about the product from friends or family, 19% from producers, 18% through the media, 9% from the sales staff, 23% of respondents are not looking for the information before purchase. 93% of respondents believe that the olive oil has some advantages compared to other oils. 79% of them agreed with the statement that it's nutritional value, 60% of respondents preferred the taste of olive oil compared to other edible oils, 49% believes that olive oil helps in the prevention of certain diseases, and 36% of respondents believes that one advantage also is versatile in food preparation.

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Through assessment of the importance of certain factors which influence the purchase, respondents give the greatest importance to taste (4.85), quality (4.57), smell (4.46), the origin (4.15), the recommendation of friends and family (4.15 ). Respondents assessed that the medium important factors are: chemical composition (3.96), the price (3.93), the method of fruits processing (3.90), the availability of product information (3.90) and the comfort of purchase - convenience (3.44), while the appearance (design) and type of packaging are less important (2,96). Chart 7 shows the evaluation of the importance of certain factors when purchasing olive oil. Chart 7. Evaluation of the importance of certain factors of olive oil

Source: Authors research

30% of respondents prefer dark green color, 20% green and 16% bright green. 5% of respondents prefer yellow color of olive oil, 2% light yellow and 2% dark yellow. Âź of respondents believe that the color is not the decisive factor for the purchase and not to prefer any color. When it comes to oil flavor, 46% of respondents prefer the classic taste of olives (young or mature), 18% prefer bitter taste, 7% taste on green leaves or grass, 6% fruit flavor, and 4% prefer spicy flavor. 19% of respondents do not prefer any flavor or they do not care about the difference. 26% of respondents agreed with the statement that they are exclusively buying olive oils for which they are they are familiar with origin of olives and only from small producers. 28% of respondents believe that the domestic olive oil is better than the industrial oils, while 12% of respondents agreed with the statement that industrial olive oil has significantly poorer quality than those produced in small family farms. 11% of respondents usually buy olive oil in a grocery store or in supermarket because they believe that those oils are more favorable compared to ones produced on the small family farms, but have much lower quality. 5% of respondents always buy the cheapest olive oil, or the one which is on special discount. 4% of respondents believe that the domestic olive oil is overrated and expensive. 9% of respondents do not care about what kind of olive oil they buy because they consider that all of them contain equal characteristics. 49% of respondents prefer packaging of 1 liter, 18% of 0.75 l, 12% of 0,50 l, 2% of 0.25 l or smaller packaging, while 1% of the respondents prefer packaging of 2 l. Of the total number of respondents, 17% prefer to buy olive oil in bulk (Chart 8). Chart 8. Preferred pack size

Source: Authors research

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When asked how much they are willing to pay for one liter of olive oil that completely meets their needs, for 40% respondents that is 60 to 80 kn, 28% thinks this is 40 to 60 kn, 18% from 100 to 120 and 9% up to 40kn. Only 5% stated that they are willing to pay more than 120 kn per liter (Chart 9). Chart 9. How much are the customers willing to pay

Source: Authors research

73% of respondents said that it is important that the olive oil is produced in Croatia and 11% thinks that the origin of the product is not important factor for them. 5% of respondents prefer oil produced in Italy, 3% oil produced in Spain, 2% oil produced in Greece and 1% prefer Portugal oil. Since they had the option to specify the country from which they would never buy olive oil, 6% of respondents said they would never buy the oil produced in Turkey, 4% of them said the same for Lebanon oil, and 2% for oil from Algeria. 2/3 of respondents are willing to pay a higher price for olive oil that is produced in Croatia, a third of respondents are not willing to pay more. When talking about Croatian olive oil, 49% of respondents stated that region of origin is not important for them, 29% prefer oil from southern Dalmatia, 12% from North and South Dalmatia, 7% preferred Istrian olive oil, and 3% oils produced in the Kvarner region. When the price, availability and other limiting factors wouldnâ&#x20AC;&#x2122;t be taken into account, 96% of respondents would favor olive oils produced on small family farms, while 4% of respondents believe that domestic oil does not have any advantage in comparison with the industrial brands. The reasons that proponents of domestic oil prefer it were: quality (64%), originality (19%), nutritional value (14%), and price (3%). Respondents who gave precedence to industrial olive oils, claim that the reason for this is: purchasing convenience (45%), cost (32%), standardized quality (23%). From the total number of respondents, 68% of them believe that the price of domestic olive oil is higher than the price of those that can be purchased in supermarket. 24% of respondents believe that the price is equal, and 8% said that domestic oil has lower prices. This study also demonstrated that, except in cooking, 40% of respondents are using olive oil for other purposes: hair care and skin.

CONCLUSION Based on the results, it can be concluded that consumers have a more positive attitude towards the olive oils produced on small family farms, although more often buy industrial brands due to the simplicity of purchase and pricing. Research found there is high loyalty towards several industrial brands, and customers are not willing to compromise quality that these brands guarantee by purchasing products which are on special discount. Although there are some family brands coming from family farms and productions, they have managed to ensure the availability of their products in large retail chains, but consumer awareness about their existence is low. To be able to compete

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with well-known industrial brands, small olive oil producers should begin to significantly invest in marketing activities, primarily in promoting and ensuring the availability of its oil in whole Croatia by building sales channels. Fees for product listing in large retail chains are extremely high, so small producers could provide placement of indigenous products, build awareness and inform potential customers about the products through pooling and creation of their own sales channels (oil shops) in major Croatian cities. Considering that most customers prefer the Croatian olive oil (regardless whether they are from small farms or industrial), there is a huge market potential for all small producers. This study also demonstrated the existence of a large market potential for the production and development of differentiated marketing and production of the cosmetic products based on olive oil. Croatian olive oil and its derivatives have considerably large export potential. To exploit such potential, further research on the neighboring and regional markets must be considered - that would enable product adjustments and better product placement for those markets. REFERENCES 1. 2. 3. 4. 5. 6.

Gospodarski list: „Agroekonomika – Maslinovo ulje“; http://www.gospodarski.hr/Publication/2012/21/agroekonomika-maslinovo-ulje/7718#.UfjoO6x7C_g Hrvatska gospodarska komora: „Hrvatska zemlja maslinovog ulja“; http://www.hgk.hr/wp-content/blogs.dir/1/files_mf/hzmu_objava_za_medije.pdf Hrvatska gospodarska komora: „Hrvatska zemlja maslinovog ulja“; http://www.hgk.hr/djelatnost/gosp_poljoprivredaprehrana/hrvatska-zemljamaslinovog-ulja Martinez-Gonzalez M., Journal of Neurology, Neurosurgery and Psychiatry: „Mediterranean diet improves cognition: the PREDIMED-NAVARRA randomised trial“,; http://jnnp.bmj.com/content/early/2013/04/19/jnnp-2012-304792 Lider: “Hrvatska na 19. mjestu svjetskih proizvođača maslina“; http://liderpress.hr/arhiva/128157/ Silvana A, Peršurić I., Juraković L.; „MASLINOVO ULJE – PROIZVODNI I MARKETINŠKI ASPEKTI“, Agronomski glasnik 3/2006 ISSN 0002-1954, 12.5.2006., pp 243-245 http://www.google.hr/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCoQFjAA&url=http%3A%2F%2Fhrcak.srce.hr%2Ffile%2F4 2003&ei=Fff4Ub36JeHh4QSMtYGgDw&usg=AFQjCNFYBcTItHcB-sJFab_gBCfYfvB-dg&sig2=nB5d-GnREc4l7pErzQxPAQ

DETAILS ABOUT AUTHORS: IVANA STANEKOVIĆ, MM STUDENT UNIVERSITY OF APPLIES SCIENCE VERN' ZAGREB, CROATIA E-mail: ivana.stanekovic@pmi.com DAVORIN ŠIMUNIĆ, MBA DIRECTOR OF MARKETING AND DEVELOPMENT ZVIJEZDA D.D. ZAGREB, CROATIA E-mail: davorin.simunic@gmail.com KATARINA LUKETA, MF IT Analyst UNIVERSITY OF APPLIES SCIENCE VERN' ZAGREB, CROATIA E-mail: katarina.luketa@vern.hr

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MODERN TRENDS OF MARKETING DEVELOPMENT IN BANKING INDUSTRY RATIMIR JOVICEVIC

ABSTRACT

Concerning general globalization and identifiable economic trends, today banks can offer to the market wide range of products and services, both in our country and abroad. Thanks to the development and application of information technologies, it is mainly conditioned and supported. In that sense it is particularly important to include: models of modern information infrastructure, databases and data keeping, data protection, data management, communication between computers, modern statistical software and other IT tools, which has contributed to the unfathomable increase of speed of data processing, introduction of ATMs, operation and processing of various types of credit and debit cards etc. Banks all over the world, as well as in our country, strongly influence the flows of economic activities in the sector of real economy. Understanding of specific nature of banking services and their complexity is of great importance for marketers, especially from the perspective of their clients. Due to that reason, efforts have been made on theoretical and methodological level, especially in the last two decades, in order to develop the marketing of financial (banking) services as a separate academic discipline. Key dimensions of these services have been the research focus for many authors and the generally accepted view is that the main dimensions of service quality are a key factor for success. The main objective of marketing-oriented bank is superior satisfaction of present and future needs of bank clients in relation to competitors, with profit realization which is a prerequisite for ensuring the sustainable growth and development with the strengthening of bankâ&#x20AC;&#x2122;s market position in relation to the competitors. Bank needs to continually update its portfolio of products and services in order to realize the marketing performance and overall business performance. Every banksâ&#x20AC;&#x2122; limitation of financial resources requires the allocation of individual marketing mix instruments in a way that will provide the best results to the bank in providing most benefits to the bank and other stakeholders. The most important role of bank marketing is to enable harmonization of banking products and services offer to the needs of specific target groups. Also, marketing has a role in staff education and in designing of banking services (of physical environment and processes), with creation of competitive advantage. If we start from the well-known statement that marketing in banks was not sufficiently developed until recently, it is completely reasonable and particularly relevant to elaborate the aspect of influence of new marketing paradigms on development of the banking marketing. Relevance of this thesis is particularly emphasized by the fact that in recent time large number of relevant academic works has been issued, proposing separation of financial (banking) services marketing as a separate part of the marketing, with need for more detailed consideration in determining its position. In that sense we would like to focus the barycenter of this paper on bank marketing and impact of new marketing paradigms on banking and bank marketing. KEYWORDS: Marketing, Bank marketing, New marketing paradigms, Characteristics of banking services, Competition

1. INTRODUCTION The main reasons for writing this addressed topic are related to at least two relevant facts .The first consists the fact that, in the last 15 years appeared a large number of studies that suggested that marketing in the financial sector and banking separates into a new field of marketing because of its specificity and the rapid development of the financial sector. Second reason shows that at the same time were appearing papers which thoroughly emphasize relationship marketing as a new marketing paradigm, which is based on strong development of IT. If everyday marketing needs are added to that, it implies that it is crucial to evaluate how much the banks are successfully involved in contemporary trends of marketing. A new marketing paradigm is based on the fact that the exchange process takes place under conditions of a degree of interdependence between the seller and the buyer. The new relational exchange opens a new approach to the theory and practice of marketing long-term relationships between buyers and sellers. The new relationships can be well seen if we compare the picturesque difference between transactional marketing and relationship marketing. Follows an overview:

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Table 1. Transactional Marketing vs. Relationship Marketing TRANSACTIONAL MARKETING Focus on transaction and single sale Company as a limit Independence Value for customer Competition Passive customers Strong impression in the sales process is basis Orientation on product characteristics Focus on services related to the product “Pushing” prices Searching for new customers Short-term thinking and actions Building business on bargaining Small market on client’s service Post-sales services as an additional expense Limited commitments to customers Moderately intensive contact with the customer Quality is important for production Mass communication Isolated market research Mass markets or market segments Market participation No structure for further business Awarding system for job performance Finished work is the end

RELATIONSHIP MARKETING Focus on orientation towards customers and partnership No limits Dependence guided by established network Value for partnership Cooperation Active customers Basis in sale and in gaining trust Orientation on benefits from product Focus on the expectations and perception of people Promoting value Keeping current customers Long-term thinking and actions Building business on relationships Large market on client’s service Post-sales services as an investment in relationships Large commitments to customers Highly intensive contact with the customer Quality is important for everyone Personal communication Improved dialog with customer Markets narrowed to an individual Participation in consciousness (participation at buyers’ etc.) Creating structure for supporting relationships Awarding system for maintenance and development of relationships and revenues Sales are only the start

Source: Author

One of the key differences between transactional marketing and relationship marketing is in their duration. Longevity is the main determinant of relationship marketing. The reason is that these relationships cannot be built in a short time. Their relations were previously based upon the concept of win-lose and now a win-win, win-win relationships. It should be borne in mind that "long-term marketing relationships can be extremely successful when it is appropriate, but it can also be costly and ineffective if it is not appropriate. Conversely, transactional marketing can be profitable and successful when appropriate, but a serious error if it is inappropriate. "(Source: Jackson B. Wining and Keeping Industrial Customer, Lexington, MA: Lexington Books, pg. XI) In terms of the new economy and intense competition, it appears a new marketing concept, known as relationship marketing, which ensures strategic competitive advantage, not only because of the products and other elements of package deals. Changes are apparent from the marketing aimed to mass anonymous customers to develop and manage relationships with more or less known and identified customers. The preoccupation of new theoretical research in the field of marketing is increasingly directed towards communication, personalization and interaction between participants in marketing channels. Pre-eminent institutions for marketing, American Marketing Association defines "Marketing is an organizational function and a set of the process of creating, communicating and delivering value to customers, as well as a set of processes and customer relationship management in a way that provides benefits to the organization and its stakeholders." (Source: AMA magazine Marketing News, by E. Gummesson, Total Relationship Marketing, Elsevier, Oxford, 2008, p.13.) This concept helps the company to focus on its clients as a key asset. Many companies, therefore, install loyalty as key components of their marketing strategies which increase competition, particularly in the sectors of financial services, retail, hotel and air travel. Relationship marketing is increasingly becoming a platform for the study of the theory and practice of marketing in the developed markets. Thanks to the specified flows, it develops an entirely new concept of content-rich management and marketing.

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2. RELATIONSHIP MARKETING IN BANKS The concept of the marketing mix (4P or 7P) is no longer sufficient, actually the concept of managing the marketing mix is not enough, it loses its dominance and supremacy, ceding primacy to building long-term relationships with the recipients and providers of the services. The essential things are not changing while expanding the 7P marketing mix concept that is used in the service industries including financial institutions. The concept of the marketing mix is not, even if extended, sufficient to encompass the complexity of relationships in the exchange servicing and ensure proper implementation of marketing philosophy in the service sector. Marketing department and organizational units have been synonymous with the marketing function in the bank, until recently, which has led to the isolation of marketing from design, service delivery, managed complaints and other relevant activities of the bank. Thus, the separation of marketing from the rest of the organization, alienated from marketing and marketing activities which are focused on the customer, became very dangerous in the service sector and banking. The service sector requires a much broader process than what the marketing mix, in its manifestation, provides. We are witnesses that even the application of differentiated and focused marketing is not a sufficiently adjusted and individualized to access customer service. The current concept has become too small for all that today's customers expect from a bank and asks for a significant shift of focus, with a constant race to win new customers and to strengthen ties with existing ones. For many authors, building a relationship marketing strategy is a key factor of competitive advantage and the preservation of the built positions and survival in increasingly competitive struggle with which banks are encountered. Building relationships between suppliers and consumers of services involves a series of transactions based on trust and contribution. The essence of the definition of the relationship lies in the fact that the meetings between buyers and sellers accumulate over the time and, based on that, there is a possibility that individual transactions are transferred to a partnership relation. In order to clarify the concept of relationships, following assumptions must be satisfied: there must be a periodic need and wish to use certain services, consumer/buyer must control the offering process of service seller; and not to forget to mention the alternative offerings which must be present. Financial services, by their nature require continuity in relationships. There is a tendency that the client accepts and initiates continuous relations, even when there is no such strongly expressed need for them, with the aim to reduce the perceived risk in the selection of services. This risk is caused by a high level of intangibility of banking services, which requires high participation of trust as a determinant of quality of service. This affects the propensity to build customer relationships and connections with the bank or even with the individuals employed in the bank, rather than be tied to a particular type of service. As the essential elements of banking services are related specifically for the high levels of perceived risk and uncertainty, it is clear that the concept of relationship marketing is the method to reduce the risk of the users, but also the risk of the bank. The key difference between relational and transactional marketing related to the sphere of the set objectives and priorities, with a further indication of the necessary changes to be made within a bank that is committed to building long-term relationships and communications with customers and application of relationship marketing. Relationship marketing is causing significant changes in the organization within the bank, and within the position and responsibilities of individual departments directed towards customers. By the logic of service marketing towards the realization of the mission of relationship marketing, it is important to engage all employees who are in any way in contact with clients. Thus, the so-called category. - part-time marketing is significantly higher than those in the category of full-time marketers, and often becomes the only real carrier of marketing activities in the service encounter and the environment of the bank. It is more than evident from the above, that relationship marketing requires a change in mindset and a lot of effort towards implementation. It is said that, when itâ&#x20AC;&#x2122;s preferred the philosophy of marketing, it is the victims who are cost-effective only for those clients with a height range of transactions and services they use, have a significant level and role in the bank. Relationship marketing, said through banking language, should apply to those customers whose accounts make high profits. To survive, banks need the new philosophy of marketing. Banks need to be very professional in terms of building relationships with clients, not only in designing and manufacturing products and providing good services, as previously anticipated. Too many banks believe that customer retention is the part of marketing or sales departments. Banks must understand that marketing cannot do this job alone. Sector Marketing department can be the best in the world but cannot successfully place the bad products and services that are not in line with the needs of consumers. Department of marketing can only be effective in the banks in which all departments and employees are joined to create a competitive superior delivery system and value for the customer. Relationship marketing involves creating, maintaining and strengthening strong relationships with customers. The concept has expanded to such a degree that includes building a relationship with all owners that participate in the creation of value and can help the bank towards better customer satisfaction. Marketing is increasingly moving away from the practice, which involves focusing on individual transactions towards building relationships that are qual-

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ity and marketing networked. It includes building relationships at multiple levels: economic, social, technological and legal, thus resulting in high customer five different levels of relationships that can be built with clients : basic, selling the product or service, but does not undertake any other activity; reactive, in addition to selling the company encourages clients to call in case of any issues or problems; responsibility, when the representative of the company contacts the client shortly after the selling to verify that the client is satisfied and to answer all of his questions and seeks suggestions to improve service ;proactive when someone from the company from time to time contact the customer to inform them of actions taken to improve or creative suggestions for future events; and, finally, the partnership when the company is constantly cooperates with the client and other stakeholders to find ways of delivering better value. Employees are turning their buyers into clients. Customers may be nameless for some institution, where the clients cannot be. Customers are served as part of a mass or as part of larger segments, customers are served on an individual basis. Customers are served by someone who is free, clients are served by specialist assigned to them. The bank should selectively develop relationships with clients, in a way, to determine which clients are worth of effort, because their needs and wants can be met more effectively than any other competitor. Kotler (2010) recommends an important fact which consists the fact that instead of focusing on developing the marketing mix, which improves sales and provide new clients, the first line of defense of a bank lies in retaining clients. Further resolution of customer complaint, in this context, is of particular importance for the bank. If something goes wrong, and the bank fixes it, the customer will come back, and if not fixed, the client will not come back. Therefore, that is why the solving of customer complaints is a critical component of customer retention. For resolving grievances, there are two important factors. First, if we are solving complaints, it should be done quickly-the longer it takes to resolve the complaint the higher rate of losing the clients is. Second, you should look for complaints from customers. In particular, a crucial chapter in resolving complaints is the fact that most customers do not complain. They do not give a chance to management to solve their problem. Therefore, management must work towards developing the ways to encourage customers to complain. One of the methods that encourage clients to give complaint is the inclusion of direct telephone lines, where they encourage customers to directly contact the bank if they have problems. Managers can train employees to look for and recognize the guest who seems dissatisfied, to try to identify their problems. Guarantee for the service is still one of the ways in which they can encourage customers to complain, to get a warranty they must complain. Customers, who complain, give us a gift. One of the potential sources of a new business are lost customers. One study found that the lifetime value of a customer is measured in the hundreds of thousands dollars by increasing income. So, the clients left because they were unsatisfied, they had complaints, but later they were paid attention, they returned to the bank and become loyal. Resolving the complaints changed much of negative word of mouth into positive word of mouth advertising. Besides the well-known specificities related to the services, specificities of financial services are (Ennew and Waite 2007 pp. 28-42): • Service variability (immateriality) • Production and consumption invisibility • Service variability (heterogeneity) • Service temporariness • Fiduciary of consumption) • Duration of consumption) • Contingency consumption. Each of these characteristics and specificities of banking services has marketing implication and implications important for overall bank work. Durability of consumption is a particular specificity of banking services, since these services suppose long-term continuous relationship with clients (insurance, mortgage, credit cards) Due to all the facts mentioned, managing relationships becomes very important. By that cooperation can be improved also with other spheres of business, with other organizations and clients. Managing client relationships has to be planned carefully. This is where programs that improve customer loyalty enter, to respect their privacy and offer appropriate services and to “bomb” them by offers for products and services that they need. The possibility of adjustment of marketing strategy and bank offers to selected target segments, is of paramount importance for creation of long-term relationships, building customer loyalty and customer relationship management (CRM).

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CRM system, in order to be useful, need to be connected with marketing information sub-system of research (database). For banks as well as for their clients, the most comprehensive definition of CRM is: CRM is integrated approach to identification, attracting and keeping of clients. By allowing bank to manage and coordinate interactions with clients through various channels, sectors, business divisions and geographic areas, CRM helps bank to maximize value of interaction with every client and to ensure superior corporate performance of bank (http:/www.siebel.com/what-is-com/sotfwere.shtm. Accessed on: 29th November 2005). Main types of CRM that bank can count on, with goal of maximizing positive effect of databases are: strategic CRM, operational CRM, analytical CRM and collaborative (strategic) CRM. One of the models of CRM that applies to banks, is shown in the following figure. Figure 1. Gartner CRM model

Source: Buttle, F., (2009), Customer Relationship Management, Concepts and Technologies, Butterworth-Heinemann, pp.21

Banks use CRM mostly for analytical purposes, for management of rate of clients leaving the bank and form improvement of performances of cross-selling. Techniques of data storage are especially useful for identification of profile of clients that leave the bank, for possible activities for bringing them back to the bank and for identification of clients that are interested in cross-selling offer as a best way for communication with clients. It should be remembered that clients that do not prefer being bound with the bank, are often reluctant to provide information on the causes and intentions of leaving, or they provide information that is not completely accurate. Because of this, banks can face a problem of information accuracy about causes that clients mention, especially for those clients that donâ&#x20AC;&#x2122;t want to accept the conversation of to explain reasons of leaving the bank. Bank management needs to create single information system that integrates all organization sectors and at the same time motivates employees to continuously communicate with clients and work on gathering information about all dimensions of characteristics and behavior of clients. Information gathered should be functionally used and necessarily be included in managerial process of decision making. It should be added that, when it comes to short-term and long-term effects of business decisions, with the positive outcome on bank's profitability, creating appropriate model of managing relationships is one of the key activities. Such a model would contribute also to formation and strengthening of organizational knowledge and following the development of relationships with clients. Fiduciary responsibility lies in the fact that clients are often not familiar with specific mathematical relations, conceptual techniques and interest accounts. According to the research of UK based Financial Services Authority, more than 20% of respondents who use bank services, did not understand the relationship between inflation rate and nominal interest rate. This occurrence is particularly present among younger respondents and lower income respondents. Because of this banks have special responsibility to explain to their clients all the positive and negative aspects of services used. Existing practice confirms the fact that clients from this geographic area are not familiar enough with conditions of contracts they close with banks. Good examples for this are house loans indexed in Swiss Franc (CHF), which is considered to be a stable currency. Due to that unfamiliarity with currency relations, loan users face serious problems with amounts they need to pay for their house loans, which becomes also national problem.

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4. RELEVANT RESEARCHES IN OUR REGION Management principle "customer life value" (described by Carl Sewell 1990) is widely accepted and met with approval and implementation in the theoretical analysis and considerations. In addition, it served as a base for a variety of researches and testing in different circumstances and in the service industry. For this work we have used several researches conducted in Montenegro, Serbia and Bosnia and Herzegovina. The goal of the research in Bosnia and Herzegovina (see: Babic-Hodović 2012, bank marketing, p.65-67) was to test the intensity of relationships between marketing orientation to retain customers and business performances - on which to measure the performance of the bank. This research shows that 50% of the banks spent at least half of the marketing budgets aimed to maintain clients. Just 30% of the researched banks have led some of the objectives aimed at customer retention among its main aims. Many goals are, more or less, focused on winning new clients, often the opposite of focus to keep the existing once. As it follows from results of research, it is more pronounced belief in the importance of customer retention, but the actual implementation of such surge marketing strategy. 90% of the banks has built a database of their clients, which is quite logical, given the nature of the relationship and all the information that clients must provide when opening bank accounts and obtaining a loan. Usage of databases are not used enough to track customer reactions in terms of analyzing the structure and use of certain services in different target groups. About 70% of the banks in Bosnia and Herzegovina, according to the survey, do not have formalized program of measurement and analysis of customer satisfaction .Therefore, a staff position at the first line of serving is crucial for ensuring proper communication with customers and the use of data as a function of creating future relationships. Processing of complaints and appeals is mostly confined to their elimination, rather than a function of correcting the entire business process. For all banks it is characteristic that the highest propensity of outflows shows the operational staff, or front line stuff of the servicing. That is an important indicator of the ability / inability of the banks to build a culture of loyalty. According to the research, this problem is more than evident. Orientation towards customer retention has a little effect on level of deposits as performance indicator; however the effect is higher on ROE and strong on level of gross profit per employee. Indicators of the amount of deposits are much more related to the nature and structure of the equity and the manner in which the bank was established and the number of subjects who followed such established banks. Also, the amount of deposit is more a result of the existence of no /confidence in the banking sector, which is present in this region. The hypothesis about the importance of the relationship between their resources towards customer retention and business performances is not confirmed. It is understandable that the structure of spending budget does not guarantee automatically its efficiency; marketing should be viewed as an investment with a long term effects. The most significant result of this research is a strong correlation coefficient expressed by a positive correlation between marketing orientation to customer retention contained in the strategic objectives, level of budget that is spent to achieve them and their joint impact on business performance. The research results confirm previously presented assumptions about appropriate customer loyalty and building long-term relationships with clients. Operating results conform that the banks that have opted for this strategy and which have enough power to implement, even in unstable conditions, such as in Bosnia, are much more successful. Results of the empirical researches (Journal, Marketing, no.1/2012) show that financial institutions in Serbia in their marketing campaigns, use the following propositions: Advertising uses 57% organizations, sales promotion 6%, PR 10%, 5% personal selling, direct marketing 7%, 11,5% sponsorship, other forms (fairs, cinemas, theaters, sports organizations and donations) 4%. Advertising has been the dominant form of promotion of financial services in 2010. with a share of 60% of the total marketing budget. Basic indicators of the effectiveness of promotion and promotion by the survey are: the number of new customers, increase sales (revenue) growth rate of brand awareness, market share growth in a targeted segment, an increase in the number of transactions and renewed contracts with existing customers. There is a very interesting fact obtained from the research, that the marketing budget is planned as follows: • By objective method and the task method tasks their promotional budget sets 49% of the organizations • Percentage of last year's sales 16% • To the percentage of the planned sale of 13% • Arbitrational method 5% • Competition method 5% • 12% of respondents said that it works its administrative unit responsible for marketing in a way that does not fit into one of the previously mentioned goals/methods Group of professors from the University of the Mediterranean-Montenegro Business School carried out research on the

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achievements and development of marketing in the Montenegrin banking. The data was not collected, until the writing of this paper, of all the banks and therefore do not have the complete analysis. But based on preliminary responses we received following -main indicators of the effectiveness of promotion are: sales growth, the growth rate of brand profitability, growth in the number of transactions and the number of repeated contracts with existing customers; question of how we collect data about customers, the answer is to analyze the structure and use of certain services to different target groups, complaints and appeals adequately treated and referred to management are used in decision-making, special attention is paid to the staff at the first service line, some banks have invested heavily in their education in order to improve their service capabilities, data of the front line staff are of curtail importance when making management decisions; customers believe to some banks, which had a positive effect on deposits; there are special software’s for "customer life cycle”. It is interesting that most of the banks responded that the complaints are always available to management. Since banks in Montenegro are mostly owned by foreign banks, some banks responded that the question of appeals and complaints procedures is regulated at the level of groups, based on which it can make detailed reports with adequate solutions. The results of this research in this area, are sufficiently indicative to show the direction in which to focus marketing in banks in order to foster long-term relationships with customers, and also how banks currently have the opposite thought in relation to contemporary theory and practice of development and marketing, relationship marketing.

CONCLUSION This paper can be classified as a pioneering research aiming to run the problem of inclusion of banking management in creating such a marketing strategy that will suit the modern trends in the development of marketing, which represents an important part of developing long-term relationships with clients. Acceptance of a business marketing strategy as a concept in banks, among other things, implies that banks adopt the following strategy: the value of bank assets depends critically on the value of customer - clients are the most important assets of the bank. A key task of managing the marketing of the bank was, among other things, keeping the clients by developing long-term relationships with customers, by generating satisfaction and delivering superior customer value and achieving full cooperation with all customers and shareholders. Given the nature of marketing services the concept of 7P (4P +3 P) marketing mix is outdated or inadequate. Bank, in our region, are still more oriented to winning new customers than retaining old ones. It is empirically proved that customer retention increases profits by 20-30%. Return of old clients, who for some reason left the bank, is much cheaper than attracting the new ones. It is more than evident that relationship marketing - CRM has significant effects on profit and performance of banks which are intensively developed, but it must be borne in mind that every client is equally valuable or suitable for relational marketing. This is characterized by a higher risk and huge profits, as opposed to the Transaction that is accompanied by lower risk and lower profits. The new marketing paradigm is very relevant to banking when connected with information technology. Related marketing, said by banking language should mainly apply to those customers whose accounts bring most profits. LITERATURE 1. 2. 3. 4. 5. 6.

Babić-Hodović, V. (2012), Marketing u bankarstvu, Ekonomski fakultet Sarajevo. Cheverton, I. et.al (2008), Key Account Management in Financial Services, Kogan Page, London. Ehrlich E. and Funelli D. (2004), The Financial Services Marketing, Bloomberg Press, Princeton. Ennew C. and Waite N. (2007) Financial services marketing, Butterworth-Heinemann, Elsevet, Oxford. Farquhar D.J.and Meidan A., Marketing Financial Services, Palgrave Macmillan. Hanić H. and Domazet I. (2011), Marketing Customer Relationship within Financial Organizations, Polish journal of Management Studies,Vol.4-201, pp 151-166. 7. Jovićević R., CRM u bankarstvu, (2007), časopis, Računovodstvo i revizija br.11, Podgorica. 8. King B. (2010), Bank 2.0- How Customer and Technology will change the Future Financial Service, Marshall Covendish Business. 9. Lovreta S., Bezman B., Petković G., Veljković S., Crnković J., Bogetić Z., (2010), Menadžment odnosa sa kupcima, Ekonomski fakultet Beograd. 10. Pelsmacher P. et.al. (2010), Marketing Communications: A European Perspective, 4th Edition, Pearson Education. 11. Veljković S.(2009), Marketing usluga, Ekonomski fakultet Beograd.

DETAILS ABOUT AUTHOR: RATIMIR JOVICEVIC PROFESSOR MONTENEGRO BUSINESS SCHOOL, UNIVERSITY MEDITERRANEAN PODGORICA, MONTENEGRO ratkojovicevic@t-com.me

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ANALYSIS OF IMAGE RESEARCH IN CROATIA MAJA DAWIDOWSKY MAMIĆ DIANA PLANTIĆ TADIĆ MIRJANA BAUTOVIĆ

ABSTRACT

The subject of this paper is to analyse the research results on the corporate image of Croatian companies. Image research is an important tool in marketing and business decision making but the performance of the mentioned activities is still insufficient in practice. This paper sets the following objectives: the importance and usage of market research in image analysis, frequency, type and methods of image research, the underlying reasons, and areas for improvement. The primary data collection method were interviews conducted by established persons in research profession (20 respondents) from market research agencies that have more than 80% of the market share in Croatia, while the data analysis was performed through methods of analysis and synthesis, supported by content analysis. The main findings state that the brand is more researched than the overall corporate image and, mostly, it is not done systematically. The paper defines ways of improving the processes behind the image perception. KEYWORDS: market research, image, image research

1. INTRODUCTION It is not sufficient nowadays only to have a high-quality product or service, as the impression that product/service makes is extremely important, i.e. indirect effects are important (Zelenika, Babić, 2005) such as entering new markets, increasing sales and growth rate, increasing market share and profit. Moreover, to have a good image has become a competitive advantage. The most famous definition of image was given by Kotler and it reads: “Image is a collection of beliefs, ideas and impressions that a person has about a certain object” and it is extremely important for the perception of potential and existing consumers, especially when making a purchasing decision (Kotler, Keller, 2006). Different authors analyse the image, i.e. its subgroups in different ways. Robert Worcester, for example, the founder of MORI (Market & Opinion Research International) classifies market image into four different types: image of a product line, a brand image, image of a brand user and a corporation image (Keller, 2002). Underlying thesis of this work is based on the assumption that image research is not carried out in a great number of companies and industries, as their marketing activities are based on their own perceptions or consumers' perceptions or they incorporate a few questions into the studies on other issues and their marketing activities are based on such insufficient results. As there is a need for a comprehensive image research in order to encompass all elements of image and relevant public, this subject matter has not been researched enough, as there is no analysis which would show the situation on the Croatian market. In addition, this subject matter is becoming more and more relevant regarding the fact that keeping up with the competition is getting more difficult due to market dynamics and more fierce struggle for each potential consumer.

2. IMAGE RESEARCH AND RESEARCH PROCESS Each company as well as a product has its own image by which it differentiates itself from the competition.The image must be continously researched in order to plan successfully the strategy of brand buiding. The more successful the brand is the more built its image is and the better communicated its identity is. The company communicates a corporate identity and identity of the product to targeted general public, but the way the targeted end-users experience this communication is related to many other factors which affect the perception either in a positive or negative way. Based on the initial research done by Opinion Research Corporation, John Marston summarized the basic findings (in Keller, 2002): 1. The size of a company does not guarantee a desirable image. 2. Well-known companies are nearly always more desirable. 3. General public is rather selective when making distinction between good and bad companies. 4. Companies that produce consumer goods have an advantage when building an image, as they can use the media to obtain better image perception.

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5. G eneral public may not be familiar with a certain company although the company is profitable. 6. People may have a high opinion of the company products; nevertheless, the company may be considered a bad neighbour. 7. Employees' opinion contributes significantly to the company's reputation, but this reputation refers mainly to the employer, and not to the product. Process of image research should include all relevant consumers and the research should be carried out in two steps in order to achieve the most relevant results for each group of consumers. The first step is qualitative research whereas the second is quantitative research by which the information, obtained from qualitative research based on a larger sample of consumers surveyed, are tested and then analysed by various techniques and modules.

3. QUALITATIVE AND QUANTITATIVE METHODS OF IMAGE RESEARCH By means of qualitative research, elements of image that targeted groups relate to the company or brand characteristics are defined (Zelenika, Babić, 2005),, motives and reasons of consumers' behaviour on the market are interpreted all aiming at understanding the position of certain competitive brands. A key element of the use of qualitative method is the defining of attributes and statements associated with a certain brand and its consumers. The most common technique used is that of first associations which consists of asking the respondents to say first thing that comes into their mind when a certain brand or a company is mentioned. In order to obtain the right insight into the meaning of first associations it is necessary to check whether those first associations are of functional or emotional nature, if they are related to some previous communications and events of the company and if they are, to which ones in particular, and whether they are positive, negative or neutral. By means of projective techniques, and through them, the picture of a product is obtained, which describes in more details a certain brand or a company than by simply asking a question „ How would you describe a certain brand, what kind of image does it have?“ Projective techniques, taken from psychology studies, are based on the assumption that people indirectly express themselves more easily. When image research is done using the techniques that enable to quantify results, attributes and statements obtained by qualitative way are tested on a larger sample by quantitative methods. The most common way of measuring the attributes and statements is by the semantic differential, the brand identity scale or by the Likert scale, or by measurement scale of school grades ranging from 1-5 which is often used in practice in the Republic of Croatia.

4. RESULTS OF THE ANALYSIS „IMAGE RESEARCH IN THE REPUBLIC OF CROATIA“ For the pupose of this paper the research was done in September and October 2012 using the interview method with 17 experts from the Republic of Croatia whereas three additional interviews were made with respondents from abroad so as to confirm the existing results of image research in the European Union and the world. In addition, in November 2012 small-scale research was done with 5 experts from major research companies of the Republic of Croatia to find out if any changes have occured since 2010. The respondents were grouped into: • heads of departments, executive directors or directors of market research agencies (all major agencies in the Republic of Croatia) – N=10 • renowned persons from scientific and public institutions – N=2 • heads of marketing departments or market research in big and medium-sized companies – N=5 • respondents from abroad (Slovenia, Hungary, Germany) are heads of departments in market research agencies – N=3 General impresssion about the quality of image research in the Republic of Croatia As in the case of many different researches, the image research is not carried out in the way it should be done. The respondents think that the image is not researched to a full extent in the Republic of Croatia as it is recommended in literature and by research agencies. Even the respondents from the companies think that the image research is not being conducted as often as it should be and they emphasise that this primarily happens for two reasons: the first and the most basic reason is the volume of the budget allocated for research in a particular fiscal year. The second reason is the opinion of the management that research into buying habits provides enough information about product perception. Moreover, many Croatian companies do not have pre-defined budget for market research and small

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companies in particular. Therefore, they manage to allocate funds for doing market research only at the time when a situation occurs which cannot fit into existing practices. Types and methods of image research in the Republic of Croatia All the respondents agree with the fact that image is not researched systematically, but a common practise is to incorporate a few questions or modules in existing commissioned research. Even in that case, it happens only in 10-20% of projects that the agencies have.The ratio is very low when comparing targeted studies of image, either by using various agency's models incorporated in a broader picture of a product or brand, or by specific studies into the company's image or a product, and research on other issues that incorporate questions related to the image. About 95% of image research is done by other research with the questions incorporated and only 5% of it are specific image researches. More thaan local companies, multinational companies conduct systemised image research which include image perception through a certain time period (either through continuous research or through specific studies of image). What's more, unlike most local companies which do not assess image attributes, they occasionally conduct quality assessment of attributes and statements which they use in quantitative research. Furthermore, product/brand image is researched in Croatia to a larger extent than corporate image - 90% is brand image research, and only 10% is corporate image research. There is also a difference between industries as some industries research more one type of image and the others research more another type. The way they communicate with the general public defines the type of image they research. Corporate image research, unlike product/brand image, is more often conducted in specific studies of image, but it is still more researched as a part of a larger study. However, the situations occur when a more detailed study of image is done, and then the image is assessed by additional questions. Multinational companies conduct it more often than local companies in order to find out to what extent a local level corresponds to a global level. There is a small number of companies, mostly multinationals, that systematically conduct image research. Every few years they conduct targeted studies and then observe changes through continuous research. Ideal way of image research Ideal way of image research is a systematic and systemised research. Systemised research implies continuous image research and attentive reflection and long-term planning of the very process â&#x20AC;&#x201C; how, in what way and how many researches will be conducted in order to achieve quality perception of image changes, and by doing so making possible for the company to anticipate a problem and minimize it at the very beginning. The first step in research planning is to clearly define a brand or company identity so as to determine variables crucial for its positioning. After the company defines a desired identity, it is extremely important to interprete particular elements of identity into the language the consumers can understand so as to avoid the use of generic and abstract terms often used in corporate communication. In an ideal process this should be conducted in a way that consumers, in preliminary qualitative research, are offered a chance to decribe a brand or a company, i.e. image, in their own words, by first associations and various projective techniques and that a desired identity is presented to them so that they can define the attributes and meaning which clearly represent that identity. The next step refers to quantitative research on a larger sample of one's own and competitor's consumers by which the attributes obtained as well as their significance would be evaluated, and the number of attributes would be reduced to a number which may be used in future research. The ideal outcome is a set of 20-30 attributes or statements which, depending on the situation, may be used in a complete or shortened form, obtained on the basis of various statistical procedures (most often by factor and cluster analysis). After a set of attributes is defined, its application in image measurement may be different. In an ideal case, a company would include previously defined attribute/statement list into existing agency models which research the image for the purpose of strategic management, which also includes a comparison with the competition.

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Comparison of image research in the Republic of Croatia with the European trends Image research in Europe is conducted more systematically than in the Republic of Croatia. Specific studies of image are more often done or models are used, research among more targeted general public are conducted, and a corporate image is researched to a larger extent than in Croatia. In addition, a set of questions about image are incorporated in other researches. The situation is not ideal, of course, as the validity of attributes and statements is seldom researched, but it is still done more often than in Croatia. It is necessary to mention that in foreign countries, especially in developed countries of EU, the budgets allocated for market research are bigger so companies may focus on wider fields of research. Changes in image research in relation to 2010 Due to deep economic crisis that not only Croatia, but the whole world is faced with, a large number of companies have reduced their budget allocated to market research in general as well as budgets allocated for image research. Although many studies show that in the time of crisis companies should be even more focused on consumers and their wishes so that they can find place in their reduced consumption bundle for a certain brand, more companies incorporate sets of statements in research on other issues, in comparison with the year of 2010. They also think that an outline of several previously defined attributes by the company itself is enough to observe image perception in the time of crisis.

CONCLUSION In order to conduct quality image research it is necessary to use systematic approach, which is done in few companies in Croatia, even in the international ones. According to the statements made by researchers who work in agencies, such a holistic approach is not used for several reasons: • lack of funds, especially in the time of crisis • lack of knowledge about the benefits of image research, and about research in general • lack of expertise that people who work in marketing and/or research department have about market research • lack of confidence in research results A major problem especially related to image research is lack of funds. Companies, especially small ones, start doing image research when the problem in business arises, which is definitely not enough. In Croatia, research agencies offer to companies the elaborate models that contain more or less detailed image analysis depending on what type of image research is done. Systematised approach that would provide comprehensive and continuous image perception among targeted general public or targeted segments requires substantial investments, bigger than the companies' budgets may cover. LITERATURE 1. 2. 3. 4.

Keller, G. (2002) Promocija.Textbook. Zagreb: Mikrorad Kotler, P., Keller, K. L. (2006) Marketing Management, 12th edition. New Jersey: Prentice Hall Worcester, R. (1971), Opinion Research – A Creative Process in Blake, K. (1971) A Management Guide to Corporate Identity. London: Council of Industrial Design Zelenika, A., Babić, M. (2005) Korporativni imidž - osnovni čimbenik opstanka i razvitka, Ekonomski pregled, 56 (7-8), pp. 501-522.

DETAILS ABOUT AUTHORS: MAJA DAWIDOWSKY MAMIĆ PRIVREDNA BANKA ZAGREB, CROATIA maja.dawidowsky@gmail.com DIANA PLANTIĆ TADIĆ UNIVERSITY OF APPLIED SCIENCES VERN’ ZAGREB, CROATIA diana.plantic-tadic@vern.hr MIRJANA BAUTOVIĆ UNIVERSITY OF APPLIED SCIENCES VERN’ ZAGREB, CROATIA mirjana.bautovic@vern.hr

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KEY FACTORS, BENEFITS AND LIMITATIONS OF APPLYING SUSTAINABILITY MARKETING SILVIJE JERČINOVIĆ AUGUST SLIVAR VALENTINA PAPIĆ BOGADI

ABSTRACT

Sustainable development represents an assumption for marketing efficiency of business subjects, as well as an assumption of balanced society. Application of sustainability in business models implies interaction of its economic, ecological and social aspects. As one of significant management instruments, marketing can in present time have an indisputable and significantly high level of influence on society and environment. The advantage and purpose of the new marketing paradigm lies in the fact that based on the newly created conditions one can achieve optimal business and organisational efficiency. The objective and purpose of this paper is to empirically determine key implementation factors, benefits and limitation factors of sustainability marketing. The paper also aims at emphasizing their importance and influence on marketing activities, as well as on business excellence based on examples of small and medium sized companies. Performance marketing is in positive correlation with the adequate application of sustainability principles during marketing planning. Based on the observed empirical findings it is evident that in the long term such approach can generate higher growth and gain, as well as some other non-financial factors of success of business subjects. As marketing tool, sustainability can easily represent a key factor in competitiveness of business subjects. KEYWORDS: Sustainability marketing, Performance marketing, Small and medium enterprises, Sustainable development

1. INTRODUCTION Changes on socio-economic environment caused by social and ecological disturbances place marketing in new role, where it assumes responsibility towards society and nature and creates new values which could influence better quality of life as a whole. According to Brundtland's report (World Commission on Environment and Development, 1987) previous approach in the scope of economic development, means of production and understanding of consumer pattern was ecologically and socially unsustainable, so this report outlines a concept of sustainable development as a turning-point in perception of social and economic creation. „Sustainable development satisfies the present needs without the risk of future generations not being able to satisfy their own needs (Cifrić, 2002). This implies that whilst decision-making and implementing activities that create value for each organisation, one needs to consider economic and social factors, as well as environmental factors. Sustainable development is such kind of development in which the processes of changes, usage of resources, direction of investments, technological development and institutional changes are consistent with the needs of present and future generations. (Bačun, Matešić, Omazić, 2012). Its feature is internal contradictoriness since it unifies static state, (sustainability) and dynamic state (development). The adjective "sustainable" describes processes which never reach their end, but are based on infinite circulation of matter and energy. Creators of this statement found its foundations in nature, where the movement of energy and matter is based on circulation, implying processes which can be repeated for an infinite number of times. The term "development" implies the process of constant improvement, and it can relate to material growth, or to upgrade of non-material origin, such as intellectual or cultural upgrade or growth of values not necessarily connected with money. Development is the process of sublimation of destructive and construction of creational human needs, as well as process of producing the means of their accomplishment. (Bačun, Matešić, Omazić, 2012). Based on the premise of sustainable development as dynamic organisational capacity of the business subject one could also develop various management models whose primary task is to apply business responsibility towards society and environment. One of them is sustainability marketing, which has a unique role to create sustainable society. (Martin and Schouten, 2012). In line with the new social paradigm, new marketing paradigms are being developed as well, which define that further profitable development and survival of business subjects depend on their capacity to fulfil economic, environmental and social objectives.

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The idea of the new concept of marketing is reflected in construction of efficient marketing strategies which will actively encourage sustainable development. Two critical answers are in need of an answer: which marketing strategies are relevant for sustainability and how can they be implemented in the right way. It is therefore essential to formulate and set the new adequate marketing model which will provide sufficient replies to the previously set requirements. Subject matter of this paper is identification of marketing elements of sustainability in small and medium enterprises of Bjelovar-Bilogora county, and to establish the importance of those sustainability elements for their organisational efficiency. The purpose of this research is to determine key implementation factors, benefits and limiting factors of sustainability marketing, as well as their importance. The objective of the research is to determine the level of presence and application of marketing strategies on the examples of small and medium enterprises in Bjelovar-Bilogora county through assessment of individual key factors and their influence on success of organisational efficiency.

2. BOND BETWEEN SUSTAINABLE DEVELOPMENT AND MARKETING CONCEPT Sustainable development surely represents potential for efficiency of business subjects as well as assumption for social well-being. Application of sustainability in business models implies integration of its economic, ecological and social aspects. In order to create such a demanding premise one needs a clear priority focus on sustainability, which will be an integral part of all business activities and decisions which will assist to formulate sustainable strategies and development directions for balanced servicing of legitimate requests of all interested parties. Furthermore, the constant management care should take care of recognition, breakdown and creation of new strategies which promote long-term sustainability. Management responsibility of business subjects should be directed towards the assessment of the current business model, portfolio or strategies and their concordance with the principles of responsibility. Market, offer and demand, capital and its optimalisation, designed and practiced by contemporary neoliberal capitalism of "profit at any cost", dressed in globalisation as some kind of "vis major", can not be regarded as efficient regulator of survival of balance in nature and its resources, guardian of primeval health of the biosphere, defender of pluralism of culture, nature and people created throughout centuries (Lay, 2007). Implementation of sustainability as concrete aspect of social responsibility in business administration, especially at times of uncertainty caused by crisis cycles and rush changes, alters traditional attitudes of business subjects regarding the competitiveness and factors which influence it. Contemporary management processes are the consequence of globalisation, increased intensity of competitive activity, demographic changes, ecological issues, social changes and requests. Without building on the usual contextualisation of events and occurrences within uniform definitions, it can be generally concluded that sustainable development in business context relates to business decisions connected with ethical values, conformity with legal regulations, respect for people, community and environment (Hollender, Breen, 2010). It is evident that inclusion of sustainable development principle in management systems of business subjects surpasses legal, technical and economic requirements. Satisfying consumer needs in profitable way is the core of marketing ideology, so in the context of marketing orientation it can be established that there is no economic efficiency of business subjects without social and ecological sustainability. As one of the most significant management instruments, marketing presently has an indisputable and strong influence on society, with special emphasis on importance of sustainability. Changes which occur due to increasingly engaging application of sustainable development concept alter the relationship between business subjects and business environment. (Emery, 2012). The role of the new marketing paradigm is to facilitate the recognition of a situation and based on the newly created conditions to achieve optimal business and organisational efficiency. In order to speak about sustainable development in more detail, one should first clarify its basic precondition, which is a notion of sustainability. Sustainability is the capacity of permanent maintaining of some function or process. Sustainability in nature is best represented by circulation of matter and energy which represents a perfect sustainable cycle. In nature there is no loss or waste, all the matter and energy is renewed and returned in the process and such circulation can go on for an infinite period of time. The notion of sustainability is presently being introduced in all economic sectors in order to slow down and stop the rush trend of pollution and exhaustion of resources which endangers survival on Earth. Sustainable usage of resources and energy ensures permanent and theoretically infinite process of development without putting the Earth's ecosystem at risk (Bačun, Matešić, Omazić, 2012).

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The very definition of sustainable development is based on preservation and development of the existing resources, both human and material, with the purpose of survival and well-being of people and environment they live in. Development is defined as adaptation and application of human, financial, life and non-life resources for the purpose of satisfying human needs and improving life conditions (Dresner, 2009). Sustainable development does not represent a unique opinion or ideology. It is a collection of values, opinions and attitudes formed around the issues such as healthy ecosystem, economic capacity, social justice (Hawken et al., 1999). Sustainability includes a large number of issues such as environment protection and preservation, climate change, globalisation, social responsibility, awareness of ecological issues, human rights, health, bio diversity, worker rights, social justice, organic agriculture etc. (Epstein, 2008). These questions surpass the framework of national boundaries, culture and social systems directly affecting each aspect of society and are moved by affirmative values which influence the initiatives and actions on local, regional, national and global level (Edwards, 2005). Sustainable development as way of thinking and behaviour pattern enables contemporary societies a new approach to solve problems imposed on them (McKenzie-Mohr, Smith, 2008). Through insight in connection of ecological and economic problems by means of applying sustainability principles, we seek long-term solutions for problems of contemporary society and nations. Marketing which is triggered by sustainable development concept represents understanding and management of the basic marketing intention by connecting economy and society. It is therefore essential to observe marketing in the context of sustainable development as initiator and guardian of sustainable society in the sense that all marketing functions need to be administered in the way in which they preserve and protect environmental and social factors, as well as influence on the market and its infrastructure in direction of creating general sustainability culture (Martin, Schouten, 2012). Marketing together with almost all other business functions passes through a radical move towards ecological and social sustainability (Hart, 1995). Basic role and task of marketing is mediation between business organisation and consumer. Function of marketing is reflected in identification of consumer's wishes and values, i.e. their communication with the rest of business organisation. Sustainability marketing must actively participate with its effect on environment protection and social balance. It can therefore be concluded that sustainability marketing represents the process of creating, communicating and delivering values to consumers taking into account protection of natural resources and human capital (Martin, Schouten, 2012). Although it may seem that this is merely new conception of marketing, we are still dealing with the upgrade of the existing and accepted definitions of marketing through more clear and precise emphasise of the role of sustainability and its elements through marketing process. Extended definition of sustainability marketing is not in conflict with the principles of marketing concept. It upgrades them through introduction of new objectives alongside with the previously well known notion of profit and satisfaction of needs and wishes of consumers. In this way we can freely speak about holistic marketing concept as the most developed and the most complete concept that takes into account all stakeholders in the exchange process, as well as those around it. Sustainability marketing represents evolution of marketing concept which accepts classical economic and technical perspective and combines it with social, ethical, environmental and intergenerational aspects of sustainable development (Belz, Peattie, 2010). Individual statements of business subjects in which they express their concern for social and environmental issues will not always be efficient or credible if they are placed in the position opposing the short-term economic objectives. Based on the above-stated it is evident that sustainability statements need to be incorporated in the process of defining long-term objectives of the company. These objectives should be precise, measurable in time and achievable (Belz, Peattie, 2010). Organisational efficiency is in positive correlation with adequate strategic marketing planning. Marketing strategies which take into account basic sustainability postulates within planning process and later on within practical application are expected to result in multiplied benefits such as strengthening of company image with consumers, employees, investors and other interested stakeholders (Dahlstrom, 2011). As marketing tool, sustainability can easily represent a key factor for success for both private and public organisations (Kuosmanen and Kuosmanen, 2009). Indirectly, as a main precondition of successful business efficiency, application of sustainability principles can decrease business risk, increase market opportunities and it therefore clearly represents business responsibility (Kiewiet and Vos, 2007). Thorough application of sustainability as ideology and dynamic organisational capacity represents differentiation (Crittenden et al., 2011) whereas its inclusion in marketing strategy can result in achieving competitive advantage regarding the competition. Sustainability and sustainabil-

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ity marketing in its emerging point do not imply an increase of business administration costs. On the contrary, they stand for cost reduction and increase of profitability (HĂ¸gevold and Svensson, 2011). Based on the observed empirical findings it is evident that in the long run such approach can generate higher growth and gain, as well as other, especially non-financial factors of organisational efficiency.

2.1. Materials and methods The research process was planned and carried out in order to obtain relevant information and insights regarding the research topic. The research process was directed towards establishing difficulties and required preconditions for application of sustainability marketing and its influence on organisational efficiency. Primary data was collected by means of survey questionnaire through including the representatives of small and medium enterprises from Bjelovar-Bilogora county. Secondary sources primarily include various available sources of authors of domestic and to a large extent foreign bibliography in the field of marketing, management, sustainable development and sustainability marketing. The following sources were used: books, articles and web sources. Preparation of this paper necessitated quantitative research through survey questionnaire as research instrument on the sample of small and medium enterprises of Bjelovar-Bilogora county. Survey questionnaire with the accompanying letter clarifying the research subject and objective was sent to electronic contact addresses. Furthermore, in individual cases we resorted to phone calls as means of reminders to fill in the questionnaire. Survey questionnaire consists of 11 questions which included: general questions about the company, questions about sustainability marketing, on key implementation factors, on limiting factors of sustainability marketing, on key benefits of implementing sustainability marketing, on most important stakeholders of success of small and medium enterprises from the aspect of sustainable development. The survey contained open and closed questions with offered answers and assessment scales, whereby Likert's scale from 1 to 5 was used. In the administered research the basic group consisted of active small and medium enterprises from Bjelovar-Bilogora county, with continuity in business administration longer than 10 years. Selection framework was the database of Croatian chamber of commerce and Regional chamber of Bjelovar-Bilogora county. Sample size was set to 143 enterprise. Basic group unit is represented by a representative of individual company, owner or CEO, i.e. lower level managers. Since this paper is based on single research which is, unlike continuous research, oriented towards the analysis of current state and determining basic factors, it was established that the current state depends on the level of application development of sustainability marketing and its influence on organisational efficiency. This enabled elaboration of assumptions for further continuous consideration of research topic.

2.2. Results of researching representatives of small and medium enterprises from Bjelovar-Bilogora county with reference to application of sustainability marketing and organisational efficiency Research regarding the connection of the application of sustainability marketing and organisational efficiency was conducted by means of including the representatives of small and medium enterprises regardless of their core business. Survey questionnaires were sent out to 143 enterprises, and subsequently 37 questionnaires were collected and analysed. This research included 25,87% of small and medium enterprises from the representative sample. Representative of individual enterprise was defined by means of unit of the basic group (one enterprise - one questionnaire). Collection of data was administered in January and February, 2013. Out of the total number of 37 enterprises (production and services) in Bjelovar-Bilogora county, 33 informants were head managers and 4 informants were lower-level managers. Sample structure regarding the size of respective enterprises is outlined in table 1.

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Table 1. Sample structure of companies regarding their organisational form Type of enterprise

Frequency

Percentage (%)

Small (11-49 employees)

83,8

Medium (50-249 employees)

16,2

TOTAL

100,0

Source: Author(s)

Based on the above presented table it is evident that the sample is prevailed by small enterprises with the total share of 83,8%. Research results are outlined below. At the beginning of the survey questionnaire, the informants were asked to select one of the offered definitions which, to their own opinion, best depicts the notion of sustainability marketing. They were also asked in which specific way marketing as the component and function of strategic planning (in the function of sustainable development) is best recognized in business practice. ( table 2.) Table 2. Definition of sustainability marketing (u %)

Sustainable marketing

Total

Company size Small

Medium

1. Business function with significant shift towards ecological and social sustainability

2,3

3,2

1,9

2. Process of creating, communicating and delivering values to consumers without putting the environment and social balance at risk

10,1

5,7

2,1

3. Creating competitive advantage taking into account the elements of ecological and social sustainability

45,7

58,8

51,3

4. Change of consumer attitudes regarding the acceptance of new sustainable patterns of behaviour and actions

40,1

31,8

44,7

4. Other

1,8

0,5

100

83,8

16,2

Source: research results

Research results indicate variations in attitudes of the representatives of small and medium enterprises when it comes to notion of sustainability marketing. Somewhat less than one half of informants (45,7%) is of the opinion that sustainability marketing represents creating competitive advantage taking into account the elements of ecological and social sustainability (58,8% of the informants from the group of small enterprises). Somewhat smaller number of informants (40,1%) is of the opinion that it is about the change of consumer attitudes regarding the acceptance of new sustainable patterns of behaviour and actions in the exchange process as well as in the following period. It is interesting to point out that this opinion is to a somewhat bigger extent supported by representatives of medium enterprises (44,7%). Although less represented perspective (10,1%), sustainability marketing is also regarded as process of creating, communicating and delivering values to consumers without putting the environment and social balance at risk.

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The smallest number of informants (3,2%) sees marketing in its functional sense, and the reasons lie in the structure of the processed enterprises, since almost none of them have a separately developed marketing structure, but the one integrated with the functions of sales, logistics etc. In order to gain a more precise perspective in application of sustainability marketing, it was important to establish the preconditions for its introduction and implementation (according to assessment of the informants) as an integral part of the business strategy and marketing strategy of the enterprise in general. (Table 3) Table 3. Key implementation factors of sustainability marketing

Average grade ĆŠ

Average grade SD

Small enterprise

Medium enterprise

Legislative support of the state and local communities in implementation of policies of environmental and social responsibility

4,46

,651

4,65

4,27

Understanding and willingness of management to deal with issues of sustainable development

4,36

,669

4,47

4,25

Environmental and social objectives defined in company strategy

4,04

,841

4,04

4,03

Developed and implemented value systems which measure impact of responsibility towards society and environment

4,02

,756

4,01

4,03

Research of consumers

3,81

,1451

3,99

3,63

Repressive state measures for failing to fulfil environmental and social standards

3,66

,822

3,78

3,54

Education for sustainable behaviour of employees

3,65

,725

3,70

3,60

Assessment of management through successful application of environmental and social programmes and company policies

3,51

,944

3,66

3,36

Actions of activist groups

3,38

,978

3,54

3,21

Competitors with successful application of sustainable development in business administration and on the market

3,17

,711

3,49

2,84

Source: research results

Ten statements were assessed with relatively favourable grades, i.e. factors which represent preconditions for the implementation of sustainability marketing. The order of statements ranges from top rated to lowest rated as follows: (1) Legislative support of the state and local communities in implementation of policies of environmental and social responsibility, (2) Understanding and willingness of management to deal with issues of sustainable development indicates to conclusion that acquired knowledge and comprehension of contemporary business and social processes enables adequate implementation of policies and processes of sustainable development, (3) Environmental and social objectives defined in company strategy, (4) Developed and implemented value systems which measure impact of responsibility towards society and environment, (5) research of consumers, (6) Repressive state measures for failing to fulfil environmental and social standards, (7) Education for sustainable behaviour of employees, (8) Assessment of management through successful application of

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environmental and social programmes and company policies, (9) Actions of activist groups and(10) Competitors with successful application of sustainable development in business administration and on the market which is thought to represent expected results. The informants assessed the benefits of applying sustainability marketing in the company (Table 4.) Table 4. Benefits of implementation of sustainability marketing

Average grade ĆŠ

Average grade SD

Small enterprise

Medium enterprise

Positive influence on company image

4,82

,857

4,75

4,89

Builds and strengthens the brand of products or services

4,62

,624

4,37

4,86

Builds positive relation with its environment

3,80

,1108

3,68

3,91

Provides added value to products and services

3,65

,749

3,51

3,79

Facilitates differentiation regarding the competition

3,55

,781

3,48

3,62

Enables possibility of applying innovative solutions through cooperation with various stakeholders

3,31

,937

3,17

3,45

Influences strengthening of loyalty and satisfaction of employees

3,21

,801

3,09

3,32

Influences awareness raising of employees regarding sustainability

3,10

,889

3,03

3,16

Contributes to reduction of operative costs (ecological and energy efficiency)

3,05

,654

3,01

3,08

Increases the scope of sale and market share

2,90

,698

2,87

2,93

Source: research results

The following statements about the benefits of applying sustainability marketing in small and medium enterprises were assessed with the grade higher than 3,5: (1) positive influence on company image 4,82 average grade of the representatives of small and medium enterprises. Such assessment indicates a high level of comprehension of good image not only among consumers which is important for development and understanding of the following factor. Factor (2) Building and strengthening the brand of products or services was assessed with average grade of 4,62. It is evident from business practice that awareness of strong image directly correlates with good marketing indicators such as large market shares, development and number of market segments, increased scope of sale, profit etc. Factor (3) building of positive relation with environment was assessed with average grade 3,80 indicating that management structures of researched companies understand the need of good relations with their immediate environment. although assessed with lower grades than the previous two factors, it can be implicitly concluded that these companies, perhaps not totally focused, implement policies of corporative social responsible behaviour. Consumers and community are sometimes capable of recognizing the values of elements of sustainable elements which (4) provide added value to products and services. Representatives of the researched companies assessed this factor with the average grade 3,65 thus placing it in the category of factors which the companies should most surely take into account and assess whilst implementing their business policies and marketing strategies. Analogue to the notion and meaning of added value for products and services, this same marketing construct in further organisational procedure (5) facilitates differentiation regarding the competition. This factor was assessed with a satisfactory grade of

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3,55. Since sustainable development not only represents a new perspective of life, society and economy, but also implies application of new technologies which (6) enable possibility of applying innovative solutions through cooperation with various stakeholders, average grade 3,31. It is somewhat worrying that this factor was poorly assessed, below the average value of 3,5. It is apparent that the research sample of small and medium enterprises with insufficient financial resources is not capable of investing in relatively expensive technological solutions. It is difficult to comprehend that in research companies the factor which (7) influences strengthening of loyalty and satisfaction of employees was assessed with a relatively poor grade of 3,21, when it is known that motivated and loyal employee directly influences organisational efficiency and cost flexibility of the company. The answer lies in frequent fluctuation of labour force in small and medium domestic companies, so it is therefore not surprising that this particular factor was so poorly assessed regarding its potential and its real importance. With reference to the same motives as those in the previous factor, the assessment of the factor (8) which influences awareness raising of employees regarding sustainability can also be regarded as poor with its average grade of 3,10 as well as factor (9) which Contributes to reduction of operative costs (ecological and energy efficiency) 3,05. Although all the informants convincingly claim that sustainable development can have a very positive impact on company image, i.e. image of products and services, as well as on consumer loyalty, it remains unclear why the informants assessed factor (10) which increases the scope of sale and market share assessed so poorly with average grade of 2,90. It seems that there is an inconsistency in marketing education, whereas some previous empirical research indicates that marketing as function on small and medium enterprises is underestimated and not quite clear, with lack of educated work force, with frequent explanation that those deficiencies are caused by inadequate financial means reserved for marketing (JerÄ?inoviÄ&#x2021;, 2006). Furthermore, it is very important to realise limiting factors which could negatively affect implementation and application of sustainability marketing (Table 5.) Table 5. Some of the prominent limiting factors which could negatively affect implementation and application of sustainability marketing

Sustainable marketing

Total

Neglecting other company objectives besides profit

Company size Small

Medium

90,8

94,3

87,2

Lack of knowledge, cognition and understanding of sustainable development by management or by the owner

54,1

65,2

43,0

Lack of interest of the social community

33,6

39,8

27,3

Lack of financial means

45,4

43,6

47,2

Influence of crisis

52,2

53,4

50,9

Insufficient education of consumers on sustainable development

40,7

37,4

44,0

100

83,8

16,2

Source: research results

It is evident that some of the factors were specially emphasized as limiting with reference to successful and adequate application of sustainability marketing. The informants to the largest extent singled out factor (1) Neglecting other company objectives besides profit (90,8%). It is obvious, that regardless of business conditions and environment impact, the companies always point out profit as the primary objective of business activity neglecting the other equally important company objectives such as environment protection and social balance. Therefore, if we only insist on profit, whilst neglecting the objectives of general wellfare and environment protection, the implementation of sustainability marketing is not realistic because the key postulates of sustainable development are neglected. The researched companies administer their business activities in the period of current economic crisis, and regardless of the research area it is almost impossible not to feel the influence of crisis.

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The factor of lack of knowledge, cognition and understanding of sustainable development by management or by the owner (2) is justifiably highly rated, i.e. recognized as key disadvantage for a more clear and stronger application of sustainability marketing in researched companies. The results undoubtedly imply that 52.2% of the researched companies consider the crisis a disturbance factor in implementation and application of sustainability marketing, (3) factor influence of crisis, just as insufficient knowledge, skills and capability, inadequate budgeting, or general problems with illiquidity, implying the struggle for survival from day to day, which can also be an indisputable limiting factor for introducing sustainability marketing in the functioning of the researched companies. Lack of financial means (4) was also assessed as disturbance factor by a large share of researched companies (45,4%). Limiting factors can sometimes also be found in the markeintg environment of the company. For example, problem of (5) insufficient education of consumers about sustainable development represents, according to the opinion of 40,7% of researched companies, a limiting factor for implementation. Another external factor has influence on implementation (6) lack of interest of social community, which 33,6% of informants consider to be a true problem. The next crucial step was to research the factors which are essential for business success and are directly linked with sustainable development, Table 6. Table 6. Key success factors of small and medium enterprises from the aspect of sustainable development

Name of the factor

Total

Concern for health and needs of consumers

Company size Small

Medium

48,1

36,2

59,9

Responsibility for ecological and social effects of the company through reduced business risks

9,8

7,1

12,5

Technology usage through access to energy efficiency

32,8

18,8

46,8

Strength and image of the company/product and service brand with consumers, employees and investors

46,5

39,2

53,7

Knowledge, experience and motivation of employees

35,1

35,5

34,7

Company size

13,0

13,2

12,7

Influence of various stakeholders on business activity of the company

15,8

14,8

16,8

Dynamic organisational capacity representing differentiation

36,7

31,2

42,2

Development and means of administrating marketing activities

9,5

9,2

9,8

Total

100

24,5

29,9

Source: research results

When it comes to business success from the aspect of sustainable development, the informants placed first (1) concern for health and needs of consumers. 36,2% of small companies emphasized this aspect, whereas 59.9% of medium companies singled out this factor as one of key factors for their success. It is evident that (2) image, i.e. the strength of product/service of the producer, employee or investor are also of utmost importance for business success. Strong image or brand is reflected in increased scope of sale, expansion of market share, possibility of more favourable management of marketing price instrument etc. We can hereby impose the conclusion of existence of another element of marketing orientation which was observed with researched companies. Technology usage through access to energy efficiency (3) was a determining factor of success, but with small companies it was not so prominently expressed (merely 18,8%). This factor clearly has a more dominant influence with medium, i.e. larger companies (46,8%) which is understandable, since large companies dispose

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with larger technological-production capacities, bigger number of employees and bigger financial possibilities facilitating easier access to financial markets and easier investment in newer, cleaner and more expensive technologies. Clearly, small companies from the sample have low level of technical and technological supplies, and some are basing their business activity on providing services, where the need for energy efficiency is smaller and therefore cheaper. Factor (4) knowledge, experience and motivation of employees was equally assessed by both small and medium companies with the average grade of 35,1%. It can be concluded that it is an universal factor of success, whereby relatively small grade can be justified by company size, and such companies provide examples of simple organisational structure which has different means of assessing engagement of individual employees, but also with the current negative impact of economic crisis marked with tendency of saving, especially in the sector of marketing and human resources. Expected influence (5) of the factor of various stakeholders on the company's business activity (specification of individual factors and their importance are outlined in the previous table) is relatively poor considering its importance frequently mentioned in relevant bibliography and previous empirical findings, amounting to 15,8% for both small and medium companies. This result is, therefore, below the expected values. The reason for relatively poor assessment of this factor lies in insufficient communication and comprehension of the importance of this communication with the environment. Another reason is insufficient financial and material means since this way of communication requires investment, primarily of financial nature, for example small and inadequate marketing budgets in researched companies. Factor (6) development and means of administrating marketing activities builds on the lack of means and was also poorly assessed with average grade of 9,5% for both groups of companies. Classical recognition of factors of business success also relates to factor (7) dynamic organisational capacity representing differentiation with average grade of 36,7% for both groups of companies. Business subjects see the opportunity through emphasizing the implementation of sustainable development policies for additional differentiation, thus seeking the opportunity for better positioning of their products and services, i.e. expanding their market segments, scope of sale etc. It seems that all informants provided a relatively poor grade for factor (8) company size with average grade for both groups amounting to 13,0%, due to existing awareness that company size and current economic crisis limit the possibilities of bigger budgets which would in other circumstances provide possibilities for more significant financing of all segments and aspects of company's business activity. It is astonishing that factor (9) responsibility for ecological and social effects of the company through reduced business risks achieved low grade of 9,8%.

2.3. Discussion Adequate and efficient implementation and application of sustainable development on all levels of human activity is of great interest not only in the domain of academic discussions, but also in the focus of a wider circle of practitioners. Sustainable development is no longer an exclusive area of ecologists, biologists, sociologists etc, but is to a great extent represented in economic management models which are actively implemented in the scope of business economics. It is therefore evident that marketing as a narrow area of business economy in theoretical sense, and more so in the practical one, places sustainable development in the limelight, not only as triggering force of new relations and conceptions of economic theories and economic policies, but also as precondition for business success of business subjects implementing them. A successful business subject represents competitive and capable economy as a whole, both from national perspective, as well as from the perspective of the general trend of globalisation and integration. Great expectations regarding application of sustainability marketing to provide answers and solutions to cumulated economic, ecological and social problems resulted in inadequate present solving thereof, as well as in exceptional importance of business subjects in society in general. Business subjects need to behave and act in line with sustainability principles in order to diminish and neutralize bad influence not only on the current state of environment and society in which production processes and exchange take place, but also to prevent possible future undesirable events thus protecting future generations. Management of ecological and social effects is a challenging and demanding task placed upon business subjects, and with careful planning and adequate selection of management instruments it can have a positive influence on its organisational efficiency. Given concept of sustainability marketing, as well as of organisational efficiency, is based on inclusion of representatives of small and medium enterprises in order to emphasize the importance of individual factors which influence the implementa-

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tion of sustainability marketing, to point out the benefits of including such business/marketing model and to determine limiting factors for its implementation and application. The research had the task to establish key factors from marketing environment which influence the creation of such business policies. Main part of the research relates to selection and assessment of the importance of individual factors which directly contribute to some business subject to be organisationally efficient, i.e. competitive, primarily in synergy with the principles of sustainable development and sustainable economic growth. The research was carried out in order to find answers to the outlined hypotheses, i.e. to confirm the facts substantiating them. Based on research results related to determining image, i.e. strength of company brand or product/service brand with consumers, employees and investors developed by building the company image which acts in line with sustainability principles, this instrument can be used for strengthening ones competitive position of sustainability through more favourable management of marketing instrument of price, increased sale scope, expansion of market segments etc. We can hereby impose the conclusion of existence of another element of marketing orientation which was observed with researched companies. A large number of researched companies 46,5% assessed this connection as very important. Research results regarding responsibility for ecological and social effects of the company through reduced business risks indicate that only 9,8% of the informants from small and medium companies consider this factor as important. Clearly, the researched companies, despite declarative support to policies of sustainable development and declarative application of individual business management models like sustainability marketing, either don't understand the core of contemporary business administration in synergy with active application of principles of sustainable development, or the problem lies in the lack of more significant budget means, which is very well detected as general problem in business administration, whereas "survival" policies are currently being implemented, leaving core problems for better times. One of the factors of business success is represented by dynamic organisational capacity. This implies that business subjects administer differentiation through emphasizing the application of elements of sustainable development policy, and average grade for both groups of companies amounted to 36,7%. It can be stated that business subjects see the opportunity through emphasizing the application of elements of sustainable development for additional differentiation, thus seeking the opportunity for better positioning of products and services, i.e. for expansion of their market segments, scope of sale etc.

CONCLUSION Results of administered research indicate the presence of application and sufficient level of interest of small and medium enterprises from Bjelovar-Bilogora county for implementation of sustainability marketing. Although the representative sample consisted of relatively varying structure of researched companies, relatively small number thereof can be singled out for their level of integration of sustainability marketing in business practice, i.e. it was observed that they are trying to develop a consistent approach to implementation and application thereof. Due to lack of the overall systematic approach, i.e. more complete integration of sustainability marketing in marketing and business strategies, processes and activities, as well as decisions subjects, a lack of synergy action was observed, which would more actively include social community, political entities and individuals with reverence to achieving concrete competitive advantages of the company. Research results imply that already at defining the notion of sustainability marketing there are differences in the way of understanding and its interpretation. Results indicate certain differences in perspective of the representatives of small and medium companies when it comes to comprehending the notion of sustainability marketing. Although somewhat less represented view (10,1%), sustainability marketing is also perceived as process of creating, communicating and delivering value to consumers without putting the environment and social balance at risk. The smallest number of informants (2,3%) experiences marketing in its functional sense, and the reasons need to be searched in the structure of the researched companies, since none of them has a separately developed marketing function, but the one integrated with functions of sales, logistics etc.

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Results of this research, as well as secondary results obtained through insight into available professional and scientific papers from the field of marketing indicate that there is enough space for improvement and more intensive implementation of sustainability marketing. Although administered research did not to the full extent confirm all assumptions, and one was discarded, it managed to achieve significant results pointing to direct and indisputable link of application of sustainable development through application of business model of sustainability marketing and its influence on positive organisational efficiency of small and medium enterprises in Bjelovar-Bilogora county. It is estimated that through further monitoring of development, more frequent application and measuring of application results and adequately designed marketing strategies one can expect practical contribution to increase of organisational efficiency of business subjects, thus making the economy as an aggregate more attractive, competitive and above all profitable.

LITERATURE 1.

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Belz, F.M., Peattie, K. (2010.) Sustainability Marketing, John Wiley & Sons, Ltd, Chichester

Cifrić, I. (2002.) Okoliš i održivi razvoj: ugroženost krajolika i estetika krajolika, Biblioteka Razvoj i okoliš, Zagreb.

Crittenden, V. L., Crittenden, W. F., Ferrel,L. K., Ferrell, O. C., Pinney, C. C. (2011.) Market-oriented sustainability: a conceptual framework and propositions, Journal of the Acad. Mark. Sci., No. 39, p. 71– 85.

Dahlstorm, R. (2011.) Green Marketing Managment, South-Western, Mason

Edwards, A.R. (2005.) The sustainability Revolution, New Society Publisher, Gabriola Island

Emery, B. (2012.) Sustainable Marketing, Pearson Education Limited, Harlow

Epstein, M. J. (2008.) Making Sustainability Work, Greenleaf Publishing Limited, Sheffield

Hart, S. L. (1995.) A Natural-Resource-Basd View of the Firm, Academy of management review, 20, 4, 986.

10. Hawken, P., Lovins, A., Hunter, L. (1999.) Natural Capitalism, Little, Brown and company, New York 11. Hollender, J., Breen, B. (2010.) The Responsibility Revolution, Jossey-Bass, San Francisco 12. Høgevold, N. M., Svensson, G. (2011.) A business sustainability model: a European case study, Journal of Business & Industrial Marketing, 27, 2, p. 142 – 151. 13. Jerčinović, S. (2006.) Analiza i primjena marketinga usluga u sustavu škola vožnje, magistarski rad, Ekonomski fakultet sveučilišta u Zagrebu, Zagreb 14. Kiewiet, D. J., Vos J. F. J. (2007.) Organizational sustainability: A case for formulation a tailor-made definition, Journal of Environmental Assessment policy and managment, 9, 1, p. 1 – 18. 15. Kuosmanen, T., Kuosmanen, N. (2009.) How to not to measuresustainable value (and how one might), Ecological Economics, 69, 2, p. 235 – 243. 16. Lay, V. (2007.) Održivi razvoj i vođenje, Društvena istraživanja, 6, 92, str. 1031 – 1053 17. Martin, D., Schouten, J. (2012.) Sustainable Marketing, Pretice Hall, Upper sadle River 18. McKenzie-Mohr, D., Smith, W. (2008.) Fostering Sustainable Behaviour, New Society Publisher, Gabriola Island 19. World Commission on Environment and Development (1987.) Our Common Future, www.un-documents.net, pristupljeno 01.02.2013.

DETAILS ABOUT AUTHORS: SILVIJE JERČINOVIĆ SENIOR LECTURER KRIŽEVCI COLLEGE OF AGRICULTURE KRIŽEVCI, CROATIA sjercinovic@vguk.hr AUGUST SLIVAR STUDENT KRIŽEVCI COLLEGE OF AGRICULTURE KRIŽEVCI, CROATIA ausl@net.hr VALENTINA PAPIĆ BOGADI SENIOR LECTURER KRIŽEVCI COLLEGE OF AGRICULTURE KRIŽEVCI, CROATIA vpapic@vguk.hr

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PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM MERICA PLETIKOSIÄ&#x2020;

ABSTRACT

In this paper, the results of the empirical research investigating the awareness, attitudes and confidence of the interested public towards authorized companies who carry out the monitoring and controlling of environmental protection in the economy are interpreted, on the example of Croatian largest cement plant. A survey research was conducted on a target sample using an in-depth interview and participant observation. One of the research aims was to determine whether the interested public believes that inspection services monitor the activity of the cement plan adequately and whether they believe their reports. In the analysis of the empirical material a grounded theory method was used, quantification of qualitatively analyzed coded material was performed using the Statistica ver 11.00, and finally, SWAT analysis was conducted. By analyzing the aforementioned results, it can be stated that representatives of the target groups differ from each other in the variables used, and that their attitude and opinion about content items depends on the group to which they belong. The variable referring to the confidence towards inspection services had the highest projection in the first discriminant function, and the greatest differences among the target groups occur in relation to this coded question. The second discriminant function has the highest relation to the variable referring to the alignment of Croatian and EU legislation, and therefore, it contributes the most in differentiating the target groups. The variable referring to the reliability of the measurement performed by authorized institutes and laboratories has the highest correlation to the third discriminant function and the highest projection of differences. The majority of subjects believe that inspection services monitor the activity of the cement plant adequately and they believe their reports. The results of the SWOT analysis show that the strengths overcome the weaknesses and the opportunities overcome the threats, supporting the growth strategy. KEYWORDS: Awareness, Attitudes, Inspection services, Economy

1. INTRODUCTION One of the most important segments affecting the world today is climate change and its impact on the economy and population. It has become a substantial global problem, and governments take significant steps to solve this problem. The speed in which physical changes of the ecosystem occur leads to economic losses and new dangers on human health and quality of life (Batelle Report br. 8, 2002). New goals for cleaner technologies from renewable energy sources are set in front of the economy. The industry is not viewed separately from its environment, it is rather viewed as a part of the system to which it is connected, and the success of the consistence of all the links in the chain of creating values is increasingly dependent on the awareness and the attitude of the public interested in the project. In the cement industry, in addition to the importance of preserving the environment and the atmosphere, the problem of climate change also brings forth serious financial consequences. CEMEX Croatia has been frequently exposed to the pressure of the public over the last ten years because of the consequences of the activities performed daily in the process of cement production, as well as to the recent efforts to meet the legal obligations of the Kyoto protocol, to introduce substitute fuels in the process of cement production in order to reduce the consumption of fossil fuels and adapt to the fight against climate change and reduce greenhouse gas emissions. The aim of this paper is to investigate the awareness of the interested and competent public about the acceptability of environmental impact of Cemex Croatia and to determine if the interested public thinks that the inspection services are adequately monitoring the cement plant and whether they believe their reports. The research hypothesis is: there are significant differences between the entities of the defined target and sector groups in their attitude towards the environmental impact of the cement plant and their confidence in the institutions of the system.

2. METHODOLOGY The subject sample was defined by 100 entities, 55 of which were male and 45 were female. Mean age of subjects was 47.9 years. Subjectsâ&#x20AC;&#x2122; age, education level, employment status and place of residence are presented in Table 1.

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Table 1. Subjects’ age, education level, employment status and place of residence N TOTAL SAMPLE

100

Gender

Male

Female

Under 30 Age

Education

Between 31 and 44

Between 45 and 60

Over 60

High school

Undergraduate/Graduate

Unemployed Employment status

Town

Employed

7 82

Retired

Students

Kaštela

Solin

Split

LEGEND: N- the number of subjects

The subjects were divided into nine subsamples (target groups) which were qualitatively defined as: ORGANIZATIONS – representatives of non-governmental environmental organizations of Split-Dalmatia County, 10 subjects; TOWNS – representatives of local government employees from Kaštela, Solin and Split, 10 subjects; BUYERS/ SUPPLIERS – representatives of buyers and suppliers of CEMEX Croatia, 10 subjects; POLITICS/SCIENCE – representatives of local political structures and scientists, 10 subjects; SPONSORSHIP AND DONATIONS RECIPIENTS – representatives of beneficiaries and recipients of CEMEX sponsorships and donations, 10 subjects; KAŠTELA RESIDENTS – representatives of neighbours of the plant “Sv. Juraj” in Kaštel Sućurac, 15 subjects; SOLIN RESIDENTS – representatives of neighbours of the plant “Sv. Kajo” in Solin, 15 subjects; CEMEX EMPLOYEES – representatives of CEMEX employees, 10 subjects; THE COUNTY – representatives of local government employees of Split-Dalmatia County, 10 subjects. Out of the abovementioned subsamples, three new clusters (sectors) consisting of the total of 70 subjects were classified, which were qualitatively defined as: PUBLIC SECTOR – 30 subjects from the target groups: TOWNS, POLITICS/SCIENCE and THE COUNTY. CIVIL SECTOR – 20 subjects from the target groups: ORGANIZATIONS and SPONSORSHIP AND DONATIONS RECIPIENTS. ECONOMIC SECTOR – 20 subjects from the target groups: BUYERS/SUPPLIERS and CEMEX EMPLOYEES. The variable sample is represented by a set of 6 qualitatively defined questions which were used in an open and/or indirect interview. The first variable, which was code-named awareness_environmental impact of CEMEX, was defined based on the first question: 1. In your opinion, how well informed are you on the environmental impact of CEMEX? The second variable, which was code-named impact of CEMEX_ acceptable, was defined based on the second question: 2. Is that impact (of CEMEX) acceptable? The third variable, which was code-named environmental impact of CEMEX _reduced, was defined based on the third question: 3. Do you think that the environmental impact of CEMEX has been increased or reduced in the last few years? The fourth variable, which was code-named measurement reliability_authorized institutions, was defined based on the fourth question: 4. In your opinion, is the measuring done by the authorized institutions controlling CEMEX reliable?

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The fifth variable, which was code-named inspection services_report authenticity, was defined based on the fifth question which reads: 5. Do you believe that the inspection services sufficiently monitor the operation of the cement plant and do you believe their reports? The sixth variable, which was code-named eu ecological requirements_croatian ecological requirements, was defined based on the sixth question: 6. Do you think that cement plants in the EU work under stricter ecological requirements than those in Croatia? A problem-oriented in-depth interview was conducted with 100 subjects divided into nine target groups and three control sector groups representing a target sample of the interested public which is rich in information and, in its activity, involved in forming the attitudes of others. After being presented with the problem and the aim of the research, all subjects gave a willing consent for participation in the research. Based on written transcripts, numerical coding of responses was performed for the purposes of forming the entity matrix, defined by the overall subject sample and coded variables, for further statistical analysis. By descriptive analysis, frequency of the six code-named variables, applied for each questions, was determined, as well as their relative and cumulative values. Discriminant analysis of differences between the defined subsamples (target groups) was also conducted, as well as the analysis of differences between the three classified clusters (sectors). Quantification of qualitative empiric material and transformation to the numerical form was performed for the purposes of further statistical analysis. Complete statistical analysis was performed by STATISTICA, Ver.10.00 software package. SWOT analysis was also used in this research.

3. RESULTS AND DISCUSSION Quantitative analysis of the entity matrix and the first variable was based on the responses obtained by the qualitatively defined first interview question: In your opinion, how well informed are you on the environmental impact of CEMEX? The respondents expressed their opinion on the level of awareness about the environmental impact of CEMEX. Their responses were defined at three levels: The first group represents those entities who responded: I am informed a little, I am not adequately informed, I have partial information. Quantitatively, these responses were coded by 0 (zero) for further statistical data analysis. The second group defined their responses affirmatively: Yes, I am informed, I am adequately informed, I have good information. Quantitatively, these affirmative responses were coded by the number 1 (one) for further statistical data analysis. The third group of respondents was classified according to the answer: I am not informed. Quantitatively, these negative answers were coded by the number 2 (two) for further statistical data analysis. Frequency of the coded answers for the overall sample was determined by descriptive analysis. The results of frequencies of all entities and the first variable awareness_environmental impact of CEMEX are presented in Table 2. The total of 93% of respondents thinks that they are well informed and familiar with environmental impact of CEMEX. Those partially and insufficiently informed on the environmental impact of the cement plants were quantitatively expressed by 6%, and only one respondent declared he was not informed.

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Table 2. Relative and cumulative frequencies of the variable awareness_environmental impact of CEMEX, N=100 Count

Cumulative - Count

Percent

Cumulative - Percent

6.00

93.00

99.00

100

1.00

100.00

Legend: 0-partially, little; 1-well, adequately; 2-not informed

Quantitative analysis of the entity matrix and the second variable was based on the responses obtained by the quantitatively defined second interview question which reads: Is that impact (of CEMEX) acceptable? The respondents expressed their attitude on how they accept the environmental impact of CEMEX plants. Their responses were classified at three levels. The first group was classified according to the negative response and it represents those entities that responded: Environmental impact of the CEMEX plants is not acceptable. Quantitatively, these responses were coded by 0 (zero) for further statistical data analysis. The second group was classified according to the affirmative response and it represents those entities that responded: Yes, the impact is acceptable, it is acceptable now, it has been acceptable for the last few years, etc. Quantitatively, these responses were coded by the number 1 (one) for further statistical data analysis. The third group represents those entities who defined their responses as: I am not sure, I am partially informed, I donâ&#x20AC;&#x2122;t know enough, I am not fully informed, I know some information but not all, etc. Quantitatively, these responses were coded by the number 2 (two) for further statistical data analysis. Frequency of the coded answers for the overall sample was determined by descriptive analysis. The results of frequencies of all entities and the second variable code-named impact of CEMEX_acceptable are presented in Table 3. The total of 68% respondents thinks that the impact of CEMEX is acceptable. There were 15 respondents who gave a negative response and 17 entities did not have an opinion on this question because they were not sure about the right answer, were partially informed, didnâ&#x20AC;&#x2122;t know enough, were not fully informed, knew some information but not all, etc. Table 3. Relative and cumulative frequencies of the variable impact of CEMEX_acceptable, N=100 Count

Cumulative - Count

Percent

Cumulative - Percent

15.00

68.00

83.00

100

17.00

100.00

Legend: 0-no; 1-yes; 2- I am not sure, I am partially informed

Quantitative analysis of the entity matrix and the third variable code-named environmental impact of CEMEX_reduced was based on the responses obtained by the quantitatively defined third question which reads: Do you think that the environmental impact of CEMEX has been increased or reduced in the last few years? The respondents expressed their attitude on the increase or reduction of environmental impact of CEMEX. Their responses were defined at three levels: The first group was classified according to the negative response and it represents those entities that responded: No, the environmental impact of CEMEX has not been reduced. Quantitatively, these responses were coded by 0 (zero) for further statistical data analysis. The second group was classified according to the affirmative response and it represents those entities who responded: Yes the impact has been reduced, it has been obviously reduced, CEMEX is investing in environmental protection, the production has been reduced, the installations have been shut down, CEMEX has done a lot for protecting the

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environment, the impact is completely acceptable, etc. Quantitatively, these responses were coded by the number 1 (one) for further statistical data analysis. The third group represents those entities that defined their responses as: I am not sure, I am partially informed, I donâ&#x20AC;&#x2122;t know enough, I am not fully informed, I know some information but not all, etc. Quantitatively, these responses were coded by the number 2 (two) for further statistical data analysis. Frequency of the coded answers for the overall sample was determined by descriptive analysis. The results of frequencies of all entities and the third variable environmental impact of CEMEX_reduced are presented in Table 4. 80% of respondents expressed the opinion that the impact had been reduced, that CEMEX is investing in protecting the environment, and that the production has been reduced and some of the installations shut down. They believe that the impact is acceptable. 10% of the entities stated that the impact had not been reduced and that the changes were only â&#x20AC;&#x153;cosmeticâ&#x20AC;?, while 10% thinks that they are partially informed, not sure, not fully informed so they decided on the undefined answer. Table 4. Relative and cumulative frequencies of the variable environmental impact of CEMEX_reduced, N=100 Count

Cumulative - Count

Percent

Cumulative - Percent

10.00

80.00

90.00

100

10.00

100.00

Legend: 0-no; 1-yes; 2- I am not sure, I am partially informed

Quantitative analysis of the entity matrix and the fourth variable was based on the responses obtained by the quantitatively defined fourth question which reads: In your opinion, is the measuring done by the authorized institutions monitoring CEMEX reliable? The respondents expressed their attitude on reliability of measurement done by authorized institutions monitoring the operation of CEMEX. Three levels of responses were defined as follows: The respondents who answered affirmatively and who did not express confidence in measuring done by authorized institutions monitoring CEMEX, and the entities who stated that the results should be consistent but they were unfortunately not sure about that, were coded by zero (0) for further statistical data analysis. The respondents who believe the measuring results and find them reliable and consistent were quantitatively defined by the number one (1) for further statistical data analysis. The entities who were not sure, not adequately informed or not familiar with the way in which the measuring had been conducted, gave an answer coded by the number two (2). Frequency of the quantitative answers for the overall sample was determined by descriptive analysis. The analysis of the frequency results of all respondents and the fourth variable code-named measurement reliability_ authorized institutions was defined by a relative value of 73% of respondents who believe the results of measuring done by authorized institutions responsible for monitoring CEMEX, and who find them reliable and consistent. 16% of respondents claimed the opposite and did not believe the authorized institutions, while 11% of respondents were indecisive because they were not sure, were partially familiar with the facts or thought they did not have enough information. The results of frequencies of all entities and the fourth variable code-named measurement reliability_authorized institutions are presented in Table 5.

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Table 5. Relative and cumulative frequencies of the variable measurement reliability_authorized institutions, N=100 Count

Cumulative - Count

Percent

Cumulative - Percent

16.00

73.00

89.00

100

11.00

100.00

Legend: 0-no; 1-yes; 2- I donâ&#x20AC;&#x2122;t know, I am not sure, I am partially informed, I do not have an opinion

Quantitative analysis of the entity matrix and the fifth variable was based on the responses obtained by the qualitatively defined fifth interview question: Do you believe that the inspection services sufficiently monitor the operation of the cement plant and do you believe their reports? The respondents expressed their attitude on the objectivity of the inspection services, quality of their supervision, and reliability and authenticity of their reports. Three levels of responses were defined as follows: The first group was classified according to the negative response and it represents those entities who responded: inadequate supervision, poor supervision, I do not believe the reports, I question their objectivity and authenticity. Quantitatively, these responses were coded by zero (0) for further statistical data analysis. The second group defined their response affirmatively as follows: yes, inspection services are doing a good job, I believe the authenticity of their reports. Quantitatively, these affirmative responses were coded by the number one (1) for further statistical data analysis. The third group of respondents remained undefined and was classified according to the answer: I do not know, I am not sure, I am not adequately informed, I am not familiar with the facts sufficiently to answer, I am partially informed, etc. Quantitatively, these incomplete answers were coded by the number two (2) for further statistical data analysis. Frequency of the coded answers for the overall sample was determined by descriptive analysis. The analysis of the frequency results of all respondents and the fifth variable code-named inspection services_report authenticity indicated a relative value of 78% of entities who believe the reports of the inspection services, who think that they perform the control and supervision well. On the other hand, the respondents who question the authenticity of the reports and believe that the authorized inspection services do not provide sufficient control were numerically defined by a relative value of 20 %. 2% of the entities were not adequately informed, were not sure and remained undefined at this question. All quantitative results of frequency N=100 and the coded variable inspection services_report authenticity are presented in Table 6. Table 6. Frequencies of the variable inspection services_report authenticity. N=100 Count

Cumulative - Count

Percent

Cumulative - Percent

20.00

78.00

98.00

100

2.00

100.00

Legend: 0-no; 1-yes; 2-I donâ&#x20AC;&#x2122;t know, I am not sure

Quantitative analysis of the entity matrix and the sixth variable was based on the answers obtained by the sixth interview question: Do you think that cement plants in the EU work under stricter ecological requirements than those in Croatia? The respondents expressed their opinion about their knowledge on the ecological requirements in the EU and Croatia. Three levels of responses were defined as follows:

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The first group was classified according to the negative response and it represents those entities who responded: No, European ecological requirements are not stricter in the EU, Croatia has the same ecological requirements as the EU, regulations, laws and requirements are the same in the EU and Croatia. Quantitatively, all responses were coded by zero (0) for further statistical data analysis. The second group defined their answer affirmatively as follows: Yes, ecological requirements are stricter, especially in Scandinavian countries, EU has better supervision and requirements than Croatia. Quantitatively, all affirmative responses were coded by the number one (1) for further statistical data analysis. The third group of respondents remained undefined and was classified according to the answer: I don’t know, I am not sure, I am not adequately informed, I am not familiar with the facts sufficiently to answer, etc. Quantitatively, these incomplete answers were coded by the number two (2) for further statistical data analysis. Frequency of the coded answers for the overall sample was determined by descriptive analysis. The analysis of the frequency results of all respondents and the sixth variable code-named eu ecological requirements_ croatian ecological requirements indicated a relative value of 45% of entities who believe that EU does not have stricter ecological requirements than Croatia, but that these are better enforced and applied. Relative value of 24% accounts for the respondents who think that Croatia and EU have comparable ecological regulations, laws and requirements. The total of 31% entities were not adequately informed, were not sure and remained undefined at this question. All quantitative results of frequencies N=100 and the coded variable eu ecological requirements_ croatian ecological requirements are presented in Table 7. Table 7. Frequencies of the variable eu ecological requirements_croatian ecological requirements, N=100 Count

Cumulative - Count

Percent

Cumulative - Percent

45.00

24.00

69.00

100

31.00

100.00

Legend: 0-no; 1-yes; 2-I don’t know, I am not sure, I am partially informed

Table 8 shows statistically significant differences of all six code variables used according to target groups, their separate Wilks’ lambda values that indicate the overlapping between the variables, F-test value that indicates the ratio of differences between the groups and within the groups, and the level of statistical significance p. Variables: awareness_environmental impact of CEMEX, inspection services_report authenticity and eu ecological requirements_croatian ecological requirements were statistically significant at the level of p=0.00, whereas the variable measurement reliability_authorized institutions had a tendency of significance at the level of p=0.06. Table 8. Analysis of differences of the content domain PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM according to the target group, N=100 variable

Wilks' - Lambda

F-test

p-value

awareness_environmental impact of CEMEX

0.12

3.2

0.00

impact of CEMEX _acceptable

0.09

0.4

0.93

environmental impact of CEMEX _reduced

0.10

1.6

0.15

measurement reliability_authorized institutions

0.11

2.0

0.06

inspection services_report authenticity

0.24

17.8

0.00

eu ecological requirements_croatian ecological requirements

0.13

5.1

0.00

Legend:Wilks’ lambda- coefficient of statistical significance, F-test- coefficient of F-test differences, p-value- level of significance

Discriminant analysis on six variables between the nine target groups determined three statistically significant functions. Coefficients of canonical discrimination, Wilks’ lambda, as well as their level of statistical significance, are presented in Table 9.

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The first two discriminant functions are significant at the level of p=0.00 whereas the third discriminant function has the level of significance p=0.01. BY ANALYSING THE RESULTS WE CAN STATE THAT REPRESENTATIVES OF THE TARGET GROUPS DIFFER SIGNIFICANTLY IN THE VARIABLES USED AND THAT THEIR ATTITUDE AND OPINION ABOUT THE CONTENT QUESTIONS PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM DEPEND ON THE GROUP TO WHICH THEY BELONG. Table 9. Discriminant analysis of the content domain PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM between the target groups, N=100 Eigen- value

Canonicl - R

Wilks' - Lambda

Chi-Sqr.

p-value

2.98

0.87

0.09

221

0.00

0.75

0.65

0.36

0.00

0.36

0.52

0.62

0.01

0.14

0.35

0.85

0.47

0.03

0.17

0.97

0.94

0.00

0.06

1.00

0.96

Legend: Can. R-coefficient of canonical discrimination, Wilksâ&#x20AC;&#x2122; lambda- coefficient of statistical significance, Chi.Sqr.- Chi Square -coefficient of statistical significance, df- degrees of freedom, p- level of significance

The contribution of each variable used in explaining the differentiating power in discriminant function is presented in Table 10. The variable inspection services_report authenticity had the highest projection in the first function and the groups differed most according to this coded question. The second function had the highest correlation to the variable eu ecological requirements_croatian ecological requirements and therefore it contributed most to the differentiation between the target groups. Measurement reliability_authorized institutions had the highest correlation to the third discriminant function and the highest differentiating projection. Table 10 Discriminant analysis of the content domain PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM between the target groups, N=100 variable

Root 1

Root 2

Root 3

Root 4

Root 5

Root 6

awareness_environmental impact of CEMEX

-0.06

-0.58

-0.13

0.70

0.37

0.07

impact of CEMEX _acceptable

0.26

0.10

-0.13

-0.24

0.90

-0.19

environmental impact of CEMEX _reduced

-0.13

0.17

0.60

0.36

-0.27

-0.62

measurement reliability_authorized institutions

0.04

0.13

0.61

0.12

0.48

0.61

inspection services_report authenticity

0.97

-0.06

-0.16

0.18

0.03

-0.05

eu ecological requirements_croatian ecological requirements

-035

0.80

-0.32

0.32

0.07

-0.16

Legend: ROOT- discriminant function

Centroids of the target groups are presented in Table 11, indicating how much each group participates in explaining each discriminant function, and based on its sign, which groups are separated. In the first function, the representatives of ORGANIZATIONS and SOLIN RESIDENTS differ significantly in their attitudes and opinions in comparison to the seven remaining target groups. In the second function, the representatives of the target groups TOWNS, BUYERS/SUPPLIERS, POLITICS/SCIENCE and SOLIN RESIDENTS differ significantly in comparison to the five remaining defined subsamples. In the third function, the representatives of TOWNS, SPONSORSHIP AND DONATIONS RECIPIENTS, SOLIN RESIDENTS and CEMEX EMPLOYEES and THE COUNTY are distinguished by their positive

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centroids and they differ significantly in their attitudes and opinions on the content domain Environmental impact of the cement plant. Table 11 Centroids of the target groups in discriminant analysis Root 1

Root 2

Root 3

Root 4

Root 5

Root 6

ORG

-3.8

-0.59

-0.4

0.05

0.00

-0.09

TOW

0.7

0.31

0.0

0.67

-0.10

-0.01

BUY/SEL

1.0

1.81

-0.1

-0.52

-0.06

-0.07

POL/SCI

1.6

0.27

-0.1

0.61

0.03

-0.03

SPO/DON.REC

0.9

-0.45

0.6

-0.12

0.43

-0.02

RES/KAŠ

0.6

-0.36

-1.2

-0.19

0.04

0.05

RES/SOL

-2.0

0.73

0.5

0.02

0.00

0.09

CEM/EMP

0.9

-0.95

0.5

-0.22

-0.18

-0.00

COU

0.9

-0.95

0.5

-0.22

-0.18

-0.00

Legend: ROOT- discriminant function

After analysing the differences between the target groups, discriminant analysis was applied between the three defined sector groups. Quantitative values of the applied coded variables and their individual statistical significance for the content domain PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM are presented in Table 12. Out of the total of six variables, two coded answers were statistically significant: awareness_environmental impact of CEMEX and inspection services_report authenticity at the level of p=0.01 and p=0.00. Table 12 Analysis of differences of the content domain PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM according to the sector group, N=70 variable

Wilks' - Lambda

F-test

p-value

awareness_environmental impact of CEMEX

0.58

4.5

0.01

impact of CEMEX _acceptable

0.53

1.2

0.30

environmental impact of CEMEX _reduced

0.51

0.1

0.95

measurement reliability_authorized institutions

0.51

0.4

0.67

inspection services_report authenticity

0.80

17.9

0.00

eu ecological requirements_croatian ecological requirements

0.51

0.3

0.76

Legend: Wilks’ lambda- coefficient of statistical significance, F-test- statistical significance of differences, p-value- level of significance

Coefficient of canonical discrimination of 0.65 indicates that the first discriminant function, with 12 degrees of freedom, is statistically significant at the level of p=0.00 (Table 13). Table 13 Discriminant analysis of the content domain PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM between the sector groups, N=70 Eigen- - value

Canonical - R

Wilks' - Lambda

Chi-Sqr.

p-value

0.73

0.65

0.51

44.0

0.00

0.15

0.36

0.87

8.8

0.12

Legend: Canonical-R-coefficient of canonical discrimination, Wilks’ lambda-coefficient of statistical significance, Chi.Sqr.-Chi Square- coefficient of statistical significance, df- degrees of freedom, p- level of significance

By inspecting the factorial structure of discriminant functions, we can see the contribution of each coded variable in the discriminant power of differences. The variable inspection services_report authenticity with its numerical value of 0.92 explains the first function for the most part and represents their correlation (Table 14).

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Table 14 Discriminant analysis of the content domain PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM between the sector groups, N=70 variable

Root 1

Root 2

awareness_environmental impact of CEMEX

-0.26

-0.92

impact of CEMEX _acceptable

0.18

environmental impact of CEMEX _reduced

-0.04

-0.10

measurement reliability_authorized institutions

0.07

0.01

inspection services_report authenticity

0.92

-0.13

eu ecological requirements_croatian ecological requirements

-0.15

0.17

Legend: ROOT- discriminant function

Centroids of the sector groups in Table 15 indicate how much each group participates in explaining each discriminant function and based on its sign, which groups are separated. In the first and the only significant discriminant function, the civil sector differs with statistical significance in the variables of the content domain PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM in comparison to the economic and the public sector. Table 15 Centroids of the sector groups in discriminant analysis sector

Root 1

Root 2

civil

-1.30

-0.03

public

0.60

-0.35

economic

0.50

0.55

Legend: ROOT- discriminant function

SWOT analysis of the content domain PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM Strengths: • 1st question: the analysed frequency results of all entities and the first variable awareness_environmental impact of CEMEX indicate that the target groups including the representatives of CEM/EMP (CEMEX employees), BUY/SUP (buyers and suppliers) and SPO/DON.REC (sponsorship and donations recipients) think that they are well informed and familiar with the environmental impact of CEMEX, as does the economic sector (16/20). • 2nd question: affirmative coded answer for the variable impact of CEMEX_acceptable was given by the representatives of the economic sector (17/20), who think that the environmental impact of CEMEX is acceptable, as does the majority of the target group CEM/EMP (CEMEX employees), BUY/SUP (buyers and suppliers) and SPO/DON.REC (sponsorship and donations recipients). • 3rd question: by analysing the frequency of the third variable environmental impact of CEMEX_reduced, it can be noticed that the representatives of BUY/SUP, SPO/DON.REC and CEM/EMP think that the environmental impact of CEMEX has been reduced. All respondents of the target groups and the economic sector responded affirmatively. • 4th question: the analysis of the frequency results of all entities and the fourth variable code-named measurement reliability_authorized institutions indicates that the economic sector fully (30/30) believes the results of measurement done by the authorized institutions responsible for monitoring CEMEX, and that they find them reliable and consistent. • 5th question: the analysis of the frequency results of all entities and the fifth variable code-named inspection services_report authenticity indicates that the economic sector fully (30/30) believes the inspection services supervising and monitoring the legality of operation of CEMEX, and finds their reports to be authentic.

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Weaknesses: • 6th question: the analysis of the frequency results of all entities and the sixth variable code-named eu ecological requirements_croatian ecological requirements indicates that 50% of representatives of the economic sector think that EU cement plants work under stricter ecological standards and that the legislation in the area of environmental protection is at the higher level. Opportunities: • 1st question: the analysed frequency results of all entities and the first variable awareness_environmental impact of CEMEX indicate that 93% of respondents think that they are well informed and familiar with the environmental impact of CEMEX, the whole public sector thinks (30/30) that they are well informed and familiar with the environmental impact of CEMEX, as does the majority of the civil sector (19/20). • 2nd question: the frequency results of all entities and the second variable code-named impact of CEMEX_acceptable indicate that 68% of respondents believe that the environmental impact of CEMEX is acceptable, as do the representatives of the public sector (22/30). • 3rd question: the frequency results of all entities and the third variable environmental impact of CEMEX_reduced indicate that 80% of respondents expressed a clear attitude that the environmental impact of CEMEX has been reduced, that CEMEX is investing in environmental protection, and that large investments in environmental sanitation and protection are evident. The majority of both public (25/30) and civil sector (15/20) expressed the attitude that the environmental impact of CEMEX has been considerably reduced. • 4th question: the analysis of the frequency results of all entities and the fourth variable code-named measurement reliability_authorized institutions was defined by a relative value of 73% of respondents of the target groups who believe the results of measurements done by the authorized institutions responsible for monitoring CEMEX, and they find them to be reliable and consistent, as do the representatives of the public sector that fully supports the work of the authorized institutions. • 5th question: the analysis of the frequency results of all entities and the fifth variable code-named inspection services_report authenticity indicates a relative value of 78% entities who believe the reports of the supervising inspection services, they believe that their monitoring and supervision of the legality of the CEMEX operation are being executed professionally, as does the majority of the public sector (28/30). Threats: • 6th question: the analysis of the frequency results of all entities and the sixth variable code-named eu ecological requirements_croatian ecological requirements indicates a relative value of merely 45% entities who think that EU does not have stricter ecological requirements than Croatia, as does the minority of the civil sector (9/20). The majority (11/15) of the target group KAŠ/RES (Kaštela residents) thinks that EU cement plants work under stricter standards, whereas the representatives of the target group SOL/RES (Solin residents) stated that they did not know or were not sure (12/15). SWOT analysis of the content domain PUBLIC CONFIDENCE IN INSTITUTIONS OF THE ENVIROMENTAL PROTECTION SYSTEM indicates that the strengths (5) overcome the weaknesses (1) and the opportunities (5) overcome the threats (1), which supports the theory of growth.

CONCLUSION The representatives of the interested public differed significantly depending on the target and sector group to which they belong because they do not have at their disposal a good enough set of information about the environmental impact of the cement plant. They express significant distrust in institutions of the system that monitor the operation of CEMEX, but also express the opinion that EU cement plants work under stricter ecological standards. SWOT analysis showed that the strengths and the opportunities overcome the weaknesses and the threats, which significantly supports the growth strategy. Therefore, the initial hypothesis that reads: there are significant differences between the entities of the defined target and sector groups in their attitude towards the environmental impact of the cement plant and their confidence in the institutions of the system is fully confirmed and accepted. CEMEX should continue with the existing environmental monitoring and report to the public about all activities to ensure an acceptable impact and constantly improve their own structure, reputation and image. It is necessary to constantly set new goals of environmental protection and to reduce the pressure on the environment, to build confidence in new technologies of the cement industry, and to point to examples of good practice of EU cement plants.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8.

Andriantiatsaholiniaina L. A., V. S. Kouikoglou, Y. A. Phillis. (2004). Evaluating in Strategies for Sustainable Development: Fuzzy Logic Reasoning and Sensitivity Analysis. Ecol. Econ. 48 :149–172. Battelle. (2002). Toward a Sustainable Cement Industry. An indepent study and its Substudies. A Report Report commissioned by the World Business Council on Sustainable Development. Geneva: WBCSD Brockington D. (2003). Myths of Skeptical Environmentalism (a Discussion). Environ. Sci. Policy. 6:543 Clift R., A. Doig, G. Finnveden (2000). The Application of Life Cycle Assessment to Integrated Solid Waste Management. Part I. – Methodology. Trans. Inst. Chem. Engn. 78:279. Dewulf J., H. Langenhove. (2002). Assessment of the Sustainability of Technology by Means of a Thermodynamically Based Life Cycle Analysis. Enviro. Sci. & Pollut. Res. 9:267. Dyson R. G. (2004).Strategic development and SWOT analysis at the University of Warwick, European Journal of Operational Research. Vol. 152.. Halmi A. (2005). Strategije kvalitativnih istraživanja u primijenjenim društvenim znanostima. Naklada Slap. Jastrebarsko. [Strategies of qualitative research in applied social sciences] Lay V., D. Šimleša. (2011). Nacionalni interesi razvoja Hrvatske kroz prizmu koncepta održivog razvoja . Zagreb : Institut društvenih znanosti “Ivo PIlar”. [National interests of development of Croatia through the prism of concept of sustainable development. Zagreb: Institute of social sciences Ivo Pilar]

Petz B. (1997). Osnovne statističke metode za nematematičare. Naklada Slap. Jastrebarsko. [Basics of statistical method for non-mathematicians]

10. Pletikosić M. (2012). Odnos javnosti prema korištenju zamjenskog goriva u industriji cementa. Magistarski rad. Zadar. [The public attitude towards the usage of substitute fuels in the cement industry. Master’s thesis ] 11. Pravdić V. (2003). Sustainable Development: its Meaning, Perception, and Implementation. The Case of Ecotourism in Croatia. Društvena istraživanja. Zagreb 12: 285. 12. Tafra-Vlahović M. (2011). Održivo poslovanje. Zaprešić: VŠPU B.A.Krčelić. Zagreb. [Sustainable business]

DETAILS ABOUT AUTHOR: MERICA PLETIKOSIĆ ENVIRONMENTAL MANAGER CEMEX CROATIA, ENVIRONMENTAL DEPARTMENT CESTA DR.F. TUĐMANA 45, 21212 KAŠTEL SUĆURAC, CROATIA merica.pletikosic@cemex.com

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WORKSPACE AND ERGONOMICS OF A SECONDARY TECHNICAL SCHOOL DAVOR ŽILIĆ OLIVER HIP ROBERT IDLBEK

ABSTRACT

The paper is based on the study and analysis of ergonomic aspects of work equipment and workspace in a secondary school in the Republic of Croatia. The analysis is primarily related to the IT part of the school i.e. offices and cabinets with computers and whose employees or students use computer equipment. A questionnaire analyzed the working conditions in a computer classroom. It will be presented all factors and possible side effects of daily exposure to bad workplace ergonomics consisting of noise impact, IT environment, lighting, screen tilt, seat position, etc. KEYWORDS: ergonomics, workspace, high school, research

1. INTRODUCTION Health is a human need. Inadequate long-term work at computer, but also with other machines and tools undermines the health of workers. Unfortunately, little attention is usually paid to these things, but the fact is that these "small" things can cause great damage to a person i.e.a worker who works in the unfit workspace with inadequate work equipment. In the IT, workspace and the equipment ergonomics is a very important factor and it should be taken care of. Some studies have already shown that an abnormal position while working at a computer, bad habits and a stressful environment lead to different health problems. However, it is not enough just to correct some of these items to meet the conditions for good work, but it is necessary to change the whole core of the problem and start from scratch with the reconstruction of the workplace and the environment. Properly organized office workplace helps worker maintain a comfortable, neutral posture, in which the joints are aligned, which reduces stress and strain on muscles, tendons, and skeletal system and minimizes the risk of musculoskeletal disorders1. In the IT developed countries, about one third of the sick leave is caused by muscle injuries received due to the poor ergonomics of the workspace and equipment. Primarily it comes to back injuries, then the neck, shoulders, arms, elbows, carpal tunnel syndrome, etc. Therefore, the main objective of the ergonomics would be improvement of work efficiency, safety, quality of work and comfort in the workplace, and this can be achieved by forming machines, workspace and production process. The main task of ergonomics is to preserve productivity without compromising the health of employees. A large number of young people, who are educated, spend half of their day at school sitting in different chairs in classrooms with different intensity of light, temperature, noise, etc. Nobody asks them if they are comfortable, but neither they themselves are aware of how important it is, while in their growth phase, to keep an eye on their health and to stay in an ergonomically friendly classrooms. And for healthy and safe work in a computer classroom it is necessary to work with ergonomically adapted equipment. Unfortunately, few schools and their founders take into account the ergonomics of the students´ environment. Most schools when purchasing the IT equipment and related supplies pay attention to the price, but do not look at the other side i.e. ergonomic suitability of that equipment. Further in this paper, we will find out whether the school meets the requirements of ergonomics and whether the students are satisfied with the comfort of their classrooms.

2. ERGONOMICS IN GENERAL The biggest mistake people were doing throughout history is that they adjusted themselves to machines and tools instead of adjusting the same machines to themselves and their needs. Only in the early 18th century people began to write about diseases and injuries caused by improper posturea and movements at work, and in the 19th century they first started making tools and machines tailored to the needs of workers. That was the source of ergonomics. "Ergonomics is the scientific discipline (science of work) with the task to explore the human body and behavior and to provide information whether the objects, in contact with people, fit the human body. So ergonomics studies anatomical, physiological and other parameters of the human body. It is not an independent science but it uses data from all disciplines dealing with people (medicine, psychology, mathematics, optics, acoustics, etc.)2. "Word ergonomics is a compound formed from two Greek words" ERGON

1 2

Europska agencija za sigurnost i zdravlje na radu, https://osha.europa.eu/fop/croatia/hr/publikacije-1/e-fact-folder/e-fact13pdf 11.08.2013. http://hr.wikipedia.org/wiki/Ergonomija 11.07.2013.

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"(deed, work, act) and "NOMOS" (custom, law, order)3. Ergonomics is, according to Fernandez, design of workplace, equipment, machine (device), products, tools, environments, and systems that take into account human physical, psychological and biomechanical capabilities, optimizing the efficiency and productivity of the system while ensuring the safety, health and welfare of workers4. Automation of production, development of means of transport, of traffic control (especially in air transport), development of automatic data processing, space technology, etc. gave their contribution to the development of ergonomics. At the beginning of the 1960s International Labour Office and the World Health Organization are beginning to deal with the ergonomics. International Society for Ergonomics was founded in 1959 and the Croatian Society of Ergonomics in 1974.5

2.1. The importace of ergonomics The goal of ergonomics is to adjust equipment, machinery and workplaces to worker, i.e. to design work equipment, procedures and environment in order to facilitate the work and to achieve the highest operating results with the minimum effort in the work process. Also, the objective of this scientific discipline is the elimination or reduction of fatigue, exhaustion and pain and the increase of job security and efficiency. Today, most jobs can be characterized by the word dynamic. The overall advancement of technology has made the world a global workplace. Today's businesses are conducted via portable computers and mobile phones from all locations. There are new ways of organizing work in which there is emphasis on the changes of classic, current, office work. Accordingly, there have been agencies that study the impact of new technologies on human life and health, environmental impact, etc. In addition, there is the problem associated with shift work, since then the place of work must ergonomically meet the needs of more people. The world is increasingly moving from conventional offices in the business buildings to the family houses in which employees perform work that would otherwise be done somewhere in the stuffy downtown. People seek more customized workspace for themselves and their personality, space to be "at home." All that is happening to make people more efficient, feel better and more comfortable in the working environment. Computers are the primary means of the majority of jobs, therefore it is very important that such equipment meets ergonomic standards. Working in front of a computer without the frequent change of position leads to specific health problems. A person who works at a computer is exposed to the long-term and fixed seating, and usually uses only his fingers, hands, eyes and mind. He/she is sitting at the workplace for a long time without a break, increasing the risk of muscle tension and joint stiffness. Therefore the following problems appear: fatigue and exhaustion, problems with the eyes, neck pain, headaches and problems with concentration and circulation. That neglect of ergonomics and recommendations of scientists who deal with it, lead to significantly increased risk of chronic injuries caused by long-term work at the computer.6 Adjustments in the workplace can mitigate damage and painful conditions caused by the long-term work at the computer so as to select the correct position and the layout of the office equipment, to use computers properly and to introduce active downtime for stretching and exercises. It is advisable to do frequent breaks - every 15 minutes a short break and every 30 minutes to an hour a longer break. Major role in the prevention of such problems and damage, except for office equipment has a size of office space, lighting, noise, humidity and ventilation. In the European Union, of which we are a member, there are health and safety at work rules, a regulation of which can be applied to psychosocial job characteristics too (89/391/EEC). The regulation specifically draws attention to the problems of a lack of autonomy on the job, and monotonous and repetitive tasks, and emphasizes the importance of ergonomics and the application of new technologies to improve the working conditions associated with health and safety at work.7

3. ABOUT CRAFTS AND TECHNICAL SCHOOL OGULIN Crafts and Technical High School Ogulin is today one of the best vocational and technical schools in Karlovac County. School educates students in vocational and technical occupations. Currently there are three technical educational programs: electrician, computer technician and rail traffic technician. In addition to the technical, school has 5 craft educational programs: auto mechanic, plumber, carpenter, machinist and hairdresser. The school is divided into the technical and the manufacturing unit, and this paper will focus only on the technical part of the school, on its classrooms8. Figure 1 shows the school building.

Tadin, V.: Ergonomija, sigurnost i prevencija pri projektiranju radnog mjesta na računalu, Elementa Laborum Standard d.o.o., Zagreb – Kaštela, 2010., str. 11 Makhbul, Z. M., Durrishah, I., Rani, M.R.A.: Ergonomics design on the work stress outcomes, Jurnal Kemanusiaan bilten 9, University of Malaysia, January, 2007., str. 51 5 Radečić, M.: Ergonomija na radnom mjestu zdravtsvenih djelatnika, Sveučilište u Zagrebu, Medicinski fakultet, diplomski rad, Zagreb, 2011., str. 8. 6 Hip, O.: Utjecaj informacijske tehnologije na stres u organizaciji, doktorska disertacija, Fakultet organizacije i informatike, Varaždin, 2009., str. 150. 7 Poredoš, D., Kovač, M.: Stres i mobbing na radnom mjestu, Kriminologija i socijalna integracija, br.12, 2004, str. 65 8 Žilić, D.: Radni prostor i ergonomija srednje tehničke škole, diplomski rad, Tehničko veleučilište u Zagrebu, Zagreb, 2012, str. 19, 3 4

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Figure 1. School today

"Crafts and Technical High School Ogulin" now employs 50 people. 480 students attend the school, and the greatest interest is shown for technical occupations. Due to the excellent technical equipment it is one of the top equipped schools in the Republic of Croatia. Ergonomics in the workplace can be divided into two levels of observation: • ergonomics of working environment / workspace and • ergonomic s of equipment. Ergonomics of working environment and workspace at a computer refers to observation of ergonomic characteristics of the workspace (the room in which a computer user resides), countertops, chairs, lighting that may be general or local, noise in the room, microclimate, etc. Ergonomics of equipment includes observation of the ergonomics of technical objects related only to the use of computers such as the ergonomics of the computer, keyboard, monitor, the amount of radiation, possibly the use of accessories such as printers, scanners, copiers ...

3.1. Ergonomics of workspace of computer classrooms IT classroom is the most important place in the education of future computer scientists in the school. In that classroom students spend most of their time during their schooling, they work a lot at the computers, therefore, it is very important that the classroom meets at least most ergonomic standards. In this very classroom, there are 12 workplaces at computers for students. A healthy workplace at a computer includes: a computer screen, a keyboard and / or a device for recording and / or software, which is the connection between the device and the workers, accessories, disk drive or some other drive, a modem, a printer, a document holder, a desk chair, a desk or a work surface, an environment that has a direct impact on the workplace9. The computer classroom is shown in Figure 2. Figure 2. Computer classroom, Crafts and Technical High School Ogulin. Source: authors

Pravilnik o sigurnosti i zaštiti zdravlja pri radu s računalom, Narodne novine, br. 69/05.

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a) DESK OR WORK SURFACE Ergonomic desk or work surface should not reflect light and must be made of materials that are not cold to the touch, the surface must be sufficiently large, there should be enough space for comfortable seating under the desk and the desk must be stable and with adjustable height. A document holder must be stable and adjustable and in the position where it does not additionally burden the eyes, neck and / or head10. According to EU regulations, a desk that does not have a height adjustment should be 72 cm tall. The desks with height adjustments are usually adjustable 68-78 cm. In some workplaces there are desks introduced with the height of approx. 110-115 cm to reduce sitting time of employees and to enable them to perform their work standing occasionally, all depending on the needs. However, in schools such desks are not necessary because the students do not spend so much time sitting at the computers. As for the width of the desk, it is not prescribed, but most commonly used is the width of 80 cm. If you use the classic CRT monitors, the width of the desk should be approx. 100-110 cm. If, on the other hand, the LCD monitors are used, then the width of 80 cm is quite sufficient to allow the proper operation at your computer. Elevated monitor stands are not the best ergonomic solution and should be avoided. The lowered view is better because the cervical vertebrae are less burdened11. As for the work surface in the classroom, it adheres to most of these standards. The LCD monitors are used so that the width of 75 cm is quite sufficient for work. The work surface is made of plastic with light hue of gray so that it fits the entire workspace and the light reflection is minimized. We can conclude that the desk meets ergonomic standards which are required for this classroom. A desk in the computer classroom is shown in Figure 3. Figure 3. A desk /work surface in the computer classroom

Figure 4. A desk chair in the computer classroom

b) DESK CHAIR Desk chair is perhaps the most important area of the workspace. Chair design in the computer classroom is shown in Figure 4. All our time at the computer we spend sitting in it. The desk chair must be stable and it must provide comfortable position to students as well as free movement and adjustment. Height should be adjustable, backrest must support the entire back, and it must have adjustable height as well as back support. The chair must have proper support for the arms, which must be at the right height for your elbows. Footrest should also be available to anyone who needs it12. We find very rarely chairs with refined anatomical shapes, which have mechanisms that adjust the chair according to the height and weight of the person sitting at it or chairs with ergonomic certificates of independent medical institutes. In the computer classroom chairs do not satisfy ergonomic standards. However, given that a good ergonomic chair still costs a lot more than a mere "studentsÂ´ chair", we can understand the motive, because an IT classroom requires a large number of such chairs, which means having a lot more money than schools or their founders have. Pupils' chairs height cannot be adjusted, the chair itself is hard i.e.the seat, on which students sit, is bare. It is a sheer wooden board or plywood. Also the chair tilt cannot be set, and the back support provides support only to the top part of the back, which also is not ergonomically friendly. The armrest is another important part of the chair, which has been neglected but it is quite important when working at the computer,. It should be adaptable to the individual, but on these chairs it does not even exist, which is a problem when hand fatigue occurs while working at the computer. With all this, it should be noted that these chairs are not suitable for every student. Can a student who is 2m tall and weighs 120kg or a student who is 1.75m tall and weighs 75kg or a student of 1.60m height and 50kg weight equally use the same chair? Yes, if the chair has the technical features and setup options for different ages and weights, and this one certainly does not. The conclusion is that the desk chair does not meet ergonomic standards and it should be replaced. 10 11

Pravilnik o sigurnosti i zaĹĄtiti zdravlja pri radu s raÄ?unalom, Narodne novine, br. 69/05. https://www.fer.unizg.hr/_download/repository/05-ErgonomijaRadnogProstora%5B2%5D.pdf 12.06.2013.

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c) WORKSPACE- LIGHTING, MICROCLIMATE, NOISE As for brightness, an office should have natural as well as artificial lighting if possible, and it must meet the minimum illumination of 300 lx13. With this illumination it is necessary to prevent glare and reflections on the screen. As for artificial lighting, ceiling lamps must be placed parallel to the students´ eye-direction at the computer workplace. Windows should have adequate protection and the screen should not be turned directly towards tthe light source because of the light reflection. Another two very important things that are related to the workspace are microclimate in the room and noise. The noise of the equipment in the room should not be greater than 60 dB, and the microclimatic conditions must meet the requirements for thermal comfort at work (temperature approx. 20-24 ° C). If the air conditioning is used, humidity must be between 40 and 60% and the temperature should not be more than 7 ° C lower than outside. All electromagnetic radiation in the room must be in accordance with the regulations14. In the computer classroom of this school there are 2 types of lighting: natural and artificial. The artificial lighting consists of new fluorescent lamps. There are 12 lamps that are parallel with students´eye- direction at the workplace. Each lamp consists of four neon tubes and accompanying mirrors. The lamps are shown in Figure 5. They set neutral white light to the classroom, that simulates daylight . Figure 6 shows the appearance of natural lighting in the computer classroom. Figure 5. A neon lamp in the computer classroom

Figure 6. Natural light int the classroom

As far as natural lighting is concerned, there are four large windows that provide a lot of daylight in the classroom. There is no air conditioning, only natural ventilation, however, given that during the course the sun is on the other side of the classroom, we can say that the temperature is acceptable for good working environment. In winter the temperature is maintained at 24 ° C using central heating and radiators. It should be noted that insufficient lighting and glare can cause improper work postures and increase the risk of injury. Prevention would be appropriate non radiant lighting15. As far as noise is concerned, the classroom is located on the road side, but the windows are double-glazed and the classroom is well insulated from the outside noise. Ther is also no interior noise present because the CPUs type ASUS provide very little noise and a comfortable work in the classroom. The only small remark would be the lack of curtains on the windows, but it is negligible in respect of the amount of the sun that shines through. We can conclude that the classroom meets standards of ergonomic workspace.

3.2. Ergonomics of the computer classroom equipment All parts of a computer (hardware) which user encounters when working at a computer belong to this part of ergonomics. Especially important are monitors, keyboards and mouse devices because they can cause the most health problems unless they are ergonomically designed, or if they do not adhere to ergonomic standards and norms. a) MONITOR These days monitor manufacturers are asked to reduce the field strength at the lowest possible level, so the health risks due to ionizing radiation can be expected only in older types of monitors. It should be borne in mind that the monitors do not 12 13 14 15

Pravilnik o sigurnosti i zaštiti zdravlja pri radu s računalom, Narodne novine, br. 69/05. Pravilnik o sigurnosti i zaštiti zdravlja pri radu s računalom, Narodne novine, br. 69/05. Pravilnik o sigurnosti i zaštiti zdravlja pri radu s računalom, Narodne novine, br. 69/05. Belt, D.: Proverbs shine light on ergonomics, J. Calif Dent Assoc, 29 (7), 2001., str. 478-480

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emit radiation only in front, but also all around. Therefore, the distance between two adjacent monitors must be at least 30 cm, and the distance from neighboring student to the back of the monitor should not be less than 50 cm. Screen must not flicker, and the refresh rate must be at least 60 Hz for LCD monitors16. The worst eye fatigue is caused by the distance between the monitor and the students´eyes. The most common problem of IT classrooms are monitors that are placed too close to the students. It is difficult to determine the minimum distance between the eyes and the monitor, but various studies have shown that a satisfactory value would be about 60 cm. It was discovered that the least amount of eye strain is at that distance. In addition to the distance from the eyes, it is necessary to have a monitor with adjustable tilt as well as theadjustable monitor holder. The required amount of tilt in relation to the eyes is 5 ° - 20 °, and it is very important that the height of your monitor is set slightly below eye level. In addition to the structure of the monitor, for the reduction of eye strain, image sharpness and size of signs are essencial. They affect readability. In order to be capable to read without problems (from a distance of 60-70 cm) the height of characters must be between 3.5 mm and 4.5 mm. Minimum spacing is one line, and for good readability 2 lines are recommended. In the observed classroom there are used LCD monitors 17'' diagonal size that are easily portable due to their light weight. They also have the possibility of the angle and height adjustments. They have the anti-glare screens, i.e. they do not reflect light sources and have the option to adjust the brightness, contrast, colour and image size. On the desk, there is a lot of space so that the monitors are more than 50 cm awayfrom the eyes of students´eyes, the distance between two adjacent monitors is about 1 meter which is more than the prescribed ergonomic requirement. These monitors and their positions meet ergonomic standards and norms, so the students can perform quality work there. A monitor in the computer classroom is shown in Figure 7. b) KEYBOARD Long-term computer work not only causes problems with the spine, but it can cause problems with hand and wrist. To prevent such problems, it is necessary to work on an ergonomically designed keyboard. Fist is capable of doing the six types of movements, each of which includes a different muscle group. Regardless of the physical layout of the keyboard, more important is, where it is placed on the desk. If set too high, automatically hands must be raised what causes the uplift of the shoulders, and thus stretching the spine and neck causing the pain. The most common way to compensate for this problem is to raise the chair, but then do not forget that your feet must always have a firm footing on the ground otherwise your legs could grow numb. Another way of solving this problem is to put the keyboard away from the body, but then again shoulders and joints suffer because the hands are too far from the hull of the body, and then the monitor is probably farther, so the eyes suffer as well. The ideal position of a keyboard would be at the same level as the elbows when your arms cling next to your body, and the position of the chair should be such that your feet touch the floor completely17. Normal keyboards with the possibility to adjust the keyboard angle are used in the classroom. They are thinner than 30mm and have enough room for adjustment. But ther are no keyboard wrist pads, the button layout is not ergonomically designed and the armrests on the chairs do not even exist. The conclusion would be that the keyboards meet some ergonomic standards, but for quality and long-term work of students at computers better keyboards are still necessary. Unfortunately, in this case as well, the price was crucial because better keyboards cost significantly more than the keyboards that are currently used in the computer classroom. A typical keyboard in the computer classroom is shown in Figure 8. Figure 7. A monitor in the computer classroom

Figure 8. A keyboard in the computer classroom

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Pravilnik o sigurnosti i zaštiti zdravlja pri radu s računalom, Narodne novine, br. 69/05. http://www.veleri.hr/files/datoteke/nastavni_materijali/k_sigurnost_3/ERG%20SIG%20pred%2012_8%20tipk-mis-pis.pdf 17.06.2013.

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c) COMPUTER MOUSE Computer mouse users often experience painful and stif fingers, shoulders and wrists. Ergonomic experts say that a good design of the mouse, proper place on the desktop and proper use can reduce these pains and fatigue. Ergonomic mouse should by its shape and design fit the size of your hands, and your fingers would be able to hold it comfortably. A regular computer mouse reduces the need to lean your hand on the desktop. Position of buttons on the mouse is also important. Keys should not be too tight together, nor too far apart, also the pressure on buttons should not be too strong (the fingers should not get tired) or too sensitive (to prevent accidental activation of the keys). In addition, it is desirable that the mouse has a scroll wheel. The mouse should be placed on the same level as the keyboard and preferably next to the keyboard. The mouse must not be placed in front of or behind the keyboard because it is burdens hands. The mouse devices used in the computer classroom do not meet the ergonomic design. They were purchased by the price, not quality. However, as in case of keyboards, ergonomically designed mouse devices are much more expensive than ordinary, and this is the reason why they are not used at the school. These devices can be used by the right-handed and the left-handed, because the design is symmetrical on both sides so that it does not matter with which hand they are used. The mouse devices are optical. As for the desktop, that part meets ergonomic standards and regulations, and students can comfortably handle the mouse while working at the computer. The conclusion is that the school should be equipped with better mouse devices, but probably due to financial constraints these devices would be too expensive. Current devices meet quantity, but not the quality.

3.3 Workspace ergonomics of principalÂ´s office and secretariat In these offices the school leadership spends its time, i.e. the principal and secretaries of the school. It is essential for their health to have an ergonomically standardized office because they spend there their working hours, approx. 8 hours a day or even more. Ergonomics of the workspace and equipment should be equal to the one in the computer classroom, however, this is much smaller space than a classroom, therefore, the offices are better ergonomically designed. The space is smaller and financially easier to monitor the workplace equpment, which also contributes to a better ergonomic workspace. a) DESK OR WORKSPACE The the principal's office desk is significantly different from "high school desks." The most noticeable difference is in the design of the desk. Unlike the flat desks in the computer classroom, this desk is formatted differently. Principal's desk is in the form of the letter "L" with a round addition. This form gives him more space, better visibility of the desk and allows him better organization of his workspace. The round additon is the advantage because it could be used for the reception of guests who come to the office. Then there is no problem with the organization of his/her office paper and things necessary for the job. Figure 9 shows the desk in the principalÂ´s office, and Figure 10 shows the desk in the secretariat. Figure 9. The desk in the principalÂ´s office

Figure 10. A desk in the secretariat

As for the office of the secretariat, since more people work in this office, there are required two separate desks, which have the basic rectangular shape. Such desk is good as far as ergonomic requirements are concernd. It is very wide, and the depth exceeds the minimum ergonomic standards to allow efficient operation of workers. There is enough space not only for a computer but also for a fax machine and a printer, and there is still room for additional work on the paperwork. All desks / desktops meet ergonomic dimensions standards. Desks are higher than the stipulated 72 cm, and although LCDs are used, desks are over 100 cm deep which gives the worker plenty of room for high-quality and efficient work. These desks are practical because of many well embedded drawers. They enable you to store paperwork and surplus material from the desk so the worker could have more space. Desktop is, unlike the plastic one in the computer classroom, wooden and it reduces

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light reflection very well. The forms of office desks are also very important in terms of space organization and contents. Total desktop should not be less than 1.82 m2, and the depth of the desk should not be less than 80 cm. With different combinations of work surfaces there should be, in the space between the support elements, place for your knees in the length of 45 cm from the edge of the table. As far as work organization on the table concerns, wrist rests in front of the devices for data input (mouse, keyboard) must to be 10-15cm away from the front edge of the table18. These desks in school offices have space for knees, dimensions meet the ergonomic criteria and we can say that they meet all the ergonomic standards. b) OFFICE CHAIR Unlike students´ chairs that are ergonomically not the best solution, office chairs are different. In the principal's office and the secretariat all chairs meet ergonomic requirements and enable the worker longer work at the computer. These chairs have adjustable height, seat tilt, there are armrests, the chairs are high enough to support the entire back and head. In addition, the chair legs have wheels, what makes it easy to move these big chairs. Principal´s chair is made of leather which provides comfortable seating and thermal insulation. The chair in the secretariat is made of fabric that also meets the criteria of chair comfort. All chairs have armrests that are quite well made, they are large and provide good support for your arms while working at the computer. As for the footrest, this is not necessary because all the chairs have adjustable height. Principal`s chair is shown in Figure 11, a chair in the secretariat in Figure 12. Figure 11. The chair in the principal´s office

Figure 12. A chair in the secreteriat

c) WORKING ENVIRONMENT- LIGHTING, MICROCLIMATE, NOISE Terms for suitable working environment are the same as for the IT classroom - it is necessary to provide enough light, reduce outside noise as much as possible, and the temperature and humidity of the room must be suitable for comfortable work. The offices in the school do not have air conditioners, but the temperature is maintained by natural ventilation in summer and in winter by conventional heating with radiators. They are located on the west side of the road so the temperature is comfortable in summer because the sun is staying on the other side of the building during office hours. In winter, the temperature is maintained at approx. 25 ° C with a radiator in every office. There is plenty of light in the offices as they have both natural and artificial lighting. Each office has one glass wall so the daylight makes them bright enough. There are adjustable curtains at the windows which let sufficient amount of light in the offices.

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http://www.fer.unizg.hr/_download/repository/05-ErgonomijaRadnogProstora%5B2%5D.pdf 22.07.2013. Bsd, http://www.bsd.hr/novosti/80-visa-nagradna-igra-koristite--svidjet-ce-vam-se (accessed 05.07.2013.)

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Figure 13. Natural light in the offices

Figure 14. Artificial light in the offices

In addition to natural light, the offices also have artificial light sources - fluorescent lamps. In every office there are four lamps. Each lamp has 4 neon lamps and associated mirrors to increase brightness.

3.4. Ergonomics of the equipment in the offices Office equipment consists of a complete computer hardware and the example below shows whether it meets the ergonomic conditions. Ergonomski standards that define good ergonomic monitors, keyboards, mouse devices and other computer equipment are described in the IT classroom. Computers in the offices should also follow the same ergonomic conditions. It can be concluded that the office equipment in the school meets ergonomic standards. Both LCD and cathode ray (CRT) monitors are used. They are not turned directly to the light source in any office, and have non-reflecting "antiglare" screens. They have an adjustable height and angle, and the possibility to set the picture (brightness, contrast, etc.). Monitors are placed at the appropriate distance from the workers. Figure 15. A computer monitor in the school offices

Figure 16. A keyboard in the school offices

It can be said that the keyboards and the mouse devices also meet ergonomic standards. The keyboards are still better ergonomically designed than those in the computer classroom. These keyboards have wrist pads, the keys are ergonomically designed to fit your fingers better when you press (have the concave surface and are thin). The mouse devices are almost the same as in the computer classroom. They are located at the same level and the worker has enough space when using them.

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4. RESEARCH RESULTS The survey sample included 45 students (2 classes of the computer science program) who answered questions about ergonomics and working conditions at the computer in the computer classroom. 13 of 45 students, or 29% were female, while 32 students or 71% were male. 11 questions were asked in this survey. The first question that was posed to respondents was: Have you heard of the concept of ergonomics? Taken that these are high school students, we can be satisfied with the aswer because 41 student or 91% responded that they had heard of the term ergonomics. Only 4 students had never heard of this term. The second question in the questionnaire was: Do you know what conditions should be provided for comfortable work at a computer? 31 students responded to know what the criteria were, while 14 students did not know what conditions should be provided for comfortable work at a computer. The third question that was posed to respondents was the following: Are you satisfied with your work space when working at a computer in the computer classroom? 39 students said they were satisfied with the work area, while 6 students or 13% were not satisfied with their workspace while working at the computer. The fourth question is related to the health problems. Specifically, respondents were asked whether they felt any health problems after prolonged work at the computer in the computer classroom. 37 students, or 82% of them responded that they did not feel any health problems, while 18% of students said they felt some health problems. Most students feel difficulty with their back (50% of them), with their wrists, elbows and shoulders 25%, and with the eyes also 25%. No one of the respondents felt any problems with their feet. In the sixth question, respondents were supposed to evaluate the ergonomics of the desk in the computer classroom. Most of the respondents assessed the desk as very good (49% of them), a grade good was given by 24% of respondents, a grade insufficient by 11% of the respondents, sufficient by 9% of respondents, while excellent was given only by 7% of the surveyed students. As for the comfort of the chairs in the computer classroom, 31% of respondents gave a rating of excellent, 20% very good, 11% insufficient, 11% sufficient, while the grade excellent was given only by 7% students. The eighth question in the questionnaire was about the computer in the computer classroom. Respondents had to score 1 to 5 for the computer. Only 9% of respondents gave the grade excellent i.e. 5 to the computer in the classroom. 4% of respondents gave the grade insufficient i.e. 1, sufficient i.e. 2 was given by 18% of the respondents, the assessment very good i.e. 4 by 20% of respondents, while good i.e. 3 was given by 49% of the surveyed students. In the nineth question, the students could express their satisfaction or dissatisfaction with the lighting in the computer classroom. 56% of students were satisfied with the lighting, very satisfied 7%, 4% very dissatisfied, dissatisfied 4%, while 24% of respondents believes that the lighting is good, but could be better. The tenth question was about the external noise in the computer classroom. 20% of respondents were very satisfied with the level of noise, 47% were satisfied, 4% were dissatisfied, while 29% of respondents assessed the level of the noise in the computer classroom as good, but it could be less. The last question in the questionnaire related to the satisfaction with the climate (temperature, humidity, ventilation) in the computer classroom. 47% of respondents were satisfied, 31% very satisfied, 13% of respondents believed that it was good, but it could be better, 7% of respondents were dissatisfied while 2% or 1 student was very dissatisfied with the climate.

CONCLUSION From the experience of developed countries, which have shown that healthy and happy workers give better business results, we can conclude that the health of our employees is very important. Therefore, ergonomics must continue to develop and give us constantly new standards and norms for office equipment and environment in order to have a satisfied worker with no medical conditions caused by its job. Everything that applies to employees, applies to students in schools as well. Students in schools spend a part of their time at computers so there should be provided better working conditions. These are young people who are still in the phase of development which should not be put at risk due to poor or low quality equipment or working environment. After analyzing the school premises it was found out that the best room temperature for work is between -20 째 C and 25 째 C, the room should have good lighting and curtains on the windows. As far as the equipment is concerned, the school should have at least in the IT classrooms adequate chairs, desks, also ergonomic keyboards and mice. From the analysis of the computer classroom, one can conclude that the school provides satisfactory conditions for students working at the computer. The school holds to the prescribed norms related to air temperature, ensures good microclimatic conditions in the classrooms and the offices. In addition, the equipment of the school is well above average. Every workplace has an LCD screen that is much better than the conventional cathode, the CPUs are silent and do not provide a lot of noise, and the working environment is satisfactory. Of course, there are some disadvantages (e.g. bad chairs, lack of window cutains or better keyboards), but one should take into account the financial side of the story. Unfortunately, good quality equipment is much more expensive than the regular one. For this reason, we can understand the occasional flaws in the ergonomics of the school workspace. These disadvantages should be taken care of by the school in the near future and it should be worked on correcting these identified deficiencies. Unfortunately, money is the problem to most the schools and that is why these deficiencies occur in the ergonomics of the workspace and the equipment. Development of ergonomics will surely change

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standards for equipment and working environment and this school will be able to follow them if the above mentioned deficiencies get corrected in the shortest possible time. Among other things, the development of ergonomics significantly affects the development of new technologies, new equipment, new programs, devices, etc. At the present time, the speed of development is growing rapidly and it is difficult to monitor such developments and such changes. Finally, we wish to emphasize that "Our health is in our hands" and that the principals and founders of the schools, and the Ministry of Science and Technology will understand the importance of good ergonomic conditions for good work of students and will ensure quality work at the computer as well as a comfortable stay at school during classes. LITERATURE 1.

Belt, D. (2001): Proverbs shine light on ergonomics, J. Calif Dent Assoc, 29 (7), str. 478-480

Europska agencija za sigurnost i zdravlje na radu, https://osha.europa.eu/fop/croatia/hr/publikacije-1/e-fact-folder/e-fact13pdf

Hip, O. (2009): Utjecaj informacijske tehnologije na stres u organizaciji, doktorska disertacija, Fakultet organizacije i informatike, Varaždin.

Kroewar, K.H.E., Grandjean, E: (1999) Prilagođavanje rada čovjeku, ekonomski priručnik, stručna redakacija prof. dr.sc. Ilija Manenica, Naklada Slap, Udžbenici Sveučilišta u Splitu, Split

Makhbul, Z. M., Durrishah, I., Rani, M.R.A.(2007): Ergonomics design on the work stress outcomes, Jurnal Kemanusiaan bilten 9, University of Malaysia, January, str. 51.

Mikšić, D.(1997): Uvod u ergonomiju, Fakultet strojarstva i brodogradnje, Zagreb.

Poredoš, D., Kovač, M. (2004): Stres i mobbing na radnom mjestu, Kriminologija i socijalna integracija, br.12, str. 65

Pravilnik o sigurnosti i zaštiti zdravlja pri radu s računalom, Narodne novine, br. 69/05.

Radečić, M. (2011): Ergonomija na radnom mjestu zdravtsvenih djelatnika, Sveučilište u Zagrebu, Medicinski fakultet, diplomski rad, Zagreb, str. 8.

10. Salvendy, G.(2013): Handbook of Human Factors and Ergonomics, Kindle Edition,4th Edition, Jon Wiley Sons, New Jersey 11. Tadin, V.(2010): Ergonomija, sigurnost i prevencija pri projektiranju radnog mjesta na računalu, Elementa Laborum Standard d.o.o., Zagreb – Kaštela, str. 11. 12. Telebec, S.(2008): Računalo i zdravlje, Zavod za istraživanje i razvoj sigurnosti, Zagreb, 2008. 13. Verhaert, V., B. Haex, et al. (2011). "Ergonomics in bed design: the effect of spinal alignment on sleep parameters," Ergonomics 54(2): 169-178 14. Žilić, D.(2012): Radni prostor i ergonomija srednje tehničke škole, diplomski rad, Tehničko veleučilište u Zagrebu, Zagreb, str. 19. DETAILS ABOUT AUTHORS: DAVOR ŽILIĆ STUDENT AT POLYTECHNIC SPECIALIST GRADUATE STUDY OF ZAGREB zilic.davor@gmail.com OLIVER HIP PH.D, HIGH SCHOOL POŽEGA, OSJEČKA 33, 34000 POŽEGA e-mail: oliver.hip@po.t-com.hr ROBERT IDLBEK PH.D, UNIVERSITY OF APPLIED SCIENCES IN POŽEGA, VUKOVARSKA 17, 34000 POŽEGA e-mail: ridlbek@vup.hr

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NEW CONCEPTS OF BRAND MANAGEMENT – PRIVATE LABELS STJEPAN DVORSKI DOMAGOJ KOPREK

ABSTRACT

Contrary to the classic concepts of brand management, which equalizes the brand owner and the manufacturer, the new concepts of brand management, which include the private labels, make a difference between the brand owner and the manufacturer. The term “private labels” refers to the brands owned by another person (intermediary), which engage the manufacturers to make the products according to their specifications, under a certain private label. The private labels are usually related to the generic products and price-sensitive market segments, in which the relation between the investment and the profit plays the key role in the process of perception and decision about buying of the product. The intense growth of the chain stores, especially those which develop the strategy of price leadership, generates the growth and development of the private labels. The domestic chain stores follow the developmental trend, so that the number of the private labels in Croatia has multiplied in the last two years, especially in the segment of food industry. The increase of the complexity of the products and strengthening of the image of the private labels is an important baseline of the turn from the basic concepts of the private labels (lower price – lower quality). The control of the quality, high demands in the sense of technology and market trends direct the development of the private label toward the production brands, both in the sense of quality and the price. At the same time, because of the reduction of the space on the store shelves which is the result of spreading of the private labels, the production brands were forced to change the strategy of business and to become subordinate to the success of the private labels. The research in this paper, which was based upon the interviews with the experts, supports the thesis about the importance of the private labels for the growth and development of the society. The development of the private labels is an extremely quick and demanding category, which in the last few years almost nullified the difference in the technical and technological quality of the product in comparison with the production brands. This is the feature which has the strongest impact on the increase of the pace of the developmental cycles of the companies, and encourages the invention and differentiation of the future production assortment. Simultaneously, the image of private labels is quickly reaching the critical limit, above which it will be hard to defend the higher added value of the established brand. The strategic dilemma of the manufacturing companies related to the private labels is additionally sensitized by the strengthening of the partner relationship and the cooperation with the chain stores; in this, the establishing of the connections is the important basis for the further growth and development of the companies. The production for the private labels is the baseline of the contemporary brand management, which, with the consistent implementation and strategic alliances with the chain stores, represents the sustainable competitive advantage for all parties included in this relationship. KEYWORDS: Brand management, Private label, Strategic alliances

1. INTRODUCTION The development of the global market infrastructure has acted as the main factor in brand expansion. The global and regional media have provided simple, economical and efficient base for brand advertisement, and the internationalization of the wholesale and retail sale has encouraged their development. Chain stores and the salesmen in general have oriented out of the national boundaries, which has contributed to the global development of the brands. Strong growth of the chain stores, especially those which are developed through the strategy of the cost leadership - Lidl, Aldi, Kaufland, Tesco etc. – generates the growth and development of the private brands. Domestic chain stores follow the developmental trends, so that recently, the number of the private brands has multiplied in Croatia, especially in the segment of the food industry. The increase of the product complexity and strengthtening of the private brand images is a simple guideline for the turn from the basic concept of the private brands (lower price – lower quality). The control of the quality, high demands in the sense of technology and market trends direct the development of the private label toward the production brands, both in the sense of quality and the price. At the same time, because of the reduction of the space on the store shelves which is the result of spreading of the private labels, the production brands were forced to change the strategy of business and to become subordinate to the success of the private labels. The clear positioning of the brand is the sign of the chosen strategy, in which the emphasis is always made on the clear, recognizable and strong image of the brand. (Esch, F.-R., 2002.,pp. 88.).

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2. INSIGHTS ABOUT THE INFLUENCE AND THE EXPANSION OF THE PRIVATE BRANDS The empiric studies have shown that the consumers evaluate differently the dimensions of the quality, which makes the quality the multi-dimensional category and the increasingly important factor of success of the private brands (Brucks, M., Zeithaml, V.A., Naylor, G., 2000., pp. 373.). This also means it is inappropriate to talk about the total quality of the product, whose scope is too broad for the quality evaluation of the consumers' perception oft the quality. The authors list three basic characterictics of the quality dimension: searching, experience and trust. Figure 1. Conceptual model of the quality perception

Source: Brucks, M., Zeithaml, V. A., Naylor, G., 2000., pp. 363.

An important goal of managing (private) brands is generating the faithfulness of the consumers, which is based upon the achieving of the high level of consumer satisfaction. Only under certain conditions does the consumer base his decision process only upon the brand. In other cases the decision process is based upon other factors which make the brand image (Keller, K.L., 1998., pp. 50.). The level of the brand recognition, and above all, its image, are the basic preconditions for the market success of a brand. (Esch, F.-R., 2003., pp. 73.). The researches have shown that the increasing number of domestic consumers (65%) consider the sales brands to be the same as the production brands, i.e. there are fewer of those who think that the private brands are worse that the production brands(31%), so the number of consumers who usually buy the sales brands is increasing (43%) (the research was conducted in Croatia by the Ipsos Puls agency in 2013.)1 The center for the market research Gfk has conducted a similar research in 2012. It has shown that 76% of the citizens are buying private (sales) brands, and 8% of them think about it in the future.2 The results of this research show that 59,5% of the respondents think that the private brand quality is equal to the production brand quality, which only increases the importance of the private brands in the future consumption. The same source sates that the estimation of the share of private brands in Croatian market is cca 15% in 2012.3. The determinants of the private brands success are, as a rule, related to the category of products or activities characterized by the high profit rate and/or weak presence of the strong national production brands (Vranešević, T., 2007., pp 202). Other factors of success are the reduction of the technical and technological differences in the quality of the product, inadequate efficiency of the traditional marketing instruments, constant increase of the negotiating power of the intermediates (chain stores), erosion of the market values of the production brands, significant shifts in the image and perception of the private brands by the consumers, as well as the general economic conditions in the state of recession or stagnation of the market (Vranešević, T., 2007., pp 203). All the above mentioned determinants of the success of the private brands have significant influence on the adaptation of the strategy of the manufacturers and on the gradual turning toward the private brand with the goal of ensuring the market survival. On the other hand, from the viewpoint of the brand owner, the importance of the private brands is based upon the improvement of image and perception by the consumers, upon the control of the price formation and larger profit, upon the 1 2 3

http://www.poslovni.hr/hrvatska/raste-popularnost-trgovackih-marki-229433 (accessed 20.06.2013.) http://www.poslovni.hr/domace-kompanije/trgovacke-marke-drze-15-posto-trzista-potrosacima-najbolji-k-plus-i-konzum-215043 (accessed 20.06.2013.) http://www.poslovni.hr/domace-kompanije/trgovacke-marke-drze-15-posto-trzista-potrosacima-najbolji-k-plus-i-konzum-215043(accessed 20.06.2013.)

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increase of the negotiating power and the loyalty of the consumers, as well as upon the building of the sustainable advantage in relation to the competition (Vranešević, T., 2007., pp 203). The last phase of the development of private brands, characterized by the equalization of the quality and price with the production brands, is present in the recent years in Croatia; also, the strategies of the chain stores are focused upon the attempts of downward vertical integration. In such way, the chain stores (intermediates) place the manufacturers of the strategically important products under their own identity, and their market identity is lost. Although it is often hard to determine the differences in quality between the private and the production brands, they are significantly different in the process of building the brand value. In such manner, the production emphasis is made on the product, while in the chain stores the emphasis is on the „store shelf“; furthermore, the manufacturers promote the products through the traditional advertising activities, while the chain stores emphasize the importance of the action sales and the experience with the product and the store (Vranešević, T., 2007., pp. 208). The important strategic decision of the production companies related to the production for the private brands is related to the permanent sexpansion of the assortment of the private brands and the reduction of the market share of production brands. Such decision signifies the pivotal point in the further development of the company, but also the danger of the total loss of market identity. Croatia is following the contemporary global trends, especially in the food industry, where the inquiries of the chain stores for the production of the products under the private brands are more and more often, and the share of the private brands is strongly increasing. Also, the production under the private brands enables the production companies to use optimally their free production capacities, or to annul them totally, which results in better management of the company costs. In short terms, the usage of the surplus of the production capacities is a right decision of the company. Further advantages of the production for the private brands are (Vranešević, T., 2007., pp 209.): • Disabling the production of the direct competitors for the private brands • Strenghtening of the partner relations with the chain stores • Specialization for certain areas (production) and use of the partner's comparative advantages • Low costs of development, and the risk of the market success of the private brand • Development of the know-how By the development of the private brands, the low price ceases to be the primary feature of the private brands, because their quality is gradually equalized with the production brands. Such concept of the private brands endangers the existence of the production brands. The disadvantages of the production for the private brands are: (Vranešević, T., 2007., pp 210.): • Long-term endangering of the market position of the production brand • Risk of erosion and serious debasement of the image and reputation of the production brand • Necessity of change of the concept of production brand management The success of the private brands, with the simultaneous reduction of the market space for the production brands, leads to reduction of the strategic options for the production dompanies, as well as to the necessary strategic actions. The strategic responses to the problem of the private brands, viewed from the viewpoint of the producers, are leaning on the permanent increase of the product differentiation through the constant innovations. Also, an important component of the success of the production brands is the investment in the perceived value of the products, the encouragement of the emotions of the consumers, but also the reduction of the price gap between the private and the production brands. Private brands are globally holding cca 18% of the total sales, according to the recent data of the renowned agency for market research - ACNielsen. The trends of growth and development of the private brands on EU market are similar to the Croatian trend – for example, France, where, according to the research of GfK Roper Reports Worldwide, as much as 57% of the respondents would exchange some branded product with its substitute under the sale brand.4 Because of the arrival of foreign discount companies in Croatia, the strenghtening of the share of private brands is to be expected. In relation to EU, where the share of the private brands is as much as 23%, and includes 17 markets with the growth rate of 4% at the annual level, Croatia shows similar trends of growth and development. The research conducted in food industry, based upon the interview with the experts, has supported the thesis about the importance of the private brands for the development and growth of the society. The experts emphasize the fact that the development of the private brands is an extremely fast and demanding category, which has, in the last five yeasrs, almost annuled the difference in the technical and technological quality of the products in comparison to the production (established) brands. This is the feature 4

GfK Roper Reports Worldwide - http://www.gfk.hr/public_relations/press/press_articles/005662/index.hr.html (accessed 20.06.2013.)

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which impacts the increase of the pace of developmental cycles of a company, if we are talking about the established production brand, and encourages the inventiveness and differentiation of the future production assortment. Simultaneously, the image of the private brands is quickly reaching the critical limit, above which it would be difficult to defend the higher additonal value of the established brand. The opinion of the experts is that the established brand, for which the premium price is the largest burden in the times of recession, has to provide the added value and sympathies over and over again to keep the market position. The strategic dilemma of the production companies related to the private brands is additionally sensibilized by the strengthening of the partner relations and cooperation with the chain stores. In this, the experts are of opinion that the connecting with the sales companies is the important base for the further growth and development of the companies. The experts emphasize that, depending upon the significance of the product for the merchant, as well as upon the specific features of the industry in which the producer is competing (consolidated or unconsolidated etc), it is possible to achieve the monopoly position on the shelf of the certain chain store with the production and private brand. This simultaneously disables the approach of the competition products to the distribution channels, but also impacts the ratio of forces in the industry in positive manner. The control of the market relations within the industry is an important determinant of strengthening of the market share, but the experts point to the possible erosion of prices, if the relations within the industry deteriorate more severely. The above mentioned situation reflects as the price war, which additionaly presses the competitive ability of the company, and this is an important determinant of the EU market.

CONCLUSION An important guideline of the private brands, in the experts' opinion, lies in the fact that the production for the private brands is „free“ of the additional pricing in the company, because the intermediate (salesman) takes the risks of developing and brand sales. All the above mentioned is especially emphasized in the industries characterized by the short development processes, where the existing production equipment does not satisfy the standards oft he new production assortment, and it is usable for the private brands. The decision about the production for the private brands is an important decision for the companies; after that, certain possibility of gradual decrease of the production brand follows. The experts are of opinion that the decision of a chain store about the introduction of the private brands is only the beginning, which will be followed by other market competitors, and which, in the end, most often leads to the reduction of the market share of own (production) brand. This endangers the future of producer's own brand and forces the company to be inventive and to make additional costs to improve the differentiation of the new production programs. It is important to emphasize that the private brands have a future, which is also forecasted by the significant increase of their market share, so the experts are of opinion that the adjustment of the company and the production for the intermediates is an important guideline of the growth and development. Based upon the above mentioned, a conclusion can be made that the production for the private brands is a guideline of the modern brand management, which, along with the consistent implementation and the strategic connection with the chain stores, represents the sustainable competitive advantage for all the participants in the chain. LITERATURE 1.

Brucks, M., Zeithaml, V. A., Naylor, G. (2000.) Price and Brand Name As Indicators of Quality Dimensions for Consumer Durables, Journal of the Academy of Marketing Science. 2000., 28., pp. 359.

Esch, F., R. (2002.) Markenführung, die auch an der Börse überzeugt?, Markenartikel, 2002., pp. 80.-89.

Esch, F.-R. (2003.) Strategie und Technik der Markenführung, München, 2003.

Keller, K. L. (1998.) Strategic Brand Management: Building, Measuring, and Managing BrandEquity, New Jersey, 1998.

GfK Croatia - http://www.gfh.hr GfK Roper Reports Worldwide - http://www.gfk.hr/public_relations/press/press_articles/005662/index.hr.html (accessed 20.6.2013.)

Poslovni.hr - http://www.poslovni.hr/hrvatska/raste-popularnost-trgovackih-marki-229433 (accessed 20.6.2013.)

Poslovni.hr - http://www.poslovni.hr/domace-kompanije/trgovacke-marke-drze-15-posto-trzista-potrosacima-najbolji-k-plus-i-konzum-215043 (accessed 20/6/2013)

Vranešević, T. (2007.) Upravljanje markama (Brand Management), Accent, Zagreb, 2007.

DETAILS ABOUT AUTHORS: STJEPAN DVORSKI, PROFESSOR, FACULTY OF ORGANIZATION AND INFORMATICS, UNIVERSITY OF ZAGREB, CROATIA stjepan.dvorski@foi.hr DOMAGOJ KOPREK, CEO, PREHRANA D.O.O., VARAŽDIN, CROATIA domagoj.koprek@vz.htnet.hr

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BRANDS AND BRAND MANAGEMENT PAVAO VRANEŠEVIĆ

ABSTRACT

Brands are the most important tools in marketing; they represent identity and image of a company. Their rise is not a recent phenomenon, but today they have an essential role in business. The reason for that is the strong image they call up in consumers´ minds and value they add to consumers but also producers. For one to introduce brand in the market, it is necessary to establish adequate brand strategy which then can bring lot of advantages to the company. This brand strategy should be integrated in all levels of business. Here we talk about branding as an integral part in the success of the brand. Once this is settled, which position the brand will take or takes is the next biggest challenge. Obviously, brand can be managed in many ways, but the most important thing is to establish a meaning of the brand that is relevant and valuable to consumers. Creating the image of the brand that stands out certainly help achieve that. However, brand development depends on strategic decision, more precisely whether the low-budget or high-budget route will be pursued. Finally, successful brands can have a social impact and benefit the society on the whole, in terms of more new products, more labor and stirring of the market. Brand management can achieve this. KEYWORDS: brands, brand management, strategic decisions, tools in marketing

1. INTRODUCTION The topic of this undergraduate paper is brand management; that is how companies make brands out of their products and themselves, how they develop them and manage them. Naturally, it also deals with brands itself and branding in general and, moreover, it discusses importance of brand management. Also, it provides an example of how brand can be expended from its core product to other products. The structure of undergraduate paper would be divided as follows: first part will be about brands, what brands are and how they developed; second part will explain in general what branding is; while third part will focus on brand management, main topic of this paper. This part will try to explain what brand management is all about and how brand can be successfully extended and developed. Finally, fourth part will briefly conclude on the matter of the importance of brands and brand management, after which I´ll even more briefly conclude the points of the whole paper.

2. ABOUT BRANDS As Wally Olins states in introduction of his book „On br@nd“, there are three elements that a company, business that is successful has: technical skills, financial know-how and the ability to sell, which actually translates into marketing skills. Also, one of these elements dominates the others depending on the company/business. Naturally, concerning the topic of my paper, I am interested in marketing element and those companies that focus on that element. Branding is after all a part of marketing, the essential part precisely, and what marketing is about in general is communicating the message of the brand as to bring awareness of the brand and attract customers. Olins himself acknowledges that; “In companies that seduce, the brand is focus of corporate life. Branding is everything.”1 He could not be more right. But before we explain why brand(s) and branding is so important, let me just introduce you to brands and how they developed. A brand can be name, term, symbol, sign, anything that makes a service or good recognizable and distinguishes it from all other services or goods. There are many definitions of brand, but most of them are similar and refer to a distinguishable and recognizable feature of certain company´s products. For example, Rik Riezebos in his book “Brand Management” defines brand as follows: “A brand is every sign that is capable of distinguishing the goods or services of a company.”2 The roots of brand can be traced to Greek and Roman times as in those times there existed markings applied to pieces of silver, sings or route descriptions to shops, and the signboards of shops which usually showed only pictures of products sold there due to high illiteracy among public. Yet the word in English, as Riezebos states, probably arose in the Middle Ages when three types of signs were used on products: craftsman, guild and city signs. However the functions of such signs were minimal and served more as methods of identification than anything else. First brands comparable to the todays brands started to appear and were introduced after the Middle Ages. Still, brand development was going at a very slow pace until the beginning of Industrial Revolution in 1830 – when a clear shift was spotted 1 2

Wally Olins (2003), On Br@and., Thames & Hudson, page 7 Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education, page 32

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– which lasted till 1870 and during which many brands were developed. The reasons behind the shift were increased urbanization and population density, mass production, improved manufacture, and increased availability of branded articles due to higher number of shops and groceries. Despite the shift, it will take some more time for marketing situation for branded articles to reach the level of present-day situation as in those times the power of distribution chain was in the hands of wholesale traders. Through their control over producers they very much determined the assortment of goods sold by groceries and due to that manufacturer-wholesaler relations weren´t great and most effective in that matter. Finally, things begin to change at the end of the 19th century as the power in distribution chain gradually shifted in the direction of manufacturer which triggered the trend of manufacturers determining themselves what will be produced and ultimately led to development of the manufacturer-owned brand. Riezebos writes: “Through the use of patents, manufacturers could claim all rights to a certain procedure or ingredient, whereby an optimal profit could be gained from certain investments. The shift in attention of manufacturers from production to product and sale resulted in, generally, qualitatively better products. Manufacturer-owned brands became uniquely marked products with a relatively high and constant quality and a constant weight (in contrast to the products of many grocers.)”3 Soon advertising became the very useful tool for manufacturers along with sales representatives in undermining the power of the wholesalers and attracting customers. Then brand portfolios were developed in response to realization of the importance of exploiting several brands in the same product class and with that followed introduction of first megabrands, such as Coca-Cola and Gillette. As response to these changes, the distributor-owned brand was also developed; at the beginning of the 20th century the first shops of still-existent grocers opened and retail trade began to rise. At long last, in 1980, came a realization among managers that established brands represent a certain value for the company which was the final stage of development of brands. This realization then quickly caught firm ground within marketing circles and for the first time “brand equity” was the term used to denote the value of a company´s brand. Brand was now seen as the most valuable possession of a company and remains to be seen so even today. Moreover, today brands, as Olins stresses out, “have become a social and cultural phenomenon with the most extraordinary strength and power”4, be it in sports, business, the arts or charities. Brands are created by marketers for companies to persuade, or seduce as Olins would say, customers into buying its products and they achieve this by “creating and projecting colourful but simple ideas clearly, again and again.”5 Their role is dual – they attract, persuade new customers (outsiders) to buy the products while at the same time they persuade the existing ones (insiders) to believe and to keep on buying the products. They come in many different shapes and sizes and they can have different characteristics but essentially it is what they represent that bears significance and value making them powerful, so-called brand value. This brand value can be derived from social status, self-actualization, material and biological needs, that is from three aspirational levels: the outer-directed, the inner-directed and the need-driven level. Olins writes: “The power of a brand derives from a curios mixture of how it performs and what it stands for. When a brands gets the mix right it makes us, the people who buy it, feel that it adds something to our idea of ourselves.”6 Ultimately, however, it is us, the customers, who are in control and who decide which brand will succeed and which will fail. Still, question remains, how comes that brands are such a strong presence and unique manifestation in ours today’s world? Answer is actually quite simple; Olins explains it clearly: “Simply because in a world that is bewildering in terms of competitive clamour, in which rational choice has become almost impossible, brands represent clarity, reassurance, consistency, status, membership – everything that enables human beings to help define themselves. Brands represent identity.”7

3. ABOUT BRANDING Branding as I already stated is the most important part of marketing, it´s integral element. For brand to succeed on the market it is not only enough to have a good brand on its own but also the branding behind it must be sound and efficient. The good brand, as mentioned, will need to satisfy following criteria: clear message, credibility, connection with the customers on emotional level, motivation to the buyers, establishment of user loyalty. Apart from that, in order to achieve success in branding the understanding of customers’ needs and wants is crucial. Without that success is unattainable. Ultimately, you want your potential customers, your prospects not only to choose you over the competition, but also to see you as “the only one that provides a solution to their problem.”8 That way you can make strong, constant presence Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education, page 4 Wally Olins (2003), On Br@and., Thames & Hudson, page 11 5 Wally Olins (2003), On Br@and., Thames & Hudson, adapted, page 14 6 Wally Olins (2003), On Br@and., Thames & Hudson, adapted, page 16 7 Wally Olins (2003), On Br@and., Thames & Hudson, adapted, page 27 8 http://marketing.about.com/cs/brandmktg/a/whatisbranding.htm, (24.9.2013.) 3 4

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in their minds in terms of your product(s) and form a firm loyalty of your customers. The way to do this is by establishing a brand strategy, after careful and thorough research, planning, and building up of your brand, which then you integrate through your business at all levels of public contact. Two parameters make grounds of a brand strategy: differentiation and added value. As Riezebos explains, by differentiation “a company tries to distinguish its product from that of the competition”9, meaning that competition is the motive and competitive advantage the goal. Added value, on the other hand, implies that a branded product has more value than the product per se. This added value can be attained either by product´s functional value, that is it´s physical/ tangible asset such as greater quality or longer durability, or by intangible aspect (non-functional value) such as meaning it has to a customer. However, Riezebos goes on to state that the value added by the brand is “often based on the differentiation basis of the product involved. The question of whether a product class is suitable for a brand strategy at all, should therefore primarily be translated into the question of whether the product in question is differentiable in the first place.”10 For sure, choosing and setting up the right brand strategy is probably the most difficult step in marketing process and the biggest challenge for marketers, but advantages of having a right brand strategy make it all worthwhile. Firstly, there are financial advantages, as in the long run the rewards are greater, even much greater, than costs. Reason is that after brand catches ground on the market among consumers - which certainly can take a while - it tends to produce higher sales hence higher profits. Of course advertising here plays a huge role. Moreover, despite high costs in the short run, higher sales in the long run can allow producer to spread the fixed costs over several units, thus allowing economies of scale, which can be achieved even in media costs. Once the brand becomes recognizable, popular producers can turn this in their favor by increasing the price. Also, this means that there will be a reasonably constant demand for the branded product and in that regards brand will serve as a guarantee of future income. Secondly, there are strategic advantages of a brand strategy. As it is very well known established brands have relatively large and stable market share which makes harder for new competitors to enter the market, creating certain barrier. After all, buying habits are not easily changed. In addition to that, company with a clear brand strategy is less dependent in relation to trade – consumers demand that branded product(s) be placed on the shelves of retail shops. This makes possible for brand owners, producers, to be directly connected with its customers, while on the other hand it makes retailers sell those product(s) (if they want to earn) even if that means accepting lower trade margin. More importantly, companies with successful and strong branded products or corporate brand attract more workers as people prefer to work for such companies, making it easier to find new workers or replacements while also building on overall well-being of both the company and society. Finally, management advantages can be also derived from brand strategy. Successful brand, for start, can much easily penetrate into different markets than is the case with product without brand strategy behind it. A larger market share can be reached either through global branding or through extension/endorsement. The difference between endorsement and extension is rather straightforward. Extension implies that a new product is introduced with the same name as the name of the product already sold by a company. Actually, what happens is company makes an extension to already existing product or develops new product which is related to the original product in some way (example: Nivea is brand name used for many personal care products). The new product is called “extended product” while original product is called “parent product” and depending on the distance between them there can be line, brand or concept extension. Line extension translates into parent and extended product belonging to the same product class, as in above-mentioned example; under brand extension parent and extended product belong to different product classes but the same type of product (example: Dr.Martens which beside shoes sells other clothes as well), while concept extension is evident in brand being used for different types of product (best example here would be Virgin). Endorsement, on the other hand, implies that although all products of a company are branded with corporate brand name, each product has its own unique name. Lastly, successful brand with successful brand strategy can more easily be spread and exploited on an international market through global branding which allows for risk to be diversified and stronger strategic position to be reached. Choosing to follow brand strategy instead of product strategy brings a fundamental change to company policy after which one of the first choices a manager faces is how to position the brand in relation to competitors. But that falls rather into brand management section. Important thing before that is to develop a right brand strategy and to incorporate brand values into company workers and staff, so-called internal branding. Without that brand can not carry the values that it supposed to have and therefore can not succeed in the market, as it is of utmost importance for brand to represent its own values at every level of business. Having that in mind, it is no great wonder that today so much emphasis is

9 10

Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education, pages 17-18 Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education, page 19

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put on branding and that branding idea has such wide scope of application. Olins writes, and with his words I would like to finish this section: “Branding has moved so far beyond its commercial origins that its impact is virtually immeasurable in social and cultural terms. It has spread into education, sport, fashion, travel, art, theatre, literature, the region, the nation and virtually everywhere else you can think of. Brands and the idea of branding are the most significant gifts that commerce has ever made to popular culture.”11

4. ABOUT BRAND MANAGEMENT Once the brand strategy is developed and brand is to be introduced, deciding how to position the brand on the market is the next biggest challenge for a marketer and one of first problems producers face. Positioning choice of the brand is determined along two lines: the relative price the branded product should have and attributes it has to offer, be it tangible or intangible. When it comes to choosing which price to charge one can choose among following strategies: low-cost, premium and prestige pricing strategy. Low-cost pricing strategy, which goes in line with penetration pricing for new products, relates to setting a lowest possible price in order to capture as large as possible share of the market. It is important to point here that brand attributes can not bring much to positioning of a brand, but only underline decent quality for the low price. (I can not help but mention here wholesaler chain Lidl which does this so perfectly.) Premium pricing strategy, on the other hand, is setting the price at high level, higher actually than product “deserves”, as to put in consumers´ minds that such products are of greater quality and better reputation. In this way they inspire greater desirability and thus capture their share of the market. Lastly there is prestige pricing strategy, which can be compared to price skimming for new products and corresponds to setting the high price similar to premium price level, but also includes certain exclusivity in it. This exclusivity does not come only from very high price and favorable brand attributes, such as extremely high quality, but also from branded product being meant for specific target group. Significance here is that both prestige and price have a meaningful role in positioning of the brand, in contrast to low-cost pricing strategy. From this it can be seen that in positioning, these two lines - the price of the branded product and brand attributes – move together. Moreover, when prestige and premium pricing strategy are concerned, branded product can succeed only if it has a differential advantage which demands large investments in marketing. Low-cost pricing strategy, however, does not demand such investments. Rather, focus here is put on identification; meaning branded product is most usually a “copy” of more successful and more highly positioned one with which branded product in question wants to be identified. If there is no such product, identification is impossible. Moving on to brand attributes, or intrinsic dimension of positioning, there are two approaches: functional approach and expressive approach. Functional approach is taken when brand is positioned in a way that emphasis is put on its intrinsic values, either instrumental or impressive aspects of them. Instrumental aspects of intrinsic values or attributes would be brand´s intrinsic attributes themselves, such as their contents or material they are made of, while impressive aspects would be its advantages or benefits. Here is also possible to position the brand as a prototype of the product class by emphasizing the distinguishing characteristics and/or to position the brand as a reaction to the product class, either redefining it (example: branding chocolate bonbons as praline) or opposing it (example: Seven-up which is positioned as “un-cola”) when distinguishing position in the market is hard to find. Although when distinguishing characteristics, attributes are concerned it is important to take note that other branded products could also take over these attributes and it is necessary then to have a patent for such a positioning to have sense. Moreover, another thing to bear in mind, is that this attribute(s) should be meaningful to consumers. Otherwise, is not worth to bother. Expressive approach, however, rests on the basis of experience the brand gives to consumers. To put it more clearly, it relies on psychosocial meaning of the brand to consumers, on emotions, wherein the brand name “communicates” with the consumers who then know what they are buying. And their decision then depends on what this brand represents and with which social group is it associated, thus they want to be associated with. It can be rightly concluded from this that in strongly matured, concentrated market in advertising and communication with the consumers, emphasis will mostly be put on emotions and experience, while in emerging markets attributes will have dominant role. In addition, besides price, the type of motivation of purchase also influences whether the functional or expressive approach to positioning of the brand will be applied. With negative purchasing motivation, where consumers use the brand in an “unpleasant” situation and thus want to reduce its negative aspects (example here would be: cleaning agents and detergents), functional approach will be applied, as this demands more attention to the distinguishing characteristics 11 12

Wally Olins(2003), On Br@and., Thames & Hudson, page 14 Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education, page 60

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of the branded product. Conversely, positive purchasing motivation requires expressive approach be applied. Reason is that consumers use branded product in a situation which, they feel, should bring positive experience – food that tastes good, piece of clothes that feels good and/or makes them recognizable, etc. Naturally, more investment in advertising is needed for products associated with negative situations. Also, it´s worth to note here that expressive approach is most suited for high price products, while functional approach is for low price products. Generally, what is important is for brand to be strongly positioned relative to other brands, either through differentiation or identification, and to be attractive enough from the start so to interest and capture a greater group of customers in the very beginning. Once these basic points are decided upon next thing to do is build up an intended meaning of a brand and this is done by deciding which value or values should the brand represent. In his book Riezebos describes a brand value as following “a state of mind that is important to consumers and that is used to decide the mission of a brand.”12 It determines both attitudes and behavior. Of course chosen value will not satisfy and appeal to everyone, but that is not the point anyway. People differ in many ways and that´s fine, the goal here is to reach to those consumers that brand is targeted at. One of prerequisites to achieve that is that chosen value(s) be incorporated and visible in everything related to the brand, from advertisement to packaging. “The first phase in choosing brand values is the choice of the aspirational level of the brand.” – Riezebos writes and, as I already mentioned in the section about brands, there are three aspirational levels. Need driven level is chosen when a brand relates to material and biological consumer needs, outer-directed when it relates to consumers´ relational needs and inner-directed when it relates to consumers´ self-actualization needs. The characteristics of the product and of the organization and competition should also all be taken into account. Again, it is not necessarily for one to limit himself to choosing only one level, as needs are often related. However, it is necessary to describe the ones on which product is focused. After the first phase is completed, next in line is picking a maximum of three values within chosen aspirational level(s).Finally, in third phase each of these values are to be translated to concrete attributes. “The central idea here is that anything that consumers may relate to the brand should signal the brand values chosen. This implies that the brand values form the basis of any decision that is being made within an organization.”13 Market research is here a helpful tool through which it can be learned how people see certain attributes and how its consequences they link with the chosen brand values. Often, these brand values make mission statements of the brand, which describe what the brand promises to consumers (this description is called brand preposition). Marketing communication delivers this message to consumers. Still, there is a possibility that consumers experience the brand identity differently than communicated by the marketing; their image of the brand does not coincide with the actual (desired) image of the brand. In book “Brand Management” brand image is described as follows: “A brand image is a subjective mental picture of a brand shared by a group of consumers.”14 Further are explained three components of brand images. “The content of a brand image refers to the associations a brand name may invoke. Some brands evoke many associations, while other brands evoke few. Associations can relate to both cognition (knowledge) and feelings, but also, for example, to smells and sounds. (…) How elaborate a brand image is, moreover, can also depend on the positioning choice. A functionally positioned brand will be expected to call up more concrete associations than an expressively positioned brand. (…) In principle, the favourability of a brand image can take on two values: negative and positive. The subject here is not the actual content of associations any more, but the “feeling” that consumers have in relation to every association (and then especially the direction of the feeling: negative or positive.) (…) The strength of a brand image is related to the extent to which an association is linked with the brand (“I associate Nivea with softness and with the colour blue; however, the association with softness is stronger.)”15 Reputation is the term binding these last two, strength and favorability, and brand´s reputation depends on its strong, positive associations it inspires. The essence here is to make the brand meaningful to consumers and, as already stated, it is marketing that makes this achievable. Ultimately it is brand-added value that makes the brand meaningful and valuable. Again, there are three components that help build up the brand value. Those are: perceived performance, psychosocial meaning and the level of brand-awareness. Perceived performance relates to material brand associations branded product has or calls up in the minds of the consumers; basically it is its perceived quality and perceived material differentiation. Psychosocial meaning is derived from immaterial brand associations as evaluated and perceived by consumers. Here it is good to note that it is not of so much importance the actual associations brand has, but perceived ones – if the actual ones are irrelevant to consumers, they will not add to brand value. Final component is brand awareness which can range from unawareness to top-of-mind awareness and the extent of it depends on level of marketing and purchasing frequency of the branded product.

Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education, page 62 Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education Page 63 15 Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education Page 63 and 64 16 Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education , Page 127 13 14

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In regards to brand development there are two routes to it: high-budget route and low-budget route. High-budget route focuses solely on advertising and since advertising is very costly hence the name. When following this route of brand development one should have an indication of the advertising budget needed and then in respect to that know if the budget necessary is available in the first place. The criteria on which one can determine this minimum advertising budget and if it is sensible to follow this route are costs related to a.) the reaching of the certain percentage of the target group, so-called task assigning method and b.) the market share one wishes to capture, so-called competition-oriented method. Low-budget route, on the other hand, focuses mainly on packaging and image transfer. Here packaging plays an active role, which means that packaging design calls up certain associations in consumers´ minds that are relevant to the branded product. Moreover, brand name plays also a significant role in this route but also in brand development in general as it can call up in consumers´ minds both the associations of the name itself and the associations that consumers link to the brand name in its use as a brand name. However, in low-budget route certain marketing communication still takes place (as it is inevitable), but is very limited. Usually it connotes below the line activities such as merchandising material. Instead of that it uses image transfer in which “one tries to carry the images that consumers have already developed around something over to something else” – that is, from source to target. These sources of image transfer can be the following: I.) Ingredient brand - brand used as a component of a branded product, can be advertised or become known by being incorporated into one well-known branded article (examples: Olean, Inel) II.) Qualification mark– valuation of a product as opposite to certificate which is valuation of the production process and also can be a source of image transfer; provided by independent institutions, comprises a certain promise whether of quality or social responsibility III.) Geographic image – related to the stereotypical images consumers often have of certain geographic area; ways to link a geographic image to a brand are: 1.) by referring directly to it in the brand name (ex. British Airway), 2.) by referring indirectly to it in the brand name (ex. Lamborghini), 3.) by clearly communicating through the label “Made in…”, 4.) using slogan beside the brand name (ex. “Ikea, the impossible store from Sweden”), 5.) by depicting a national symbol beside the brand name, like a national flag IV.) Co-branding – alliance between brands made clear to consumers where focus is on mutual advantages; there are three different forms of co-branding: 1.) On the product level where a new branded product is introduced with two brand names (ex. Häagen-Dazs with Baileys) 2.) On the distribution level where one branded product is sold in combination with the other 3.) On the communication level where one branded product is praised in another´s marketing communication Concerning the brand name - which I already stated is very important in brand development and its success - there are three brand-name strategies that can be followed. One of them is monolithic brand-name strategy where one brand name and one visual style in different product classes or groups are used, called usually the “family brand” (example for this strategy would be Phillips that makes light bulbs, CD players, television etc.). When two brand names are used for the same product, this being a joint brand name and an individual brand name for each product, dualithic brand-name strategy is followed. Two situations correspond to this strategy, either there is talk of product-line extension or endorsement is taking place. (Example would be Bacardi with beer brand Hatuey.) Lastly there remains a multilithic brand-name strategy where several brands with each its own name are exploited by a corporation (ex. Procter & Gamble). We distinguish here series brands which have similar brand names and one common syllable (ex. Nestlé with Nestea, Nesquick etc), brands with different names but similar or same logos (ex. Unilever with its international subsidiaries that produce ice cream: Ola in Netherlands, Eskimo in Hungary), and brands with entirely different names and logos. Decision on which of these strategies will be followed depends on the financial investment one is willing to make for a brand strategy and the financial (and strategic) advantages one aims, hopes to achieve with this investment. Choice of a brand name itself, however, depends on following four factors: the size of the marketing communication budget for the new brand, the relationship between brand and the product, the competitive position of the brand and the use of a brand name in another language area. First factor determines the extent to which a brand name acts as symbol or a signal, wherein symbol is appropriate for small budget case. When large marketing communication budget is available, a brand name that does not refer to the product (or the use experience associated with it) can be chosen, and when it is opposite brand name is much more important. The relationship between product and the brand is important in two aspects: the type of positioning and possible plan for extensions. In introduction of extensions the brand is greatly distanced from the product and thus a brand name not-referring to the

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product is sensible choice. In the type of positioning, though, there is a case where brand and the product should be distanced and non-referring brand name should be chosen (if brand is differentiated on the grounds of expressive approach) and a case where opposite holds (if brand is differentiated on functional grounds). In terms of competitive position of the brand, the choice of a brand name depends whether a branded product is based on identification strategy or differentiation strategy. If it is based on identification strategy it should be in tune with the leading brand it wants to be identified with, meaning anything but original, and if it is based on the differentiation strategy it should be strictly original. One last thing to note here is also to have in mind use of a brand name in different language areas which if not considered can prove tricky. It is enough to just take a look of the example of Nescafe and its meaning in Portuguese which is “not coffee.” Moreover, if this brand name is already used and protected in some other country this can cause juridical problem ending in law suits and loss of money (and possibly damaging the company´s image). Besides name of the brand, design also is important in brand development and is one of essential brand instruments. In the book “Brand Management” Kotler´s and Rath´s take on design is quoted: “Design creates corporate distinctiveness in an otherwise product and image-surfeited marketplace. It can create a personality… so it stands out… It communicates value to the customer, makes selection easier, informs and entertains.”17 Design is here used as a broad, general term that includes product design, packaging design, advertising design, corporate design, retail design and web design. It is related to all visually perceptible expressions of the company and the brand and can add value to them. We distinguish design as a management instrument and design as a brand instrument. As a management instrument it relates to all activities that “ensure that the visual identity of a brand is put to effective use in the achievement of the goals set out for the brand. (…) Design management can be seen as planning and management process that guides the implementation of design to help realise the organisational goals: `maximising the potential of design to benefit the corporation.´”18 However, as a brand instrument design is far more valuable. It can differentiate the product, create USP and rouse feelings of desire and interest; it can make qualities visible and persuade the consumers into buying. Four most important roles design can take are: 1.) Identification – brand and its owner become known, 2.) Differentiation – branded product stands out, 3.) Transfer of material brand values – through physical aspects design contributes to the perceived performance of the brand, 4.) Transfer of immaterial brand values – through visual expression design contributes to the psychosocial meaning of the brand In addition, design plays a role not just in the product, the packaging, the corporate design but also in the logo. Logo design, although others design elements also correspond to the brand identity, is the most important element as it has “a central place in the communication and presentation of the brand. (…) A logo can ensure a quick recognition of the brand and its design can bring certain associations to the mind.”19 Identification, differentiation, communication of brand values, attractiveness and familiarity are criteria for an apt and successful logo design. To conclude, design is along with the brand name and the brand image one of the foundations and essential elements of brand development.

5. IMPORTANCE OF BRANDS AND BRAND MANAGEMENT One of the definitions of a brand is that brand is an attempt in establishing and maintaining long-term relations between a company and its clients, in which the clients, the company but also the general public will have benefits. For this to be achieved brand management of a company owning the brand is responsible. Brand management thus should be viewed as a system which has that as its main goal. In this context a brand can be viewed as “mirror” though which all marketing (management) strategies and activities with this purpose are focused.20 Brand has important role not just in expressing characteristics of a product and reducing shopping risk in evaluation of products or services, but also in attracting and keeping customers. There is a general need to establish relations with customers due to great number of impulses experienced by consumers every day that can often leave them confused and brand provides just that. Brand management can help create differences against number of other products and in that way establish this ´special´ relation between consumers and the brand, which affects company´s overall wealth. Moreover, as brands have great role for its owners as they bring profit and value, they also, consequently, stir the market and economic developments in general. In support to this statement, there is report in accordance to PIMS study that company with brands launch more new products and invest more in research and development. Brands also have social impact. For instance, first McDonald´s opening in Croatia was an event that implied change of economic and political movements. The introduction of Mecca Cola served as an answer to perceived supremacy of Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education, page 128 Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education,, page 139 19 Tihomir Vranešević, Upravljanje markama, 2007, pg. 12, reference to source, adapted 20 Tihomir Vranešević, Upravljanje markama, 2007, pg. 18, reference to source, adapted 17 18

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American companies and American culture and way of life which shows how with brands not only market battles can be fought. Although similar product with similar elements of brand identities it send out completely opposite message as it was launched with the slogan “don´t drink stupid anymore, drink with trust”.21 According to Keller brands are for companies:22 • Instrument of identification for easier monitoring and managing • Instrument for legal protection of trademarks • Signal of quality for consumers • A means of enrichments of products with unique features • Source of competitive advantages • Source of profit

On the other hand brands for consumers mean:23 • Identification of product´s origin • Determining the responsibility of producer • Lowering of risk • Lowering of cost of looking for products • Promise, assurance or contract with the producer • Symbolical mean • Signal of quality

Branding the products helps companies monitor them while brands make strategic planning and determining the goals easier. On the other hand, they give customers signal of quality, safety and assurance helping them make their choice. They serve as identifications and as warrants that the producer will fulfill his promises. Once these promises are met, customers in turn give their trust to the brand in return. This then establishes costumer-producer (or customer-brand) relation based on expected and received value which facilitates brand management and market performance. The final effect goes in two correlated directions; brand influences the image of customer and image of customer influences the brand.

CONCLUSION Purpose of this paper was to provide insight into the world of brands and brand management. Certainly, much more can be said on the subject. Brand today is the most important asset of the company and value that it derives exceeds other values of a company. It is also most important tool in marketing, representing the identity itself. Its power lies in the image they call up in the minds of the consumers. This image is usually made by right brand management and sound marketing, but ultimately consumers decide which brand will succeed and which not and they can alter this image. Branding is elemental to the success of a brand. Before doing anything else brand strategy which will be pursued must be decided and integrated in all levels of business. This brand strategy relies on branded value which is added value a brand adds to the product and on differentiation. It is essential that everyone in a company “feels” the brand. Brand can be positioned in many different ways, but the two make grounds to all the other: identification and differentiation. Also it depends on price strategy, brand attributes and type of purchasing motivation. The most important thing is to build up a meaning of a brand relevant to consumers and to create the image of the brand that will stand out. Design can here play very important role, besides the brand name and the image. In brand development one can choose either low-budget route or high-budget route depending on strategic decisions. Finally, brands are important as they create value for both customers and the company/producer. They can have a social impact as well and help stir up the market. When brand is successful, society on the whole benefits. Brand management is a system through which this can be achieved.

LITERATURE/REFERENCES 1.

Wally Olins (2003), On Br@and., Thames & Hudson

Rik Riezebos with Bas Kist and Gert Kootstra (2003), Brand Management: A Theoretical and Practical Approach, Pearson Education

Tihomir Vranešević (2007), Upravljanje markama (Brand Management), Accent

Keller L.K (2003), Strategic Brand Management, Aprentice Hall

http://marketing.about.com/cs/brandmktg/a/whatisbranding.htm

DETAILS ABOUT AUTHOR: PAVAO VRANEŠEVIĆ STUDENT UNIVERSITY OF ZAGREB, FACULTY OF ECONOMICS AND BUSINESS ZAGREB pavo.vranesevic@yahoo.com 21 22

Tihomir Vranešević, Upravljanje markama, 2007, pgs. 19 and 20, reference to source: - Keller L.K., Strategic Brand Management, Aprentice Hall, 2003, pg 9 Tihomir Vranešević, Upravljanje markama, 2007, pgs. 19 and 20, reference to source: - Keller L.K., Strategic Brand Management, Aprentice Hall, 2003, pg 9

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LOCAL AND REGIONAL GOVERNMENT IN PROCESS OF THE REFORM ZVONKO NOVOSEL â&#x20AC;&#x201C; DOLNJAK

ABSTRACT

This paper discusses the development of Croatia's local and regional self-government in the past twenty years. Solutions for the organization and the model itself are associated with the European Charter of Local Self-Government, and are compared to the accepted model of the European local and regional self-governments. The paper also discusses the existing functions of the regional-county characters, with specific references to their authorities and duties undertaken. Furthermore, possible reforming models in the Republic of Croatia are also elaborated, and a comparison is given between some european models and trends in the context of regional self-government. KEYWORDS: local self-government, regional self-government, county, reforms, the European Charter of Local Self-Government

1. INTRODUCTION Researching necessary processes of the reform of Croatian local and regional authorities, the last few years, attracted the attention of the scientific and professional community. On this subject, they have been publishing articles, maintain professional and scientific meetings, which all of them point to the need to reform local and regional government. EU countries in terms of local and regional development, in its documents give a special status of territorial development programs, which allow rapid progress of local communities. By Croatian accession to the European Union, Croatia has adopted standards and processes of the European Community, and thereby accepted the obligation to harmonize local and regional policies with acquired practices of the European Union. Given the fact that the Republic of Croatia, through transitional transformation changed its economic system and the political and legal system, it is necessary to carry out the changes in terms of the political-administrative system at the local level.

2. CROATIAN BASIS OF LOCAL AND REGIONAL GOVERNMENT Croatian Parliament on 29 September 1997 accepted and ratified the European Charter of Local Self-Government. The Charter for the Republic of Croatia entered into force on 1 february 1998. Considering the Croatian government, as the division and that the legislative, executive and judicial branches provided limits constitutionally guaranteed right to local and regional government. Croatian Constitution in Art. 134 determines that the activities of local and regional importance are determined by law under the European Charter of Local Self-Government. European Charter of Local Self-Government imposes us three important legal constitution requires, on which to build and define local and regional governments. The requirements are based on the principle of subsidiarity, the application of general jurisdiction passwords and financial independence. The partition of work between the central and local government units is enforced by the password-general jurisdiction or the enumeration method. When using the method of enumeration, tasks that are the responsibility of local authorities should be explicitly specified by an operative part, while other tasks implies the jurisdiction of the central state authorities. Unlike the methods of enumeration, using the password of general jurisdiction believes that they are all local businesses, except those that were by an operative legislation part defined as those who belong to the central authorities. We can see a two opposing methods, where both have their shortcomings. Lack of application of passwords general jurisdiction does not go in favor of the poor units and reinforces the responsibility of broader units. In the method of numbering disadvantage is the complexity of the method, since for every possible lowering responsibilities to the local level must implement changes in the law. In order to be able to overcome the above disadvantages, a number of versions and transitional models has been created. For example, it is possible when using the password of general jurisdiction nonetheless specify some tasks that are required to perform in all local government units. The ARTICLE 19 Law on Local Self-Government stated: "Cities and municipalities in government jurisdiction dealing with issues of local importance which are directly related to the needs of citizens, not the Constitution or the law to bodies,

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especially activities related to: • Organization of settlements and housing, • Spatial and urban planning, • Municipal Corporation, • Childcare, • Social Welfare • Primary health care, • Nurture and primary education, • Culture, physical culture and sport, • Consumer protection, • The protection and improvement of the environment, • Fire and civil protection, traffic in their area and other activities in accordance with special laws. " The legislator,defining the scope of the municipalities and cities, fully Implemented general jurisdiction password since its application assumes that business, of whose performance of this unit is turned off, explicitly defined by the Constitution and the law. The organization of local government in Croatia in relation to the types of local government units, differs essentially only by degree of urbanization. The functioning of local government in Croatia amounts to legal shaping of cities and municipalities. Municipalities are established for a number of settlements that are natural, economic and social unit, connected by common interests of the inhabitants of these settlements. The city is considered a bigger place with at least 10,000 people, which represents urban, historical, natural, economic and social entity. The current law has made it possible that even without these conditions, a settlement could become a city for special reasons and specific meanings that can be historical, economic, transportation, etc. In carrying out the tasks, municipalities and cities enjoy a degree of autonomy, although in most cases the responsibility for planning, providing and financing public services is divided between the central, regional and local levels. Due to the practice of territorial development of the basic level of local government, the division of the municipalities and cities has become undefined in the law regarding certain criteria, and boils down to deciding stakeholder decision-making at its discretion. A large amount of units that have received city status aren't cities in terms of urban units, and can not have needs that have urban populated places or require some public services that would otherwise require cities. Local Government Act enabled the establishment of forms of local governments, which are defined as a form of citizen participation in local governance. They are established as local boards, municipal districts and city districts, and they have a certain territorial. They have their legal personality and they get elected at a special election every four years. Funding for the work of local boards are provided in the local budget. The county is local (regional governments) in the Republic of Croatia, whose area is a natural, historical, transport, economic, social and administrative unit, and is organized to carry out tasks of local (regional) interests. Croatian territory is divided into twenty counties and the city of Zagreb, while enjoying the status of the city and county. Counties are defined according to the political needs of the period when they were introduced, and not by the historical, expert or social criteria, as it should be, and because of the dire economic reality are not capable to sustain and develop the regional economy. The law that the Republic of Croatia, in accordance with the Constitution, determines the scope and jurisdiction of the county is the Law on Local and Regional (regional) government. Taking into account all the regulations governing the scope and functions of the county, is also an important practice that defines its scope. It's about jobs, the execution of the county require government bodies, and where the county typically appears as a service of central government bodies.

3. POSSIBLE CRITERIA IN THE REFORM OF LOCAL AND REGIONAL GOVERNMENT IN CROATIA Croatia at the end of the twentieth century was a centralized state and county primary function was to perform centralized within the state apparatus and comprehensively expand the scope of activities and the impact of state structures in civil society. Changes to the Constitution in 2000. year, allow the decentralization of certain functions. Regarding the implementation of the reform of local and regional government, necessarily should be kept only a portion of the present counties, and most of it should be restructured. Counties should be territoricly reformed

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without government and should function as a unit of public administration at the local level. Analyzing the current state administration offices in counties that are entirely organizational, financial and work separate from counties in local (regional) self-government, we see that there is no need for specific changes. Rationalization of operations and additional savings in the state administration are possible, even in a way that more currently existing units of various government bodies merge into a single government office. Within these organizations, services for citizens and business would be conducted in one place you would go to the benefit of service users. The direction of change is in the consolidation of the existing counties, because there is no doubt that for the current 20 counties there is no real need, and not making reasonable criteria for their survival. County consolidation would lead to strengthening the newly created unit in terms of a financial nature and terms of economic development and competitiveness of the economy. To implement the changes it is necessary to create a strategy of consolidation of regional units, which should answer important questions for future functions, finance, economy, development, relationship to the politics of the European Union, efficiency and effectiveness. The future of the region / county should be able to do organizationally and financially more demanding public affairs, especially the affairs of regional significance that can not be done small local units. Since the Republic of Croatia is a member of the European Union, it is important to look at the future of the reform and change processes within the local and regional governments in Croatia, especially as Croatia has claimed responsibility for pre-negotiations to make changes in accordance with the EU acquis. Local and regional governments in the period of the 1993rd until today, has undergone various changes, so today we have 126 towns and 429 municipalities, 20 counties and the City of Zagreb. From then until today, the unit had a patchy area of work, authority and responsibility. Local and regional government by the Constitution and laws of the Republic of Croatian received a significant role in the organization of public affairs and in the area of public utilities, zoning, education, encouraging economic development, etc. In performing these tasks municipalities, cities and counties were given the high degree of autonomy, with a delay that the responsibility for the planning and financing of public needs and services, should be distributed between the central, regional (regional) and local levels. Looking at the experiences of the EU countries with the processes of local government reforms , it is necessary to include the three key guidelines: functional decentralization - devolution of powers and responsibilities from central to lower levels of government; fiscal decentralization -transfer of appropriate funds for public powers to local and territorial (regional) selfgovernment and territorial reorganization - finding the optimal model of territorial organization of public services. Croatian Government in 2010 has announced the reform of local self-government with a task to design a model that would allow equal access and quality of public services in the whole territory of the Republic of Croatia. From the announced reform model we can read the goals and criteria that would be managed by the Government in implementing the reforms Specific objectives of the reform of local government include: • Strengthening of the administrative and financial capacity and autonomy of local and regional government, • Dissemination activities from authorities in local and regional government, • Strengthening the autonomy of local and regional governments in the planning, financing and delivery of services in accordance with the principle of subsidiarity, • Creating conditions for the transfer of certain operations within the jurisdiction of the central government to local and regional government (delegation) • Enhancing cooperation and coordination of central government and local and regional governments in the planning and implementation of local and regional importance, • Reducing the overall administrative costs of local government, • Rational channeling of funds supporting the central government local government • Strengthening local democracy and increasing participation of citizens in decision-making In the implementation of reforms and determining the appropriate territorial organization Government announces implementation of several criteria, such as: • Demographics (population, age structure, educational structure, the number of households, employment rate, etc.) • Geographical criteria (size and position, the size of settlements, transport links, etc.) • Economic / development criteria (development index, businesses, local entrepreneurial infrastructure, local projects, the degree of urbanization, roads, etc.) • nancial criteria (amount of income of local governments, the share of own resources in the local budget, the structure of expenditure and revenue, etc.) • Administrative criteria (organizational and administrative structure, decentralization of public services and utility companies, institutions), existing administrative capabilities of local governments, etc.).

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4. PROPOSED NEW ORGANIZATION OF LOCAL AND REGIONAL GOVERNMENT IN CROATIA BASED ON EUROPE EXPERIENCE Public management, which includes management by local and regional governments, in the entire democratic world is a significant segment of the development of democracy, economy and overall well-being in the future. At different times and different political and economic conditions, the advanced countries in the world adapt to the system of governance (and the system of local and regional government), towards the needs for high quality service delivery to citizens and businesses. Is it going to be centralized or decentralized model, depends on the will of the ruling political furniture, which according to their spheres of interest are modeling model system of government and public governance. All political ruling sets in Croatia point out as generally acceptable decentralized model, so in this case the new organization Croatian looked like this: • It is necessary to abolish the special status of certain categories of units (special state concern, mountainous areas, islands, local government grants budgets, etc), and fully implement the Law on Regional Development • Regional government should be organized at the regional level and the local level on monotype municipalities • Set up a maximum of five (5) regions, provided that none of them have less than 800,000 inhabitants, the region formed on the historical and functional criteria, and they might be: Central Croatia and Istria, Dalmatia, Slavonia and Zagreb region. The proposed division of the region in any case offers a variety of solutions, both in terms of the future seat of the region and the territory that would encompass the region. In any case, it is necessary to pay special attention to the delimitation of the area in central Croatia and wider Zagreb area. This question arises from the well-known reasons, the stronger economic development and other infrastructure in the area, which could be an impediment to the balanced development of other undeveloped parts to enter into such a region. Number of municipalities should be reduced to 130-150, taking into account that in them moving population 1500030000. City of Zagreb has to be harder decentralized on urban counties / districts, esspecialy in the execution of administrative public affairs and finance. Local governments should continue to take the development process of the areas of local government, which would be abolished, provided that it has legal personality and it participates in the distribution of public funds. Public administration should be organized at levels below the central and thus begin transferring performing set tasks government on local and regional units. Countries in the European Union last twenty years are developing models of regional development of its units, with an emphasis on partnership and concerted action of different stakeholders at different territorial levels. Local and regional units in the Republic of Croatia, due to new models of regional development, should necessarily accept the norms of behavior and prepare for the use of European Union structural funds. For this kind of proactive action is necessary to ensure the financial and human resources in local and regional self-government units.

CONCLUSION The current system of local and regional government should be reformed in terms of consolidation of regional and local government and enable an increase in their income and taking over part of the central public authorities. Further development of the reform of local and regional government in Croatia should be based on administrative science, experiences of the European Community, coordination and active involvement of the central state, county and local communities. DETAILS ABOUT AUTHOR: MR.SC. ZVONKO NOVOSEL – DOLNJAK GRADING INVEST D.O.O. zvonko@grading-invest.hr

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ABSTRACTS OF PRESENTED WORK WITHOUT FULL PAPERS

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I N T E R N AT I O N A L CO N F E R E N C E FO R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N ES S

ECONOMIC GROWTH PATHS IN EUROPE JANOS RECHNITZER TAMAS TOTH

ABSTRACT

As an initial state we suppose that there is in Europe different economic growth paths that can be identified along two dimensions the stage and growth of ecomonic performance. We have used the econometric analysis method for classifying the national economies that has given 4 different groups called the traditional developed EU member states, the transforming new EU member states, the mediterranen and the nordic countries. Each group has the own growth path determined by the economic performance and the rate of its growth. As a second stage we have tried to explain the economic performance (indicator: gross domestic product) with different input variables and changing them in order to achieve the highest explanatory power. As a result we have received 4 different groups with 4 own regression line that are able to give a forecast about the expected GDP in case of changing input factors. KEYWORDS: economic growth, paths, Europe, econometric analysis method, national economies DETAILS ABOUT AUTHORS: TAMAS TOTH PHD STUDENT tamas.toth@sze.hu PROF. DR. JANOS RECHNITZER UNIVERSITY PROFESSOR FOR BOTH AUTHORS: SZECHENYI UNIVERSITY GYOR, HUNGARY

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2013 M-SPHERE

HOW DID THE BULGARIAN BANKING SYSTEM COPE WITH THE GLOBAL FINANCIAL CRISIS DURING 2008-2012? A PANEL STUDY DIDAR ERDINÇ

ABSTRACT

The onset of the global financial crisis in late 2008 sent shock waves throughout emerging Europe, particularly Central and East European countries (CEECs) that experienced rapid yet unsustainable credit growth, financed through foreign dominated banking sectors during 2002–2008. In a similar state, Bulgarian banking sector remained vulnerable to a crisis-induced banking distress, and a credit crunch, reversing the previous trend of a credit boom. Amid a quickly unfolding global financial crisis, overexposed in risky credit financed through its Western European parents, most Bulgarian subsidiary banks experienced a surge in non-performing loans, liquidity shortages, and were shunned from access to wholesale borrowing markets during 2008-2010. Some weak banks were downgraded due to concerns over their insolvency and capital deficiency. A credit crunch ensued and preceded a recession induced drop in credit demand, complicating monetary policy options in a currency board environment. Based on a panel data analysis of thirty Bulgarian banks over the period 1999–2010, I assess the extent of the credit crunch and banking distress based on the empirical specifications of loan supply and various indicators of banking distress. I employ a dynamic panel analysis based on the generalized method of moments approach and find evidence that several indicators of banking fragility contributed to a crisis-induced credit crunch and raised the probability of banking distress since the advent of the crisis in 2008. Conservative supervision by the Bulgarian National Bank and its monetary policy response while maintaining a stable currency board served as a bulwark against potential banking failures and ensured financial and macroeconomic stability so far without resorting to International Monetary Fund funding. KEYWORDS: banking distress, credit crunch, transitional banking, panel data, GMM DETAILS ABOUT AUTHOR: DIDAR ERDINÇ ASSOCIATE PROFESSOR OF ECONOMICS AMERICAN UNIVERSITY IN BULGARIA BLAGOEVGRAD, BULGARIA didar@aubg.bg

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2013 M-SPHERE

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DIFFUSION OF INNOVATION: ADOPTION OF INNOVATIVE TOOLS FOR COMMUNICATING AND PRESENTING INFORMATION DINKO SVETIĆ ALEN DELIĆ IVA GREGUREC

ABSTRACT

Due to the fast pace industry of ICT and its market, where a product or service (or even a whole company) should be innovative, creative and distinguishable in order to survive, we are witnesses of new products and services emerging on a monthly basis. These new products or services often push older ones out of the market in a community (as did Skype with Windows Live Messenger among teenagers and students) relatively quickly, whereas others compete for the same market with an innovative approach, but still cannot truly make a mark that quickly (i.e. Prezi and Microsoft PowerPoint or Keynote for Mac). However, there are also some examples of using existing products and services for originally entirely unintended purposes. A good example of this is the usage of Facebook groups that students use to communicate with one another instead of using eLearning systems that are already specialized for that. In this paper, we summarize the theory of diffusion of innovation and investigate how students adopt new products and trends, at what rate and how does the diffusion process continue. We also provide some information as to why students adapt and adopt innovation. KEYWORDS: innovation, diffusion of innovation, communication, presentation DETAILS ABOUT AUTHORS: DINKO SVETIĆ STUDENT dinko.svetic@foi.hr ALEN DELIĆ STUDENT alen.delic@foi.hr IVA GREGUREC MA, ASSISTANT iva.gregurec@foi.hr FOR ALL AUTHORS UNIVERSITY OF ZAGREB FACULTY OF ORGANIZATION AND INFORMATICS VARAŽDIN, CROATIA

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2013 M-SPHERE

VALUES ORIENTATION IN LOGISTICS MANAGEMENT IN RUSSIA AND THE UKRAINE AND ITS IMPACT ON CORPORATE PERFORMANCE SAMO O. KOTNIK ELMAR WILHELM M. FÜRST

ABSTRACT

During the last decades, transition economies went through rough times. In many ways former “stars” among companies became either “poor dogs” or just “cash cows” lacking visions for further development. Short-term profit maximization was in the focus rather than sustainable management as most public or private investors solely aimed at maximum earnings per share instead of stability and long-term survival of the firm. In such environments, new business models and approaches are vital to maintain the pace of development and assure stability or further growth and to avoid distortions. Value orientation and managers’ commitment to sustainability has proven to be an important factor and even a crucial precondition in this respect. A company’s performance depends on the managers’ attitudes and leadership style as well as the values reflected in the managers’ actions and in corporate culture. The way this commitment is “transferred” to all management levels and communicated to employees is important in terms of long term sustainability. Building upon this evidence we address the question, whether corporate logistics can be a moderator as it ensures correct and on-time deliveries and therefore strongly influences customer satisfaction which is the primary source for sustainable corporate success. We therefore investigate, how management values influence logistics and logistics performance and how it can contribute to overall corporate performance? Our study focuses on the current perception of management values in Russia and Ukraine producing companies operating in both the B2B and B2C sectors. A particular focus is put on the companies’ transport and logistics functions in order to investigate their role within the functional chain of a company and its interrelationship with management values and the overall performance of the company. Using an online questionnaire based on the “Values Theory” by Shalom H. Schwartz a random survey has been conducted including questions on company performance, logistics management, corporate innovation and the competitive situation. Furthermore, several interviews were performed to strengthen and complement the respective findings. Parts of this study can be considered as replication of studies conducted in other settings and environments which helps to broaden evidence and to develop general models and theories. The results have strong impacts on both management theory and practice as the evidence gained can be incorporated into existing models and theories of the firm and improve management decisions in companies. KEYWORDS: values; logistics management, performance, Russia, Ukraine DETAILS ABOUT AUTHORS: SAMO O. KOTNIK RESEARCH ASSOCIATE WU VIENNA, INSTITUTE FOR TRANSPORT AND LOGISTICS MANAGEMENT NORDBERGSTRAßE 15, 1090 VIENNA, AUSTRIA samo.kotnik@wu.ac.at CLUSTER DIVISION MANAGER HEALTHCARE RUSSIA &CIS AND UKRAINE ECOLAB GMBH ERDBERGSTRASSE 29,1030 VIENNA, AUSTRIA samo.kotnik@ecolab.com ELMAR W.M. FÜRST ASSISTANT PROFESSOR WU VIENNA, INSTITUTE FOR TRANSPORT AND LOGISTICS MANAGEMENT NORDBERGSTRAßE 15, 1090 VIENNA, AUSTRIA elmar.fuerst@wu.ac.at

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D U B R O V N I K , C R O AT I A

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463

2013 M-SPHERE

I N T E R N AT I O N A L CO N F E R E N C E FO R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N ES S

PRIVACY ISSUES OF SOCIAL MEDIA: A MARKETING PERSPECTIVE CĂLIN VEGHEȘ MIHAI ORZAN CARMEN ACATRINEI DIANA DUGULAN

ABSTRACT

We live in an everchanging environment where new technologies and new techniques arrive constantly, some of them significantly impacting social behavior and, indirectly leading to paradigm shifts in economic approaches. Online social networks are becoming increasing presences in consumers’ habits and many of them base their opinions on information found online. As a result, companies need to include them in their branding and marketing research efforts. However, in many cases customers are less than thrilled when companies follow them in a web space that they perceive as private and personal. In this paper we present the opinions of Romanian consumers through the results of an exploratory study regarding the importance given to the protection of their personal space and information on the social networking websites they access. The results of the research show that as the time spent weekly on the social networking sites increases, members are more likely to offer their personal information to companies and they are more willing to be contacted with media messages online. KEYWORDS: privacy issues, social media, marketing perspective DETAILS ABOUT AUTHORS: CĂLIN VEGHEȘ ASSOCIATE PROFESSOR c_veghes@yahoo.com MIHAI ORZAN ASSISTANT PROFESSOR mihai.orzan@ase.ro CARMEN ACATRINEI ASSISTANT PROFESSOR carmen.acatrinei@gmail.com DIANA DUGULAN TEACHING ASSISTANT diana.dugulan@yahoo.com FOR ALL AUTHORS: ECONOMIC STUDIES UNIVERSITY OF BUCHAREST FACULTY OF MARKETING

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2013 M-SPHERE

HUMAN CAPITAL AND LABOUR MARKET: THE CASE OF THE VISEGRAD GROUP COUNTRIES SILVIE CHUDÁRKOVÁ

ABSTRACT

The positive impact of education, which is the main component of human capital, on productivity of individuals and the country’s economic growth economists has already been emphasized by economists of the classical political economy. Considerations of whether better knowledge, skills and abilities of individuals have some influence on their employment on labour market, respectively on the amount of their earnings, have been the subject of scientific investigation of many economists. The idea that education is a form of investment that brings an individual income in the form of higher wages, was not foreign nor Adam Smith. However, a comprehensive theory of human capital was formed in the Sixties of the 20th century. Mainly T.W. Shultz, G.S. Becker, J. Mincer and more contributed to her development significantly. Empirical findings did not confirm any assumptions that this theory recognized, and so over time, new theories have been created that either complementary adapted to new findings, or criticized the old theory. None of them, however, refused the positive relationship between the formal qualification, education and level of income. Only the reasons that this relationship confirmed have changed. Some economic studies therefore confirm that people with higher education and qualification achieve higher average earnings than people with lower education. Unemployment rate among people with higher education is lower than the rate of unemployment among people with lower achieved education. The paper will examine the relationship between levels of human capital and selected economic variables in the Czech Republic, respectively in the countries of the Visegrad Group. KEYWORDS: Economic Growth, Education, Human Capital, Relative Earnings, Unemployment DETAILS ABOUT AUTHOR: SILVIE CHUDÁRKOVÁ Ph.D. STUDENT SILESIAN UNIVERSITY IN OPAVA SCHOOL OF BUSINESS ADMINISTRATION IN KARVINÁ DEPARTMENT OF ECONOMICS KARVINÁ, CZECH REPUBLIC chudarkova@opf.slu.cz

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I N T E R N AT I O N A L CO N F E R E N C E FO R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N ES S

“EASY-TO-READ” INFORMATION IN PUBLIC TRANSPORT - ITS PERCEPTION, IMPACT AND APPLICATION CHRISTIAN VOGELAUER ELMAR W.M. FÜRST

ABSTRACT

Text-based notices, bulletins and signposts are the main source for public transport users to acquire important information for their trips. This specific type of information is present pre-trip while planning a journey (e.g. web-based route planning), on-trip on the way to the destination (e.g. Time tables, Displays, destination information) and post-trip for navigating the “last mile” (e.g. plans of the surrounding). As can be seen, the range of written and displayed information provided by public transport operators is far stretched. These texts can be presented in a short, simple and understandable manner or long, over boarding and highly complex in their structure and are therefore not accessible to persons unfamiliar with the written language. As can be imagined, not all passengers using public transport services are able to understand or decipher all of this information. This might be due to a lack of education (illiterates), mental capacity (persons with cognitive impairments) or simply due to being a foreigner in the given country (migrants and tourists). All of these groups suffer heavily from not being able to fully utilize written and displayed information. In addition the respective persons on the one hand represent important customers for public transport providers and on the other hand are legally entitled to not being excluded from public services. Furthermore it has to be mentioned that solutions enabling the persons concerned to better access the provided information also improve the accessibility for most other public transport passengers. With the implementation of “easy-to-read” information in public transport systems most of the problems the above groups are facing could be avoided or at least reduced. However, the general awareness for even the availability of “easyto-read” guidelines - not to mention the employment of those - is mostly non-existent among public transport providers and public authorities. The proposed article will first clarify the term “easy-to-read” in a public transport context and provide information on its importance. Building on this definition the respective target groups will be identified and their specific needs will be highlighted. Eventually, we will derive policy implications for public authorities and guidelines for public transport providers for a more widespread implementation of “easy-to-read” solutions in public transport. KEYWORDS: „Easy-to-read“, Impairment, Mobility, Public Transport DETAILS ABOUT AUTHORS: CHRISTIAN VOGELAUER RESEARCH ASSOCIATE, WU VIENNA, INSTITUTE FOR TRANSPORT AND LOGISTICS MANAGEMENT NORDBERGSTRAßE 15, 1090 VIENNA, AUSTRIA christian.vogelauer@wu.ac.at ELMAR W.M. FÜRST ASSISTANT PROFESSOR, WU VIENNA, INSTITUTE FOR TRANSPORT AND LOGISTICS MANAGEMENT NORDBERGSTRAßE 15, 1090 VIENNA, AUSTRIA elmar.fuerst@wu.ac.at

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10.-12. 10. 2013.

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2013 M-SPHERE

MOBILITY BARRIERS AND SOLUTIONS IN PUBLIC TRANSPORT FOR SIGHT IMPAIRED IN RURAL AREAS - IMPACT AND APPLICATION CHRISTIAN VOGELAUER ELMAR W.M. FÜRST

ABSTRACT

Public transport, in rural, suburban and urban areas, should, as might be assumed, allow for the mobility needs of all members of society to be fulfilled. This prerequisite should hold true whether the respective person is “just” the regular commuter on her or his way to work, the child on the way to school or the student travelling to university. However each of these persons has their individual needs and possibilities in coping with the barriers imposed on them. The commuter might be physically impaired and using a wheelchair, the child might not already be able to read and the student might suffer from impaired sight. All of these persons not only have a need of using public transport services but are entitled by law to receive the same opportunities as unimpaired passengers. This unhindered access to the daily mobility provided by public transport services however is rather seldom met – particularly in rural settings. On the one hand this is due to public transport companies not having enough knowledge and awareness on the specific needs, barriers and possible solutions for impaired persons but also to a lack of resources due to the far stretched systems with relatively low numbers of passengers has to be taken into account. As can be deducted it is an absolute necessity to investigate the respective target groups separately to gather group-specific information that can then be translated into technically and economically feasible plans for convenient and barrier-free designs. Specifically in rural areas where the provision of public transport might be quite scarce, sight impaired passengers are strongly limited in their mobility. This can be due to missing, destroyed, dirty or illegible plans and timetables at stops, non-visual guidance systems if any or simply bad weather conditions like heavy snowfall or rain which rural area stations are not equipped for. Another important factor for sight impaired in rural areas is the link between individual and public transport. The proposed article is dedicated to this topic and going to shed light on the specific circumstances that sight impaired persons face when travelling by public transport in rural areas. Thus we will discuss sight impairment and the needs of persons suffering from limited vision in detail. Then we relate the barriers imposed on sight impaired persons with the provided public transport infrastructure and vehicles in the context of rural areas. This will be illustrated by some examples of good and bad solutions. Eventually conclusions will be draw on how to improve the rural public transport system for sight impaired and thus also for most other passengers. KEYWORDS: Rural Areas; Sight Impairment; Mobility; Public Transport DETAILS ABOUT AUTHOR: CHRISTIAN VOGELAUER RESEARCH ASSOCIATE christian.vogelauer@wu.ac.at ELMAR W.M. FÜRST ASSISTANT PROFESSOR elmar.fuerst@wu.ac.at FOR BOTH AUTHORS: WU VIENNA INSTITUTE FOR TRANSPORT AND LOGISTICS MANAGEMENT NORDBERGSTRAßE 15, 1090 VIENNA, AUSTRIA

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2013 M-SPHERE

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REDEFINING STOCK OPTIONS − TOWARDS BETTER SUSTAINABILITY FOR COMPANIES AND THE SOCIETY NATAŠA SAMEC

ABSTRACT

The stock options, which are discussed in this work, are an unregulated kind of individualized call options, which are only one form of the options on stocks. The subject of this work is a topical issue, since worldwide there is a wide discrepancy between wages of the majority of employees and remunerations of the management. This wide discrepancy is not only detrimental to society as a whole but also discourages large proportion of the employees. Not only do these discrepancies present a problem for the low-paid workforce but also for the middle classes, on which any development of society is actually based and which are becoming increasingly impoverished, all the more so due to unfavorable taxation. The work demonstrates that stock options represent a special instrument with civil and company law features. They must be distinguished from other forms of options on stocks on the one hand and from other types of wages/remuneration as well as other types of employee financial participation on the other hand. Furthermore, the work also stresses the reasons for the need to distinguish between the terms variable and additional wages/remuneration, which are also defined accordingly. The work is based on the hypothesis that stock options as performance-related payments/remunerations can be effective instruments in unifying divergent interests (of shareholders, employees in the broader sense, issuing companies and society as whole), and that there is no alternative to this concept. This concept can be realized if the state not only provides for suitable tax incentives but also sets up an appropriate legal framework laying down the conditions for the design and the necessary transparency of stock option programs to prevent their abuse. KEYWORDS: Stock options, stakeholder value, sustainable company, performance-related payments/remunerations, (variable) wages/remuneration DETAILS ABOUT AUTHOR: NATAŠA SAMEC ASSISTANT PROFESSOR UNIVERSITY OF MARIBOR FACULTY OF LAW MLADINSKA ULICA 9, SI-2000 MARIBOR, SLOVENIA natasa.samec@um.si

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2013 M-SPHERE

SATISFACTION WITH CRM IMPLEMENTATION IN CROATIAN COMPANIES MIROSLAV MANDIĆ

ABSTRACT

Customer Relationship Management (CRM) is often linked with high expectations and, consequently, dissatisfaction with its implementation. The aim of this paper was to research the level of satisfaction with CRM in Croatia. Accordingly, the research included expectations and satisfaction in the implementation of the CRM strategy. The population included 1000 leading Croatian companies based on the following criteria: a) newly acquired value, b) income, c) profit. The research was conducted in the period between April and July 2010 and consisted of three parts. The instrument of the research was a survey and there were 268 respondents, which ensured the return rate of 26.8%. The sample consisted exclusively of the decision makers in those Croatian companies, which means their leading business experts. The surveys were sent via email or fax, and only exceptionally via post, if specifically asked by the respondents. The results revealed that as much as 75% had high or extremely high expectations. Moreover, the results showed that 59% of the respondents were very or exceptionally satisfied with CRM, which is entirely in opposition with similar research conducted for different markets. Especially significant and interesting were the results which revealed that 69% of respondents believe the relationship with their clients has improved or considerably improved after implementing CRM. KEYWORDS: Customer Relationship Management, CRM, implementation, expectations, satisfaction DETAILS ABOUT AUTHOR: MIROSLAV MANDIĆ ASSISTANT PROFESSOR UNIVERSITY OF ZAGREB FACULTY OF ECONOMICS AND BUSINESS ZAGREB mmandic@efzg.hr

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2013 M-SPHERE

I N T E R N AT I O N A L CO N F E R E N C E FO R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N ES S

THE IMPORTANCE OF MUSIC FESTIVALS FOR DEVELOPING YOUTH TOURISM, THE CASE OF CROATIA DORIS PERUČIĆ BLANKA BRADVICA

ABSTRACT

Party in combination with sun and sea is an important motive for young people to visit tourist destinations. Music festivals are seen as a mean of attracting both international and national tourists. Furthermore, they form a strong promotional vehicle for destinations towards the youth travel market segment. Youth travelers are recognized today as valuable visitors that can make an important economic contribution to the places they visit. The number of music festivals in Croatia during the summer months has grown significantly in past few years. Major international music events with the performance of international music stars form a crucial element of international tourism promotion. The paper explores the importance of organizing international music festivals for the development of youth tourism in Croatia. KEYWORDS: youth tourism, music festivals, Croatia DETAILS ABOUT AUTHOR: DORIS PERUČIĆ ASSOCIATE PROFESSOR UNIVERSITY OF DUBROVNIK DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS dperucic@unidu.hr BLANKA BRADVICA, M.A. DUBROVNIK SATI blanka.bradvica@gmail.com

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2013 M-SPHERE

QUALITATIVE RESEARCH DESIGN IN BUSSINES MANAGEMENT TIHOMIR VRANEŠEVIĆ

ABSTRACT

Exploratory researches are useful in: (1) diagnose the situation, (2) the selection of different options of action, (3) raise of new ideas. Particularly useful approaches in exploratory research are: search secondary data sources, analysis of selected cases (i.e. case analysis), interviews with experts and/or people who have experience with matter of research, and qualitative researches. Qualitative researches are: a) focus group(s), b) in-depth interviews and c) projective techniques. Focus group interview mean unstructured, free flow discussion with group of participants (usually 6-12 people). Benefits of focus group discussion can be seen as the 10S (Malhotra, Marketing Research, 2010, p. 181): synergism, snowballing, stimulation, security, spontaneity, serendipity new ideas, specialization, scientific scrutiny, structure, speed. In-depth interview is unstructured interviewing of one person (and/or conversation with one person). This approach is particularly useful in situations when dealing with sensitive issues and respondents want to maintain the highest possible level of privacy – i.e. on topics not discussed or at least not be honestly discussed in public. Projective techniques are considered an indirect approach due a fact that the respondents (participants) are not fully familiar with the proper purpose and goal of the research, what in particularly situations, could be considered as advantage. The main idea of projective techniques is that it is expected that respondents freely expressed their real feelings, beliefs and motivations through imaginary persons, situations, objects or even animals. There are numerous approaches and they can be classified into techniques: associations (the word and the image), completion (sentences and stories and balloon test or cartoon test i.e. completing the picture shows the situation), and RPG (role-playing game, imaginary person or “mask”). Only imagination can be limitation to the design of projective techniques and their application, but, at the same time, imagination can be a limitation to the interpretation of the results obtained using projective technique. KEYWORDS: exploratory research, qualitative research, focus group, in-depth interview, projective techniques DETAILS ABOUT AUTHOR: TIHOMIR VRANEŠEVIĆ PROFESSOR FACULTY OF BUSINESS AND ECONOMY UNIVERSITY OF ZAGREB tvranesevic@efzg.hr

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2013 M-SPHERE

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AUTHORS INDEX A

ABRANTES, J.L. 204, 213, 221 ACATRINEI, C. 464 AGARAJ (SHEHU), X. 271

BARBIĆ, N. 231 BAUTOVIĆ, M. 404 BILOŠ, A. 290 BIROVLJEV, J. 125 BRADVICA, B. 470 BREČIĆ, R. 259 BUCKLEY, S. 62 BUSHNEY, M. 62

CHUDÁRKOVÁ, S. 466 CILEG, M. 328 CIRIC, I. 125, 328 CIRIC, Z. 125 CRAVIDÃO, F. 204 CULÉN, A.L. 100, 302

ČOP, M. 380

DAWIDOWSKY MAMIĆ, M. 353, 404 DELIĆ, A. 462 DIEPLINGER, M. 276 DJOKIC, N. 358 DRABIK, P. 88 DRIENIKOVÁ, K. 7 DRLJAČA, M. 321 DUGULAN, D. 464 DVORSKI, S. 443

ERDINÇ, D. 461

FAIRER-WESSELS, F.A. 241 FÜRST, E.W.M. 463, 466, 467

GASOVIC, M. 250 GASPARINI, A.A. 100 GOSPIĆ, D. 73 GREGUREC, I. 462 GRILEC KAURIĆ, A. 259 GRUBOR, A. 365

JAKOVLJEVIC, M. 62 JERČINOVIĆ, S. 408 JEZ, V. 80 JOHANSEN, V. 80 JOVICEVIC, R. 397 JOVOVIC, R. 24 JUNG, S. 284 JURIČ, B. 380

KALINIĆ, Z. 107 KANAI, M. 345 KAŠČÁKOVÁ, A. 189 KAŠŤÁKOVÁ, E. 7 KELIĆ, I. 290 KERETA, J. 144 KIM, S.W. 308 KIS, T. 328 KOBAYASHI, H. 345 KOPREK, D. 443 KORKMAZ, S. 196 KOTNIK, S.O. 463 KOVAČ ŽNIDERŠIĆ, R. 365 KRIGER, M. 302 KRNACOVA, P. 88 KUBIŠOVÁ, Ľ. 189 KUMMER, S. 276

LAPORŠEK, S. 17 LEKIĆ, R. 157 LENZ, K. 276 LESAKOVA, D. 152 LUKETA, K. 144, 389

MAJEWSKI, G. 62 MAJIĆ, M. 157, 353 MANCE, N. 157 MANDIĆ, M. 469 MARINKOVIĆ, R. 54 MARIĆ, D. 365 MEDIĆ, R. 375 MEDVEĎOVÁ, P. 45 MESAROS, I. 358 MEŠKO, M. 183 MEŠKO ŠTOK, Z. 183 MOJAŠEVIĆ, A. 174 MYRTVEIT, I. 80

HARA, Y. 345 HIP, O. 432 HORVAT, S. 73 HRDÝ, M. 1 IDLBEK, R. 432 IVANKOVIĆ, J. 353

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NEDELOVÁ, G. 189 NIYAZI ÖZKER, A. 35 NOGUEIRA, M.J. 213 NOVOSEL-DOLNJAK, Z. 455 OBRAZ, R. 134 ORZAN, M. 464

PAIVA, O. 204, 213 PANDŽA BAJS, I. 73 PAPIĆ BOGADI, V. 408 PAVIĆ, Ž. 107 PERUČIĆ, D. 470 PLANTIĆ TADIĆ, D. 321, 404 PLETIKOSIĆ, M. 420 POVAŽANOVÁ, M. 45 PRELEC, K. 380 PROSTOR, J. 13

RATHMAN, D. 114 RECHNITZER, J. 460 REHAK, R. 88 ROCCO, R. 231 RUŽIĆ, I. 290

SALAI, S. 358 SAMEC, N. 468 SEABRA, C. 204, 213, 221 SEDLAK, O. 328 SENIĆ, S. 24 SILVA, C. 221 SLIVAR, A. 408 SPIŠIAKOVÁ, M. 166 STANEKOVIĆ, I. 389 STANKO, Z. 134 STRACENSKI KALAUZ, M. 259 STRAHONJA, M. 375 SVETIĆ, D. 462

ŠIMUNIĆ, D. 389 ŠPIRKOVÁ, J. 166 ŠPOLJAR, G. 321 ŠUPUT, B. 375

TAKEMURA, M. 345 TOLUŠIĆ, M. 338 TOLUŠIĆ, Zd. 338 TOLUŠIĆ, Zr. 338 TOTH, T. 460

VAREZ, K. 114 VARLANDY SUPEK, M. 134, 144 VASELIC, D. 250 VASILOVA, M. 88 VEGHEȘ, A. 464 VICENTE, M. 213, 221 VOGELAUER, C. 466, 467 VRANEŠEVIĆ, P. 447 VRANEŠEVIĆ, T. 471

ŽILIĆ, D. 432

D U B R O V N I K , C R O AT I A

10.-12. 10. 2013.

I N T E R N AT I O N A L CO N F E R E N C E FO R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N ES S

10.-12. 10. 2013.

D U B R O V N I K , C R O AT I A

2013 M-SPHERE

BOOK OF PROCEEDINGS

473