Book of Proceedings PART 2 - M-Sphere Conference Dubrovnik 2012 by Tihomir Vranesevic

1ST International M-Sphere Conference for Multidisciplinarity in Science and Business

Book of Proceedings PART 2 Dubrovnik, Croatia 4th-6th October 2012

1ST International M-Sphere Conference for Multidisciplinarity in Science and Business

Book of Proceedings PART 2 Dubrovnik, Croatia 4th-6th October 2012

1st M-Sphere Conference, Book of Proceedings. Copyright 2012. All rights reserved. The authors are responsible for all of the content that has been published. Published 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 Leopoldo Gutiérrez Gutiérrez Universidad de Granada, Spain Professor Pablo Gutiérrez Rodríguez Universidad de León, Spain Professor Branko Maričić University of Beograd, Serbia Professor Jože Mencinger University of Ljubljana, Slovenia 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: Professor Marija Dragičević University of Dubrovnik, Croatia 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 Tihomir Vranešević University of Zagreb, Croatia CORRESPONDENCE: Professor Tihomir Vranešević

info@m-sphere.com.hr

Organized by: M-Sphere (www.m-sphere.com.hr) Hosted by: University of Dubrovnik, Department of Economics and Business Economics, Croatia Publisher: Accent For Publisher: Tihomir Vranešević Editors: Tihomir Vranešević Doris Peručić Miroslav Mandić Boris Hudina Graphic design and layout: Tvrtko Zelić ISBN 978-953-7930-00-4

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 â&#x20AC;&#x201C; 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 â&#x20AC;&#x201C; RESULTS WORTH TO DISSEMENATE

Table of Contents KEY NOTE PAPER: MULTI-DISCIPLINARITY OF SCIENCES, CURRENT ECONOMICS AND BUSINESS �� 1 Soumitra Sharma

PAPERS BY AUTHOR(S) - ALPHABETICAL ORDER / PART 1 / A-M: VOLUNTEERS AND NONPROFIT SECTOR IN ALBANIA �� 7 XHILIOLA AGARAJ (SHEHU) THE INFLUENCE OF WIVES IN THE TOURISM DECISION PROCESS ��15 KRISZTINA ARPASI CUSTOMER PERCEIVED VALUE AS A MEDIATOR BETWEEN CORPORATE REPUTATION AND WORD OF MOUTH IN BUSINESS MARKETS ��21 MAJA ARSLANAGIĆ; VESNA BABIĆ-HODOVIĆ; ELDIN MEHIĆ INTERDISCIPLINARY HIGHER EDUCATION: THE CASE OF CROATIAN HIGHER BUSINESS SCHOOLS ��29 LJILJANA BABOGREDAC; MARTA RAČIĆ ECONOMIC TRANSACTION WITH THE WORLD – EXTERNAL AND INTERNAL BALANCE ��37 OLIVERA BAIĆ THE IMPACT OF QUALITY ON CROATIAN MANUFACTURING SMEs PERFORMANCE ��43 TOMISLAV BAKOVIĆ; TONĆI LAZIBAT; INES SUTIĆ HEALTH AND SPA TOURISM: TRENDS IN SOUTH TRANSDANUBIA IN ECONOMIC DEVELOPMENT AND QUALITY OF LIFE TERMS ��49 MÁRTA BAKUCZ; ALEXANDRA FLINK; ÁRON KOVÁCS COMPARISONS OF COMMODITY AND EQUITY MARKET ��63 DUŠAN BARAN; MARTIN RANUŠA SPECIFICS OF MARKETING STRATEGY IN THE SEGMENT OF HIGH FASHION ��71 RUŽICA BUTIGAN; ALICA GRILEC KAURIĆ; DARKO UJEVIĆ ANALYSIS OF MACROECONOMIC FUNDAMENTALS OF V4 COUNTRIES AND THEIR IMPACT ON BOND RISK SPREADS ��81 BOZENA CHOVANCOVA; PETER ARENDAS BEHAVIOR OF SECONDARY LEVEL EDUCATION STUDENTS IN VARAZDIN CITY ON FACEBOOK – CASE STUDY ��87 ALEN DELIĆ; MATIJA KAPIĆ; IVA GREGUREC SYSTEMS APPROACH TO MANAGEMENT PROBLEMS ��93 STJEPAN DVORSKI; VLADIMIR KOVŠCA ENTREPRENEURSHIP AND ITS LONG ROAD TO DEVELOPMENT IN BOSNIA AND HERZEGOVINA: AN INSTITUTIONAL APPROACH ��101 ZIJAD DŽAFIĆ; ILIJA ĆORIĆ VENTURE CAPITAL – FORM OF FINANCING ��113 BLAŽENKA EROR MATIĆ; TOMISLAV GELO FOSTERING SUSTAINABILITY THROUGH ENTREPRENEURSHIP IN SOUTH AFRICA: SELECTED CASE STUDIES ��125 FELICITE A. FAIRER-WESSELS MILESTONES OF THE DEVELOPMENT OF HUMAN RESOURCE MANAGEMENT IN CENTRAL AND EASTERN EUROPE ��135 SONIA FERENCIKOVA PRODUCT PLANNING AS A PHASE OF PRODUCT DEVELOPMENT MANAGEMENT ��143 MILAN GAŠOVIĆ; DARKO VASELIĆ; MARIJA BRDARIĆ PATIENTS’ BEHAVIOURAL INTENTIONS AND THE INFLUENCE OF SERVICE QUALITY PERCEPTIONS AND CUSTOMER SATISFACTION IN THE ALBANIAN HEALTHCARE INDUSTRY ��149 ELSA GEGA; ZHANINA DAPI THE MARKETING OF HIGH-TECH INNOVATION: RESEARCH AND TEACHING AS A MULTIDISCIPLINARY COMMUNICATION TASK ��157 RAINER HASENAUER; PETER FILO; HERBERT STÖRI DISTORTING EFFECTS OF TAXATION ON ASSETS AND SOURCES OF FINANCE: EFFECTIVE TAX RATES IN THE CZECH REPUBLIC IN THE YEARS 2000 - 2010 ��169 JAROSLAVA HOLEČKOVÁ PERCEPTION OF PRIVATE LABELS IN THE GROWTH PHASE OF THE PRODUCT LIFE CYCLE ��179 SANDRA HORVAT STRATEGIC DECISION MAKING AND STRATEGY IMPLEMENTATION IN SMALL AND MEDIUM ENTERPRISES IN CROATIA ��187 DOMAGOJ HRUŠKA; TOMISLAV BAKOVIĆ; MARIJA JURČEVIĆ EDUCATION FOR ENTREPRENEURSHIP IN PUBLIC ADMINISTRATION ��191 MLADEN ILIĆ

JAYSTUDENT EXPERIMENTS IN HIGHER EDUCATION ��201 KATALIN JÄCKEL; ZOLTÁN VERES THE KEY SPECIFICITIES OF BRANDING IN AREA SERVICING ��215 RATIMIR JOVIĆEVIĆ ALBANIAN BRANDS- A TOOL TO INCREASE COMPETIVENESS OF LOCAL PRODUCTS - CASE STUDY OF SASA PROJECT ��221 IRIS KAZAZI; BLEDI HOXHA; ILIR ELMAZI ECONOMIC IMPERIALISM AND LACK OF WILLINGNESS FOR BETTER COOPERATION WITH OTHER SCIENTIFIC DISCIPLINES ��229 ALEKSANDAR KEŠELJEVIĆ MARKET RESEARCH AIMING AT ENHANCEMENT OF MARKETING COMMUNICATION ON THE REGIONAL MARKET OF AGRICULTURE: THE CASE OF AGROPORTAL ��235 INES KLARIĆ; DIANA PLANTIĆ TADIĆ; MIRJANA BAUTOVIĆ POSITION OF SELECTED CEE COUNTRIES IN CONDITIONS OF GLOBAL ECONOMIC IMBALANCE ��243 JANA KOTLEBOVÁ E-BUSINESS AS A TOOL FOR GAINING STRATEGIC ADVANTAGE IN INSURANCE COMPANIES. THE CASE OF ALBANIA AND MACEDONIA ��253 MIMOZA KOTOLLAKU; KLIME POPOSKI; ILIR ELMAZI ETHICAL CONSUMER BEHAVIOUR IN MARKETING ��261 RUŽICA KOVAČ ŽNIDERŠIĆ; DRAŽEN MARIĆ; SUZANA SALAI; ALEKSANDAR GRUBOR LIQUIDITY MANAGEMENT IN TIMES OF CRISIS IN THE EURO AREA1 ��271 LUCIA KOZMOVA THE EU FINANCIAL AND ECONOMIC CRISES – A NEED FOR A MULTIDISCIPLINARY APPROACH ��279 ANDREJ KUMAR; VINKO KANDŽIJA THE ROLE OF INFORMATION SOURCES IN POSITIONING TOURIST DESTINATION OF MONTENEGRO ��293 DARKO LACMANOVIĆ AGE IN SHOPPING BEHAVIOUR ��307 DAGMAR LESAKOVA TRACKING A FINANCIAL BENCHMARK IN INEFFICIENT MARKETS: THE CASE OF BULGARIA ��313 BOYAN LOMEV ; IVAN IVANOV IMPACT OF INOVATION ON CUSTOMER SATISFACTION AND BRAND LOYALTY OF MOBILE PHONES USERS IN MACEDONIA AND ALBANIA ��321 ELFRIDA MANOKU; JOVAN STOJANOSKI; LILJANA ELMAZI INFLUENCE OF GENERAL AND ECONOMIC ANIMOSITY ON CONSUMERS’ PURCHASE INTENTION TOWARDS PRODUCTS FROM FORMER YUGOSLAVIA: AN EMPIRICAL STUDY IN DALMATIA REGION ��327 MATEA MATIC AN OUT-OF-SAMPLE ASSESSMENT OF THE EFFICACY OF CURRENCY BOARDS IN EUROPEAN TRANSITION ECONOMIES ��333 PETYA MIHAYLOVA; NUMAN ÜLKÜ IMPORTANCE OF BRAND ARCHITECTURE STRATEGY IN REPOSITIONINIG PROCESS ��345 ANA MULOVIC; TIHOMIR VRANESEVIC

PAPERS BY AUTHOR(S) - ALPHABETICAL ORDER / PART 2 / N-Z: PUBLIC GOVERNING IN THE CONTEXT OF QUALITY AND TRANSITION ��351 ZVONKO NOVOSEL DOLNJAK OPERATIONAL RISK MANAGEMENT IN BANKS IN SLOVAKIA ��355 KATARÍNA ORAVÍKOVÁ PODOLIAKOVÁ SELF-PROMOTION ACTIVITIES OF ADVERTISING AGENCIES IN CROATIA AND COMPARISON BETWEEN AGENCIES IN TRANSITIONAL AND DEVELOPED COUNTRIES ��363 IRENA PANDŽA BAJS; KRISTINA OZIMEC URBAN TOURISM TOWARDS SUSTAINABLE DEVELOPMENT ��371 IVANA PAVLIC; ANA PORTOLAN; MARIJA BUTORAC TOURIST OFFER IN THE FUNCTION OF SATISFACTION AND LOYALTY - THE CASE OF THE ISLAND MLJET ��381 IVANA PAVLIC; ANA PORTOLAN; LUCIJA HAJDIĆ TOWARDS THE SUSTAINABLE TOURISM DEVELOPMENT PLANNING IN THE TOURISM DESTINATION IN THE INVOLVEMENT STAGE ��389 IVANA PAVLIC; ANA PORTOLAN; LJUBICA MIŠKOVIĆ Possibilities for development of rural tourism in Herzegovina ��401 Doris Peručić; Blanka Bradvica

ROLE OF BRAND IMAGE “DORINA” IN CREATING CUSTOMER LOYALTY ��413 DIANA PLANTIĆ TADIĆ; JADRANKA IVANKOVIĆ; KORNELIJA KOVAČIĆ ECONOMIC COMPETITIVENESS IN THE CEE REGION ��421 PETRA PLATZ; TAMAS TOTH LOCAL RESIDENTS ATTITUDES OF DUBROVNIK AS A CULTURAL DESTINATION ��435 BARBARA PUH THE INFLUENCE OF BACKGROUND MUSIC ON THE MOOD AND PURCHASING INTENTIONS OF CONSUMERS IN SERVICES ORGANIZATIONS IN DUBROVNIK ��447 IVANA RAKIDZIJA; MARIJA DRAGICEVIC QUALITY MANAGEMENT AND INTEGRATED INFORMATION SYSTEM AS SUCCESS FACTORS OF PORT AUTHORITIES ��455 DEŠA RATHMAN; ANA MATULIĆ THE ROLE OF THE PORT AUTHORITY WITHIN CRUISE DESTINATION MANAGEMENT ��463 DEŠA RATHMAN; KATARINA VAREZ THE LOW LEVEL OF COMPETETIVENESS AS A RESULT OF INADEQUATE IMPLEMENTATION OF BUSINESS LOGISTICS ��469 BOZIDAR ROCA; NIKOLA MILICEVIC WEALTH, POVERTY AND HAPPINESS IN THE CONTEXT OF THE DIFFICULT CONDITIONS OF THE EARLY 21st CENTURY ��477 DARIA ROZBORILOVÁ DEVELOPMENT OF GROUP BUYING IN POLAND ��487 EDYTA RUDAWSKA; KRISTINA PETLJAK; IVANA STULEC ANALYSIS OF USE OF TOURIST BOARD WEB SITES IN THE REPUBLIC OF CROATIA ��495 IVAN RUŽIĆ; ANTUN BILOŠ; IVAN KELIĆ MODELS FOR MEASURING OF KNOWLEDGE MANAGEMENT AND E-BUSINESS SYSTEMS SUCCESS ��505 OTILIJA SEDLAK; MARIJA ČILEG; TIBOR KIŠ; IVANA ĆIRIĆ IS THERE A NEED FOR APPLYING A BROADER SET OF CRITERIA FOR EMU MEMBERSHIP – THE ROLE OF UNOFFICIAL EUROISATION ��515 VLADIMIR ŠIMIĆ THE PERCEPTION, ATTITUDES AND BEHAVIOUR OF ZAGREB`S TEENS TO APPAREL BRANDS AND THEIR LOYALTY - ARE ZAGREB`S TEENS “CRAZY” ABOUT CLOTHING BRANDS? ��523 MAJA STRACENSKI KALAUZ; TIHOMIR VRANESEVIC; MIROSLAV TRATNIK STRATEGIC BRAND ANALYSIS IN DESTINATION IDENTITY CONTEXT - CASE STUDY OF ALBANIA ��535 SAIMIR SUMA; KRESHNIK BELLO DETERMINANTS OF LOAN PRICING FOR CROATIAN BANKS ��541 IVAN ŠVERKO; IVICA PRGA; ZORAN MARTINOVSKI DETERMINANTS OF CROATIAN MONEY SUPPLY ��549 TONĆI SVILOKOS THE STORY OF THE HUNGARIAN FITNESS SECTOR – FAIRY TALE OR NIGTHMARE? ��561 ÁGNES SZABÓ COMMUNICATIONS MODEL OF A SOCIALLY RESPONSIBLE CORPORATION ��567 MAJDA TAFRA-VLAHOVIĆ CONCEPT OF BRAND IN MONTENEGRIN SERVICE INDUSTRY ��577 LUKA B. USKOKOVIĆ SPORTS AND RECREATION ACTIVITIES AND TOURISM ��587 ZLATKO VERUNICA; MAJA VIZJAK BENCHMARKING EFFECTS IN TOURISM BUSINESS ��595 ANA VIZJAK ; MAJA VIZJAK; JASNA LASINGER YOUTH UNEMPLOYMENT IN THE CRISIS: THE CASE OF CROATIA ��603 PERICA VOJINIĆ; NEBOJŠA STOJČIĆ; MARIJA BEČIĆ APPLICATION OF MUNDELL-FLEMMING MODEL IN CONDITIONS OF EUROZONE COUNTRIES FROM FISCAL PERSPECTIVE 611 MARIA VOJTKOVA ; RICHARD ĎURECH INTERTEMPORAL APPROACH TO THE BALANCE OF PAYMENT: CASE OF SLOVAK REPUBLIC AND SLOVENIA ��625 MARIA VOJTKOVA ATTITUDES OF BUSINESS STUDENTS TOWARDS LEADERSHIP STYLES: CASE OF UNIVERSITY OF DUBROVNIK-CROATIA ��637 IVONA VRDOLJAK RAGUZ; MATEA MATIC; BOZENA MILJANIC

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PUBLIC GOVERNING IN THE CONTEXT OF QUALITY AND TRANSITION ZVONKO NOVOSEL DOLNJAK

ABSTRACT The author sees the concept of public governing through percieving the theory of governing quality, associated with transitional problems, european norms, criteria and defects on the croatian example. The quality of public governing, as seen through the economic and social theory, as well as the experience drawn from the transitional changes and Croatia’s admittance into the European Union, is significant proof of the importance of public institutions, which are responsible for the quality of said governing. The European Union, in accordance with its rules, expects from Croatia comlete success in achieving the goals of public governing, manifested in the system’s stabilisation, economic and social development, organisation of its legal system and internal affairs, reform of public administration and preservation of the environment and natural resources. KEYWORDS: public governing, qualitiy, transition, European Union, Croatia.

1. PUBLIC GOVERNING IN THE CONTEXT OF SOCIAL AND ECONOMICAL THEORY Public governing as a term is quite understandable and recogniseable in everyday communication. Neverheless, a number of authors and scientific speculators point out in their works various definitions of the term by seeing it from different points of view and sources. Public governing in the works of economical, political, politico-philosphico-social sciences take many approaches and often give contradictory answers and conclusions. These diversities are also present in cases of questioning about public governing. From them we can also derive the differences in the view of making these conclusions, based upon the results of good or bad public governing. The mere research of public governing seeks interdisciplinary researches of every individual case, especially because governing refers to a system of the organisation of state administration, which includes functioning of the state. In this paper public governing is based upon the translation of the english term “public governance”. Therefore, the use of the adjective “public” is refered to the governing of the state. The inexistance of a particulate definition of the term “public governing” is noticeable in literature, where some terms are used more than others. For example, the World Bank describes public governing as an act which is used by the state for governing economical and social resources for the state’s development (World Bank, 1992:1). Another author characterizes public governing as an ability of formal and informal institutional environment. In this, environment individuals, social groups, civil associations and state officials work mutually. Their goal is to apply and carry out the agreed upon state policy and improve the coordination in the private sector (Ahrens, 2002:128). Braton and van de Walle (1992:30) see public governing as an active process in which the state and its political actors negotiate the rules of the political game. Kaufmann, Kraay and Zoido-Lobaton (1999:1) define public governing as institutions and traditions, through which the state power is executed in a society. Williamson sees it in the terms of microeconomics as a tool which helps maintain order in relations, which are in danger of the diversities that could disable the use of economical actors (Williamson, 1996:4-5). Max Weber defines it as a continuous activity of mutually connected people who do specific work (Pusić, 1989:9). Eugen Pusić, when speaking of administration, speaks in terms of an assemblage of administrative organisations, while governing is related with observation of the administration in an atmosphere of certain activities. Based upon these various points of view on public governing, the authors have defined several elements for its assessment, such as: • the responsibility of the policy-makers and the possibility of arbitration and public participation in the selection of governments • state’s effectiveness • political and social stability • administrative obstacles • rule of law • control over corruption Some of the authors (Campos, 2000), define public governing through five segments: • public governing • rule of law • process of how politics is governed

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civil society In referance to these five segments, the authors think that public governing is good if it satisfies the next: • the executive power is responsible for its own actions • public governing is efficient and able to adapt to the changing needs of the society • corresponding legal framework • transparent political leadership • strong civil society which is included in public affairs Huter and Shahu claim that public governing grows when government services adapt in a way to suit the needs of the people. The authors see in that the increase of public sector’s responsibilities. These authors also grade the qualitiy of public governing through the next elements: • political stability • political freedom • judiciary efficiency • public governing efficiency • spread of corruption • equal income distribution • macroeconomical management Good public governing, according to UN ESCAP (2003) is graded upon the following characteristics: • participation -defines freedom of association and expression, and organized civil society • promoting the rule of law - defines the legal framework implemented by an independent judiciary and uncorrupted police, which is often put in relation with secure property rights • transparency - defines the possibility of obtaining information related to actions in politics • understanding the needs of the people • existence of a social consensus - where the preferred decision-making is based on consensus of the whole society, and the realization of its goals in the long term interest • equality and participation of all the citizens in the decision-making process • effectiveness and efficiency in meeting the needs of society, taking into account all the available resources and using the same in a sustainable way • responsibility of the government and the private sector to the omnipresent public, that is, those who are affected by their decisions It is clear that governing not only apostrophies the country, but also includes the private sector (companies) and Civil Society. It is quite understandable that there are unpredictable internal and external factors which are out of the state’s control, but is clear that they effect the quality of good public governing. The European Union, along with its members, also emphasizes the principles of governing in order to increase connectivity with the public and prepare for the challenges ahead.

2. PUBLIC GOVERNING IN THE ASPECT OF TRANSITION AND THE EUROPEAN UNION Every system’s institutions have a strong resistance towards changes. Somewhat faster pace in the coming changes in the conditions of occurrence of external factors that enforce the rules of your game. The word “institution” (latin: intituere, to put, to found) as a term has multiple meanings: • institution or institute • in social studies the term institution refers to a narrower set of interconnected, relatively enduring social relationships that are regulated by the established social rules (customs, moral, legally) Seeing institution in other contexts, the thesis which says that institutional changes come easier and faster when they have a benefit, or will have in the future, of existing institutions forced to accept the new institution. This clearly shows an example of receiving and embracing the European Union. It may be noted that the European Union is, in its principles, implemented a common characteristic for all members to strengthen the institutional and legal environment, the sustainability of the achievements of institutions, democratization and respect for human rights and individual freedoms. Often the question is raised whether the transition is completed receiving individual countries in the European Union, or the act of accession to the EU would only be changing the form of transition and objectives that are intended to accomplish. Looking at the EU practice we observe two approaches. In the initial period of joining the Union dominates the entry based on political debates. In Croatia’s case, it can be said that this approach was performed later. Some authors see this as a powerful impact on speedy changes of governing, and thus economic performance, because the probabil-

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ity of joining the EU institutional reform accelerates, creating a social and political consensus for them, directing their implementation and consolidation conditions and processes for undertaking reforms in the whole system of governing . From the EU experience it can be seen that the membership or joining the union encouraged competition among countries. This is especially visible among the candidates who were strongly motivated to carry out further reforms in order not to fall behind in the development of the agreed rules of the game (IMF, 2003:103). The European Union, through the European Commission, established its own “White Paper on European public management ‘ definition of governing. The concept was designed from the perspective of EU citizens, and it symbolizes the way that the EU uses the authority given to it by the citizens. Here should be noted that the people are the staring point in public governing, given the known fact that there is less faith in the organization and political action of the EU. The public is clearly not interested in this, so there are dangers of not executing its work properly. The distrust of the citizens in such an european system creates uncertainty in the system itself, as well as undefined projection of what the EU is and what it wants to become in the future. EU documents show that its members are bound by certain principles, such as: • openness in communication with the public and transparency • increasing the responsibility of policy • participation of the citizens in politics • effectiveness in the execution of policy • compliance and enforcement of policies at all levels of government in order to achieve balance Often mentioned in the EU’s research are the principles of good governing by the UN ESCAP (2003), which indicate the following: • openness is necessary in order to increase confidence in the complexity of the EU organizations. Member States should use a language that is accessible and easy to understand to the omnipresent public. Regularity in informing the public about all the activities of the EU and the decisions taken in the EU bodies is mandatory. • ensuring broad participation of the citizens in all stages of decision-making, all for the quality and effectiveness of the EU policies. It is required from the civil society adherence to the same principles of good governing • all of the EU bodies should take responsibility for their own actions and report to the public. Roles of the EU bodies in terms of legislative and executive powers should be fully transparent • measures of the implementing policy should be timely and fully effective. Policy should be based on clear objectives, past experiences and evaluation of future impacts. It is recommended to use the knowledge and experiences of all the domicile experts • nforcement of the policies should be coordinated and understandable for the perpetrators. In order to achieve a number of tasks, decisive political leadership is needed, and strong and responsible EU bodies • Certainly, for the above principles, legal and regulatory environment, stable macroeconomic framework and sound economic policy are needed. EU can certainly act as a driving force in raising the quality of governing, but we need to be aware of the fact that neither itself is without weaknesses and mistakes, especially in the terms of nepotism and corruption. Quality of governing is only viable if the member states, or those that are candidates for EU membership, each in their community and their environment, are taking measures and procedures that will be a function of good governing.

3. INSTITUTIONAL EXTENSION OF GOVERNING IN CROATIA Reform of the Croatian public administration at all levels, and that means a complete reform of the governing model, is a primary consideration for the economic development of a country, especially in countries in transition or who are waiting to join the EU. Creating an enabling environment, political and legal, is a key dimension of reform. For public governing to be able to address the chalenges made by the creation of a new society, public administration has to face the current needs of its effective action in complex and changing conditions of the modern society. In the situations, where the market and democracy are an universal social component, monopolistic structures must be transformed into competitive. If the commercial sector requires higher productivity, why would not the same be required of public management and public administration in general. The inherited model of public management with its bureaucratic and hierarchical structure, insufficient expertise, lack of knowledge and excessive procedures used in their work, is not able to follow the creation of the new society and its custom made commercial environment. There is a lack of responsibility towards the users of the service, as well as excessive costs and poor quality. Introducing a system of strategic and entrepreneurial management in the public administration (government administration and public services), creates the preconditions for increasing the quality of management, economy and efficiency

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in the provision of customer service. The organizational structure of the public administration has to be adapted to its new tasks, and should be set to move into the legislative framework. The state’s monopoly in Croatia, in the field of public sector, as well as in the sphere of public administration, has demonstrated inefficiency, and has to look for other solutions, modeled after the economic agents which adapt faster to the business conditions imposed by the globalized world. The pace of change in the field of public administration in Croatia, despite the patronage and pressure from the EU, it is still slow and insufficiently effective. Through good governing, that is to say, with their service, regulatory and enforcement activities of the state structures should take on the role of the organizer and coordinator of a series of activities related to the achievements of development and exsistential goals of the society. The transition period and the period of the state that is to recieve full membership of the EU, as is Croatia’s current situation, demands many changes and new solutions, both in the content of its activities, as well as its methods of work. Entrepreneurial management strategies in the quality of governing should find a special place.

CONCLUSION In this paper, a theoretical but also practical point od view is shown on the Croatia’s example, of how important a prerequisite is for quality public governing. If in a country there are no effective mechanisms of control over the work of government, there is no good governing. Moreover, if politicization and corruption is widespread in the public administration and the judiciary,and the degree of bureaucratization is extremely high, it shows that the way the state uses its power is more negative for forming system of government and its economy. Without the rule of law, an effective judiciary, the authority and good governing, monitoring of the policy is disabled. By lacking the legal framework needed for developing a civil society, we create an environment that is not conducive to economic development and economic progress of the state. Governing must be changed, as the society changes. Our goal is to provide good governing and the implementation of reforms in adapting good governing should be a continuous process. Croatia is a true example of this, and the times ahead will show how long it will be successful. Good governing has no alternative.

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.

Ahrens,J.,2002. Governance and Economic Development, Cheltenham: Edward Elgar Aron,J., 2000. „Growth and Institutions : A Review of the Evidence“ The Word Bank research Observer. Coase,R, 1998. „ The New Institutional Economics“. The American Economic Review. Hall, R., C. 1999. „Why do some contries produce so much more output per worker than others ? „ Quartely Journal of Economic. Kaufmann, D., Kraay,A., Mastruzzi, M. 2007. „ Governance Matters VI : Governance Indicators for 1996-2006“, Word Bank Policy research Working Paper No, 4280, July 2007. Kaufmann, D., Kraay,. A. and Zoido-lobaton,P., 2003. „ Governance Matters III: Governance Indicatorrs for 1996-2002“ The Word Bank: draft for comment. Available from: (http://www.worrdl-bank.org/wbi/governance/pdf/govmatters3.3.pdf) Koprić,I., 2001. „Državna uprava i lokalna samouprava u hrvatskoj 1990-2001.-vladavina prava ili politike“ Zbornik Pravnog fakulteta u Zagrebu. Koprić,,I., 2003. Modernizacija Hrvatske javne uprave, Zagreb, Suvremena javna uprava. Malik,F., 2009. Uprvaljati,stvoriti,živjeti, zagreb, Mozaik knjiga. Marušić, S., 1995, Upravljanje i razvoj ljudskih potencijala, Zagreb, Ekonomski institut. Mecanović, i dr. 2012. Državne (regulatorne) i javne agencije, Osijek, Pravni fakultet Osijek. Musa, A., 2003. Javna uprava- zbirka propisa, Zagreb, Suvremena javna uprava. Dujanić, M., 2007, Menađment, Rijeka , Veleučilište u Rijeci Dujanić,M., 2007., Osnove menađmenta, Rijeka, Veleučilište u Rijeci. Pusić,E., 1999. Država i državna uprava, Zagreb, Pravni fakultet. Pusić, E., 2002. Nauka o upravi, Zagreb, Školska knjiga Sikavica,P, Novak,M., 1999. Poslovna organizacija, Zagreb, Informator. Šimac, N., 2002. Europski principi javne uprave: od vladanja do služenja građanima, Zagreb, Udruga za demokratsko društvo. Vlada RH, 2002. „ Nacionalni program Republike Hrvatske za pridruživanje Europskojj uniji“ Weber, M., 1968. Economy and Society .New York : Bedminster Press. Weber, M., 2006. Politički spisi, Beograd, Filip Višnjić, JP Službeni glasnik Zakon o državnim službenicima i namještenicima, NN.49/2012. Zakon o medijima, NN 59/04, 84/11. Zakon o sprječavanju sukobu interesa , NN. 26/11.,12/2012. Zakon o Uredu za suzbijanje korupcije i organiziranog kriminala, NN. 76/09,116/10, 145/10,57/11.

DETAILS ABOUT AUTHOR: MR.SC. ZVONKO NOVOSEL DOLNJAK, DIPL. ING. GRADING-INVEST D.O.O. DUGO SELO zvonko@grading-invest.hr

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OPERATIONAL RISK MANAGEMENT IN BANKS IN SLOVAKIA KATARÍNA ORAVÍKOVÁ PODOLIAKOVÁ

ABSTRACT Management and measurement of operational risk in banks is currently one of the most debated topics, both at the scientific level, as well as in economic practice within the banking sector. It is estimated that operational risk represents approximately 30% of total risk in the banking sector. The remaining percentages are divided as follows: 60% of credit risk, 5% of market risk and the remaining 5% represent mixed risks. This paper deals with the operational risk management in banks in Slovakia. It is divided into two thematic units. The first part focuses on theoretical approaches to the operational risk management and defines partial steps in the process of managing operational risk, with particular emphasis on capital adequacy requirements under current legislation. In the second part, the operational risk management deals with practical problems, the way it compiles management strategy and how the operational risk management has been of organized in the banking sector of Slovakia. Finally, the end of the paper covers recommendations for more effective operational risk management that could help the banks in Slovakia to improve their operational risk management. The paper also shows the importance of operational risk for the Slovak banking sector on the basis of the analysis of sector´s quantitative data. KEYWORDS: external, internal balance, interest rate, exchange rate, competitiveness, import, export, balance of payment

1. INTRODUCTION „It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.“ These were famouse words Charles Darwin had writen in his book On the Origin of Species by Means of Natural Selection, or The Preservation of Favoured Races in the Struggle for Life (1859). Given the advanced nature of the global financial community and its level of complexity it may seem incredible that failures can occur. Futhermore, that results in the demise of major financial institutions or even threatens the entire system itself. On a lesser scale, losses due to operational risk events occur on daily basis in all organizations. Their combined value is without any doubt very significant, although difficult to determine since many go unreported. The results of such inefficiencies are a reduction in overall global wealth-creation and associated living standards. In the banking sector as well as in the nature, the ones who survive are not the strongest ones but the ones who are able to predict and to adjust to the changes in the surrounding environment. The evidence might be downfall of Leman Brothers (2008) during the last financial crises. Operational risk (OpRisk) and moral hazard has played a significant role in this case. According to some experts, operational risk can be summarized as human risk. It is the risk of business operations failing due to human error. Operational risk change from industry to industry, and is an important consideration to make, when looking at potential investment decisions. Industries with lower human interaction are likely to have lower operational risk and conversely. Banking industry is highly human interactive and operational risk is closely involved with banks. A widly used definition of operational risk is the one contained in the Basel II regulations. This definition states that operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. However, the Basel Committee recognized that operational risk has been a term that has had a variety of meanings and therefore, for internal purposes, banks are permitted to adopt their own definitions of operational risk. Management of the operational risk has become an important part of modern practice in risk management and the same applies to banking sector in Slovakia. Within the legislational framework of Slovak banking law, the following definition of operational risk was introduced. Operational risk is the risk caused by inappropriate and incorrect internal procedures , human factors, used systems or external events. A part of operational risk is the legal risk, which represents the risk caused by unenforceability of contracts, threat of unsuccessful legal proceedings or the judgments with a negative influence on the banks. Strategic risk and reputational risk do not belong to the operational risk. In the operational risk management area, the banks should mainly focus on identifying, measuring, monitoring, reducing or even eliminating operational risk in order to minimize losses arising from OpRisk, while maintaining a competitive market position. The emphasis should be primarily on improving the quality of processes and the measures to reduce

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operational risks. Expected aims must be based on knowledge of these risks and the overall bank‘s culture of the operational risk management. The aim of this paper is to examine the importance of the operational risk to the financial stability of the entire banking institutions in general, as well as from the perspective of the banking sector in Slovakia, based in the analysis of a selected sample of commercial banks. This paper mainly refers to the fact that operational risk has its place in the system of assessment of the commercial banks, and that is very important to be properly recognised and evaluated, measured and ultimately controlled. Finally, it is a result of effective OpRisk management, that many finacial losses in the banks can be prevent or at least partially eliminated.

2. OPERATIONAL RISK MANAGEMENT Operational risk is not a new category in the banking sector. However, the idea that operational risk management is a scientific discipline with its own management structure, tools and processes, is new.1 Operational risk was until the Basel II was published by the Basel Committee on Banking Supervision at the end of the 90s of the 20th century, mainly residual risk category, which are difficult to quantify, insuredd and measured in the traditional way. For these reasons, it is almost impossible to find a lot of studies on operational risk, which have been done before the end of the nineties.

2.1 Theoretical approaches to operational risk management Operational risk management methods differ from those used in the management of credit and market risk. It is mainly for the reason that the very nature of operational risk is different. One of the first studies of operational risk management was done by Embrechts in 1997, who modeled extreme events in finance and insurance. Later, Embrechts initiated further research in the area of the operational risk (the results of these researches were published in his papers from 2003, 2005, 2006) and his work has become a classic in professional literature focusing on operational risk. Other pioneers in the field of operational risk management area were Cruz (1998), Coleman and Cruz (1999) and King (2001) with their works. Subsequently, other researchers such as van den Brink (2002), Hiwatshi and Ashida (2002), de Fontnouvelle (2003 and 2005), Moscadelli (2004), Nešlehová (2006) and Dutta and Perry (2007), who experimented with data concerning loss-making events resulting from operational risk, collected over the past two decades, based on various studies initiated by the banks themselves, as well as by regulators and supervisory authorities. Till this very day, probably the most important work in this area is Moscadelli´s work The modelling of operational risk: experience with analysis of the data, collected by the Basel Committee, which was published in July 2004 at the conference organized by the Italian bank, consulting the Risk Management in Practice. Moscadelli here presented a detailed analysis of extreme value theory, which was applied to data collected in the Quantitative Impact Study (QIS),2or to all 47 000 loss events. On the basis of this work he came to conclusion that the distribution functions, respectively distribution of losses from operational risk are well described by Pareto distribution on the upper end. Estimated end parameters for different business lines were in the range from 0,85 for asset management, to 1,39 for commercial banking. Six business lines have estimated this parameter to a value greater than one, which corresponds to a mean unlimited. Based on the data from this impact study, the estimated capital requirement for operational risk varies in the range from 8,3% for retail banking to 33,3% for business line payment and settlements. The total capital requirement was calculated to 13,3%, which is only slightly below the value specified in the Basel II (15% using the Basic Indicator Approach). Modeling OpRisk helps the risk managers to better prevent operational risk, in order to support effective management of the risks in the bank. There are several thechniques and methodological tools already mentioned extreme values theory, which are dealt with in addition to Cruz even Embrechts and Chernobai, used for OpRisk. It is also the implication of Bayesian (Schevchenko and Wuthrich) or dynamic Bayesian networks, which gives Ramamurthy in his work Operational risk and probabilistic networks – An application to corporate actions processing in 2005 and likelihood of maximization algorithm (Bee, M.: Estimating and simulating loss distributions with incomplete data, Oprisk and Compliance, 2006). New trends in the development of operational risk management can be found in the work of Peters and Terauds Quantifying Bank Operational Risk in 2006, van Leyveld Economic Capital Modelling: Concepts, Measurement and ImplementaPower, M.: “The invention of operational risk”, Review of International Political Economy, October 2005, p. 577–599. QIS – quantitative impact study conducted by Basel Committee on Banking Supervision. Another important source of data is the research conducted by Federal Reserve Bank of Boston and published as a part of de Fontnouvelle work in 2004. 1 2

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tion in 2007, Chernobaita Operational Risk: A Guide to Basel II Capital Requirements also in 2007 or Jobsta “The Regulation of Operational Risk under the New Basel Capital Accord - Critical Issues, which was published in Journal of Banking Law and Regulation in the May 2007. All these works have one thing in common. They follow unwritten rule governing the management of the bank, which is measurable, and can be managed. As experience has shown, the measurability of operational risk is one of the basic problems when trying to effectively manage this risks in the banking sector.

2.2 Operational risk management in the bank Operational risk management in commercial bank is usually modified by the boards´ instruction, which govern the procedures for identification, assessment, monitoring and mitigation of operational risks. The main objectives and principles of the bank in operational risk management contains a document Strategy of Risk Management. Another important element taken by the bank is to establish, within its structure, a Department of Operational Risk Management. This department provides the requirements, processes and methods in operational risk management, development of basic principles, the creation and maintanance of a consistent methodology for identifying, monitoring, assessment and mitigation of OpRisk. In operational risk management the bank uses information system to monitoring potential and actual loss events caused due to operational risk. The process owner assigns risk basis on expert judgment of any operational risk events, identified three parameters (average frequency of events, the average loss to a maximum single loss event caused by one event), which are used to measure the operational risk. Operational risk management consists of the identification, assessment, monitoring and selection of its management and mitigation. This cycle of operational risk management is illustrated on the Figure below. The aim is to optimize the risk profile of the bank at a reasonable cost. Figure 1: Cycle of operational risk management

Source: own processing

Identification of operational risk is realized in the form of the risk analysis in the preparation of new products, new processes, non-standard business, the implementation of new information technology, project management and planning continuity of banking activities. The bank monitors and analyzes the development of key risk indicators, identified residual risks in the process of Risk and Control Self-assessment and all operational risk events collected and analyzed. After identifying operational risk, action plans are generally taken for the purpose to eliminating or mitigation existance of loss events in the future. The bank has several insurance contracts covering the main risks, for the purpose to mitigating the financial impact of those events. Operational risk management is based on four basic tools of operational risk management: • Collection of operational losses database, which allows the monitoring of operational losses cases and provides the basis for mapping of OpRisk across business lines, processes, products such the types of operational risk. • Key Risk Indicator (KRI), which is a measure used in the risk management in banks, which indicates, how risky is the process or product that is described by the indicator. KRI serves as a warning system to identify potential loss events with a negative impact on the bank.

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Risk assessment which is intended for identification and quantification of the risks in the bank. Its substance is based on subjective estimation of potential losses over a given time horizont. The result of this process is to identify the major sources of operational risk faced by the bank. Operational risk scenarios, which are used to describe a possible, but less likely extreme events with a significant impact on the bank.

For the purposes of calculating capital requirements, the banks´ activities and processes are divided into 8 business lines and the sum of indicators (net income of each business line) is calculated capital requirement for operational risk. Individual bank activities and processes are mapped in the process map. Usually once a year, self-assessment of the bank takes place. During this event the owners of processes organize workshops focused on identification and reassessment of risks in security process. For each assessed risk, the expected loss is calculated by estimating the impact and likelihood of OpRisk. Operational risk management is the development of business continuity plans designed to prevent inadvertent disruption of activities carried out by the bank and protect critical processes from the effects of serious errors and accidents. Continuity plans are developed for processes, that were considered critical to the functioning of the bank. Include critical times for the failure of systems and applications, and the time and procedues necessary for the recovery process and achieve full recovery. Continuity plans are tested by the bank and they are regularly reviewed in order to fit the current business strategy of the bank. Truly effective operational risk management has been acknowledged by the rating agencies as requiring well-qualified and honest people.3 This applies both to employees and contract staff. The importance of well-qualified and honest people stems in part from the fact, that it is people who determine the culture and ethics of the bank. These fundamental factors can prove almost impossible to change, particularly in the short term. And so precisely cultural and ethical incompatibility can limit the effectiveness of growth by preventing effective implementation.

2.3 Operational risk in banking sector in Slovakia Slovak banking sector has significantly contributed to the economic growth of the country in recent years. According to statistics of the National Bank of Slovakia (NBS) on the 30th of June 2012, there were 31 credit institutions in Slovakia, operating under a banking license. In addition, out of those 31 banks, one is a state bank and two others are owned by domestic investors. Apart from the banks, there are 16 branches of foreign banks. Even though in Slovakia, the banks face operational risk, it´s historical awareness has began by Basel II and timetable set out within it. This basically means that each bank in the Slovak banking sector started the monitoring, recording and managing operational risk approximately around 2004. Up to this day, there has been no serious bank losses of operational nature, within the Slovak banking sector. Therefore the perception of operational risk within each bank and its risk culture is relatively underestimated. Most banks in Slovakia are part of the international banking groups, that usually set the rules for management and measurement of operational risk for their daughter companies and subsidiareis. Even in some cases, the capital requirements for operational risk is calculated in the parnet cpmpany itself. However, majority of the banks adapt these rules in accordance with their specific conditions and their own risk profile.

2.4 Legislation The concept of operation risk has been included to Slovak legislative framework at the same time as the amendment to the Banking Act in 2006 as a part of implementation of European legislation took place. It was a reaction to a concept acceptance of Basel II into legislative framework of the European Union under the two directives on capital adequacy (Directives 2006/48/ES on iniciation and operation of activities of credit institutions and Directives 2006/49/ES on capital adequacy of investition companies and credit institutions). • •

Among the legal acts dealing with operational risk in Slovak legislation are: Act 483/2001 on Banks and on amendments and supplements to certain laws,

Moody’s Investors Service. (June 2002.) Bank Operational Risk Management - More than an Exercise in Capital Allocation and Loss Data Gathering; Special Comment: p.4 3

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Act 566/2001 on Securities and Investment Services and on amendments and supplements to certain laws, Decree of NBS No 3/2011 amending Decree No 4/2007 of NBS on banks’ own funds of financing and banks’ capital requirements and on investment firms’ own funds of financing and investment firms’ capital requirements as amended, Decree of NBS No 13/2010 on further types of risks, on details of risk management system of a bank and a foreign bank branch and on defining a sudden and unexpected change of interest rates on the market, Decree of NBS No 15/2010 on disclosures by banks and branches of foreign banks, Decree of NBS No 11/2011 on risks and risk management system, risk measurement and whole risk calculation and counter party risk.

2.5 The issue of operational risk management in the Slovak banking practice The first step in creating of effective operational risk management structure is the appointment of employees responsible for operational risk and trusting them. The result is the creation of independent department for operational risk, or integrate such department with other activities such as market risk management, securitisation, capital allocation, and so on. At the same time, one needs to emphasize that the creation of a separate and independent control for operational risk management is one of the basic requirements of the Basel Committee. Furthermore, it is also the possibility chosen by the majority of banks in Slovakia. According to my knowledge, 92% of banks in Slovakia already done so. This is a significant improvement, especially when considering that in 2004, when it started with the implementaton, only 38% of them had formed an independent unit for operational risk management within its structure. Bank unit for operational risk is in most cases directly responsible for defining the procedures for the management and control of operational risk, describing and implementing of methodology in operational risk assessment and reporting as well as identification, evaluation and internal supervision over operational risk. The responsibility for defining policies and strategies for OpRisk still remains in the hands of the Board. Less progress has been achieved in the establishment of committee for operational risk . Only half of the banks has established separate and independent committee for operational risk under their management system and one bank has established a subcommittee on operational risk within the Committee for Risk Management of the whole bank. The positive news is that the other two refering banks are in a process of implementation of such committee within their governance structure. Another important step in the OpRisk management is the measurement and then calculating the capital requirement to cover potential or actual losses incurred as a result of exposure to the bank‘s operational risk. In the light of Basel II and Capital requirements Directive,4significant effort has been devoted by the banking sector in Slovakia to the development and integration of qualitative and quantitative risk-management methodologies for the determination of capital adequacy. However, significant diversity in application remains. It should be recognized that many banks do not have a fully articulated comprehensive AMA framework and, indeed, such a sophisticated approach may prove practical for only a relatively small number of major banks. Best practice will therefore be determined by what is appropriate, given the bank’s size, sophistication, and stage of development. Let it see in figures. In Slovak banking sector, the standardised approach is used for calculation of capital requirement for operational risk, which is used by 42,9% refering banks5. Slovenská sporiteľňa, UniCredit banka a Všeobecná úverová banka use more risk sensitive methods for operational risk measurement and they have created their own measurement techniques individually approved by NBS. These above mentioned banks gradually switched to the advanced approaches of calculating capital requirement in last three years, which required them significant effort especially from the side of their risk managers. Despite all this progress in operational risk management area in banks in Slovakia, there is also such banks, which are weak in abiding their duty to report in the area of operational risk management. In the following table, one might see the distribution of banks using different approaches for calculating the capital requirement to cover the losses incurred due to OpRisk.

As it was already mentioned at this article before, Basel II was implemented in the European Union via the Capital Requirements Directives (CRD). It was designed to ensure the financial soundness of credit institutions (banks and building societies) and certain investment firms. The CRD came into force on the 1st of January 2007, with banks applying the advanced approaches from the 1st of January 2008. 5 These results come from analysis conveyed by the author of this article, between the leading commercial banks in Slovakia in the period from 2006 to 2011. 4

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Table 1. Division of methods for calculation of capital adequacy in bank according to different appoaches Approaches for capital Approach based on the requirement calculation elementary indicator of operational risk Number of banks

Standardised approach

Advanced approaches

Source: own processing

As mentioned above, the operational risk is a natural part of all bank activities. The bank manages it through the process of identifying, measuring, monitoring, evaluation and control. The unfavorable economic situation in recent years in the world and thus in the Slovakia, forcing banks to closely monitor and analyze all kinds of risks, that are associated with their activities. It is therefore adjust their processes in this area and focus on compliance with regulatory requirements set by the National Bank of Slovakia. The importance of the risk management process is to ensure the profitability of banke, and each is independently responsible for level of risk taken. Sources of operational risk might be different. However, in the Slovak banking sector, the most common sources of operational failures are external fraud; clients, products and business practices; damage to physical assets, and business disruption and system failures. In the following chart, one might see percentage of all loss events figured cumulatively for the whole sector. Figure 2. Percentage of individual components to the overall risk

Source: own processing

â&#x20AC;Š As one might see from the chart, the most common source of operational failure is external fraud. The losses are mainly caused by third parties activities done with intention of fraud, embezzlement or circumvent the law. Among the areas, where the operational risk failure appears are corporate finance, trading and sales, retail banking, commercial banking, agency services, asset management and retail brokerage. The degree of appearance of these loss events are mentioned in the table below. Table 2. Areas and degree of operational risk appearance Area

Degree

Corporate finance

Low

Trading and sales

Middle

Retail banking

High

Commercial banking

Low

Payment and settlement

High

Agency services

Middle

Asset management

Low

Retail brokerage

Low

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The most common areas of operational risk iclude retail banking and payment and settlement, which one might see in the above mentioned table. The reason for the frequent appearance of operational risk in retail banking might be that the largest segment in banking sector in Slovakia is the retail clients segment. In the case of payment and settlement, there is a human failure factor on one side and system for accounting of individual payments on the other side. On the basis of information and precise analysis of obtained knowledges, I dare to state that the amount of operational failures has a rising tendency. One of the reasons might be increased dynamics of changes in the external environment, increased competition and pressure to reduce costs across the banking sector. In recent years, the whole banking sector in Slovakia has developed considerable effort in implementing effective operational risk management system and even though this process is not at the end, during the relatively short period significant progress has been achieved. Although, there is a large preference in using simpler methods (basic indicator approache, the standardized approach) compared to more complex methods, however the situation is changing, and it will be interesting to monitor its further progress in the future. The major challenge, which banking institutions in Slovakia face, is including operational risk in the banking culture of each bank. Comprehensive managent of this risk category might help them not only to meet regulatory requirements and valid legal acts, but also allows them to reduce the losses caused by operational errors, control the risk itself and improve the quality of services, which ultimately contributes to the effective functioning of the entire bank.

3. CONCLUSION Failure of the financial services sector to properly understand risk was clearly demonstrated by the recent financial crisis. In its 2008 Global Stability Report, International Monetary Fund sharply criticised banks and other financial institutions for the failure of risk management systems, resulting in excessive risk-taking. Financial sector supervision and regulation was also criticised for lagging behind shifts in business models and rapid innovation. And therefore, there has never been a greater need for the banking industry to reassess the way it looks at risk, and not only in Slovakia but also in the global environment. Banks have to draw attention to the current widespread practices of risk management. Thus risk management is becoming increasingly recognized as a key factor in the assessment of banks. There is growing awareness that enterprise-wide risk management enables banks to more precisely tailor their risk appetite and risk profile. Consequently, the rating agencies are placing greater emphasis on it. In the future it is unlikely that any bank will be awarded a triple-A rating without having adopted an enterprise-wide risk management approach. Risk assessment is an integral part of informed decision making, ingluencing strategic positioning and direction. It is fundamental to a banks‘ performance and a key differentiator between competing management teams. Increasing complexity is resulting in the need for more dynamic, responsive approaches to the assessment and management of risk. Not all risks can be quantified. However, it remains incumbent upon management to determine the impact of posible risk-events on financial statements and to indicate the level of variation in projected figures. In summary, the long-term winners are likely to be those banks, that gain competitive advantage and increase shareholder value by increasing responsiveness through adoption of a more forensic risk-based approach, together with improving transparency and thereby enhancing their reputation.

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

Act 644/2006 amending Act 483/2001 on Banks Act 552/2008 amending Act 566/2001 on Securities and Investment Services and on amendments and supplements to certain law Basel Committee on Banking Supervision (2006.) The International Convergence of Capital, Measurement and Capital Standards: A Revised Framework – Comprehensive Version, BIS Jun 2006 Coleman, T.S. (2011.) A Practical Guide to Risk Management, CFA Institute, 2011 Decree of NBS No 3/2011 amending Decree No 4/2007 of NBS on banks’ own funds of financing and banks’ capital requirements and on investment firms’ own funds of financing and investment firms’ capital requirements as amended Decree of NBS No 13/2010 on further types of risks, on details of risk management system of a bank and a foreign bank branch and on defining a sudden and unexpected change of interest rates on the market Decree of NBS No 15/2010 on disclosures by banks and branches of foreign banks Decree of NBS No 11/2011 on risks and risk management system, risk measurement and whole risk calculation and counter party risk.

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Directive 2006/48/ES of the European Parliament and of the Council relating to the taking up and pursuit of the business of credit institutions Directive 2006/49/EC of the European Parliament and of the Council on the capital adequacy of investment firms and credit institutions Power, M. (2005.) The invention of operational risk, Review of International Political Economy, October 2005, Sivák, R., Gertler, Ľ., Kováč U. (2009.) Riziká vo financiách a v bankovníctve, Spirit dva, Bratislava 2009 Young, B., Coleman R. (2009.) Operational Risk Assessment: The Commercial Imperative of a More Forensic and Transparent Approach, Wiley, Chichester 2009

The project is co-financed by the European Union and VEGA No. 306 2011-2013 „The capital market and its role in supporting the real economy in the euro area.“ DETAILS ABOUT AUTHOR: ING. KATARÍNA ORAVÍKOVÁ PODOLIAKOVÁ, PHD. ASSISTANT PROFESSOR UNIVERSITY OF ECONOMICS IN BRATISLAVA, FACULTY OF NATIONAL ECONOMY DOLNOZEMSKÁ CESTA 1, 852 35 BRATISLAVA, SLOVAK REPUBLIC podoliakova@zoznam.sk

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SELF-PROMOTION ACTIVITIES OF ADVERTISING AGENCIES IN CROATIA AND COMPARISON BETWEEN AGENCIES IN TRANSITIONAL AND DEVELOPED COUNTRIES IRENA PANDŽA BAJS KRISTINA OZIMEC

ABSTRACT Advertising agencies develop, prepare, and place advertising in advertising media. The modern advertising agency provides a variety of important services to clients, including media planning and buying, research, market information, sales promotion assistance, campaign development and creation of advertisements, as well as other services developed to help their clients to achieve marketing objectives. It is therefore expected that advertising agencies use their best and the most efficient activities for their own promotion and winning new business. Liberalization of advertising business in Croatia and other transitional countries in east and south-east Europe influenced market dynamics and transition of these national economies initiated modernization of advertising industry and incorporation of contemporary advertising concepts and professional standards in advertising business. Croatian agencies consider that “Positive recommendation of satisfied clients”, “Personal contacts with top management”, “Responding to requests for new business presentations” and “Publicity on recent successful campaigns” are the most successful techniques for attracting new clients. These activities are found to be the most successful in winning new clients in other, both transitional and developed, countries. KEYWORDS: Advertising agency, Self-promotion activities, Croatia

1. INTRODUCTION Advertising agencies are independent businesses that evolved to develop, prepare, and place advertising in advertising media for sellers seeking to find customers for their goods, services, and ideas (American Association of Advertising Agencies, 2000.). The modern advertising agency provides a variety of important services to clients, including media planning and buying, research, market information, sales promotion assistance, campaign development and creation of advertisements, and other services developed to help their clients in achieving marketing objectives. Advertising agencies are experts in communication and they are professionals in this business (Wells, Burnett and Moriarty, 1998.). Therefore it is interesting to see weather the advertising agencies also use their professional knowledge when communicate with their potential clients. It would be expected that advertising agencies use their best practice and the most efficient activities for their own promotion and winning new business. Advertising agencies operate on B2B market and because of specific characteristics of that market promotional activities can very much differ from those used in B2C market. And personal selling usually has the very important role in the scope of communication strategy on B2B market (Waller at al., 2001.). Our research is based on previously conducted researches in US, Australia and Bosnia and Herzegovina (Butkys and Harpel, 1992.; Wills, 1992.; Waller at al., 2001.; Cicic, Brkic and Pandza, 2003.). Wills (1992) defined following eight activities advertising agencies use to attract new clients: Personal contacts with top management, Positive recommendation of satisfied clients, Publicity on recent successful campaigns, Responding to requests for new-business presentations, Trade adveritisng, Direct mail, Unsolicited speculative-proposal and Sales calls by new business development staff Waller at al. (2001.) added onother four activities to previous list: Winning industry awards, Yellow pages, Sponsorship and Internet homepage. Liberalisation of advertising industry in Croatia and other transitional countries in east and south-east Europe in mid ’90 had a significant influence on market dynamics. Transition of these national economies resulted in modernisation of advertising industry and incorporation of contemporary advertising concepts and professional standards in advertising business (Brkic, 2002.). Although Croatian economy is far less developed than USA and Australia it is interesting to compare the trends in activities used to attract new clients in transitional and in developed countries.

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2. RESEARCH GOALS AND METODOLOGY A main aim of this research is to analyze promotional activities of Croatian advertising agencies and to compare ratings among other other transitional and developed countries. Following questions referring to Croatian advertising business were addressed in the scope of this research: 1. 2. 3. 4.

Which are the main characteristics of advertising agencies’ self-promotion in Croatia? Which promotional activities Croatian advertising agencies use to attract new clients and how agencies rate these activities? What are the similarities and differences between advertising agencies in Croatia and B&H according to efficiency ratings of each promotional activity? What are the similarities and differences between advertising agencies in transitional countries in south-east Europe and Australia and USA according to efficiency ratings of each promotional activity?

For gathering primary data semi-structured questionnaire was developed based on previous research in this field (Wills, 1992.; Butkys and Herpel, 1992.; Waller at all, 2001., Cicic, Brkic, Pandza, 2003.). The questionnaire was designed to measure effectiveness of twelve activities advertising agencies use for winning new clients. Advertising agrencies had to estimate perceived successfulness in winning new clients for every activity in questionnaire. The questionnaire was intended to be filled in by agency executives. The respondents were asked to indicate the degree of success they perceived the agency has had in winning new clients on the ten-point scale where 0 is “Not effective at all” and 10 is “The most effective activity”. In a case some agencies did not use some of the activities they were asked to mark the box “Not using”. There were three groups of questions in the questionnaire: 1. 2. 3.

Questions regarding to an agency profile. Questions for estimating percieved effectiveness of each activity used to attract new clients. Questions regarding an advertising agency attitude towards its own promotion.

Purpose of this research was to set up the promotional aspects of advertising agencies on Croatian market. The questionnaire was distributed via e-mail to 72 advertising agencies in Croatia. A list of advertising agencies was obtained from the Croatian Media and Marketing Guide 2009. There were initial, second and third mailing during a period of one month. At the end 37 advertising agencies responded, ie. 51.4%.

3. RESEARCH RESULTS 3.1. Activities used for winning new clients on Croatia The effectiveness of following 12 activities used for winning new clients was estimated: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

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Sponsorship, Direct mail, Internet homepage, Personal contacts with top management, Positive recommendation of satisfied clients, Publicity on recent successful campaigns, Responding to requests for new business presentation, Sales calls by new business development staff, Trade marketing, Unsolicited speculative propusals, Winning industry awards i Yellow pages.

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The results show that advertising agencies perceive “Positive recommendation of satisfied clients” (mean 8.8) to be the most effective activity. Other activities, which are also perceived to be very effective are “Personal contacts with top management” (8.4) “Responding to requests for new business presentations” (7.9) and “Publiicity on recent successful campaigns” (7.5). So, it could be concluded that developing strong successful business relationships with existing clients are the most influential activity in attracting new clients. Other rather successful activities also include “Unsolicited speculative propusals” (7.2), “Sales calls by new business development staff” (6.9), “Winning industry awards” (6.5) and “Internet homepage” (5.7). Activities being perceived as not effective in gaining new business are: “Sponsorship” (4.9), “Direct mail” (4.3), “Trade advertising” (4.3), and “Yellow Pages” (2.1). We have to point out that almost half of the Croatian agencies don’t even use “Trade adveritsing” and activities as “Sponsorship”, “Direct mail” and “Yellow pages” are not used by two thirds of Croatian agencies at all. Other activities which advertising agencies find effective in attracting new clients are: Public relation strategies, organization of events and various educations and conferences. Final results are given in Table 1. Table 1. Activities used for winning new clients in Croatia Activity

Not using

Using

Average

Positive recommendation of satisfied clients

8,8

Personal contacts with top management

8,4

Responding to requests for new business presentations

7,9

Publicity on recent successful campaigns

7,5

Unsolicited speculative proposals

7,2

Sales calls by new development staff

6,9

Winning industry awards

6,5

Internet homepage

5,7

Sponsorship

4,9

Direct mail

4,3

Trade advertising

4,3

Yellow pages

2,1

Source: Authors

3.2. Attracting new clients vs. Improving relationships with existing ones One of the research goals was to find out whether agencies more emphasize attracting new clients or improving relations with existing ones. Therefore we asked the agencies: “Is it more important for agency to attract new clients than to improve relations with the existing ones?”. Almost 78% of questioned agencies gave a negative response and only 11% prefer to increase the number of new clients and are currently focusing on it, explaining that they already have good relations with the existing ones. Four agencies stated that they consider both activities equally important: ”There need to be a balance between those two groups, existing clients should not be neglect because of new ones.” Main reasons for focusing on existing clients agencies see in: importance of long term cooperation and mutual satisfaction, improving service quality by better understanding client needs, lower costs and lower business risk, and limited capacity of agencies. A lot of agencies emphasize that satisfied client brings a new client to the agency. For the majority of agencies “long term cooperation and improvement of relations with existing clients” is more important in order to offer better quality services and better understand their needs. “Existing clients are absolute priority. Agency should never endanger the quality of services to the existing clients because of the acquisition of the new ones”,

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“Experience from previous work shows that it is better to have quality work with fewer clients”, “Bringing a new clients is risky and expensive and asks for increasing the capacity of the agency”, “Agency is not willing to accept new clients if it is not able to fulfill the needs of existing clients with its current capacity...” Croatian agencies are not primarily focused on increasing client number. They are rather trying to satisfiy the needs of present clients with existing resources and scope of activities. Expansion of current business and long-term cooperation is main orientation. Same research conducted in Bosnia and Herzegovina came up with similar results. The most of Bosnian agencies, 65% of them, think that improving relations with the existing is more important then attracting new ones. (Cicic, Brkic, Pandza, 2003.) Results of previous research in the field of advertising industry in B&H showed that: “...half of Bosnian advertising agencies has one major client who represents 25% of their total business and in the other half of agencies 50% of total business is brought by their 3 major clients. This means that the loss of one major client would affect the agency business in the number of following years” (Brkic, 2002.).

3.3. Improving promotion activities Respondents were asked whether the Croatian agency needs to increase its promotion activities in order to attract new clients. Positive response was given by approximately 73%, while remaining 27% responded that agency should not increase self-promotion. The main reasons for increase in self-promotion are:

Promotion is an essential factor that advertisers recognize the agency, services and values which offers. It contributes to image creation.

Rising number of potential advertisers and rising competition on Croatian market.

Those agencies that think they shouldn’t increase promotional efforts give different explanations: “We have full working capacity. Before anything else, quality of our services is more important then quantity” and “Our reputation and recommendations of satisfied clients are sufficient for attracting new clients.” Analysis of responses to the question “Does your agency need to increase advertising for self-promotion?” show that about 84% of agencies think that advertising has not to be used more. Precisely, most of them think that advertising is not efficient for agency business, so it should not be used at all. Opinion of Bosnian agencies are completely divided – 50% of agencies think that advertising has to be used more, and the other half thinks opposite (Cicic, Brkic, Pandza, 2003.). The most common reasons for negative response is inefficiency of advertising compared to other forms of promotion: “We do not think that advertising is efficient for our target group, our target are managers, not broader population”, “Other activities, such as, newsletter, web site, direct mailing, festival attendance, are more efficient. Advertising is not a dominant way to promote agency services”. One agency claims that advertising should be used more because “…we have to follow what we propose to our clients”, “What kind of message we sending them if we do no use advertising for our business.” Agencies in Croatia and Bosnia and Herzegovina are aware of importance of self-promotion in attracting new clients and most of them support opinion that increase in self-promotion is necessary, but they do not consider advertising to be efficient in business promotion.

4. COMPARISON BETWEEN TRANSITIONAL AND DEVELOPED COUNTRIES Research on activities used by advertising agencies to attract new clients were also carried out in USA (Willis, 1992.), Australia (Waller at al., 2001.) and B&H (Cicic, Brkic, Pandza, 2003.). Based on these results we are able to compare activities used to attract new clients in developed countries and transitional countries in south-east Europe. Considering the difference in an economy development degree there can also be expected the difference in effectiveness among various techniques used for winning new clients.

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4.1. Comparing Croatian results to results obtainted in Bosnia and Herzegovina Croatian agencies consider that “Positive recommendation of satisfied clients”, “Personal contacts with top management”, “Responding to requests for new business presentations” and “Publicity on recent successful campaigns” are the most successful techniques for attracting new clients. When we compare these results to corresponding results in B&H it is obvious that agencies in B&H consider the same ativities the most successful in winning new clients. Although there is a slight difference in ranking top four activities. Agencies in B&H consider “Positive recommendation of satisfied clients” the most effective activity in attractiong potential clients. It is followed by “Publicity on recent successful campaigns”, “Personal contacts with top management” and “Responding to requests for new business presentations” (Table 2.) Table 2. The effectiveness of promotional activities in Croatia and B&H Croatia

Bosnia and Herzegovina

Activity

No.

Average

No.

Activity

Positive recommendation of satisfied clients

8,8

8,9

Positive recommendation of satisfied clients

Personal contacts with top managementom

8,4

8,8

Publicity on recent successful campaigns

Responding to requests for new business presentations

7,9

7,8

Personal contacts with top managementom

Publicity on recent successful campaigns

7,5

7,2

Responding to requests for new business presentations

Unsolicited speculative proposals

7,2

6,7

Sales calls by new development staff

6,9

6,1

Unsolicited speculative proposals

Winning industry awards

6,5

6,1

Winning industry awards

Internet homepage

5,7

5,2

Direct mail

Sponsorship

4,9

4,2

Sponsorship

Direct mail

4,3

3,7

Trade advertising

4,3

3,7

Internet homepage

Yellow pages

2,1

2,0

Yellow pages Source: Authors

Table 2. indicates that pretty high equality in estimating perceived effectiveness of activities used for attracting new clients exists between agencies from transitional countries included in this research. Although using “Internet homepage” turns out to be an exemption while Croatian agenies consider their web pages more successful than agencies in B&H. Croatian agencies marked successfulness of their “Internet homepage” activities in winning new clients with average of 5.7 and they ranked it on eight place. While B&H agencies consider the same activity significantly less successful and therefore it was placed on eleventh position with average mark of 3.7. This can be due to the fact that research in B&H was carried out five years before the one in Croatia and to the fact that Croatia uses better Internet infrastructure and has a better economy development index.

4.2. Promotional activities differences among transitional countries, Australia and USA According to results of US research among four most succesful promotional activities used by advertising agencies to attract new clients were activities as followes: “Positive recommendation of satisfied clients”, “Responding to requests for new business presentations”, “Personal contacts with top management” and “Publicity on recent successful campaigns” (Wills, 1992.). The situation in Australian advertising industry also indicates the same trend whet it comes to extractiong top four activities in attracting new clients. “Personal contacts with top management” are considered to be the most effective in gaining new clients and it is followed by “Positive recommendation of satisfied clients”, “Responding to requests for new business presentations” and “Publicity on recent successful campaigns” (Waller et al., 2002.).

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Table 3. Promotional activities ranking in Croatia, B&H, Australia and USA Rank Croatia

B&H

Australia

USA

Positive recommendation of satisfied clients

Personal contacts with top management

Positive recommendation of satisfied clients

Personal contacts with top management

Publicity on recent successful campaigns

Positive recommendation Responding to requests of satisfied clients for new business presentations

Responding to requests for new business presentations

Personal contacts with top Responding to requests management for new business presentations

Personal contacts with top management

Publicity on recent successful campaigns

Responding to requests for new business presentations

Publicity on recent successful campaigns

Unsolicited speculative proposals

Sales calls by new development staff

Winning industry awards

Sales calls by new development staff

Unsolicited speculative proposals

Sales calls by new development staff

Trade advertising

Winning industry awards

Direct mail

Internet homepage

Direct mail

Unsolicited speculative proposals

Sponsorship

Internet homepage

10.

Direct mail

Trade advertising

11.

Trade advertising

Internet homepage

Sponsorship

12.

Yellow pages

So, among twelve activities advertising agencies use to attract new clients there are same four activities considered to be the most important and most effective for attracting new clients in every country. There is just slight difference in ranking these activities in each research. Analyses of the research results in south east Eurepe’s transitional countries Croatia and B&H as well as in USA show that good and stable agency-client relationship with present clients is the best method for winning new ones. Present satisfied clients that believe the agency they hired is the most responsible for developing their successful marketing plan are also willing to recommend that agency to others. On the other hand for Australian agencies the most important way of getting new clients is making contacts and building long-term relationships with top executives in present and potential clients. Building such personal relationships enables an agency to get to better know their clients and to better understand mission and vision of their client’s businesses. It also enables agency to become accustomed with client’s corporate culture, to better understand client’s products and services assortments in order to promote client’s values. Besides top four activities for winning new clients some remarks can be made to other activites. The role of “Unsolicited speculative proposals” is perceived differently by transitional countries compared to developed ones. Croatian and B&H agencies consider “Unsolicited speculative proposals” more successful in winning new clients then agencies in USA and Australie. Therefore, while ranking activities according to their effectiveness in winning new clients, “Unsolicited speculative proposals” take fifth place in Croatia and sixth place in B&H but only eighth place in USA and Australia being considered rather unsuccessful in acquiring new clients. Australian agencies see “Winning Industry Awards” as rather successful in winning new business, so it is on the fifth place according to effectiveness in winning new clients while agencies from transitional countries don’t see “Winning Industry Awards” so important and pay more attention to “Unsolicited speculative proposals” and “Sales calls by new development staff” considering these activities more effective in winning new clients. Behind that difference could be the fact that various industry festivals and culture of awarding are more popularized in developed countries and have longer tradiotion and better media focus as well.

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Despite the fact they do business in far more developed economies Australian agencies don’t consider “Internet homepage” more effective in winning new clients than agencies in Croatia. Australian agencies put “Internet homepage” on ninth place and Croatian agencies on eigth place. This could be due to the fact that research in Australia was conducted in year 2001. In every research agencies rated “Sponsorship”, “Trade marketing” and “Yellow pages” as inefficient in winning new clients therefore it is recommended to use these activities as supporting activities. “Direct mail” is rated as moderately efficient activity for attracting new clients. So, it is advisable to use “Direct mail” as additional activity to attract new clients. Supporing and additional activities are intended to be a base for building and maintaining relationships with potential clients as well as for identifying new opportunities and getting propositions for preparing a business presentation to potential clients. It is important to compare results of agency relations with the existing clients and the new ones between transitional and developed countries. If we compare the research conducted in Croatia and BH with the one conducted in Australia, the results are different. The majority of agencies in Australia state that attracting new generations of clients are for them a “major priority”. For them new business is ”vital to the agency growth, it keeps agency strength and moral at a high level” and “...presents the only way to achieve growth.” (Waller at al., 2001.). There is a strong competiotion present in Australian advertising market. Therefore more intensive winning of new clients is necessary which inevitably leads to higher agency growth. On the other side, in transitional countries e.g. Croatia and Bosnia and Herzegovina, advertising agencies are primarily using their capacity (finances, equipment, staff etc.), to meet the needs of existing clients. This finding points out difference in advertising agency business between transitional and developed countries.

4.3. Understanding promotional activities in trasitional countries Better understanding of research results from transitional markets – Croatia and B&H, could be achieved if we compare it with corresponding studies from developed markets. The research on the importance of self-promotion of advertising agencies was conducted in US. Results showed that 86% of agencies felt that they should intensify self-promotion due to following 4 reasons (Butkys and Herpel, 1992.): 1. Promotion is essential for growth 2. Competition is extremely intense 3. Agencies need to follow their own advice 4. Agencies should attempt to differentiate themselves According to study by Cadwell and Davis the most common reasons for agencies’ negative feelings towards advertising were: 1. Advertising is not very effective 2. We have never budgeted for advertising 3. We have never been able to agree on an advertising theme In Croatia almost 90% of agencies do not use advertising for self-promotion at all, because in their opinion advertising is not effective for their business, while 10% of them develop advertising campaign on its own. In B&H the picture is something different - 70% of agencies develop advertising campaign on its own, while 18% don’t use advertising for self-promotion at all (Cicic, Brkic and Pandza, 2003.). Analyzing the promotional activities on different agencies’ markets we can conclude that agencies in transitional countries have the same opinion as agencies in developed countries concerning the questions of increasing promotional activities and using advertising.

5. CONCLUSION This research has been conducted to show effects of globalization process in advertising industry and specifics of agency market in transitional countries. This article considered two main aspects: 1. To identify activities of advertising agencies in Croatia and importance of improving promotional activities 2. Comparison between agencies in transitional countries (Croatia and B&H) and those in USA and Australia.

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Since the activities important for the promotion of agency business are the same in all four analyzed markets the effects of globalization are obvious. The following 4 activities are recognized as the most efficient techniques used to attract new business in all four markets:

• • • •

Positive recommendations of satisfied clients Publicity on recently successful campaigns Personal contacts with top management Responding to requests on new business presentations

Advertising agencies pay a great importance to improving self-promotional activities in both transitional and developed markets. Agencies in Croatia and Bosnia and Herzegovina are aware of the importance of self-promotion and the majority of them support the view that it is necessary to intensify self-promotion. Their current level of promotion is not sufficient, because by focusing on existing clients they do not have enough time and other resources to be engaged in creating self-promotional activities. Since Croatian and Bosnian agency markets are of negligible size compared to agency markets in US and Australia, the results of those researches reflect specific features of local advertising industry. Australian agencies state that attracting new clients are the major priority for them, but on the other side, Croatian and Bosnian agencies are primarily focused on existing clients and improving relations with them. We can conclude that in transitional markets growth of an agency from the aspect of client increase is of secondary significance. With the existing size and capacity Croatian and Bosnian agencies are trying to satisfy the needs of existing clients and also they are trying to ensure a long-term cooperation with them.

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

Brkic, N. (2002.), Advertising Agencies and Advertising Industries in Bosnia and Herzegovina. Sarajevo: University of Sarajevo Press. (References from Proceedings and Books) Butkys, A., Herpel, G. (1992.), How advertising agencies handle their own advertising strategy: An industry-wide overview of its self-promotion efforts, Journal of Advertising Research, 32. (References from Journals) Cicic, M., Brkic, N., and Pandza, I. (2003.), Advertising Agencies’ Activities in Attracting New Business in Bosnia and Herzegovina, 8th International Corporate and Marketing Communications Conference: “New Challenges for Corporate and Marketing Communications”, London, Great Britain, Proceedings, pp. 34-45. (References from Proceedings and Books) Cadwell, F.; Davis, H. (1979.), Why Is It That Ad Agencies Don’t Advertise, Advertising Age. (References from Journals) Gamble, F. (1970.), What Advertising Agencies Are-What They Do and How They Do It, 7th Edition, American Associations of Advertising Agencies, New York, USA. (References from Proceedings and Books) Jones, J. P. (1999.), The Advertising Business, USA: Sage. (References from Proceedings and Books) Kaynak, E., Kucukemiroglu, O., Odabasi, Y. (1994.), Advertising agency/client relationship in advanced developing country, European Journal of Marketing, 28 (1), pp. 35-55. (References from Journals) Kotler, P., Keller, K.L. (2006.), Marketing Management, twelft edition, New Jersey: Pearsons Pretence Hall. (References from Books) Kolter, P. (2001.), Upravljanje marketingom: analiza, planiranje, primjena i kontrola, Zagreb: MATE. (References from and Books) Waller, D., Cusick, D., Matheson, H.; Miller, M. (2001.), Advertising agency activities used to attract new clients in Australia, Journal of Business & Industrial Marketing, 16 (2). (References from Journals) Wells, W, Burnett J., Moriarty, S. (1998.), Advertising Principles and Practice, Fourth Edition, New Jersey: Prentice Hall. (References from Books) West, D.C., Paliwoda, S.J. (1996.), Advertising client-agency relationships, European Journal of Marketing, 30 (8), pp. 22-39. (References from Journals) Wills, J. (1992.), Winning New Business - An Analysis of Advertising Agency Activities, Journal of Advertising Research, 32. (References from Journals)

DETAILS ABOUT AUTHORS: IRENA PANDŽA BAJS, PHD TEACHING AND RESEARCH ASSISTANT, FACULTY OF ECONOMICS AND BUSINESS ZAGREB, UNIVERSITY OF ZAGREB ZAGREB, CROATIA ipandza@efzg.hr KRISTINA OZIMEC, B.A. TEACHING AND RESEARCH ASSISTANT, FACULTY OF ECONOMICS AND BUSINESS ZAGREB, UNIVERSITY OF ZAGREB ZAGREB, CROATIA kozimec@efzg.hr

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URBAN TOURISM TOWARDS SUSTAINABLE DEVELOPMENT IVANA PAVLIC ANA PORTOLAN MARIJA BUTORAC

ABSTRACT Tourism is a modern global phenomenon and reflects the general development of society. The impact of tourism development implies not only the economic but also environmental, social and cultural aspects of life. Due to the numerous economic benefits arising from its development, tourism has gained a very important status and in many countries has received a significant role and priority in economic development. Tourism, from the area uses certain economic benefits that would otherwise remain unused. However uncontrolled development often destroyed the area where it’s realized, and in this way operates contrary to the tourism development primary aims. Uncontrolled development in which tourism is an essential part, bring into the question its further development. Therefore, the object of the paper is to determine the negative effects of uncontrolled and intensive tourism development in urban areas that are not based on the principles of sustainable development. The aim and purpose is to present the importance of applying the principles of sustainable tourism development in urban areas and define the key subjects that will have the impact for the application of the concept of sustainable development in such areas. In order to collect the basic data about the importance of applying the sustainable development conception in urban areas survey method was applied. Kruskal-Wallis test is used for the realization research aims. The research results will serve as the operational guidelines for the destination tourism managers in applying the concept of sustainable development in urban areas. KEYWORDS: sustainable tourism development, positive and negative impact, urban areas, Dubrovnik.

1. INTRODUCTION Tourism is very important part of economy for many countries because tourism can bring many economic benefits like further development of the area, employment etc. Although tourism has positive impact on the destination development, uncontrolled and unplanned development may be responsible for many negative effects on the destination. Rapid expansion of the tourism can create a pressure on the natural, social and economic environments of the destination. It is considered that uncontrolled and unplanned development of tourism can have negative impacts on environment, social and economic particularities, but also that all those possible negative impacts represents a serious threat to tourist activities and further development of urban areas. To be sustainable tourism should make optional use of the environmental resources, should respect the socio cultural authenticity of the host communities and ensure viable long term economic operations. Those are the principles of sustainable development of tourism. In order to prevent all those possible negative impacts that tourism could create we have to develop tourism in accordance with the principles of sustainable development so we can protect the basis on which tourism is built. Therefore, the main objective of this paper is to point out the necessity of the implementation the goals and the principles of the sustainable tourism development in the urban areas.

2. LITERATURE REVIEW The explicit idea of sustainable development was first highlighted by the International Union for the Conservation of Nature and Natural resources in its World Conservation strategy.1 The original definition of sustainable development was provided by the Brundtland Commission in Our Common Future as „development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”2 Authors Vukonić and Keča indicated the following definition of sustainable development: „Sustainable development is a change in the structure of global production and consumption that does not disturb the ecosystem“.3 Four basic principles for the concept of sustainability have been considered: idea of holistic planning and strategy making, the importance of preserving essential ecological processes, the need to protect both human heritage and biodiversity and development based on the idea that productivity can be sustained over the long term for future generations.4 Authors Kordej de Villa, Stubbs and Sumpor Zhenhua, I. (1987.) Sustainable tourism development a critique, Journal of sustainable tourism, vol. 11 (6), p. 460. http://www.tandfonline.com (accessed 31.05.2012.) 2 World Commission on Environment and Development (gro Harlem Bruntland) (1987.) Our Common Future, Oxford University Press, Oxford accessed in Pravidć, V. (1996.) Perspektive održivog razvitka i izbor između ekonomske i ekološke koncepcije, Ekonomija: Hrvatska i održivi razvoj (2) Rifin, Zagreb, p. 339. 3 Vukonić, B. Keča, K. (2001.) Turizam i razvoj pojam, načela i postupci, Mikrorad, Zagreb. p. 190. 4 World Commission on Environment and Development, op. cit., accessed in Lu, Y. Nepal, K. S. (2009.) Sustainable Tourism Research an analysis of papers published in Journal of Sustainable Tourism, Journal of Sustainable Tourism, vol. 17 (1), p. 6. http://www.tandfonline.com (accessed 31.05.2012.) 1

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indicated that definition of sustainable development as a concept that encompasses intertwined economic (it is defined as growth, efficiency and „equitable „distribution of wealth), social (participate in decision making, social identity) and environmental dimension (respect the integrity of various ecosystems, carrying capacity and protection of natural resources).5 Concept of sustainability rests on three integrated elements: the economic, socio cultural, and ecological. Delivering sustainable development means striking a balance between mentioned elements.6 Sustainable development refers to achieving the right balance between social, economic and environmental goals. The goal in economic field is changing unsustainable patterns of consumption and production, while in the environmental field the goal is sustainable managing of natural resources for development.7 Interpretations of sustainable development can be classified as ranging from „very strong“(traditional resources exploitative) to „very weak” (extreme resources preservationist).8 Sustainability cannot simply be a „green“or „environmental“concern, no matter how crucial those aspects of sustainability are. A truly sustainable society is one where wider questions of social needs and welfare, and economic opportunity are integrally related to the environmental constraints imposed by supporting ecosystems and the climate.9 Economic growth and environmental conservation are not only compatible, they are necessary partners and that they cannot exist without another.10 The rapidly growing size and significance of the tourism has also given rise to increased critical review of its social and environmental consequences.11 There is now recognition that uncontrolled growth in tourism aiming at short-term benefits often results in negative impacts, harming the environment and societies, and destroying the very basis on which tourism is built and thrives.12 Tourism, it is claimed ultimately degrades the attractive natural and cultural features of the place and thus can neither sustain the basic resources on it which relies, not rely on itself as an industry in the long term. If those charges are valid than tourism either can be severely restrained or will eventually burn itself out, but not before causing a great deal of damage.13 Tourism destinations are facing increasing pressure on their natural, cultural and socio-economic environments as a result of the rapid expansion of the tourism sector.14 Author Turkelj thinks that negative sides of tourism can place direct pressure on fragile ecosystems causing degradation of the physical environment and create pressure on host communities.15 Tourism development not only changes the physical landscape of a destination but also results in changes to the social life of the community.16 Tourism can contribute to environmental degradation, but also has the potential to assist in improving the environmental situation.17 Tourism can bring many economic benefits for many countries, regions and local communities, uncontrolled development may be responsible for numerous adverse effects on the environment. Today is considered, not only that uncontrolled development of tourism can do harm to the environment, but also that environmental degradation represents a serious threat to tourism related activities.18 When the exploitation of nature resources for tourism development is carried out carefully and in certain limits, tourism becomes a special form of protection of the nature. We are talking about destructive forms of tourism when tourism uses natural resources in uncontrolled way.19 Cultural heritage attractions are, by nature, unique and fragile. Therefore, it is fundamental that tourism authorities study how best to develop these cultural sites while protecting and preserving them for the long term.20 World heritage sites include many of the outstanding attractions and monuments of the past. They require management that preserves them for future generations and at the same time, makes them accessible to the public.21 The World Tourism Organization also indicated that accelerated and the massive growth in tourism has fundamental implications. It means that Kordej De Villa, Ž. Stubbs, P. Sumpor, M. (2009.) Participativno upravljenje za održivi razvoj, Ekonomski institut, Zagreb, p. 18. Turkelj, Ž. (2010.) Turizam i agroturizam u funkciji održivog razvitka, Sveučilište J.J. Strossmayera u Osijeku, Ekonomski Fakultet Osijek, p. 31. 7 World Tourism Organization, (2002.) Contribution of the World Tourism Organization to the World Summit on Sustainable Development, Madrid, p. 3., http://www.wtoelibrary.org (accessed 31.05.2012.) 8 Turner, R. Pearce, D. Bateman, I. (1994.) Environmental Economics an elementary introduction, Hemel Hemstead: Harvester Wheats Heaf, accessed in Harris, R. Griffin, T. Williams, P. (2002.) Sustainable Tourism a global perspective, Elsevier Butterworth Hiennemann, p. 9. 9 Bramwell, B. Lane, B. (2009.) Priorities in Sustainable Tourism Research, Journal of Sustainable Tourism, vol. 16 (1), p. 1. http://www.tandfonline.com (accessed 31.05.2012.) 10 Harris, R. Griffin, T. Williams, P. op. cit., p. 36. 11 McCool, S. F. Moisey, R. N. Nickerson, N. P. (2001.) What tourism should sustain the disconnect with industry percepteption of useful indicators, Journal of travel research, vol. 40 (124.), p. 124. http://jtr.sagepub.com/content/40/2/124 (accessed 15.06.2012.) 12 World Tourism Organization, op. cit., p. 7. 13 Harris, R. Griifin, T. Williams, P. op. cit., p. 24. 14 Butler, R. W. (1999.) Sustainable tourism a state of the art review, Tourism Geographies an international Journal of tourism, space and environment, vol. 1 (1), p. 18. http://www.tandfonline.com (accessed 31.05.2012.) 15 Turkelj, Ž. op. cit., pp. 30- 31. 16 Kang, S. K. Lee, C. K. Yoon, Y.S. Long, P.T. Resident perception of the impact of limited stakes community based casino gaming in nature garming communities, Tourism Management, vol. 29 (4.), pp. 681-94, accessed in Doohyun, H. Stewart, W. P. Ko. D. (2012.) Community behavior and sustainable rural tourism development, Journal of travel research, vol. 51 (328.), p. 382. http://jtr.sagepub.com/content/51/3/328 (accessed 15.06.2012.) 17 Pigram, J. Outdoor Recreation and resource menagement, London, Croom and Helm, accessed in Pigram J. Wahab, S. (1997.) Sustainable tourism in changing word, Tourism development and growth, Routledge, London, p. 19. 18 Neto, F. (2003.) A new approach to sustainable tourim moving beyond environmental protection, Natural resources forum 27, p. 216. 19 Vukonić, B. Keča, K. op. cit., pp.82-88. 20 World tourism organization, (2001.) Cultural heritage and tourism development a report on the international conference on cultural tourism, Madrid, p. 38. http://www.wtoelibrary.org (accessed 31.05.2012.) 21 World tourism organization (1993.) Tourism at world heritage sites the sites managers handbook international committe on cultural tourism, Madrid, p. 7. http://www.wtoelibrary.org (accessed 31.05.2012.) 5 6

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tourism resources in urban centre, especially cultural sites, monuments and museums are becoming heavily congested. Aware of dangers of mass and unplanned tourism, as well as opportunities for the more human type of cultural encounter between local host and guests, tourism authorities, local communities, and the tourism private sector have to work closely together and apply the principle of sustainability in the planning and management of tourism. A balance must be achieved between tourism development on one hand and cultural preservation on the other. Achieving this balance is a challenge.22 Sustainable tourism began life in part as a negative and reactive concept in response to the many issues that tourism had begun to create in the 1970s, issues ranging from environmental damage to serious impacts on society and traditional cultures.23 In the wake of the World Commission on the Environment and Development Report, Our Common Future tourism research has responded to the popularization of the concept of sustainable development.24 Since the Rio Earth Summit, sustainability has become the central issue in tourism development policies. The Rio Summit clearly meant a turning point in the level of awareness about sustainable practices in tourism among governments and major groups.25 Sustainable tourism development is “management of all resources in such a way as to satisfy the economic, social and aesthetic needs, and ensuring the preservation of cultural integrity, ecological processes, biological diversity, and meet basic human needs“.26 In 1996, the World Tourism Organization, the Earth Council and the World Travel & Tourism Council, representing large multinational tourism and travel companies, joined together to launch an action plan entitled „Agenda 21 for the Travel & Tourism Industry: Towards Environmentally Sustainable Development“ a sectoral sustainable development programme based on the Rio Earth Summit results.27 Fundamental principle of all sustainable tourism development policies is that the natural, social and cultural resources upon which tourism depends should be protected.28 Sustainable tourism as “all forms of tourism development, management and activities that provide long life and cultural activities that will preserve for future use all inherited resources (natural, cultural or built) which allow further development of tourism.29 To be sustainable tourism should make optional use of the environmental resources, respect the socio-cultural authenticity of host communities, conserve their built and living cultural heritage and ensure viable, long term economic operations providing socio-economic benefits to all stakeholders.30 Sustainability is a positive approach intended to reduce the tensions and friction created by the complex interactions between the tourism industry, tourists, the environment and the host communities so that the long term capacity and quality of both natural and human resources can be maintained.31 Many authors have proposed that sustainable tourism (alternatively green tourism and ecotourism) be developed to address the social, environmental, and economic issues associated with the tourism industry.32 Sustainable tourism is tourism that is developed and maintained in a manner and at such a scale, that it remains economically viable over an indefinite period and does not undermine the physical and human environment that sustains and nurtures it.32 Sustainable tourism can be viewed as “a process which allows development to take place without degrading or depleting the resources . . . so that they remain able to support future as well as current generations“.34 Visions of sustainable development (and sustainable tourism) are couched in the language of „balance” finding the right balance between the need for development and the need for environmental protection.35 Sustainable tourism as a tourism that: both now and in the future operate within natural capacities for the regeneration and future productivity of natural resources; recognize the contribution that people and communities, customs and lifestyles, make to the tourism experience; accept that these people must have an equitable share in the economic benefits of local people and communities in the host areas.36 World tourism organization, op. cit. p. 5. http://www.wtoelibrary.org (accessed 31.05.2012.) Bramwell, B. Lane, B. (1993.) Sustainable tourism an evolving global approach, Journal of sustainable tourism, 1(1), 1:5, accessed in Bramwell, B. Lane, B. (2012.) Towards innovation in sustainable tourism research, Journal of sustainable tourism, vol. 20 (1), p. 1. http://www.tandfonline.com (accessed 31.05.2012.) 24 World Commission on environment and development, op. cit., accessed in Harris, R. Griffin, T, Williams, P. op. cit., p. 3. 25 World Tourism Organization, op. cit., p. 11. http://wtoelibrary.org (accessed 31.05.2012.) 26 Globe 90, Tourism Canada, An action strategy for sustainable tourism development,Ottawa, p. 3., accessed in Murphy, P. E. (1998.) Tourism and sustainable development, Global tourism, Butterworth Heinemann, Second edition, Oxford, p.179. 27 World tourism organization, op. cit., p. 24. http://www.wtoelibrary.org (accessed 31.05.2012.) 28 Sharpley, R. (2000.) Tourism and sustainable development exploring the theoretical divide, Journal of sustainable tourism, vol. 8 (1), p. 12. http://www. tandfonline.com (accessed 31.05.2012.) 29 Travis, A. S. Sustainable tourismn concept and innovations in coastal areas and coastal city, Zbornik radova međunarodnog znastvenog skupa prema održivom razvitku turizma u Hrvatskoj, Institut za turizam, Zagreb, accessed in Magaš, D. Smolčić, Jurdana, D. (1999.) Metodološki aspekti određivanja prihvatnog kapaciteta turističkog područja, Tourism and hospitality management, vol.5., no. 1-2, Opatija/Wien, p. 98. 30 World tourism organization (2005.) Sustainable definitions of tourism conceptual definition http://www.world-tourism.org/frameset/frame_sustainable.html, accessed in Turkalj, Ž. op. cit. pp. 31-32. 31 Bramwell, B. Lane, B. op. cit., p. 1, accessed in Zhenhua, L. op. cit. p. 460. http://www.tandfonline.com (accessed 31.05.2012.) 32 Butler, R. W. (1991.) Tourism, environment and sustainable development, Environmental conservation, 18 (3) pp. 201-9 accessed in McCool, F. S. Moisey, R. N. Nickerson, N. P. op. cit., p. 124. http://jtr.sagepub.com/content/40/2/124 (accessed 15.06.2012.) 33 Harris, R. Griffin, T. Williams, P. op. cit., p. 24. 34 World tourism organization (1993.) Sustainable tourism development guide for local planners, Madrid, accessed in Soteriou, E. C. Coccossis, H. (2010.), Integrating sustainability into the strategic planning of national tourism organizations, Journal of travel research, 49 (2) p. 191. http://jtr.sagepub.com/ content/49/2/191 (accessed 15.06.2012.) 35 Harris, R. Griffin, H. Williams, P. op. cit., p. 10. 36 Eber, S. ed. (1992.) Beyond the green horizont a discussion paper on principles for sustainable tourism, Goldaming, UK accessed in Butler, R. W. op. cit., p. 10. http://www.tandfonline.com (accessed 31.05.2012.) 22 23

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Sustainable tourism is defined as an alternative tourism form that improves the quality of life of the host community provides a high quality of experience for the visitors and maintains the quality of the environment on which both the host community and the visitor depend.37 Sustainable tourism as „tourism which is developed and maintained in an area (community, environment) in such a manner and at such a scale that it remains viable over an infinite period and does not degrade or alter the environment (human and physical) in which it exists to such a degree that it prohibits the successful development and well being of other activities and processes“.38

2.1. Urban tourism and importance of sustainability principles in urban areas Urban tourism has emerged as a significant and distinctive field of study during the 90s. Earlier work, dating back to the 60s, was sporadic and limited in scope, much of it being carried out by geographers.39 According to Law four factors have propelled cities toward tourism development: the decline of long established manufacturing activities, the need to create new economic activities or face high unemployment, the perception of tourism as the growth industry and the hope that tourism development will result in the regeneration and revitalization of urban cores.40 Major urban areas perform important functions within the workings of the overall tourism system: for example, they are key ‘‘gateways’’ for both international and domestic tourists and, as key nodes in the air transport system, act as staging posts for multi-destination trips. Many of these functions are often taken for granted and, as a consequence, the requirements for profitable and sustainable tourism development in urban areas are not well understood.41 The attractiveness of urban destinations according to Karski lies in the “… rich variety of things to see and do in a reasonably compact, interesting, and attractive environment, rather than in any one component. It is usually the totality and the quality of the overall tourism and town centre product that is important …”.42 According to Law here are some key attributes that urban areas have to possess as tourist destinations. They have naturally large populations which in turn attract visiting friends and relatives. They draw tourists to their attractions because these are often much better developed than in other types of destinations. They are easily accessible through airports and scheduled services. There is a large stock of accommodation built to serve the business traveller and finally, urban destinations appeal to a number of different tourist markets as they offer the communications, transport, services and facilities which meet tourist needs.43 Urban expansion has firmly established cities as strategic centres of growth, innovation, and creativity, making it essential to ensure their sustainability in the twenty-first century.44 Urban tourism is becoming one of the fastest growing tourism sectors in the world. The unexplored opportunities and the rising adverse effects on the local communities, however, are increasingly highlighting the importance of dealing with the sector in relation to the urban economy, environment, society, and cultural specifics.45 This increase in attention in part reflects the growth of tourism in urban areas and its resulting associated policy issues. This tend to be of two main types. On the one hand, the growing demand from tourists, particularly in historic cities, has brought a reactive response arising from the problems of coping with increased visitation, a situation perhaps most commonly experienced in Europe.46 On the other, many urban policies have recently incorporated an increasingly proactive stance towards tourism which is seen more and more as a strategic sector for urban revitalization in post industrial cities.47 Growth in tourism demand will positively affect income and employment levels of a relevant part of the population. At the same time, increasing numbers of visitors will generate negative effects, or “costs” borne by the physical and cultural environment, the local population and the visitors themselves. A particular concern is the manner in which tourist’s effect changes in McIntry, G. (1993.) Sustainable tourism development guide for local planners, Madrid, Hwan, S. Choi, C. Sirakaya, C. (2005.) Measuring residents attitude toward sustainable tourism Development of sustainable tourism attitude scalee, Journal of travel research, vol. 43 (380), p. 381. 38 Butler, R. W. op. cit., p. 18. 39 Guttierez-Ronco, S. (1977.) Localizacion Actual de la Hostelaria Manrilena Boletin de la Real Sociedad Geografica 2:347-357, Pearce, D. G. (1981.) L espece touristique de la grand ville: elements de synthe et application a Christchurch, L espece Geographique, 10:207-213, accessed in Pearce, D. G. (2001.) An integrated framework for urban tourism research, Annals of tourism research, vol. 28. no. 4., Elsevier science Ltd, p. 126., accessed in www.elsevier.com (01.09.2012.) 40 Law, C. M. (1993.) Urban Tourism Atrracting visitors to large cities, London, Mansell accessed in Chan, T. C. (1996.) Urban heritage tourism the global local nexus, Annals of tourism research, vol. 23. no. 2., Elsevier Science Ltd, p. 286., accessed in www.elsevier.com (31.08.2012.) 41 Edwards, D. Griffin, T. Hayllar, B. (2008.) Urban tourism research: developing an agenda, Annals of tourism research, vol. 35. no. 4., pp. 1032-1052, Elsevier Ltd, p.133. accessed in www.elsevier.com (31.08.2012.) 42 Karski, A. (1990.) Urban tourism a key to urban regeneration, The planner (April 6), 15-17, accessed in Pearce, G. D., op. cit., p. 927. 43 Law, C. (1996.) Tourism in major cities, London: international Thompson Bussine press/Routledge, accessed in Edwards, D. Griffin, T. Hayllar, B. op. cit., p. 1033. 44 International urban development association (2006.) Competitiveness, creativity and community: how cities and territories compete in tomorrows world, 30th urban dvelopment congress, October 8-11, Belfast, United Kingdom, accessed in Krassmira, A. P. S. (2007.) New paradigms in city tourism management: Redefinig destination promotion, Journal of travel research, vol. 46. no. 108., p. 109. 45 Ibidem., p.109. 46 Van der Borg, J. (1998.) La gestion du tourisme dans les villes historiques, in Cazes, G. Potier, F. Eds, Le tourisme et la ville: experience Europennes, pp. 99-109, accessed in Pearce, D. op. cit. p. 927. 47 Jansen-Verbeke, M. C. Lievois, E. (1999.) Analysing heritage resources for urban tourism in European cities, In Pearce, D. G. Butler, R. W. eds, Contemporary issues in tourism development, London, Routledge, pp. 81-107, accessed in Pearce, D. G. op. cit. p. 927. 37

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host communities collective and individual value systems, behaviour, patterns, community structure, lifestyle and quality of life.48 Urban tourism now is being increasingly seen as a means of developing competitive urban destinations, in the context of improving the attractiveness and functioning of places and regions as visiting areas through a sustainable process, not just economically and ecologically, but socially, culturally, and politically as well.49 Urban areas have always attracted visitors, but in the recent years tourism to cities has increased and the visitors economy has become more important to them.50 Development of tourism in cities can bring to the city a lots of positive things (economic benefits, employment), but on the other hand arrivals of tourists, especially in large numbers, can create negative effects. Authors Girard and Nijkamp indicated that negative sides of the presence of tourists, especially in large numbers may have adverse effects on the local quality of life, to the point of possibly destroying the social and cultural uniqueness of locations.51

2.2. Dubrovnik as an example of urban tourism area Dubrovnik is destination in which urban tourism is developed. Tourists’ arrivals, overnights and environment protection in Dubrovnik Neretva County are shown below. More than 1.922.104 overnights in Dubrovnik Neretva County are realized in August. 1.174.168 of the overnights are realised in July in Dubrovnik Neretva County.52 Most of those overnights are realized in the city of Dubrovnik. From this date we can see that more than 50% of the total overnights (in 2010.) are realized in just two months during the high season in Dubrovnik. Tourist season in Dubrovnik last from June until October, and most of the overnights and arrivals in this county is realized in that period of time. Large numbers of tourists in such short period of time can create negative effect on environment, biodiversity, and what is the most important can have negative impact on destination.53 Furthermore investments in environment protection are very low. We invest in environment protection 9.026.000 HRK which is only 0,39 % of the total investments in environment in Croatia.54 From this date we can conclude that investments in environment protection in this county are very low especially when we know that this destination depends only on tourism development. In the future we have to invest more in environment protection so we can prevent possible negative effects on environ on which tourism depends. All this data can show us that we have to develop tourism in this destination in accordance with the principles of sustainable development so we can avoid negative impacts on the destination.

3. DATA AND METHODOLOGY In order to present the importance of applying the principles of sustainable tourism development in urban areas and determine the negative effects of uncontrolled and intensive tourism development in urban areas that are not based on the principles of sustainable development, an analysis was carried out, where primary data was collected and compiled alongside the collection of secondary data. In order to identify the key subjects that will have the impact for the application of the concept of sustainable development, empirical research was carried out using a sample survey taken from among 150 randomly-chosen local residents in Dubrovnik. The research was conducted within the cooperation between University of Dubrovnik and „Deša“ association with aim to determined necessaries and features for customization local centres of sustainable development in Dubrovnik Neretva County. The research was carried out from June 1st to September 1st, 2010. In total, 185 questionnaires were distributed among residents of Dubrovnik out of which 150 were correctly filled. The data obtained from the survey were analyzed using different analytical tools, including methods of analysis and synthesis, inductive and deductive methods, method of generalization and specialization, and different statistical methods. A survey was made for the purpose of emphasizing the role and importance of implementation the principles of the sustainable tourism development especially in the urban tourism areas. The aim of the research was to create operational guidelines for the destination tourism managers for applying the concept of sustainable development in urban areas. As dependent variable was measured on ordinal scale Kruskal-Wallis test was used. All statistical analyses were made using an SPSS package version 17.0. Jansen-Verbeke, M. C. Lievois, E. (1999.) Analysing heritage resources for urban tourism in European cities, In Pearce, D. G. Butler, R. W. eds, Contemporary issues in tourism development, London, Routledge, pp. 81-107, accessed in Pearce, D. G. op. cit. p. 927. 48 Edwards, D. Griffin, T. Hayllar, B. op. cit., p. 1037. 49 Crouch, G. Ritchie, J. R. B. (1999.), Tourism, Competitiveness and societal prosperity, Journal of business research, 44:137-152, Richie, B. Crouch G. (2000.) The competitive destination: a sustainability perspective, Tourism Management, 21 (1); 1-7, accessed in Krassmira, A. P. S. op. cit., p.109. 50 Law, C. M. (2002.) Urban tourism the visitor economy and the growth of larges cities, Cengage Leaming, p. 13. 51 Girard, L. F. Nijkamp, P. (2009.) Cultural tourism and local sustainable development, Ashgate Publishing Ltd, London, p. 13. 52 www.dzs.hr (27.11.2011.) 53 www.dzs.hr (27.11.2011.) 54 www.dzs.hr (27.11.2011.) 47

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The goals of the research aimed to prove or reject the following hypotheses: H1: The major role in the application of the concept of sustainable development in urban tourism areas has regional and local autonomy and local tourist board H2: Regional and local autonomy need to participate the most in application of the concept of sustainable development in domain of optimal resources use, cultural heritage conservation and environmental protection.

4. RESULTS The table below shows results of descriptive statistical analysis of frequencies. Table 1. Respodent profile Demographic characteristics

Frequency

Percentage (%)

18-39 40-69 70 and over

83 62 5

55,3 41,3 3,4

Male Female

87 63

58 42

Education

High school and less College Post-graduate school

84 60 6

56 40 4

Occupacy

Unemployed Farmer Private undertaking Employed in public sector Employed in private sector Manager Rest

18 0 13 45 55 7 12

12 0 8,7 30 36,6 4,7 8

Age

Gender

Source: Authors research

H1: The major role in the application of the concept of sustainable development in urban tourism areas has regional and local autonomy and local tourist board Table 2. The role in the application of the concept of sustainable development in urban tourism areas Type of stakeholder

Yes

Partly

Government

2,7

15,3

Regional and local autonomy and local tourist board

51,47

90,7

115

2,7 6,7 Economic operators

84,7

5,3

Respondents considered that all quoted stakeholders have the huge role in application of sustainable development concept in Dubrovnik as urban area, but their attitude is that the major impact has regional and local autonomy and local tourist board. H2: Regional and local autonomy need to participate the most in application of the concept of sustainable development in domain of optimal resources use, cultural heritage conservation and environmental protection.

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Table 3. Ranks

Regional and local autonomy and local tourist board

Optimal use of resources

Mean Rank

Strongly disagree

91,0

Disagree

42,50

Neither agree nor disagree

67,69

Agree

70,19

Strongly agree

90,33

Total

149

Results of the Kruskal Wallis test are: • Chi-Square = 11,223 • Df =4 • Asymp. Sig. = ,024 Table 4. Ranks

Regional and local autonomy and local tourist board

Cultural heritage conservation

Mean Rank

Strongly disagree

123,50

Disagree

10,50

Neither agree nor disagree

55,69

Agree

72,87

Strongly agree

80,82

Total

149

Results of the Kruskal Wallis test are: • Chi-Square = 10,113 • Df =4 • Asymp. Sig. = ,039 Table 5. Ranks Environmental protection Regional and local autonomy and local tourist board

Mean Rank

Strongly disagree

123,50

Neither agree nor disagree

51,92

Agree

70,18

Strongly agree

80,58

Total

149 1

123,50

Results of the Kruskal Wallis test are: • Chi-Square = 8,316 • Df =3 • Asymp. Sig. = ,040 Data review showed in Tables 3, 4 and 5, as the results of Kruskal Wallis test, confirm the second hypothesis that regional and local autonomy need to participate the most in application of the concept of sustainable development in domain of optimal resources use, cultural heritage conservation and environmental protection.

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5. CONCLUSION Urban tourism areas are facing increasing pressure on their natural, cultural and socio-economic environments as a result of the rapid expansion of the tourism. Implementation of sustainable development principles refers to achieving the right balance between social, economic and environmental goals. Uncontrolled tourism development ultimately degrades the attractive natural and cultural features of the place and thus can neither sustain the basic resources on it which relies, not rely on itself as an industry in the long term, although tourism can bring many economic benefits for many countries, regions and local communities. Sustainability is a positive approach intended to reduce the tensions and friction created by the complex interactions between the tourism, tourists, the environment and the host communities so that the long term capacity and quality of both natural and human resources can be maintained. The need to create new economic activities, the perception of tourism as the growth industry had induced urban areas toward the tourism development. Major urban areas perform important functions within the workings of the overall tourism system. Therefore this paper analyzed positive effects of the implication of the sustainable principles in the urban areas with the example of Dubrovnik. Research attempted to determine the community awareness about the need for implementation of the sustainable principles in the urban areas. Results showed that all quoted stakeholders have the huge role in application of sustainable development concept in Dubrovnik as urban area, but their attitude is that the major impact have only regional and local autonomy and local tourist board and also that regional and local autonomy need to participate the most in application of the concept of sustainable development in domain of optimal resources use, cultural heritage conservation and environmental protection. All above mentioned indicate that implementation of the sustainable principles of the development in the urban areas such is Dubrovnik is at the same beginning. Only by raising the general level of the importance of the sustainable education of the whole community, not only of the regional and local autonomy and local tourist board, it is possible to get benefits of the tourism development for the long term. According this research it is evident that now is created completely incorrect vision of the sustainable development.

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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Bramwell, B. Lane, B. (2009.) Priorities in sustainable tourism research, Journal of Sustainable tourism, vol. 16 (1), p. 1. Bramwell. B. Lane, B. (2012.) Towards innovation in sustainable tourism research, Journal of sustainable tourim, vol. 20. (1), p.1. Butler, R. W. (1999.) Sustainable tourism a state of the art review, Tourism Geographies and international journal of tourism, space and environment, vol. 1 (1), p.18. Chan, T. C. (1996.) Urban heritage tourism th global local nexus, Annals of tourism research, Vol. 23. No. 2., Elsevier science Ltd, p. 286. Doohyun, H, Stewart, W. P. Ko, D. (2012.) Community behaviour and sustainable rural tourism development, Journal of travel research, vol. 51 (328), p. 328. Edwards, D. Griffin, T. Hayllar, B. (2008.) Urban tourism research: developing an agenda, Annals of tourism research, Vol. 35. No. 4., pp. 1032-1052, Elsevier Ltd, p.133. Girard, L. F. Nijkamp, P. (2009.) Cultural tourism and local sustainable development, Ashgate Publishing Ltd, London, p. 13. Harris, R. Griffin, T. Williams, P. (2002.) Sustainable tourism a global perspective, Elsevier Butterworth Heinemann, p. 36. Helmy, E. Cooper, C. (2002.) An Assessment of sustainable tourism planning for the archaeological heritage the case of Egypt, Journal of sustainable tourism, vol. 10 (6), p. 514. Hwan, S. Choi, C. Sirakaya, C. (2005.) Measuring residents attitude toward sustainable tourism development of sustainable tourism attitude scale, Journal of travel research, vol.43 (380), p.381. Kordej de villa, Ž. Stubbs, P. Sumpor, M. (2009.) Participativno upravljanje za održivi razvoj, Ekonomski institute, Zagreb, p. 18. Krassmira, A. P. S. (2007.) New paradigms in city tourism management: Redefinig destination promotion, Journal of travel research, Vol. 46. No. 108., p. 109. Law, C. M. (2002.) Urban tourism and the visitor economy and the growth of the largest cities, Cengage Learning, p. 18. Liu, L. (2003.) Sustainable tourism development a critique, Journal of sustainable tourism, vol. 11 (6), p. 460. Lu. Y. Nepal, K. S. (2009.) Sustainable tourism research an analysis of papers published in Journal of sustainable tourism, Journal of sustainable tourism, vol. 17 (1), p. 6. Magaš, D. Smolčić, Jurdana, D. (1999.) Metodološki aspekti utvrđivanja prihvatnog kapaciteta turističkog područja, Tourism and hospitality management, vol. 5, no. 1-2, Opatija/Wien, p. 98. McCool, S. F. Moisey, R. N. Nickerson, N. P. (2001.) What tourism should sustain disconnect with industry perception of useful indicators, Journal of travel research, vol. 40 (124), p. 124. Murphy, P. E. (1998.) Tourism and sustainable development, Global tourism, Butterworth Heinemann, Oxford, p. 179. Neto, F. (2003.) A new approach to sustainable tourism moving beyond environmental protection, Natural Resources forum 27, p. 216. Pearce, D. G. (2001.) An integrated framework for urban tourism research, Annals of tourism research, Vol. 28. No. 4., Elsevier science Ltd., p. 126. Pigram, J. J. Wahab, S. (1997.) Sustainable tourism in changing world, Tourism development and growth, Routledge, London, p. 19. Pravdić, V. (1996.) Perspektive održivog razvoja i izbor između ekonomske i ekološke koncepcije, Ekonomija Hrvatska i održivi razvoj, broj 2, Rifin, Zagreb, p. 339. Salah, Hassan, S. (2000.) Determinants of market competitiveness in a environmentally sustainable tourism industry, Journal of travel research, Journal of travel research, vol. 38 (239), p. 239. Sharpley, R. (2000.) Tourism and sustainable development exploring the theoretical didvide, Jouranl of sustainable tourism, vol. 8 (9), p. 12. Soteriou, E. C. Coccossis, H. (2010.) Integrating sustainability into the strategic planning of national tourism organization, Journal of travel research, vol. 49 (2), p. 191. Turkalj, Ž. (2010.) Turizam i agroturizam u funkciji održivog razvitka, Sveučilište J. J. Strossmayera u Osijeku, Ekonomski fakultet Osijek, p. 31. 32 Vukonić, B. Keča, K. (2001.) Turizam i razvoj pojam, načela i postupci, Mikrorad, Zagreb, p. 190.

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28. World tourism organization, (1993.) Tourism at world heritage sites the sites managers handbook, International committe on cultural tourism, Madrid, p. 7. 29. World tourism organization, (2001.) Cultural heritage and tourism development a report on the international conference on cultural tourism, Madrid, p. 38. 30. World tourism organization, (2002.) Contribution of the world organization to the world summit on sustainable development, Madrid, p.3. 31. www.dzs.hr 32. Zhenhua, L. (2003.) Sustainable tourism development a critique, Journal of sustainable tourism, vol. 11 (6), p. 460. DETAILS ABOUT AUTHORS: IVANA PAVLIC, PH.D UNIVERSITY OF DUBROVNIK THE DEPARTMENT OF ECONOMY AND BUSINESS ECONOMY LAPADSKA OBALA 7 DUBROVNIK, CROATIA ipavlic@unidu.hr ANA PORTOLAN, UNIV.SPEC.OEC. UNIVERSITY OF DUBROVNIK THE DEPARTMENT OF ECONOMY AND BUSINESS ECONOMY LAPADSKA OBALA 7 DUBROVNIK, CROATIA ana.portolan@unidu.hr MARIJA BUTORAC, MR.SC. marijabutorac@yahoo.com

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TOURIST OFFER IN THE FUNCTION OF SATISFACTION AND LOYALTY - THE CASE OF THE ISLAND MLJET IVANA PAVLIC ANA PORTOLAN LUCIJA HAJDIĆ

ABSTRACT Growing competitiveness between tourism destinations on the tourism market increases the role of marketing activities towards measuring the tourists’ satisfaction of the tourism destinations. According those findings qualitative tourist offer will be created and at the other hand satisfied tourists will return to the destination. Satisfied tourist is the best way for the positive word-of-mouth communication. On the tourism market, under this conditions of growing competitiveness between tourism destinations, which are trying to find the best development strategy is one of the main problem for those who participate in creating tourist destination policy. Therefore, a main factor in the creation of tourism policies is the satisfied tourist who makes a positive image of a tourist destination. That is connected to the efforts of having a tourist supply that can satisfy the expectation of tourists. Hence this paper explores and analyzes the relationship between aspects of age, accommodation, length of stay, price and quality of provided services and the tourist satisfaction, loyalty and recommendation in the case of the island Mljet. The aim of the paper is to explore which tourist segments are satisfied with actually tourist offer and to identify the main attributes of tourist segment that are satisfied which results with return to the destination. The research problem is the decline of tourist demand for travel to the Mljet. The purpose and the objectives of this research are to determine the level of satisfaction of tourist demand in the Mljet. In order to confirm the hypotheses, Kruskal-Wallis and chi-square test are applied. This paper will propose further actions, based on the research results that can serve as a good base and instrument for the selection of adequate touristic policies for destination management in island Mljet, which is a necessity for the destination development. KEYWORDS: Tourists, Satisfaction, Sustainable Development, Island Mljet.

1. INTRODUCTION Tourism is a global phenomenon with a strong impact on global economy. It’s profit is counted in billions. This phenomenon became vital for economies of certain countries as it includes large number of participants both on demand and supply side. Number of tourists is increasing rapidly and so is number of tourist destinations. In this tough competition, destination managements use different strategies and activities to attract more tourists to their destination. Both satisfaction and loyalty are seen as behaviour of tourists towards certain tourist product, service, destination or more simply explained, towards tourist offer. They are related both to emotions as much as to behaviour of tourists. Satisfaction became one of the most important variables in analysis of tourist behaviour. The importance of tourist satisfaction measurement lies in essentialness to define a positioning strategy for a tourism destination. It helps tourist managements to see which part of tourist offer is satisfying/ dissatisfying tourists so certain interventions can be done and helps to measure how big is the gap between what tourists wanted and expected and what is provided by the destination. Loyalty is the activity of costumers reusing one product or service or buying it repeatedly. It can be seen as a devotion to certain person, product, service, etc. Loyalty brings benefits for companies in long terms as loyal customers are predictable, the expense of promotion and attracting customer is lower and loyal customers are easier to do business with. Positive satisfaction, loyalty and positive destination image make one destination more competitive which indicates that measurements of satisfaction and loyalty have to be done frequently as it is of the great interest for destination. Therefore the aim of the paper was to define which tourist segments are satisfied with actually tourist offer and to identify the main attributes of tourist segment that are satisfied which results with return to the destination. The research problem is the decline of tourist demand for travel to the Mljet.

2. LITERATURE REVIEW The scientific approach to researching tourist satisfaction dates back to the end of the seventy years of a twenty century. Leiper states that „the tourism industry consists of all those firms, organizations, and facilities which are intended to serve the specific needs and wants of tourists“.1 They are grouped as tourist demand and offer (supply) and represent 1

Leiper, N., (1979.) The framework of tourism: Towards a definition of tourism and the tourism industry, Annals of Tourism Research, vol. 6(4), p. 79

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two basic elements of tourist market. Pearce defines tourist demand as “a relationship between the tourist’s motivation of wanting to travel and his ability to do so“. Motivation in tourism is reflection of needs and desires of an individual and is one of the key factors in making a decision about travel.2 Motives are the initiator in creation of tourist demand. It is the very basis of the demand for tourism. Tourism demand is the outcome of tourist motivation, as well as marketing, destination features and contingency factors such as money, health and time relating to the traveller’s choice behaviour.3 The most used definition of tourist demand is “the total number of persons who travel, or wish to travel, to use tourist facilities and services at places away from their places of work and residence”.4 Classical economic theory suggests that the major determinants of the demand to travel are the income of tourists and the price of the goods and services relative to the price of substitutes.5 Frechtling (1996) proposed that determinants in demand are grouped as push, pull and resistance factors. According to Dwyer, all of proposed components of tourist demand can be divided in several groups: socio-economic and demographic, qualitative factors and price. Depending on these components, tourist demand is changing and tourist offer has to adjust itself to this new demand. Listening „the heart beat“ of tourist demand helps destination managements to improve their offer and gives them an insight on what tourists want and what are their needs. World tourist demand is growing and new or current destinations may be developed or extended in order to satisfy such a growth.6 However, despite tourist demand is still growing, tourist supply is also growing in the same fashion and competition among destinations arises.7 Tourism supply is a complex phenomenon because of both the nature of product and the process of delivery.8 Principally, the product cannot be stored, cannot be examined prior to purchase, it is necessary to travel to consume it, heavy reliance is placed on both natural and human-made resources and a number of components are required, which may be separately or jointly purchased and which are consumed in sequence.9 Goeldner and Ritchie (2009) classify tourism supply components into four broad ranged categories: natural resources and environment, built environment- infrastructure and suprastructure, operating sectors and spirit of hospitality and cultural resources. Each of these components serves tourists in satisfying their needs. One destination may have more of one component or equally of several of them which makes one destination more or less attractive. In a highly competitive market, being able to offer an attractive tourist destination implies having a deep understanding of the motives that lead a tourist to choose one particular destination among all the alternatives, the activities available to the tourist at the destination and the degree of satisfaction with the product he receives.10 In that purpose, it is necessary to observe behaviour and changes on the demand side and measure their satisfaction so destination managements can intervene on the supply side by ad justifying it or creating a completely new offer. Tourists are no longer shackled by a lack of choice and so need not to return to where they have been dissatisfied - with regard to transport, accommodation, attractions, tour operators or travel agents, web sites or destination organizers or any other tourism provider.11 This confirms that supply has to be updated with tourist demand. Fuchs and Weiermair (2003) argue that tourist satisfaction is one of the main competitive edges for destination.12 According to Kozak and Rimmington (2000), tourist satisfaction is important to successful destination marketing because it influences the choice of destination, the consumption of products and services, and the decision to return. Satisfaction may be defined as „a judgment that a product or service feature, or the product or service itself, provides a pleasurable level of consumption-related fulfilment“.13 On the other hand, MacKay and Crompton (1989) define satisfaction in a similar way by focusing on „psychological outcome which emerges from experiencing the service“.14 Baker and Crompton (2000) define it as the psychological and emotional conditions of personal experiences. Satisfaction is the process through which the increase in subjective well-being is identified and understood by the individual.15 It can be suggested that satisfaction is the natural result when one concludes that he or she is feeling better than prior to the travel.16 Del Bosque and San Martin (2008) were more precise and define satisfaction as „an individual’s cognitive-affective state derived from a tourist experience“17 in which cognitive and affective states are two determinants of tourist satisfaction. Chang, J.C., (2007.) Motivi putovanja turista u organiziranim skupinama, Turizam, br 2., http://www.iztzg.hr/, accessed 29.06.2012. Pearce, D.G., Butler, R.W., (1993.) Tourism Research: Critiques and Challenges, Routledge, London, p. 113 4 Matheson, A., Wall, G., (1992.) Tourism: Economic, physical and social impacts, Longman, London, p. 1 5 Gomezelj Omerzel, D., (2011.) Stakeholders’ understanding of factors influencing tourism demand conditions: The case of Slovenia, Tourism and Hospitality Management, vol. 17 (1), p. 5 6 Eugenio-Martin, J.L., (2003.) Modelling determinants of tourism demand as a five-stage process: A discrete choice methodological approach, Tourism and Hospitality Research, vol. 4 (4), p. 344 7 Ibidem 8 Stabler, M., Sinclair, M.T., Papatheodorou, A., (2010.) The Economics of Tourism, 2nd edition, Routledge, New York, p. 79 9 Stabler, M., Sinclair, M.T., Papatheodorou, A., op. cit., p. 79 10 Jang, S., Feng, R., (2007.) Temporal destination revisit intention, The effects of novelty seeking and satisfaction, Tourism Management, vol. 28, p. 581 11 Bowen, D., Clar, J., (2009.) Contemporary Tourist Behaviour: Yourself and Others As Tourists, CABI, Cambridge, p. 139 12 Cerina, F., Markandya, A., McAleer, M.,( 2011.) Economics of Sustainable Tourism, routledge, New York, p. 24 13 Da Costa Mendes, J., Oom do Valle, P., Guerreiro, M.M., Silva, J.A., (2010.) The tourist experience: Exploring the relationship between tourist satisfacton and destination loyalty, Tourism, vol. 58 (2), p. 114 14 Ibidem 15 Genc, R., (2012.) Tourism Consumption Behavior and Quality-of-Life, Handbook of Tourism and Qualityoflife Research, Springer, p. 144 16 Ibidem 17 Del Bosque, I.R., San Martin, H., (2008.) Tourist Satisfaction: A cognitive-Affective Model, Annals of tourism Research, vol. 35 (2), p. 553 2 3

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Bowen and Clarke (2009) identify that components of tourist satisfaction are expectation, performance, attribution, expectancy disconfirmation, equity and emotion. Martzler and Saurwein (2002) define following factor structure for satisfaction: (1) Basic factors as factors being guaranteed by the service provider, with no need to request them specifically, (2) Performance factors as factors which increase satisfaction levels if they are fulfilled and reduce then if not, (3) Excitement factors as factor that increase satisfaction if they are fulfilled but don’t cause dissatisfaction if they are not. Satisfaction can be described as a result of tourist’s expectations and perceptions. It is the conformity between the tourist expectations and the characteristics of the host destination.18 Expectation is the service that the customer anticipates.19 If tourist offer doesn’t fulfil the expectations, tourist will be dissatisfied. Santos (1998) sees it as „a pre-consumption attitude before the next purchase: it may involve experience, but need not“and it is formed under influence of many uncontrollable factors. Alexandris et al. (1999) define satisfaction as a multidimensional factor influenced by five factors: facilities/services, individual/psychological, relaxation, social, and health/fitness. These factors are related to cognition and emotions. Zeithaml et al. (1993) stated that customer service expectations are built on complex considerations, including their own pre-purchase beliefs and other people’s opinions.20 In order to make tourist satisfied it is necessary to identify all of these factors and understand their influence so risk in creating convenient tourist offer can be minimized. When it comes to satisfaction, some of the theories were developed such as Oliver’s Expectation Confirmation Theory or Expectation—perception gap model, Sirgy’s self-congruity theory, perception-only theory, etc. Expectation-perception gap model is based on the fact that the less the gap is between expectations and perceptions of destination, it is more likely that tourists will be satisfied. As it is already stated, expectations coupled with perceived performance lead to post purchase satisfaction which is mediated through positive or negative disconfirmation. Oliver’s Expectation-confirmation theory states that if it’s mediated through positive disconfirmation, tourist will be satisfied, if it’s mediated through negative disconfirmation; tourist is more likely to be dissatisfied. According to self-congruity theory, people select to purchase and use goods and services that have a user image consistent with their own self- image.21 Figure 1: Expectation- confirmation theory scheme

Source: Oliver R. L, 1977, “Effect of Expectation and Disconfirmation on Postexposure Product Evaluations - an Alternative Interpretation,” Journal of Applied Psychology, 62(4), p. 480

All these theories became a basis for the measurement of tourist satisfaction. The monitoring of satisfaction provides destination with internal opportunities such as facilitation of resource management, product enhancement and differentiation.22 Chon relates satisfaction with quality of provided services and product. Fuchs and Weiermair (2003) summarize that „service quality comprises all those product attributes and dimension which are capable of satisfying specific needs and creating consumer satisfaction“23. That means that service quality is prior to satisfied tourist. Further, tourist satisfaction is an antecedent of loyalty and positive word of mouth.24 Satisfaction outcomes in post experience decisions which can lead to loyalty and to free promotion with most credibility, word of mouth. But it is not just satisfaction that generates loyal tourists. Loyalty is desired by service providers, for it is what secures the relationship between customer and supplier, when the customer is faced with increasingly attractive competitive offers, or the supplier’s own shortcomings.25 Some service provides even reward loyalty of their customers to make this relationship even stronger. Lawfer (2004) states that customer loyalty isn’t only about opinions, belief or attitudes, it is also about behaviour. Niiminen and Riley (2007) recognize two dimensions of loyalty: psychological attachment and behavioural consistency. Backman and Crompton (1991) find their relationship resulting in 4 different states of loyalty: low, latent, spurious and high loyalty. Dick and Basu (1994) Bowie, D., Chang, J.C., (2005.) Tourist Satisfaction: A view from a mixed international guided package tour, Journal of Vacation Marketing, vol. 11 (4), p. 307 20 Ibidem 21 Sirgy, M.J., Lee, D.J., Johar, J.S., Tidwell, J., (2008.) Effect on self-congruity with sponsorship on brand loyalty, Journal of Busness Research, vol. 61 (10), p. 1092 22 Fallon, P., (2008.) Monitoring Visitor Satisfaction with Destinations using Expectations, Importance and Performance Constructs, Tourism Management, Analysis, Behaviour and Strategy, CABI, Cambridge, p. 426 23 Fuchs, M., Weiermair, K., (2003.) New perspectives of satisfaction research in tourism destination, Tourism Review, vol. 58 (3), p. 7 24 Cerina, F., Markandya, A., McAleer, M, op. cit., p.24 25 Petrick,, J.F., (2004.) Reoperationalising the loyalty framework, Tourism and Hospitality Research, vol. 5. No. 3., p. 200 19

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also proposed 4 types of loyalty which are most used in typology of loyalty behaviour. True loyalty would be that kind of loyalty which occurs when both repeat purchase and relative attitude are high. Spurious loyalty is characterized with high repeat purchase and low relative attitude. In contrary with true loyalty, this loyalty is believed to persist only in short term. Latent loyalty is the result of low repeat purchase, but relative attitude is high which can be explained that some barriers exist between the customer and the product. No loyalty shows to occur in situations where relative attitude is low and so is the repeat purchase. Figure 2: Types of loyalty

Source: Dick, A.S., Basu, K., Customer Loyalty: Towards an Integrated Conceptual Framework, Journal of the Academy   Science, 1994., vol. 22 (2), p. 101 of Marketing

Further, Lawfer (2004) defines loyalty as „a specific behaviour of buying again and again from the same business while telling the world why everyone else should also buy from them“26. In tourism, loyalty isn’t much different. Tourist loyalty is loyalty to certain destination or a certain segment of tourist offer and it can be understand as a situation where tourist values one destination and prefers it to other destinations. Loyalty to one destination is the repeat visitation. Reid and Reid (1993) add that loyal tourist visit destination more frequently, tend to be a stable source of income and can be more profitably served than new buyers. Oppermann (2000) explained tourist loyalty as a tourist’s willingness and readiness to revisit one destination. Tourists become loyal because choosing the same destination reduces the risk or risk-reduced strategy for the service users. Tourists know for sure that chosen destination and it’s tourist offer can satisfy their needs even though tourist considerate other destinations each time he is making a decision to travel. Determinants of repeat visitation by tourists to destinations include the friendliness of the destination’s residents, cultural amenities, natural attractions and activities and past experience and destination familiarity.27 In short terms, it includes tourist offer, experience and satisfaction with provided product and services. One of the factors affecting loyalty is motivation which again depends on socio-economic and demographic, qualitative factors and price. High competition also affects loyalty as well as novelty, perceived quality, destination image, past experience, safety and risk reduction. Yoon and Uysal (2005) proposed a model which made possible an examination on how motivation and satisfaction affect loyalty. They grouped motivation into push and pull factors (internal and external forces) and tended to show their influence on destination loyalty through two forces: psychological needs and wants. Generally, loyalty has been measured in one of the following ways: (1) the behavioural approach, (2) the attitudinal approach, and (3) the composite approach.28 The reason of loyalty measurement is to see how strong the relationship between customer and product is. The behavioural approach is viewed as producing static outcome of a dynamic process (Dick and Basu, 1994) and in contrast, attitudinal approach goes beyond overt behaviour and expresses loyalty in terms of customers’ strength of affection toward a brand (Backman and Crompton, 1991). The composite approach is integration of both behavioural and attitudinal approaches. In conclusion, it is logical that dissatisfied tourist cannot become a loyal tourist. Therefore satisfied tourist is or it has the potential to become a loyal tourist. By measuring levels of satisfaction and loyalty, providers of tourist offer have a possibility to do corrections and adjustments on their offer. According to Gallarza and Saura (2006) there is a natural link between destination image, quality, satisfaction and loyalty. Satisfied tourist and loyal tourist will do free promotion and it will lead to a positive effect on tourist destination image. Positive satisfaction, loyalty and positive destination image make one destination more competitive which indicates that measurements of satisfaction and loyalty have to be done frequently as it is of the great interest for destination.

Lawfer, M.R., (2004.) Why Customers Come Back: How to Create Lasting Customer Loyalty, Career Press, Franklin Lakes, p. 43 Fyall, A., Garrod, B., (2005.) Tourism Marketing: A Collaborative Approach, Channel View Publications, Clevedon, p. 305 28 Yoon, Y., Uysal, M., (2005.) An examination of the effects of motivation and satisfaction on destination loyalty; a structural model, Tourism Management, vol. 26, p. 48 26 27

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3. DATA AND METHODOLOGY In order to determine the importance of tourist offer for satisfaction and loyalty, an analysis was carried out, where primary data was collected and compiled alongside the collection of secondary data. In order to identify the current situation on the island Mljet, empirical research was carried out using a sample survey taken from among 104 randomlychosen tourists (only foreign) that stayed on the island Mljet. The research was carried out from July 1st to September 1st, 2011. In total, 150 questionnaires were distributed out of which 104 were correctly filled. A semi-structured questionnaire, including 11 questions, was used. The first group of questions concerned the sociodemographic profile of tourists. Other groups of questions regarded satisfaction of destination tourist offer, while the third group of questions regarded the loyalty. The data obtained from the survey were analyzed using different analytical tools, including methods of analysis and synthesis, inductive and deductive methods, method of generalization and specialization, and different statistical methods. A survey was made for the purpose of finding out statistically significant relations between aspects of age, type of accommodation, length of stay, price and quality of provided services and the tourist satisfaction, loyalty and recommendation on the case of the island Mljet. A variety of analytical tools was applied in the analysis, including correlation techniques. The aim of the research was to define which tourist segments are satisfied with actually tourist offer and to identify the main attributes of tourist segment that are satisfied which results with return to the destination. The research problem is the decline of tourist demand for travel to the Mljet. Therefore, they were evaluated using the statistical method of the Kruskal-Wallis test, and Ď&#x2021;Â˛ test depended on parameter type. All statistical analyses were made using an SPSS package version 17.0. In order to support the working hypothesis stated in introduction of this paper following auxiliary hypotheses were made: H1: There is a statistically significant difference in satisfaction of tourist offer between tourists who used different types of accommodation H2: There is a statistically significant difference in satisfaction of price between different age groups of tourists H3: There is a statistically significant difference in satisfaction of tourism offer quality between tourist with different length of stay H4: Tourist who are satisfied with quality of provided services will visit the island of Mljet again H5: Tourists who are satisfied with price will recommend their friends and family to visit the island of Mljet

4. RESULTS The table below shows results of descriptive statistical analysis of frequencies. Table 1. Results of descriptive statistical analysis of frequencies Demographic characteristics Age

Gender Type of accommodation used

Length of stay

Frequency

Percentage (%)

18-29 30-39 40-49 50-59 60 and more

34 23 28 10 9

32,7 22,1 26,9 9,6 8,7

Male Female

57 47

54,8 45,2

Private accommodation Hotel Camp

87 6 11

83,7 5,8 10,6

No overnight 1-3 days 4-7 days 8-10 days 11 days and more

4 40 19 24 17

3,8 38,5 18,3 23,1 16,3

Source: Authors research

H1: There is a statistically significant difference in satisfaction of tourist offer between tourists who used different types of accommodation

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Table 2. Ranks Tourist offer

Type of accommodation

Mean Rank

Private accommodation

55,05

Hotel

59,00

Camp

28,77

Total

104

Results of the Kruskal Wallis test are: • Chi-Square = 8,811 • Df =2 • Asymp. Sig. = ,012 p=0,012 which is lower than 0,05 and shows that there is statistically significant difference between satisfaction of tourist offer between tourists who used different types of accommodation. Tourists who were accommodated in hotel were the most satisfied with tourist offer on the island. H2. There is a statistically significant difference in satisfaction of price between different age groups of tourists Table 3. Ranks Price

Age

Mean Rank

18-29

35,93

30-39

63,15

40-49

59,36

50-59

67,45

60-

49,94

Total

104

Results of the Kruskal Wallis test are: • Chi-Square = 18,991 • Df =4 • Asymp. Sig. = ,001 p=0,001 which is lower than 0,05 and shows that there is statistically significant difference between satisfaction of price and different age groups of tourists. Tourist in age between 50 and 59 were the most satisfied with price of different elements of tourist offer. The younger tourist were the most dissatisfied. H3 There is a statistically significant difference in satisfaction of tourism offer quality between tourists with different length of stay Table 4. Ranks Tourist offer

Length of stay

Mean Rank

no overnight

57,75

1-3 days

46,19

4-7 days

51,03

8-10 days

50,25

11 days and more

70,94

Total

104

Results of the Kruskal Wallis test are: • Chi-Square = 9,609 • Df =4 • Asymp. Sig. = ,048 p=0,048 which is lower than 0,05 and shows that there is statistically significant difference between satisfaction of total tourist offer and tourists length of stay. The tourist offer is the best for tourist who stayed at the island 11 days and more.

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H4: Tourists who are satisfied with quality of provided services will visit the island of Mljet again Table 5. Count Quality of provided services Future visit

very unsatisfied

dissatisfied

partly satisfied

satisfied

very satisfied

yes

Total

Results of χ² test are: • Pearson Chi-Square = 11,460 • Df = 4 • Asymp. Sig. = 0,022 p=0,022 which is lower than 0,05 and shows that there is statistically significant difference between satisfaction of provided services and future visit to island Mljet. H5: Tourists who are satisfied with price will recommend their friends and family to visit the island of Mljet Table 6. Count Price Recommendation

very unsatisfied

dissatisfied

partly satisfied

satisfied

very satisfied

yes

Total

Results of χ² test are: • Pearson Chi-Square = 35,353 • Df = 4 • Asymp. Sig. = 0,000 p=0,000 which is lower than 0,05 and shows that there is statistically significant difference between satisfaction of price and recommendation to friends and family.

5. CONCLUSION In order to realize greater results, where competitive advantages are based primarily on satisfied tourist is perceived, a large number of existing and new destinations are competing for their market segment. Destination management in policy creating for a tourist destination, an emphasis must be put on the formation of a constantly research of tourists’ satisfaction of the destination in order to achieve a competitive edge for the destination. The researching of the main characteristics of the tourists’ satisfaction is very important to successful organization of the destination management of every tourism destinations. There are few reasons and the most important is the fact that the tourists’ satisfaction has the great impact on the destination choice, the consumption of the tourism products and services and the repeat decision to return. The research that was carried out on island Mljet with the aim to identify which tourist segments are satisfied with actual tourist offer and to define the dependence of satisfaction with different relevant parameters, showed that there was a significant difference in the satisfaction of particular segments. The most satisfied segments according to different segmentation criteria are tourists that were accommodated in hotels and those who stayed on island more than 11 days. Analyses by tourist segments show that tourists older than fifty years are more satisfied with the price. That indicates on inadequate facilities for the young and middle age market segment. The highest level of satisfaction with tourist offer quality was shown by tourists who stayed more than 11 days and that indicate the necessity for the better presentation of the tourist offer for those who stayed less than 11 days. The research showed which tourist segments are satisfied with the existing offer but also what are the weaknesses of the tourist offer regarding the tourist satisfaction. By examining how satisfied tourists are, and their other characteristics, planners can determine which tourists should be targeted.

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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.

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Communicating tourism suppliers: service building repeat visitor relationships, Journal of Travel and Tourism Marketing, vol. 2 (2), p. 3-20 Matheson, A., Wall, G., (1992.) Tourism: Economic, physical and social impacts, Longman, London Petrick, J.F., (2004.) Reoperationalising the loyalty framework, Tourism and Hospitality Research, vol. 5 (3), p. 200 Santos, J., (1998.) The role of Tour Operators Promotional Material in Formation of Destination Image and Consumer Expectations: The Case of the People’s Republic of China, Journal of Vacation Marketing, vol. 4 (3), p. 282-397 Sirgy, M.J., Lee, D.J., Johar, J.S., Tidwell, J., (2008.) Effect on self-congruity with sponsorship on brand loyalty, Journal of Busness Research, vol. 61 (10), p. 1092-1097 Stabler, M., Sinclair, M.T., Papatheodorou, A., (2010.) The Economics of Tourism, 2nd edition, Routledge, New York Troung, T.H., Foster, D., (2006.) Using Holsat to Evaluate Tourist Satisfaction at Destinations: The Case of Australian Holidaymakers in Vietnam, Tourism Management, vol.27., p 842-855 Uysal, M., Perdue, R.R., Sirgy, M.J., (2012.) Handbook of Tourism and Quality-of-life Research; Enchancing the Lives of Tourist and Residents of Host Communities, Springer, London Yoon, Y., Uysal, M., (2005.) An examination of the effects of motivation and satisfaction on destination loyalty; a structural model, Tourism Management, vol. 26 (1), p. 45-56 Zeithaml, V.A., Berry, L.L., Parasuraman, A., (1993.) The Nature and Determinants of Sutomer Expectations of Service, Journal of te Academy of Marketing Science, vol. 21, p. 1-12

DETAILS ABOUT AUTHORS: IVANA PAVLIC, PH.D UNIVERSITY OF DUBROVNIK THE DEPARTMENT OF ECONOMY AND BUSINESS ECONOMY LAPADSKA OBALA 7 DUBROVNIK, CROATIA ipavlic@unidu.hr

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ANA PORTOLAN, UNIV.SPEC.OEC. UNIVERSITY OF DUBROVNIK THE DEPARTMENT OF ECONOMY AND BUSINESS ECONOMY LAPADSKA OBALA 7 DUBROVNIK, CROATIA ana.portolan@unidu.hr

LUCIJA HAJDIĆ lucija.hajdic@gmail.com

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TOWARDS THE SUSTAINABLE TOURISM DEVELOPMENT PLANNING IN THE TOURISM DESTINATION IN THE INVOLVEMENT STAGE IVANA PAVLIC ANA PORTOLAN LJUBICA MIŠKOVIĆ

ABSTRACT In the last few decades, tourism generated a high growth rate. Economic impacts of tourism in tourist destinations are multiple. On the tourism market an increasing number of tourism destinations are trying to achieve a significant market share by attracting as many tourists to realize maximum benefit from them. However the tourism development in some destinations that have reached consolidation stage has strongly intensified and caused many problems in destination. Such development has brought into the question own tourism destination potential and also the quality of the development site. Therefore, the research objective is to emphasize the role and importance of planning for sustainable tourism development of tourist destinations especially in the tourism destination that are in the involvement stage of the tourism development. The paper pointed out the importance of sustainable tourism development planning in order to estimate the benefits and negative impacts of tourism development in the long term. The aim of this paper is to analyze specific case; it’s positive and negative impacts, as well as community awareness about the need for sustainable tourism development planning in destination in the involvement stage of the development. Kruskal-Wallis test is applied to accomplish this aim. The research results should be the base for the destination managers in tourism destinations where tourism development is in the involvement stage in order to take preventive action, slowing the arrival to the saturation stage and to avoid unintended consequences of further tourism development. Considering that research in this paper is geographically limited, research results are more indicative rather than representative for the destinations in the stage of involvement. KEYWORDS: tourism planning, sustainable development, tourism destination, involvement stage.

1. INTRODUCTION Over the past half century, tourism has evolved into one of the world’s most powerful, yet controversial, socio-economic forces. It is world’s largest phenomenon significant not just because of its size in terms of number of people travelling, how many people it employs, or how much money it brings into a destination. Tourism is significant also because of the enormous impact that has on people’s lives and on the places. As almost billion people travel and seek personal rewards from their experiences, massive development of resources is the consequence. Tourism can enrich people’s lives, can expand an economy, can be sensitive and protective of environments, and can be integrated into a community with minimum impact. Therefore, the research objective is to emphasize the role and importance of planning for sustainable tourism development of tourist destinations especially in the tourism destination that are in the involvement stage of the tourism development. The paper pointed out the importance of sustainable tourism development planning in order to estimate the benefits and negative impacts of tourism development in the long term. The aim of this paper is to analyze specific case; it’s positive and negative impacts, as well as community awareness about the need for sustainable tourism development planning in destination in the involvement stage of the development. Kruskal-Wallis test is applied to accomplish this aim. The research results should be the base for the destination managers in tourism destinations where tourism development is in the involvement stage in order to take preventive action, slowing the arrival to the saturation stage and to avoid unintended consequences of further tourism development. Considering that research in this paper is geographically limited, research results are more indicative rather than representative for the destinations in the stage of involvement.

2. LITERATURE REVIEW The need for tourism planning may not be as blatantly conspicuous as other development concerns. But, nevertheless it is real. Those involved in the tourist business today realize that tourism is more competitive than ever before. In the past, growth of demand was so great that competition was not a concern. Today, through the world, thousands of investors, public and private, are developing new tourism areas. Market specialists are discovering that travel markets are not as simple as they once were considered. Now they talk of market segmentation and much greater sophistication levels of travellers. New markets are dynamic, demanding continuing market research.1 Tourism, once considered the Sharply, R., Telfer, D., J., Tourism and Development in the Developing World, Routledge, NY., 2008., p.1.

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sole responsibility of hotels and travel promoters, is now being recognized as encompassing much more, it is a very complicated phenomenon. Many of the foundations of tourism have been and continue to be eroded. Natural and cultural resources with poor tourism planning have produced beach pollution, soil erosion, threats to wildlife, and scenic spoliation. These and many other issues are sufficient cause for mounting new planning initiatives and actions.2 It doesn’t matter is it a short or long term planning, it has common features. Some of them are vision, enabling action, realization of goals, identification of emerging consequences, etc. Murphy sees planning as a process for the designing the future, innovation, influencing, learning and managing.3 Importance of the planning is multiple because it define goals, integrate process in a system, determine the temporal sequence of development, coordinate needs and opportunities, coordinate development and environment, standardize the relationship between economies, natural resources and quality of life, determine the basic directions of development, space allocation, and utilization of natural resources, protect created and natural assets, regulates behaviour of all participants in the development process.4 The action plan is completed with production planning and further implementation is in the hands of entities for which the plan is made. Consequently, planning is in function of management development. A quality tourist planning destination contributes as tourism planning cooperates with the policy. Tourism planning is extremely difficult in terms of rational thinking, concentrating on the goals and objectives of certain location. It contains many phases-it is a lasting process and strikes a balance between economic objectives, environmental protection, sustainable development and quality of life for local people. Quality tourism planning emphasizes the quality, benefits, effectiveness and efficiency of destination through the entire process of realization.5 Tourism strategic plan is a framework designed to guide any tourism organization or destination through that emphasize their quality, effectiveness and efficiency.6 Planning consists of an ordered sequence of operations and actions designed at organizing and controlling tourism development in the areas of destination, according to the outlined political objectives. Taking place under different forms (development, infrastructures, use of resources, marketing and promotion), institutions (different governmental organizations), and levels (national, regional, local), it aims at providing satisfaction to tourists, improving economic benefits and minimizing the negative impacts on the destinations.7

2.1. Sustainable tourism development planning Tourism development planning is extremely important in each stage of tourism destination development, but often is applied only in the stage of stagnation what is totally inadequate approach. One of the authors who deal with tourism planning is Getz. He defines it as a process based on research and evaluation, which tends to optimize the potential contribution of tourism to human welfare and environmental quality.8 Intention of modern planning is finding the optimal opportunities for problem solving and the maximization of benefits. It has commissioned a series of operations and actions designed to realize one or more separate interrelated goals.9 For the purpose of understanding the planners of tourism, they could be categorized in four main groups as the business sector, as the public sector as planners of tourism, as the nonprofits sector as planners and also as the community and destination integration.10 For, community tourism to be effective it must enhance the operating effectiveness of all parties. To ensure mutual effectiveness requires a more comprehensive management that incorporates elements of monitoring, such as visitor surveys and environmental audits, and controls, such as land use zoning.11 Tourism must be planned with the specific goal of fusing tourism with the social and economic life of a region and its community. Enhanced visitor satisfaction, better business, sustainable resource use, and community integration should be the motivating forces for all stakeholders in tourism to plan and develop the needed objectives and the strategies to carry them out. The opportunity that tourism offers for positive economic, environmental, and social benefits for tomorrow will depend on the decision being made today. We can plan well for the development of tourism by adhering to important principles, policies, and philosophies of sustainable tourism or let it happen haphazardly and hope for the best. If we do not define Gunn, C., A., Var, T., Tourism planning:Basics, Concepts, Cases, Taylor˛&Francis group, NY., 2002., p. 8. Murphy, P., E., Murphy, A., E., Strategic Management for Tourism Communities:Bridging the Gaps, Great Britain, 2004., p. 41. 4 Dulčić, A., Petrić, L., Upravljanje razvojem turizma, Mate, Zagreb, 2001.,p. 344. 5 Edgell, D.,L.,Sr., et.al., Tourism Policy and Planning: Yesterday, Today and Tommorrow, Butterworth and Heineman,Elsevier, Oxford, 2008. p. 298.-299. 6 Ibidem, p.299. 7 Brebbia, C., A., Pineda, F., D., Sustainable tourism IV, WIT PRES, UK, 2010., p. 88. 8 Getz, D., Models in Tourism Planning, Tourism Management, Buttherworth&Co.Calagry, Canada,1986., p.21. 9 Mason, P., Tourism impacts, Planning and Management, Second Edition, Butterworth-Heineman, Elsevier, English, 2008. p. 84. 10 Gunn, C., A., Var, T., ...,op.cit. p. 10. 11 Murphy, P., E., Murphy, A., E., …, op.cit. p. 42. 2 3

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clear-cut directions for sustainable tourism at this juncture in the growth of tourism, there may never be another chance. Sustainable tourism, properly managed, can become a major vehicle for the realization of humankind’s highest aspirations in the quest to achieve economic prosperity while maintaining social, cultural, and environmental integrity.12 Other new developments in sustainable tourism have arisen as a result of past lessons learned in the tourism industry. For example, the focus of tourism in the 1970s was almost always economic development, growth, and financial gain. By the 1980s, it was clear that tourism projects must not only include an economic impact statement but also meet new and growing environmental regulations. By the 1990s, it was clear that a third dimension needed to be added, that of social impact, particularly on local communities. The social dimension often relates to history, heritage, and culture and requires progressive local government involvement and public participation. In the new millennium, we are witnessing a strong movement toward the management of all three elements – economic, environmental and social – as a condition of sustainable tourism.13 In a long term, it is important to maintain a balance between preserving the environment and its development for tourism purposes, although this is not an easy and simple task. In order to adequately protect natural resources and services to evaluate the overall economy, not just tourism, it is necessary to implement legislation which clearly manifests on environment. Only by raising the general level of environmental education and awareness about the necessity of an active attitude towards nature and the environment in general, it is possible to complete economic, social and natural development to implement the general principles of sustainability. Table 1. The difference between sustainable and unsustainable development SUSTAINABLE DEVELOPMENT Trying to improve our quality of life, this doesn’t include only material goods but consider social and environmental elements of the healthy environment.

UNSUSTAINABLE DEVELOPMENT Trying to raise our standard of living that is based exclusively on material goods.

Observe the economic, social and environmental issues as Observe the economic, social and environmental interconnected. Looking for complete and permanent solutions. issues as separate entities. Solving the problems of today’s generation, considering needs of future generation.

Focused on short-term solutions, not considering needs of future generations.

In a decision making processes, it take consider at limitation of natural resources necessary for human activities.

Observe the environment as a luxury that must be protected only if material resources allow it. There is no awareness of the limitations of natural resources.

Trying to establish the balance between the rights and needs Primarily focuses on the rights and needs of of individuals and social responsibility. individuals. It is planned in collaboration between experts, politicians and the population at whose lifestyles the development will affect.

Planned only by experts and politicians. Source: www. ecologica.hr., April, 2010.

The concept of sustainable development is especially actual for tourism because its development is based on very attractive and well preserved environment especially in the involvement stage of the tourism development. Since the tourism is the widest global phenomenon that touches the supreme desires of mankind, and also an important element of the great number of countries, it must be developed through criterions of responsibility. One of the first public action strategies on tourism and sustainability came from the Globe 90 conference held in Canada. Conference delegates suggested five goals of sustainable tourism. These are as follows: (a) to develop greater awareness and understanding of the significant contribution tourism can make to environment and economy, (b) to promote equity and development, (c) to improve the quality of life of the host community, (d) to provide a high quality of experience for the visitor, (e) to maintain the quality of the environment.14

Edgell , D., L., Managing sustainable tourism: a legacy for the future, The Howarth Hospitality Press, Bringhamton, New York, 2006., p. 1. Ibidem, p. 4. 14 Mason, P., … , op.cit., p. 109. 12 13

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However, the concept of sustainable tourism changed during the last decade of the twentieth century and early twentyfirst century. Emphasis has been placed on environmental factors, social factors or economic factors depending on the author, the target audience and the context in which statements have been made. Therefore, the tourism must be viewed as an integrated whole with an impact on the economy, society, culture and physical environment. Government policy makers and all stakeholders in the tourism sector must work together to meet present needs without compromising the ability of future generations to meet their own needs. There are four issues for sustainable tourism development.15 The first issue involves tourism policy-making in both its substantive and procedural aspects. A country’s tourism policy should provide the most explicit statement of the government’s approach to sustainable tourism development and the roles that all stakeholders in the tourism sector are expected to take. In order for policy-making to be effective, government policy-makers and stakeholders need reliable information and timely data of good quality to enable better understanding of tourism’s complex and long-term interactions with the rest of the economy. The effectiveness of tourism policy-making will clearly be influenced by the availability of resources. The second issue relates to planning in terms of its policy and operational elements as part of a process for deciding objectives, priorities and means for achieving objectives. Sustainable tourism development can be achieved in a comprehensive way through the use of a tourism master plan as well as integrated tourism planning. In addition, planning based on reliable and timely information can highlight the links between national economic development and the tourism sector. The third issue concerns management for sustainable tourism development, which involves leading, coordinating and controlling actions to mobilize resources in order to formulate and implement tourism policies and plans. This also involves administrative issues about the structure, functions and responsibilities of the national tourism organization. The fourth issue focuses on participation of the private sector as a major stakeholder providing tourism services. This involves questions about how to attract grater private sector participation that is appropriate for sustainable tourism development as well as how to encourage public and private sector partnerships. Government policies and plans would need to focus on creation of a conducive business environment, formulation of an adequate legislative framework and strengthened governmental capacities to work with the private sector to make sustainable tourism development the top priority. Economic planning for tourism will be carried out in three phases:16 1. Projections of investments and costs; 2. Estimates of revenues ; 3. Cost/benefit analyses. While there is a general awareness of the economic benefits of tourism, its net contribution to the economy is often not known, making it difficult to make effective policies. Systematic research to understand the economic impact of tourism is needed to: (a) make integrated planning easier, (b) strengthen links between national economic development policymaking and sustainable tourism development and (c) better understand how to maximize the economic benefits from tourism. In proper planning process-physical, legal, promotion, finance, economic, market, management, social and environmental aspects all help to deliver the benefits of tourism development. These aspects must be given due consideration while planning. The following steps may be helpful for making good planning process:17 • Define the system: scale, size, market, character and purpose; • Formulate objectives: the objective must be comprehensive and specific and should include a timetable for completion; • Data gathering: fact-finding, or research, provides basic data that are essential for developing the plan; • Analysis and interpretation: once data collected, the many fragments of information must be interpreted so the focus gathered will have meaning for analysis and interpretation purposes; • Preliminary plan: various scale models are developed to illustrate the land use plans; sketches are prepared to show the image the development, financial plans are drafted from the market information, site surveys, and the layout plans are to show the investment needed in each phase of the project and the cash flow expected; • Approving the plan: the parties involved can now look at plans, drawings, scale models, estimates of costs, estimates of profits, and know what will be involved and what are the chances for success or failure regarding this project; • Final plan: this phase typically includes a definition of land use, plans for infrastructure facilities, such as roads, airports, like paths, horse trails, pedestrian walkways, sewage, water and utilities, architectural standards, landscape plans, zoning and other land use regulations, economic analysis, market analysis, and financial programming; • Implementation: carries out the plan and creates an operational tourism development.

Suriyamongkol, M., L., Plan of action for sustainable tourism development in the Asian and Pacific region, UN, 2005., p. 4. Sharma, K., K., Planning for tourism, Sarup&Sons, New Delhi, 2003., p. 28. 17 Raina, A., K., Ecology wildlife and tourism development-Principles, Practices and strategies, Sarup&Sons, New Delhi, 2005., p. 125. 15

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Tourism planning should be integrated to avoid as far as possible, disparities in the standards of amenities for the visitors and the local population. Tourism planning should not be left totally to private enterprise in search of profit. Government and non government organizations must actively participate in it. Tourism planning should be planned at the national, regional and local levels.18 At all levels of tourism planning tourism development policies, structure plans, facility standards, institutional factors and all the other elements are necessary to develop and manage tourism effectively and efficiently. Then, within the framework of national and regional planning, more detailed plans for tourist attractions, resorts, urban, rural and other forms of tourism development can be prepared. Tourism development has to be planned in relation to the total development of the country and the available resources at the destination places. The following point’s throws light on the purpose of tourism planning.19 • Makes for purposeful and orderly activities- planning efforts are pointed towards the desired results, and an effective sequence of efforts. Planning distinguishes between action and accomplishment. • Points out need for future change- planning helps in the decision marking to visualize future possibilities and to appraise key fields for possible participation. • Answer ‘’what if’’ question: a planner can see through a complexity of variables that effect what action he decides to take. For example: institution, judgement, and various contingency approaches like ‘’studies of the situation’’ can be used and answer to questions. • Provides a basis for control: the twin of planning is controlling, which is performed to make sure that the planning is bringing about the results sought. By means of planning, deadlines are determined for the start and the completion of each activity and setting the standards of performance. • Encourages achievement- the act of putting thoughts down on paper and evolving a plan provides the planner with guidance and a drive to achieve. Planning reduces random activity, overlapping efforts, and irrelevant actions. • Increases and balances utilization of facilities- planning provides for a greater utilization of the available facilities of an enterprise. For any given period of time, the best use is mode of what is available. • Compels visualization- this overall comprehension is valuable, as it enables the decision makers to see important relationship, gain a fuller understanding of each activity, and appreciate the basis upon which managerial actions are supported. Through planning, a constructive identification with the problems and the potentialities of the tourism enterprise as a whole is gained. Negative impact of tourism does not include that tourism is inherently destructive. Tourism can enrich people’s lives, can expand an economy, can be sensitive and protective of environments, and can be integrated into a community with minimum impact if planned properly on scientific management principles. Sustainable tourism development guidelines and management practices shouldn’t be considered only as regarding special categories of tourism activities (eco-tourism, green travel, responsible tourism, etc.), but they have to be considered as the referential framework for driving all forms of tourism in all types of destinations, including mass tourism and the various niche tourism segments, towards more sustainable patterns.20 Visitors will come to an area in small numbers initially, restricted by lack of access, facilities, and local knowledge. As facilities are provided, and awareness grows, visitor numbers will increase. With marketing, planning, information dissemination, and further facility provision, the area’s popularity will grow up rapidly. Eventually, however, the rate of increase in visitor numbers will decline as levels of carrying capacity are reached. These may be identified in terms of environmental factors (land scarcity, water quality, air quality), of physical plant (transportation, accommodation, other services), or of social factors (crowding, resentment by the local population).

Pran, N., S., Successful Tourism Management, Volume 1, Sterling Publishers PvT.Ltd., 1997., pp. 120.-121. Terry, R., G., and Franklin, …, op.cit. p. 130. 20 Castellani, V., Sala, S., Sustainable tourism as a factor of local development, Tangram Edizioni Scientifiche Trento, Italy, 2009., p. 15. 18 19

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2.2. The case of tourism destination in involvement stage of development Dubrovacko primorje The stages through which it is suggested that tourist destination pass are illustrated as follows21: 1. Exploration: small number of visitors attracted by natural beauty or cultural characteristics-numbers is limited and few tourist facilities exist. 2. Involvement: limited involvement by local residents to provide some facilities for tourists-recognizable tourist season and market destination begin to emerge. The pressure is put on governments and public agencies to improve transport and other facilities for tourists. Figure 1: Hypothetical evolution of tourist area

Rejuvenation Critical range of elements of capacity Consolidation

Stagnation Decline

Development

Involvement Exploration

Time

Source: Butler, R., The tourism Area Life Cycle: Applications and modifications, Opseg 1, 2006. p. 5.

3. Development: large numbers of tourists arrive, control passes to external organizations and there is increased tension between locals and tourists. 4. Consolidation: tourism has become a major part of the local economy, although rates of visitor growth have started to level off and some older facilities are seen as second-rate. 5. Stagnation: peak numbers of tourists have been reached, although the resort is no longer considered fashionable and turnover of business properties tends to be high. 6. Decline or rejuvenation: attractiveness continues to decline, visitors are lost to other resorts, and the resort becomes more dependent on day visitors and weekend recreationalists from a limited geographical destination-long-term decline will continue unless action is taken to rejuvenate the destination and modernize it as a tourist destination.22 Dubrovacko primorje is a municipality in the Croatian south. It is point of contact with the jewel of the Adriatic – Dubrovnik. With its modest population of 2216 it offers an underutilized tourist and agricultural goods which Dubrovacko primorje has in plenty. Since tourists are just discovering the area, only with careful planning is possible so called bottom up which would revive the municipality. That would help to keep young people, attract new labour force and fresh capital that is essential for cautiously investing. Dubrovacko primorje has very rich cultural heritage, but during the Homeland war the great deal of it was destroyed. Today, after more than twenty years, it can be said that there is a small progress of change for the better. That this is the case, it can be concluded from the following:

21 22

Butler, R., The tourism area life cycle: Applications and modifications, Opseg 1, Cromwell Press,Great Britain, 2006. p. 5. Carr, M., New Patterns: Process and Change in Human Geography, Nelson Thornes Ltd., UK, 2003., p. 464.

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Table 2. Total number of arrivals of domestic and foreign tourists in the period 2001-2011 Year

Domestic

Foreign

2001

349

5, 96

14897

14, 61

2002

477

8,15

8378

8,22

2003

375

6, 41

8969

8,8

2004

548

9,36

9217

9,04

2005

665

11,36

11329

11,11

2006

785

13,41

11502

11,28

2007

738

12,61

10765

10,56

2008

890

15,21

12908

12,66

2009

1023

17,48

13944

13,68

2010

834

4,76

16681

95,24

2011

1050

5,27

18887

94,73

Source: Tourism in Seaside Resort and Municipalities from 2001 to 2011, Statistical Reports, Croatian Bureau Statistics, Zagreb, Croatia, from 2002 to 2012

Table 3. Total number of overnight stays of domestic and foreign tourists in the period 2001-2011 Year

Domestic

Foreign

2001

2160

6,04

61745

8,71

2002

3050

8,54

69159

9,76

2003

2221

6,21

70350

9,93

2004

3113

8,71

74652

10,54

2005

4688

13,12

85811

12,11

2006

4317

12,08

80932

11,42

2007

4463

12,49

78172

11,03

2008

5492

15,37

89841

12,68

2009

6210

17,38

97557

13,77

2010

4867

4,00

116947

96,00

2011

6322

4,88

123322

95,12

Source: Tourism in Seaside Resort and Municipalities from 2001 to 2011, Statistical Reports, Croatian Bureau Statistics, Zagreb, Croatia, from 2002 to 2012

During the years the number of tourists grows in arrivals with the average annual growth rate of 3% and in overnights 7%, but there should be caution because there is still no carefully crafted plan for tourism development and the perception of what destination that should be. According to this, it can be seen that Dubrovacko primorje is in initially stage of life cycle. Visitors arrive in small numbers and are supported by limited facilities, there is often poor access and restricted local knowledge of their needs. Research has shown that there no exists adequate facilities intended for spending tourists. Chart 1. Adequate tourists offer intended for consumption

N o 11 %

Partl y 13 %

Ye s 76 %

Source: author’s research

At this initial stage they are highly adventurous, looking for places that have not yet been ‘’ruined’’ by tourism. However, as other models demonstrate, visitors bring the seeds of change with them, and can be instrumental in actually creating the type of destination they despise.

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There is a hope that awareness of the destination will be growing as does the number of visitors and facilities. That would be introduction in a third, development stage. Destination will begin to increase its marketing, information dissemination and further facility provision. Its popularity will grows rapidly and the destination will move into the third stage of the life cycle, which often becomes a form of mass tourism.

2.3. Tourism destination sustainability planning The main reason for tourism destination planning is destination life-cycle concept as defined by Plog. Plog’s hypothesis is that destination areas tend to rise and fall in popularity according to the whines of those in the predominant psychographic group. As the destination area becomes more widely publicized and better knows, it loses its appeal to the allocentrics and they are replaced by the ‘’mid-centrics’’, who greatly outnumber the allocentrics in the population in general.23 Basically, the destination area can be said to have mass-market appeal at this point. Destination areas can carry with them the potential seeds of their own destruction if they allow themselves to become over commercialized and to forsake the unique appeals, which made them popular in the first place. One of the core reasons of tourism destination planning is to provide the basic framework to allow the destination area to cope with change. If the destination area wishes to maintain tourism as a long-term economic activity, it must show its concern through planning to preserve and enhance these special factors that make it different from all other destinations.24 Planning in this context has five basic purposes. 1. Identifying alternative approaches to: marketing, development, industry, organization, tourism awareness, support service and activities. 2. Adapting the unexpected: general economic conditions, energy supply/demand situation, values and life-styles, fortunes of individual industries, other factors in the external environment. 3. Maintaining uniqueness: natural features and resources, local cultural and social fabric, local architecture, historical monuments and land marks, local events and activities, parks and outdoor sports areas, other features of the destination area. 4. Creating the desirable: high level of awareness, benefits tourism, clear and positive image of area as a tourism destination, effective industry organization, effective marketing, signage and travel information programs. 5. Avoiding the undesirable: friction and unnecessary competition among individual tourism operators, hostile and unfriendly attitudes of local residents towards tourists, damage or undesirable permanent alteration of natural features and historical resources, loss of cultural identities, stoppage of unique local events and activities, pollution. Tourism planning in a destination should take place at a variety of levels. There are five essential phases in the tourism planning process.25 The first phase in the tourism planning process is background analysis phase and it could be classified as being a situational analysis that produces the basic direction for the succeeding phases. Because every destination area, have some level of existing tourism activity and policy framework for the industry, this is a logical launching point for most tourism plans. If any particular destination area has having any existing tourism policy, then it should be carefully reviewed at the outset of the plan. Tourism policy goals falls into four categories-economic, consumer/social, resource/environmental and government operations. After the above exercise the tourism demand in the destination area should be analysed by collecting secondary sources of information. The last step in the above phase should be a review of the major strengths, weakness, problems and issues within the destination area’s existing tourism industry. Another step that can be taken in some tourism plans at this point is that of staging a series of public meetings with citizen groups in the destination area. Second phase is detailed research and analysis phase. Research should be concentrated in four distinct areas-resources, activities, markets and competition. • Resource analysis - the first step in the resource analysis involves the preparation of maps identifying the location of key resources. The step is the resource classification according to their significance as being of national, international or local market appeal. • Activity analysis - activities include all the things the tourist can do while visiting the destination area such as shopping, viewing scenery, etc. As the activities available at the destination area are often a prime motivating factor to travel, this exercise can be most useful in highlighting new demand generation opportunities. It is necessary to classify the activities in terms of their range. Plog, S., C., Why destination areas rise and fall in popularity, Cornell Hotel and Restaurant Administration Quarterly, New York, 1973., pp. 13.-16. Raina, A., K., ... , op.cit. p.137. 25 Mill, C., R., Morrison, A., M., The Tourism System, An Intoduction Text, Prentice Hall, INC, Englewood, New Yersey, 2002., p.292. 23 24

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• Market analysis - a good tourism plan will incorporate some original research on the existing and potential markets

•

for the destination area. Carrying out one or more surveys of existing and potential markets for the destination area. Carrying out one or more surveys of existing tourists and potential tourists can do the research. Surveys of existing tourist are normally carried on while they are travelling within the destination area, and for potential tourists, focus group sessions, telephone interviews, and mail-out, mail-back questionnaires techniques can be applied. This research helps to determine attitudes toward future travel to the subject destination area, levels of awareness of the area’s tourism resource, back components images of the area, and the steps needed to be taken to attract patronage from these potential visitors. Competition - no destination area is without competition and thus a tourism plan must consider the competitive advantages and future plans of other areas as well as its own.

The third phase of the tourism planning process represents the point in which the major conclusions regarding all of the previous work are formulated. A comprehensive tourism plan will produce conclusions on five distinct subjects: tourism development; tourism marketing; tourism industry organization; tourism awareness and other tourism support services and activities. The first step in the synthesis phase should be the preparation of position statements indicating, ‘’where we are now’’ in respect of above five subjects. The second step is that of determining ‘’where we would like to be’’ or the desired future situation in respect of some subjects. Tourism strategies and plans provide the ‘’bridge’’ between the present situation and desired future situation in a destination area. The next step is to setting up the goals it can be, to stimulate employment, income and economic development, through the systematic improvement, etc. The tourism plan usually makes for five to eight years, and planning goals are achievable within this time period. Once the planning goals have been set, there are usually a variety of approaches or strategies that can be employed to achieve them. The final phase of the tourism planning process is the development of the plan itself. The plan details, the actions needed to achieve the objectives, implement the strategy, and satisfy the planning goals. A comprehensive plan deals with the five subjects of development like marketing, industry, organization, awareness and support services. For the realization of the above, it is important synergy between all subjects involved in tourism planning including and domestic people. According the opinion of some experts, only sustainable development is the salvation of mankind. One man alone can do nothing, he collapses, and his work barely gets noticed, while the joint forces of the impossible makes possible.

3. DATA AND METHODOLOGY In order to determine the importance of the sustainable tourism development planning in the involvement stage of the tourism destination, an analysis was carried out, where primary data was collected and compiled alongside the collection of secondary data. In order to identify the local residents’ attitude toward the importance of sustainable tourism planning, empirical research was carried out using a sample survey taken from among 131 randomly-chosen local residents in Primorje. The research was conducted within the cooperation between University of Dubrovnik and „Deša“ association with aim to determined necessaries and features for customization local centres of sustainable development in Dubrovnik-neretva County. The research was carried out from June 1st to September 1st, 2010. In total, 170 questionnaires were distributed among residents of Primorje out of which 131 were correctly filled. The data obtained from the survey were analyzed using different analytical tools, including methods of analysis and synthesis, inductive and deductive methods, method of generalization and specialization, and different statistical methods. A survey was made for the purpose of emphasizing the role and importance of planning for sustainable tourism development of tourist destinations especially in the tourism destination that are in the involvement stage of the tourism development. The aim of the research was to analyze specific case; it’s positive and negative impacts, as well as community awareness about the need for sustainable tourism development planning in destination in the involvement stage of the development. As dependent variable was measured on ordinal scale Kruskal-Wallis test was used. All statistical analyses were made using an SPSS package version 17.0. The goals of the research aimed to prove or reject the following hypotheses: H1: A higher degree of consideration for the principles of sustainable development implies a higher degree of involvement in planning H2: A higher degree of tourism control in the region implies a higher degree of involvement in planning H3: A higher degree of participation in the preservation of the environment implies a higher degree of involvement in planning H4: A higher degree of optimization of resource use implies a higher degree of involvement in planning

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4. RESULTS The table below shows results of descriptive statistical analysis of frequencies. Table 4. Respodent profile Demographic characteristics

Frequency

Percentage (%)

18-39 40-69 70 and over

51 66 14

38,9 50,4 10,7

Male Female

65 66

49,6 50,4

Education

High school and less College Post-graduate school

100 23 8

66,2 17,6 6,2

Occupacy

Unemployed Farmer Private undertaking Employed in public sector Employed in private sector Rest

4 40 19 24 17

3,8 38,5 18,3 23,1 16,3

Age

Gender

Source: Authors research

H1: A higher degree of consideration for the principles of sustainable development implies a higher degree of involvement in planning Table 5. Ranks Consideration for the principles of sustainable tourism

Participation in planning

Mean Rank

Yes

65,10

35,20

Partly

51,47

Total

115

Results of the Kruskal Wallis test are: • Chi-Square = 10,102 • Df =2 • Asymp. Sig. = ,006 p=0,006 which is lower than 0,05 and shows that there is statistically significant difference between respect the principles of sustainable development and the degree of involvement in participation in planning. Respondents consider that, if responsible tourism mean consideration for the principles of sustainable development, in its planning should be more open to all community stakeholders. H2: A higher degree of tourism control in the region implies a higher degree of involvement in planning Table 6. Ranks

Control the impact of tourism on the region

Participation in planning

Mean Rank

Yes

63,42

46,15

Partly

50,21

Total

114

Results of the Kruskal Wallis test are: • Chi-Square = 5,747 • Df =2 • Asymp. Sig. = ,0,057

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p=0,057 which is higher than 0,05 and shows that there is no statistically significant difference between control the impact of tourism on the region and participation in planning. Respondents consider that, if responsible tourism is equally with control of the impact of tourism in the region, in its planning doesn’t necessarily participate all community stakeholders. H3: A higher degree of participation in the preservation of the environment implies a higher degree of involvement in planning Table 7. Ranks

Preserving the environment

Participation in planning

Mean Rank

Yes

65,15

36,50

Partly

56,99

Total

119

Results of the Kruskal Wallis test are: • Chi-Square = 7,800 • Df =2 • Asymp. Sig. = ,020 p=0,020 which is lower than 0,05 and shows that there is statistically significant difference between preserving the environment and participation in planning. Respondents consider that if responsible tourism implies the preservation of the environment, in planning its development must be more open to all community stakeholders. H4: A higher degree of optimization of resource use implies a higher degree of involvement in planning Table 8. Ranks

Optimal use of resources

Participation in planning

Mean Rank

Yes

65,10

28,00

Partly

54,99

Total

116

Results of the Kruskal Wallis test are: • Chi-Square = 12,351 • Df =2 • Asymp. Sig. = ,002 p=0,002which is lower than 0,05 and shows that there is statistically significant difference between optimal use of resources and participation in planning. Respondents consider that if responsible tourism implies an optimal use of resources, in planning its development must be more open to all community stakeholders.

5. CONCLUSION Importance of the planning is multiple in each stage of the tourism destination development but it is usually ignored in the initial stages. Tourism destination planning is mostly applied in the stage when the many problems are occurred and that stage is stage of the stagnation. According everything mentioned above tourism destination planning is not so efficient in the advance stages. Therefore this paper pointed out the importance of tourism destination planning in each stage especially for the sustainable tourism development planning in the tourism destination that are in the involvement stage of the tourism development because it define goals, determine the temporal sequence of development, coordinate needs and opportunities, coordinate development and environment, standardize the relationship between economies, natural resources and quality of life, determine the basic directions of development, space allocation, and utilization of natural resources, protect created and natural assets, regulates behaviour of all participants in the development process. Planning consists of an ordered sequence of operations and actions designed at organizing and controlling tourism development in the areas of destination, according to the outlined political objectives. This paper analyzed

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approach of the sustainable destination planning in the destination that is in the involvement stage of the development and that is Dubrovacko primorje where is limited involvement by local residents to provide some facilities for touristsrecognizable tourist season and market areas begin to emerge. The pressure is put on governments and public agencies to improve transport and other facilities for tourists. At all levels of tourism planning tourism development policies, structure plans, facility standards, institutional factors and all the other elements are necessary to develop and manage tourism effectively and efficiently. This paper analyzed the community awareness about the need for sustainable tourism development in the stage of the involvement. The results showed that responsible tourism mean consideration for the principles of sustainable development, in its planning should be more open to all community stakeholders. Also it is also entrenched that if responsible tourism implies an optimal use of resources, in planning its development must be more open to all community stakeholders, not only for the few of them. Only by raising the general level of environmental education and awareness at every level about the necessity of an active attitude towards nature and the environment in general, it is possible to complete economic, social and natural development to implement the general principles of sustainability in the involvement stage of the tourism destination development.

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

Brebbia, C., A., Pineda, F., D., Sustainable Tourism IV, WIT PRES, UK, 2010., p. 88. Butler, R., The tourism area life cycle: Applications and modifications, Opseg 1, Cromwell Press, Great Britain, 2006., p. 5. Carr, M., New Patterns: Process and Change in Human Geography, Nelson Thornes Ltd., UK, 2003., p. 464. Castellani, V., Sala, S., sustainable tourism as a factor of local development, tangram Edizioni Scientifiche Trento, Italy, 2009., p. 15. Dulčić, A., Petrić, L., Upravljanje razvojem turizma, Mate, Zagreb, 2001., p. 344. Edgell, D., L., Managing sustainable tourism: a legacy for the future, The Howarth Hospitality Press, Bringhampton, New York, 2006., p. 1. Edgell, D., L., Sr., et al., Tourism Policy and Planning: Yesterday, Today and Tommorow, Butterworth and Heineman, elsevier, Oxford, 2008., p. 298.- 299. Getz, D., Models in Tourism Planning, Tourism Management, second Edition, Butherworth˛&Co.Calagry, Canada, 1986., p. 21. Gunn, C., A., Var, T., Tourism Planning: Basics, Concepts, Cases, Taylor&Francis group, New York, 2002., p. 8. Mason, P., Tourism impacts, Planning and Management, Second Edition, Buttherworth-Heineman, Elsevier, English, 2008., p.84. Mill, C., R., Morrison, A., M., The Tourism System, An Introduction Text, Prentice Hall, INC, Englewood, New Yersey, 2002., p. 292. Murphy, P., Murphy, A., E., Strategic Management for Tourism Communities: Bridging the Gaps, Great Britain, 2004., p. 41. Plog, S., C., Why destination areas rise and fall in popularity, Corenll Hotel, and Restaurant Administration Quarterly, New York, 1973., p. 13.-16. Pran, N., S., Successful Tourism Management, Volume 1, Sterling Publishers PvT Ltd., 1997., p. 120.-121. Raina, A., K., Ecology wildlife and Tourism development-Principles, Practices and Strategies, Sarup&Sons, New Delhi, 2005., p. 125. Sharma, K., K., Planning for Tourism, Sarup&Sons, New Delhi, 2003., p. 28. Sharply, R., Telfer, D., J., Tourism and Development in the Developing World, Routledge, New York, 2008., p. 1. Suriyamongkol, M., L., Plan of action for sustainable tourism development in the Asian and Pacific region, UN, 2005., p. 84. Terry and Franklin, Principles of Management, A.I.T.B.S. Publishers and Distributors, New Delhi, 1994., p. 148. Tourism in Seaside Resort and Municipalities from 2001 to 2011, Statistical Reports, Croatian Bureau Statistics, Zagreb, Croatia, from 2002 to 2012

DETAILS ABOUT AUTHORS: IVANA PAVLIC, PH.D UNIVERSITY OF DUBROVNIK THE DEPARTMENT OF ECONOMY AND BUSINESS ECONOMY LAPADSKA OBALA 7 DUBROVNIK, CROATIA ipavlic@unidu.hr ANA PORTOLAN, UNIV.SPEC.OEC UNIVERSITY OF DUBROVNIK THE DEPARTMENT OF ECONOMY AND BUSINESS ECONOMY LAPADSKA OBALA 7 DUBROVNIK, CROATIA ana.portolan@unidu.hr LJUBICA MIŠKOVIĆ, MR.SC. ljubicalovric@gmail.com

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Possibilities for development of rural tourism in Herzegovina

Doris Peručić Blanka Bradvica

ABSTRACT In today’s world of overall globalization more importance is being given to the selective forms of tourism to diversify the tourist offer of the country or a region and make it more competitive on world’s market. If we take a look to the selective forms of tourism in Herzegovina we can say that the rural tourism has the biggest growth. This paper analyzes the current state of development of rural tourism in Herzegovina, exploring the potentials and possibilities of further development of rural tourism in the area and residents’ attitudes and their familiarity with the very concept of rural tourism. It also gives suggestions on how to evaluate the “rural” tourism resources, without losing the need of their tight link to the other resources (sea, culture, sports) which have a decisive motive force when selecting a tourist destination. The research started from the general assumption that the region of Herzegovina has a great potential in rural tourism and that this selective form of tourism can contribute much to the development of the region in general. Based on the obtained results it was possible to suggest possible directions of development of rural tourism. Some of the suggested routes are as follows: evaluate and network the touristic resources and accommodation of rural territory, develop a micro infrastructure to serve the rural tourism, financial support for tourism development, education and training of human resources, create a unified strategy for destination marketing and management, develop a range of rural tourism coordinated and thematically associated with the region. KEYWORDS: rural tourism, Herzegovina, tourism resources

1. INTRODUCTION Observing the global trends of tourists, significant changes can be seen in their preferences. It has been observed that tourists are becoming increasingly sated by mass tourism, and now are looking more and more for some new experiences. On the other hand, taking into account the overall positive impact of tourism on the economy but also on the quality of life, it is often emphasized that tourism is one of the branches of the economy that the future holds. In today’s world of globalization and overall globalization more importance is being given to selective forms of tourism which diversify the tourist offer of the state or region and make it more competitive on the world market. From selective forms of tourism, the form that has had great momentum and progress is the rural tourism. Rural tourism is a collective term for various forms of tourism that occur outside the cities and areas in which the mass tourism has developed. It is conditioned and marked by tourist attractions that are located in rural areas. This paper examines the potential and opportunities for development of rural tourism in Herzegovina. Starting from the general assumption that the region of Herzegovina has a great potential for rural tourism, this form of selective tourism can contribute much to the development of region in general. However, the question is whether enough resources are properly used and whether there is a real and feasible development strategy not only in tourism but also in other activities related to sustainable development of rural areas.

2. OPERATIONAL RISK MANAGEMENT When we talk about rural tourism, as well as the development of tourism in general, we can not ignore the importance of natural beauty and preserved environment. Herzegovina still has a very nice environment and a lot of natural attractions that are insufficiently or not used at all for tourism purposes. However, we can say, besides the promotion of the natural beauty it is much more important to protect the quality of natural beauty with the appropriate legal measures in order to continue to enjoy the beauty and phenomena of the region.

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Thus, we can only mention some of the beauties of Herzegovina:1 • Karst fields • Mountains • Rivers • Lakes: Rama, Jablanica, Boračko • Natural Protected Zones • Caves • Climate Observing the above we can say that Herzegovina has, very favorable conditions for the development of tourism in general and especially for rural tourism: a fully privileged geographical location in the hinterland of the Adriatic coast, which receives over 10 million tourists a year, the central position of Mostar as a real tourist magnet of the state ( Međugorje which attracts a huge stream of pilgrims), moderate climate, the Neretva valley and surrounding mountains are a real stronghold of natural, environmental and sports attractions. A strong agricultural character and rich basket of traditional agri-food products can still be added to all of that, making Herzegovina ideal environment for the development of rural tourism, which is able to fertilize the capillary economy of this area, on the one hand contributing to the development of alternative and conventional accommodation and on the other, commercial qualification and evaluation of its many typical products, ranging from wine to cheese.2 Due to the favorable climatic conditions, there are number of agricultural crops. The area is unique for horticulture, outdoor and indoor landscape gardening, and livestock production. This area is very famous for the production of highly regarded wines Blatina and Žilavka, whose evaluation process is underway. Peaches, pomegranates and figs as products with their specific high quality, included in the tourist offer may represent a unique identity of the area and contribute to the improvement of economic conditions and living standards of the local population. The results of the research for creating “Strategic plan for creating a basket of local qulity products in the area of Stolac County – Stolac basket of goods” show that olive is important produce and possibilities for its valuation should be considered. On the other hand, the villages in Herzegovina are being increasingly abandoned every year and number of farmers is in decline due to low birth rates, excessive imports, migration of people to urban areas, etc. Therefore, the local stakeholders have developed a basket of typical products, animals and crafts from all over Herzegovina. Table 1: Typical products of Herzegovina Cheese in the sack Livanjski cheese Sage honey Ljubuški honey Wine “Žilavka” Wine “Blatina” Beans “Poljak” Corn “Osmoredac” Kilims Nevesinje potatoes Herzegovinian ham Tomato “Jabučar” Olive oil Wild pomegranate juice Cherry “Alice” Melon “Sagrijaš” Balm “Healthyderm” Pomegranate “Glavas” Dry figs Mlaćanica Wild greens

Bukara Wicker basket Copper engraving Bosnia and Herzegovina Carving products Embroidery Cow “Buša” Sheep “Pramenka” Bosnian mountain horse Herzegovinian donkey Mint Kantarion Sage Dog rose Jablanička soup Onion salad “Pura” “Cicvara” “Popara” “Prijesnac” “Izljevača” Herzegovina Donuts

Source: Strategic guidlines for development of rural tourizm in HercegovinaNeretva county 2001.-2015. , Project –„ Protection and valorization of high quality, traditional products inHerzegovina“, UCODEP, Mostar, 2010., page 20.

Strategic guidlines for development of rural tourizm in Hercegovina-Neretva county 2001.-2015. , Project –„ Protection and valorization of high quality, traditional products inHerzegovina“, UCODEP, Mostar, 2010., page 19. 2 Ibidem, str 10. 3 Strategic guide for creation of basket of quality local 1

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Besides natural beauty, one of the strongest assets Herzegovina has, other attractions should also be mentioned, now representing the tourist offer of the region. This attraction should be one of the leading points in the development of rural tourism, but of course it should not be left it at that because the offer should constantly expand. 1. Heritage Blagaj – Tower of herceg Stjepan, the spring of the Buna, Dervish Tekke (tentative UNESCO list) Čapljina - Mogorjelo, festivals Čitluk - Festivals, Međugorje Jablanica - Museum of the Second World War, lake Konjic - heritage, Borčko lake Mostar- UNESCO protected sites Međugorje - Catholic pilgrimage sites Neum - resort on the Adriatic Coast Nature Park “Hutovo Blato,” Archaeological Park, a UNESCO tentative list Počitelj - heritage, UNESCO’s tentative list Prozor/ Rama - Rama Lake, Franciscan Monastery, fishing canyon of Rakitnica Stolac - the legacy of medieval architecture, tentative UNESCO list Cave Vjetrenica Žitomislić - Monastery Ljubuški - Kravice waterfalls, tower Herceg Stjepan, Humac museum 2. Sports and Outdoors For rural tourism in Herzegovina, there are sports and outdoor activities that are compatible with other resources. There is a large number of registered sports clubs in Herzegovina, of which the most popular are: hunting societies, fishing, rafting, trekking, biking and paragliding. These are also the tourist products that are not well promoted because of bad connection between tourism community and sports clubs. Examples of eco-tourism can be bird watching and photo safaris, which are almost non-existent. 3. Festivals Brotnjo - Wine Festival - Grape Picking Days/”Dani berbe grožđa” Čapljina - Carnivals (winter and summer) Konjic - Festival “Kulin Ban” triathlon, rafting and rafting championship race Jablanica - Rowing Marathon Prozor/ Rama - Days of prunes/ “Dani šljive” Počitelj - Art Colony Neum - Folk Festival

3. Rural turism in Herzegovina Herzegovina is currently in the process of promoting a variety of resources in rural areas of Herzegovina (eg, typical products, nature and heritage), so sometimes its residents are not aware that the fragments of tradition, gastronomy, natural attractions or festivals, should be carefully “connected” so that the tourism product can be complete and ready. This is probably why there are only a few local travel agencies at the moment that conduct their business on the basis of the local offer and tourism. When we talk about wine in Herzegovina and small “family” wine cellars, it is usually a “group” of rural enterprises that are closest to achieving final tourism product. Most families who produce wine, also have an accommodation capacity, which deserves to be mapped, categorized and promoted. This sector has been significantly improved and developed after the European Commission funded project “Wine Route4“ initiating a revival of winemaking in the region. Although the project is mainly worked with great producers - some of whom started their businesses based on the wine, and despite the fact that the “Wine Route” quite disappeared after the project, a positive result is that they “encouraged” the rural population to begin producing wine again. The experience gained from the first themed road “Wine Route” are valuable for the construction of similar thematic initiatives such as “herbs and honey” or “cheese and wine”. There are a number of people working in agriculture in rural areas Herzegovina who have a good base to start the “Bed and Breakfast” (B&B) or even agro-tourism. The problem is that no one does anything about integrating this potential, 4

www.wineroute.ba (02.03.2011.)

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which could be put to a very good use. The only initiative in this area was implemented by JICA and “ECO Velež,” mapping and promoting offer of 10 families in Podveležje - Buna. We can also mention few people who take action on their own, trying to build their own new rural attractions - such example is the horse farm in Mogorijelo in Čapljina. Yet, in such cases, municipalities or tourist board are not very interested in helping these initiatives. In any case, agricultural producers should be pioneers of capacity development and promotion of rural tourism. This fact has already been recognized by a number of stakeholders. General observation of the stakeholders in tourism in Herzegovina shows they are focused on their own interests, poorly connected and uninterested to work together on destinations’ development. New strategies at the individual level propose different concepts and ways to access destination management.

3.1. SWOT analysis of Herzegovina as tourist destination Table 2 shows the SWOT analysis of Herzegovina as a tourist destination. Analysis below together with the survey can be used in making the guidelines for further development of the destination. Table 2. SWOT analysis of Herzegovina - as a tourist destination of rural tourism Strengths

Weaknesses

Vicinity of the Adriatic coast

Lack of rural accommodation

Mostar, Međugorje, Neum - destinations that generate the bulk of tourism’s regions and as such are recognized in travel markets

Lack of accommodation in the open

Places to sports activities (Neretva)

Lack of specific legislation

Rural culture and traditions (Herzegovina)

Lack of destination’s promotion

Hutovo Blato, Blagaj Počitelj (excursions) – even now have a large number of tourists

Unfamiliarity of the local population with opportunities offered by the development of rural tourism

Mediterranean climate Natural beauty and environmental preservation

Lack of integration of rural resources

Cultural and historical heritage Opportunities

Threats

Lack of rigorous environmental policy, especially for Upper Neretva has the potential to become a destination Neretva, could threaten the future of tourism in Herzefor sports tourism and adventure, not only excursions govina Herzegovina, thanks to its geographical position and varied resources of the territory could become a famous destination for rural tourism.

Development, which is left to spontaneous private initiative, and is not operated with suitable means of territorial planning, can cause irreparable damage.

Herzegovina in its entirety can be networked with remarkable range of attractive resources, with Mostar proudly on top, can be one macro destination with multiple products.

The phenomenon of rural depopulation, if not stopped with the appropriate policy and promotion, can ruin any prospects of tourism development.

Source: Strategic guidlines for development of rural tourizm in Hercegovina-Neretva county 2001.-2015. , Project –„ Protection and valorization of high quality, traditional products inHerzegovina“, UCODEP, Mostar, 2010., page 32.

From the table 2, which shows the SWOT analysis of Herzegovina, natural beauty and preservation of the environment can be extracted as major strengths of Herzegovina; we can extract the lack of promotion of the destination as weakness, while Herzegovina’s opportunity to become familiar destination for rural tourism thanks to its geographical position and resources and lack of rigorous environmental policy can be extracted among the opportunities and threats. Counting the strengths and weaknesses, with lack of accommodation facilities and insufficient legislation there are still more weaknesses which override the strengths. And if the development of rural tourism is still left to disorganized private policy all opportunities will not be able to overcome the threats that threaten the development of tourism.

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3.2. Example of good practice - Ethno village „HERCEG“ Herceg Ethno Village is a unique Hotel and Tourist complex opened at the end of 2008 and located on four acres of land with 50 stone buildings divided into five sections. The goal of the project was to offer a complete service to the today’s tourist in the authentic atmosphere at one place. Center of the complex is a restaurant Herceg, there is also a hamlet of 10 stone houses with the accommodation section and a shopping section with 10 souvenir shops. Apart from these, there is also a conference hall which provides the facilities as a business venue and an amphitheatre for holding cultural events. To complete the village atmosphere, a chapel has been built on an elevation with a vineyard close by with the indigenous grapevine varieties, Žilavka and Blatina. Finally there is a section with stables housing domestic animals from this region and a playground in front of the terrace for youngest guests.

4. Exploration of opportunities for development of rural tourism in Herzegovina Exploring opportunities for development of rural tourism in Herzegovina is very important and necessary if Bosnia and Herzegovina wants to be included in international tourist flows. That leads us to the problem of identifying the potential for development of this kind of selective form and familiarity of population with the very concept of rural tourism. It also gives suggestions on how to evaluate the “rural” tourism resources, without losing the need of their tight link to the other resources (sea, culture, sports) which have a decisive motive force when selecting a tourist destination.

4.1. Research Methodology Despite the fact that in other European countries, rural tourism has existed for many years (sometimes even as the main form of tourism) we can see signs of the development of these selective types of tourism in Herzegovina only in the past few years (ethno village “Herceg” in Međugorje). There are not many studies on this subject (the latest published and party used in this paper is Strategic guidlines for development of rural tourizm in Hercegovina-Neretva county 2001.-2015. , Project –„ Protection and valorization of high quality, traditional products inHerzegovina“, UCODEP, Mostar, 2010.), and the competent ministry began to think seriously about the guidelines for the development of rural tourism only in its latest development strategy ( „ Strategy for tourism development of Federation of Bosnia and Herezegovina for period 2008.-2018., Federal ministry of environment and tourism, December 2008.”) Project has the following hypotheses in defining this research: H1 - Herzegovina has all the necessary resources for the development of rural tourism. H2 - Local residents are not familiar with the possibilities of the development of rural tourism. The aim of the research is to explore the attitudes and opportunities for development of rural tourism in Herzegovina, and also the very familiarity of residents of Herzegovina with the concept of rural tourism. Research of the attitudes and opinions of residents of Herzegovina on rural tourism and the possibilities of its development was carried out by the test method with the help of a questionnaire. Form of communication with respondents was personal, to a lesser extent by auto fill of the questionnaire. The questionnaire contained 31 question and consisted of five sets of questions. The first group of questions focused on the characteristics of the respondents, the second group was related to the strengths, weaknesses, opportunities and threats to the region, third group of questions is concerned with the participation of community stakeholders in tourism development, the fourth group of questions focuses on the goals of improved community and the fifth group of questions is related to the characteristics of Herzegovina.6 The occasional deliberate pattern was used. The study included 100 subjects. The research was conducted between July and November 2010. Subjects were residents of Bosnia and Herzegovina (the most common are the cities of Mostar, Čapljina and Ljubuški, other cities to a lesser extent). Age of the participants ranged from 18 years onwards. Since occasional deliberate pattern was used, with small number of subjects and quite a number of young subjects (20-29 years old) that is the basic limitation of this study and because of that the results can not be used for firm conclusions about the basic set. The collected data were analyzed using the statistical package SPSS 17.0.

During the research, questionnaire used was “Formiranje lokalnih centara održivog razvoja”, which a nonprofit organization “DESA” from Dubrovnik used in research related to the formation of centers of sustainable development in the area of Dubrovnik - Neretva County, with the special set of question for Herzegovina. 6

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4.2. The research results Once the hypotheses of the study were defined and the research was conducted all that remained was analysis of data obtained from questionnaires. Data were analyzed using the statistical package SPSS 17.0 and results are presented on the following pages.

4.2.1. Analysis of respondents by gender, age, education and occupation To obtain some basic parameters the initial questions were related to gender, age, education and occupation of the respondents. Target groups were Herzegovina residents older than 18 years who are somewhat familiar with the topic of research. The survey covered 47.3% of men and 52.7% women.The largest number of respondents, as many as 63.9% belongs to the age group of 20-29 years, and 13.8% of the respondents belong to the age group of 40-49 years and only 2.3% of the respondents belong to the age group of 60-69 years. Analysis of education shows that only few respondents have a low level of education (2.1% of skilled and highly skilled 1.0%), a high proportion of respondents had a secondary education - 43.1% of respondents, but also a significant proportion of respondents has higher education (14, 8% higher school, college 32.2%, 4.9% MA, 1.8% doctorate). In terms of occupation of the respondents 21.1% were unemployed, 2.9% of the respondents are engaged in agriculture, 4.2% of respondents identified themselves as a private entrepreneurs, while 15.4% of respondents were employed in the public sector and 18.5% of respondents were employed in the private sector, 1.8% of respondents were managers and 36.0% of the respondents replied Others (mostly students).

4.2.2. SWOT analysis of the region Respondents were asked to rate strengths, weaknesses, opportunities and threats by importance on a scale from 1 to 5. According to data obtained from the conducted research the following conclusions can be drawn. The largest percentage of respondents, as many as 50.1% considered preserved environment as an extremely important strength of development in the region, and 40.5% of the respondents consider opportunities for development of rural tourism as a very important strength of the region. Also we have to mention organic production and farming of autochthonous species as important strengths of regionâ&#x20AC;&#x2122;s development. As the main weakness of the region the largest percentage of respondents, 51.9% considered lack of experts that should not be ignored because for every branch of tourism man is the most important factor. As an important weaknesses it should also be mentioned content- poor tourist product which is for 41.0% respondents considered as a significant weakness for development, but also inadequate accommodation structure, lack of efficiency and undeveloped tourism promotion, integrated tourist information system that would greatly slow the further development of not only rural but also other selective forms of tourism. The main opportunity for development of the region which 51.2% of respondents recognize is the value of heritage,we can say that this is one of the most important factor for the development of rural tourism, because rural tourism is based on the particularities and uniqueness of heritage of the region, in this case Herzegovina. In addition we can also highlight the preservation of traditional products of the region, which for 38.4% of the respondents is a very important opportunity to develop the region, and providing high-quality experiences 40.3% of respondents considered as a very important possibility of development in the region. As a major threat to the development of the region, 43.1% of respondents see mass tourism, with which we agree, because we think that Bosnia and Herzegovina has involved late in the international tourism flows to be able to compete in the race of mass tourism, and rather should learn from the mistakes of countries whose environment was destroyed by mass tourism. Also it shouldnâ&#x20AC;&#x2122;t be ignored, undefined image of the country which for 43.1% of the respondents represents a major threat to the development of the region, and the economic crisis and inadequate process of privatization for 41.8% of respondents is a very important threat to development.

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4.2.3. Responsible tourism Respondents were asked to express the degree of agreement, what is responsible tourism according to them. Table 3: Opinions of respondents about the meaning of the concept of responsible tourism %

I totally disagree

I do not agree

Partially Agree

Agree

I agree completely

2,1

4,2

28,3

39,2

26,2

2,1

1,8

19,0

36,4

40,8

Agritourism Ecotourism Green tourism 3,4

2,6

18,7

32,9

42,4

Cultural Tourism

3,4

8,8

32,7

37,9

17,1

Respect for the principles of sustainable development

2,9

9,4

39,5

32,2

16,1

Optimal use of resources

2,3

6,2

28,1

32,7

30,6

Biodiversity

1,8

3,6

24,2

41,8

28,6

Control of impact of tourism on the region

1,2

3,4

35,3

42,1

17,9

Organic farming

1,0

3,4

21,6

38,4

35,6

Special education for staff in tourism

1,0

4,7

29,4

36,9

28,1

Preservation of Cultural Heritage

1,0

0,8

17,1

39,0

42,1

Respect of the capacity limitations

2,3

18,7

35,8

40,8

Preservation of the environment

1,0

6,0

33,8

59,2

Code of conduct for tourists

2,9

5,7

19,2

45,7

26,5

Source: Processed and calculated on the basis of data obtained by survey

Table 3 presents the responses of respondents on what they consider responsible tourism, as many as 59.2% were in full agreement that responsible tourism involves the conservation of the environment. Theyalso highlighted the code of conduct for tourists, conservation of the natural heritage and the impact control of tourism on the region, where it can be concluded that the respondents have a basic idea of what is responsible tourism but more invesments are needed in the promotion of responsible tourism.

4.2.4. Participation in the development and opportunities for community development The next group of questions was related to EU funds and the familiarity of the respondents with possibilities which EU funds provide. • When asked whether they would like to volunteer to build community 45.5% of respondents answered yes, 14.3% of respondents answered no, while 40.3% of respondents answered partially. • With the concept of EU funds for the development only 21.8% of the respondents were acquainted, while 48.3% were not acquainted with the term, and 29.9% of them were partly acquainted. • For the LEADER approach to the development of rural communities only 8.1% had heard for it, and 74.0% of them never heard for this approach, 17.9% of them were only partly acquainted with this approach. • The term “Local Action Group” is known only by 6.5% of respondents, while 74.5% were not familiar with the term “Local Action Group”, and 19.0% of the respondents were partly familiar with this therm. • The term “Local partnership” is known only to 17.7% of the respondents, 54.3% were not familiar with the term, and 28.1% were only partially familiar with the term “local partnership”. • According to the respondents 61.8% of them said that all members of the community should be involved in decision-making, 4.9% think they shouldn’t be, and 33.2% of them partially agree.

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All things considered, it is very worrying that nearly half of respondents were not familiar with the concept of EU funds for development, while more than 70% of respondents were not familiar with the LEADER approach, the concepts or “Local Action Group” and “Local Partnership.” The devastating facts show that the government and all other stakeholders of the community must invest a lot of energy and effort in educating and informing the population about the possibilities and opportunities offered to them with the purpose of better development. According to the opinion of the respondents, and the data obtained from the survey, we can see that the respondents are undecided on the issue of responsibility for development issues, so even 49.4% partially agree that the tour operators are responsible for the issues of responsible tourism development, while 42.3% of respondents agrees that the local community should be responsible for the issues of tourism, environment and heritage. According to the respondents, most of them, as much as 53%, agree that the goal of strengthening the capacity of local communities to participate in tourism greatly contributs to the development. In addition a large percentage agrees that an increase in funding should be provided for improvement of international recognition of the destination which leads to conclusion that by the opinion of the respondents it is most important to work on increasing the capacity and promotion of destination. 87.3% of the respondents agree with participation of the state in the development of the region in accordance with the principles of sustainable development, 4.4% of them disagree, and 8.3% of the respondents agree partially.When asked whether they think that on the county level, local governments and tourism associations should participate in the development of the region in accordance with the principles of sustainable development 70.9% of respondents said yes, 12.7% no, while 16.4% of respondents considered they should partially participate. Deciding on the level of economic entities 59.7% of respondents support, 21.3% do not support it, while 19% of respondents considered that this should be a partly. YES for participation of counties, local governments and tourism boards was the answer of 70.9% of respondents, and they found that special emphasis should be made on the regulation of tourist sites. A smaller percentage of them, 59.8% of respondents believe that the companies should participate in the development process of the region, and believe that the greatest emphasis should be on increasing involvement in the supply of domestic production. Deficiencies and absurdities can be identified in the tourism industry, according to the respondents’ replies in relation to specific claims, but also in their perception. Thus, as many as 51.4%, partially agree that the values that tourists recognize are emphasised well, while some 46% of respondents agreed with the statement that some of the prominent values are emphasised for private interests.

4.2.4. Characteristics of Herzegovina The last set of questions was related to the source of traditional customs and souvenirs from the rural area important for tourism and its development. Respondents were asked to express their opinion about the offered material products that could be offered to the community as an original souvenir. Figure 1. Local products as original souvenirs

Source: Ibid, Table 3

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The biggest percentage of respondents thinks wine and rakija are the most important and the most prestigious local products important for rural tourism of Herzegovina. As with the previous question the respondents were asked for an opinion about the traditional customs that could be offered in the rural development. Figure 2. Traditional customs

Source: Ibid, Table 3

According to the replies received the highest number of respondents considered Folklore as an essential manifestation of rural tourism in Herzegovina. In the next question the respondents were asked to rate the importance of the development of certain types of selective forms of tourism in Herzegovina. Figure 3. Selective forms of tourism in Herzegovina

Source: Ibid, Table 3

Figure 3 shows responses of the respondents about their perceptions of particular forms of tourism. Thus, the largest percentage of respondents considered religious tourism as a very important kind of selective tourism important for the development of tourism in the region of Herzegovina. Traditional products that could be a souvenir of rural tourism Herzegovina, and according to which it could be recognized, the largest percentage of respondents, 79.5% considered that it would be wine, although others (like brandy and figs) do not lag far behind, we can say that the minimum percentage considered olive oil and tobacco as a good traditional souvenirs. Although, we should not reject tobacco, because it has a very long and turbulent history in Herzegovina, and many stories and legends can be related to it and it can be used for tourism purposes. Traditional custom that could contribute to the development of tourism, for the largest percentage of respondents, 66.0% of them, is the Folklore Festival. What is on one hand accurate because many folklore groups today have retained a lot of customs that would help in the development of rural tourism, but on the other hand we must not allow that rural tourism to be perceived only through this offer segment but through other parts also. And this can be best achieved through education and promotion of all parts that could enrich the overall offer. At the end of these selective forms the largest percentage of respondents, 45.5% of them attributed the exceptional importance to religious tourism, which means that the largest percentage of respondents still perceived the religious tourism as the most important for the region of Herzegovina.

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4.3. Guidelines for further development Rural tourism is potentially leading product of Herzegovina, understood as a combination of cultural, natural and rural resources, by tourists who want to visit Bosnia and Herzegovina, which have a fixed base in the rural area. They love living in the open air, long walks and relaxing, exploring, photographing, excursions; they are very sensitive to the beauty of the place, picturesque landscape, bio-diversity; often well informed who do research before they begin their journey in the guides but primarily on web sites, but they are also demanding in terms of service, look for path maps, rates, furnished locations for vacation, want to rent a bicycle, horse, etc. They are sensitive to the overall quality of hospitality, starting with kindness of residents, they want to visit historical sites, artistic and cultural values, such as Sarajevo and Mostar, visit museums and they are interested in local traditions, native products, traditional cuisine, prefer individual organization of their vacation, travel with cars, motorcycles, campers. They represent the segment on the rise, especially in Europe: it is slow tourist, the one that made agritourism in Tuscany famous, who does not want to know the place in the frantic visit but wants to be introduced with the place all the way, and sometimes on several occasions, they are interested in local cuisine, often true gourmands attracted by the typical products, fascinated by the manifestations of local culture which maintain the flavour of authenticity. This is the ideal client of agritourism or ordinary rural home, very sensitive to the quality of hospitality and demanding, seeking comfort, courtesy, cleanliness, fairness of service regardless of its simplicity. The most generous market with this goal is probably Germany as well as Italy, Austria, France, Serbia, Croatia, Slovenia. The most appropriate locations for this type of tourism are Stolac, Čapljna, Čitluk, Blagaj and targets for excursions can be many, except Mostar and Sarajevo (and Dubrovnik): historic core of Počitelj , Stolac, Blagaj, Nature park Hutovo Blato, Trebižat safari, rafting on the Neretva etc.7 Rural tourism, as it is described, differs from conventional tourism because of the difference in style and concept of the holiday: “rural” tourist prefers accommodation in agritourism (or other forms of rural accommodation) because it allows for “closer” relationship with places and people because he wants a freer and less formal vacation than a hotel vacation. And if he wants to prepare dinner and experience a family vacation just like home, which is not interfered with the rigidity of hotel accomodation.8 As part of the strategic development of rural tourism in Herzegovina it is extremely important to: valorize and network tourism and accommodation resources of rural area. Valorize rural offer means to qualify and promote quality and traditional agricultural products, but also the cuisine, crafts, traditional events, historical, artistic and cultural resources which are present on the micro-territory, they create networks, extending the offer, giving it a strong territorial and cultural identity. All this should be united in a network that includes all actors, from farmers and agro-tourism businesses to hotels, restaurants, cellars and ensure through common rules the best level of hospitality and maximum level of promotional synergy, that in this way the visitor can be simultaneously offered wider range of possibilities with strong experience of territorial identity. An example of this might be the restoration of old houses and their conversion for tourist purposes. In almost every Herzegovinian village we have plenty of abandoned houses which decay but with little money and the right vision can become real jewels of tourism. This is an example where we should use the EU funds, but I still think that the main obstacle is certainly unresolved property relations that are one of the biggest obstacles to any development. Develop micro infrastructure to serve rural tourism - roads for trekking, cycling and mountain biking, access to places of outstanding natural beauty and value, equipped with places to stay, renting services, etc. Priorities will have to be determined by the municipality and the local community, taking into account possible synergies with private operators, competent authorities and international cooperation, harmonizing each intervention with a common evaluation image. Financial support for tourism development - pilot projects financially supported by funds, guarantee loans or preferential interest rates, can be a good way to encourage local interest and the decision to start with the rural / eco tourism enterprises. Priority in the selection of beneficiaries should be given to those who create new products such as agrotourism, which is based on the cultivation and production of wine, as well as those that invest in rural accommodations (agricultural producers, farmers, etc.). Education and training of human resources - the quality of tourism consists in providing the experience that meets or exceeds the expectations of the visitors. Some of the standard themes of education and training human resources are issues of product development, interaction with visitors, taking care of clients, hospitality skills, marketing and communication, environmental management, management skills, legal issues and financial control, education for guides, including content and presentation, and basic language training.

Strategic guidlines for development of rural tourizm in Hercegovina-Neretva county 2001.-2015. , Project –„ Protection and valorization of high quality, traditional products in Herzegovina“, UCODEP, Mostar, 2010., page 37. 8 Ibid, pg. 37. 7

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Create a unified policy for destination marketing and management - a real big disadvantage of tourism development in B&H today is the lack of an adequate system of promotions that would be able to project the demand on the international market. Promotion is a topic which is well known to the local governments, but often because it is primarily a widespread illusion that it is enough to print out a brochure and tourists will come, while on the contrary, the importance of one rational dimensions of promotion is often underestimated, both by the county and state. Today it is much easier to reach out to the international market than it once was thanks to the Internet and the huge success that has seen particularly in the tourism sector. Develop a range of rural tourism thematically aligned and linked with the region - with the standard offer of rural tourism that everyone should develop, it must be remembered that the tourism market is constantly changing and therefore needs innovative products. An example of such a product, maybe not so innovative but certainly interesting, is an international wedding in traditional costumes of each region. In the current craze for weddings, there will certainly be those who will find it very interesting. This is just one of many possible examples, examples that we should seek and adopt those that have proven as the most successful.

5. Conclusion The study started from the general assumption that the Herzegovina region has a great potential in rural tourism, this form of selective tourism can contribute much to the development of the region in general. But, the question was whether is there enough resources and were they properly used and whether there is a real and feasible development strategies not only in tourism, but also in other activities related to the sustainable development of rural areas. These assumptions led to the hypothesis of the study. Research confirmed the hypothesis that region of Herzegovina has necessary resources for the development of rural tourism. This certificate is reflected in the data that the highest percentage of respondents considered important factors for the development of rural tourism as an important strength in the region (such as preserved environment, unsaturated area, the possibility of developing rural tourism, agricultural cultivation of indigenous species, organic farming, natural attractive factors of the offer). And the second research hypothesis is also confirmed. Although a large number of respondents considered the development of rural tourism as the strength and opportunity to develop the region but still are not fully familiar with all the advantages and opportunities brought by the development of rural tourism. Still, most of the respondents perceived religious tourism as a major driving force behind the development of the region. Also, there are contradictory opinions; rural tourism is considered as strength but not the opportunity of the region. From the given traditional products the one that could be a souvenir of rural tourism of Herzegovina, according to which it would be recognizable, for the largest percentage of respondents, 79.5% of them, considered that it would be wine although others (like â&#x20AC;&#x153;rakijaâ&#x20AC;? and figs) do not lag far behind, we can say that the minimum percentage considered olive oil and tobacco as a good traditional souvenirs. Traditional custom that could contribute the most to the development of tourism, for the largest percentage of respondents, 66.0% is folklore. That is somewhat accurate because many folklore groups which operate today have retained a lot of practices that would help in the development of rural tourism. In the end from given selective forms, the largest percentage of respondents, 45.5%, attributed the exceptional importance of religious tourism, which means that the largest percentage of respondents still perceived the religious tourism as the most important for the region of Herzegovina. Based on the obtained results the possible directions of development of rural tourism were given: evaluate and network tourist accommodation and resources of rural territories, develop micro infrastructure to serve rural tourism, financial support for the development of tourism, education and training of human resources, creation of a uniform policy for destination marketing and management, development of a range of rural tourism thematically aligned and linked with the region. It is important to note that upon creation and development of tourism the mistakes of countries that have already gone through this development are not repeated. It should be noted that potentially the greatest threat to the development of tourism in Herzegovina, and generally throughout the country, is the unresolved political situation, poor investments and general dissatisfaction of the population. However, it can not be ignored that the development of tourism, as well as the development of rural tourism, is one of the potentially major generators of the region, which should improve the situation in the country.

More about results of these programs see in: Svilokos, T., Bank Credit Activity and Economic Growth in The Republic of Croatia, Journal of International Scientific Publications: Economy & Business, Vol. 5, part 2, Info Invest, Bulgaria, 2011, pp. 460.-474., ISSN: 1313-2555 6

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LITERATURE Articles 1. Strategic guidlines for development of rural tourizm in Hercegovina-Neretva county 2001.-2015., Project–„Protection and valorization of high quality, traditional products inHerzegovina“, UCODEP, Mostar, 2010., pp 19-37. 2. Strategic for tourism development of Federation of Bosnia and Herezegovina for period 2008.-2018., Federal ministry of environment and tourism, December 2008. 3. Strategic guide for creation of basket of quality local products in the areaof Stolac County – Stolac basket of goods, period 2009.-2014., Sarajevo, 2009., page 8. Internet sources 1. http://www.wineroute.ba 2. www.etno-herceg.com

DETAILS ABOUT AUTHORS: DORIS PERUCIC PROFESSOR UNIVERSITY OF DUBROVNIK, DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS DUBROVNIK, CROATIA dperucic@unidu.hr BLANKA BRADVICA DUBROVNIK, CROATIA blanka.bradvica@gmail.com

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ROLE OF BRAND IMAGE “DORINA” IN CREATING CUSTOMER LOYALTY DIANA PLANTIĆ TADIĆ JADRANKA IVANKOVIĆ KORNELIJA KOVAČIĆ

ABSTRACT Research work is focused on the importance of quality management elements of the brand and its identity, which creates a certain brand image that ensures customer loyalty. Brand image is a key concept that ensures customer satisfaction and their loyalty. Brand image is a result of reflection of certain elements of brand identity in consumer’s eyes. Globalization and increasing competition creates the need for specific brands which base their positive image on differentiated elements of identity. Brand image management based on differentiation can ensure customer satisfaction, and then loyalty. Studying the candy industry and especially the chocolate market, it is considered that brand Dorina has the potential to secure loyalty of its consumers. The aim of this research is to assess the current level of consumer satisfaction on the basis of individual elements of Dorina’s brand identity and establish its market position in relation to competing brands on the chocolate market in the Republic of Croatia For gathering information, primary and secondary researches were conducted. The availability of literature, scientific papers and previously conducted studies on similar topics were of great importance for collecting and analyzing secondary data relevant for this research. Primary data were obtained using surveys and discussion in focus groups. Obtained results can serve as a starting point for improving a current image of Dorina brand and as a model for similar future studies. KEYWORDS: brand image, brand satisfaction, loyalty.

1. INTRODUCTION Kraš, a leading food industry in Croatia with its trademark Dorina chocolate, faces with numerous competing brands that may jeopardize its market position. Beside already known brands present for years on the Croatian market (Milka, Nestle, Kinder ...), recently on the market of chocolate, several other brands have profiled which attracted customers’ interest. Also, some brands, such as Mikado “returned” in a completely new design and a range of products. Due to the lack of brand identity profiled in the situation of the above mentioned competitive offerings, the future of Dorina brand can be compromised. To overcome the perceived problem it is necessary to successfully manage the brand and brand identity elements, with the aim of creating a positive image. Positive brand image ensures market success and has an impact on customer satisfaction. Long lasting, sometimes fanatical loyalty is the result of a unique experience and the experiences that consumers attach to the brand. A key factor for the survival of the brand in a highly competitive business environment is to have loyal customers. Many authors believe that only exceeded expectations resulting in excitement, and only an enthusiastic customer can be a guarantee to brand loyalty. The time when it was enough to fulfill consumer expectations about the value of brands has definitely passed. With a large number of competing brands, consumers expect added value or a story to delight them and which they can relate to. Accordingly, a research was conducted to examine cognitive elements of Dorina brand identity and to which extend the received value met initial expectations of consumers. It is also necessary to examine the extent to which the existing customers are willing to repeat purchase or to give positive recommendation. In addition, elements of identity of competing brands are evaluated with the intention of making a conclusion about their immediate impact on the general satisfaction with Dorina brand.

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2. IMAGE AND BRAND IMAGE Brand indicates name, symbol, term, design or their combination and aims to identify the goods or services and their differentiation from the goods or services of competition. Basic requirement in creating positive brand image is quality that is recognized by consumers. In the concept of creating a brand image is a part of the stimulus combination that has a special meaning and is closely related to communication activities. Brand image is created as a result of identity or as a result of decoding the information received in the communication process. Skoko emphasizes that “the first condition of shaping the image of a particular brand is to know it and different levels of knowledge of the brand, personality and sentiments of consumers as individuals create a different brand image.”1 Only in the case where the image of a particular brand is found at the same level with the expectations of consumers as an individual, we are talking about a good brand image. The notion of image and image building process as an integral part of brand management was introduced by Sidney Levy in 1955. Since then, the image has been an integral part of marketing theory and practice.2 The main reason for introducing the concept of brand image is a desire to add a specific identity to individual products and services in the global market that would distinguish them from a large number of substitutes on the market. Accordingly, Vugrinec described brand image as “guided tour through the massive offers jungle of different companies, products and services that with their use and appearance are very similar to one another.”3 During development process, there have been various definitions of brand image and one of the most commonly used is given by Kotlers, which states that the image is a sum of beliefs, ideas and impressions that a person has acquired about a particular object. Keller states a slightly wider definition and says that “the image is an impression, picture, attitude, opinion, belief, prejudice and any other previous experience which about a particular product, brand, company, person or organization have consumers, retailers, suppliers, listeners, viewers and other actors in the communications, commercial and market developments.”4 Kesic combines all of the above and defines the brand image as “cognitive image of the company, product, person, process or situation that an individual has formed on the basis of a previous experience, attitudes, opinions and perceptions that are more or less aligned with the actual characteristics.”5 For all of the mentioned definitions it can be concluded that the image is extremely layered concept and difficult to describe. Its main characteristics are closely related to psychological status of the consumer as an individual and the communication process of marketing activities. It is necessary to choose the most effective marketing strategy and proper marketing mix in order to achieve the desired effect. Kesic explains this by stating that “the brand image is actually a way of decoding stimuli that consumers receive in the communication process. Based on a specific brand identity derives a communication campaign through which the defined identity will be communicated to consumers.”6 Brand image is primarily the result of a communication process and marketing activities, which are emitted by an object in the environment at a conscious or unconscious level. Such communication has a significant impact on consumer behavior and their reaction to the selection process, or buying certain brands.

3. CUSTOMER LOYALTY The desired result of post purchase evaluation is a positive attitude about the purchased product or service in accordance with the expressed satisfaction. The greater satisfaction level is, there is a greater chance for a repeated purchase, and it is more likely to receive a loyal customer. If there is a positive attitude and expressed satisfaction, the consumer will continue to buy the same brand of product or service. Globalization, high competition and product availability have led to the point where “classic” managing customer satisfaction is no longer enough to ensure loyalty to a particular brand. This statement is a result of the analysis of secondary sources where many authors believe that only exceeded expectations will result in enthusiasm, and only enthusiastic consumer guarantee brand loyalty. With a large number of competSkoko, B., (2002.), Poslovni magazin – RRIF, „Kvalitetnim brandom do ugleda tvrtke“, Zagreb, page 37. Kotler, P., Barih, H., (1991.), Okvir za marketinški menadžment imagea, Tržište, Zagreb, page 17. 3 Vugrinec, V., (1997.), Image i reputacija, RRIf, Zagreb, page 184. 4 Keller, K.L., (2008.), Strategic Brand Management, Upper Saddle River, New York, page 48. 5 Kesić, T., (1997.), Marketinška komunikacija, Mate, Zagreb, page 297. 6 Kesić, T., (2005.), Integrirana marketinška komunikacija, Opinio, Zagreb, page 116. 1 2

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ing brands, consumers want added value, or a story that will delight him which they can relate to. In this way consumer becomes loyal to the brand. Loyal consumers do not evaluate promotional activities or those of competitive brands, they don’t discuss competitive brands and don’t inquire about the possible price changes. Loyal consumer will buy a particular brand without any real reason, regardless of the environment of competition. Loyal consumers also do not react quickly to unfulfilled expectations in relation to the brand or neglect them. Brand loyalty is a reflection of the image in the minds of consumers, and not of its functional characteristics, which proves that the marketing strategy is more effective than additional investment in the product quality. Examples to this are the so-called “blind tests”7 of different brands within the same product category. These tests confirm that consumers do not distinguish between the products, but when they are asked to choose the product of highest quality they choose the brand which they are loyal to. Although devotion and loyalty are different concepts it is difficult to define their distinction. Briefly, devotion can be described as a phenomenon of consistently buying the same brand, as a result of an extremely positive attitude towards it (the result of experience, learning and solid stance) while loyalty is defined as the buying habit of the same brand due to satisfaction. Marketing strategies that primarily use communication tools of advertising and sales promotions are aimed at attracting new consumers to the brand or attracting consumers of competing brands. Creating a long-term communication relationship has a goal to turn consumers into loyal ones.

4. THE RESEARCH AND THE INTERPRETATION OF RESEARCH RESULTS 4.1. The research – basic information The first step in the research process refers to the collection of available secondary data sources that are relevant to the study. Secondary sources include data about the company, information on the development of the Kraš most famous brands, data on the development of Dorina brand, examples and analysis of best practices within different product categories, and an example of best practice in the chocolate category. Simultaneously, primary data is being gathered from the market. For that purpose surveys are being conducted within shops, using the electronic questionnaire survey and focus group methods. Survey was conducted in the period between February and May 2012. Testing within shops was conducted on a random sample of consumers. “Survey 1” was properly completed on 34 and “Survey 2” on 13 consumers. The electronic survey was sent to 98 email addresses, from which 91 sent duly completed survey in the suggested time frame. Only properly and fully completed surveys were entered into an analysis and data processing. The focus group was held on April 1st, 2012. in the premises of the company Florens Zagreb. Two separate groups were created, each composed of nine different segments of society with the aim of discussing the current image of Dorina chocolate and competing brands. The main goal of the focus groups as a method of research was to discover the ways in which consumers perceive the Dorina brand or Kraš food industry as a whole, which ultimately results in a certain degree of satisfaction with the brand.

4.2. The interpretation of survey results The results are based on analyses of the two surveys, which are hereinafter defined as “Survey 1” and “Survey 2”. Furthermore, “Survey 1” is divided into three interpretive parts. The questions in the first part of the “Survey 1” are designed so that the participants could evaluate individual elements The experiment of tasting many different products in the same category during which consumers evaluate the quality and characteristics of the products without knowing which brands they evaluate. 7

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of Dorina brand identity and determine their level of satisfaction. Most respondents expressed their dissatisfaction with the visual identity (logo design) of Dorina brand, its lack of differentiation and its promotion in the market. Top-rated elements of identity were taste and availability. Graph 1. Satisfaction with Dorina’s brand design

Source: Authors

Analyzing the results of the satisfaction level with Dorina brand design, it is concluded that of 124 respondents, 70   (56.4%) evaluated design as bad or very bad, and the logo was rated average by 40 respondents (32.2%) while 58 (46.7%) rated it poor or very poor. Visual identity is in general the lowest-rated element of identity, which may point to a conclusion that it isn’t up to current trends on the market. Graph 2. Satisfaction with Dorina’s brand logo

Source: Authors

Graph 3. Satisfaction with Dorina’s brand differentiation

Source: Authors

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Furthermore, analysis of satisfaction with Dorina brand differentiation can be concluded that of 124 respondents, 66 (53.2%) rated differentiation as poor or very poor. Following the fact that differentiation is the most important element of the brand, with a large competitive market, this information can be disturbing. In addition to visual identity and differentiation, promotion of the Dorina brand was also poorly evaluated. Conclusion stems from the fact that of 124 respondents, 64 (51.6%) said they are dissatisfied. Graph 4. Satisfaction with Dorina’s brand promotion

Source: Authors

The questions in the second part of the “Survey 1” are designed so that the participants could evaluate individual elements of Dorina’s brand identity compared to competing brands. Comparing Dorina brand with competitive brands, majority of respondents rated branding and promotional activities as worse or much worse, while the taste was evaluated as better.

Graph 5. Satisfaction with Dorina’s brand design compared to competitive brands

Source: Authors

Analyzing the results of the satisfaction level with Dorina brand design compared to competitive brands, it can be concluded that a large percentage rated Dorina’s as much worse than the competitive  brands. This result was expected due to very poor estimate of the current design of Dorina brand. (Graph 1). Graph 6. Satisfaction with Dorina’s brand promotion compared to competitive brands

Source: Authors

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Furthermore, analyzing the results of the satisfaction level of Dorina’s brand promotion compared to competitive brands can be concluded that 70 respondents (56.4%) believe the promotion to be worse or much worse than the competitions. This result was expected due to the fact that 51.6% of respondents expressed their dissatisfaction with promotional activities related to Dorina. An interesting fact is that the flavor of Dorina brands was rated better than that of competing brands. It can be concluded that in this case the chocolate flavor is only a secondary element to provide lasting satisfaction and loyalty. Graph 7. Satisfaction with Dorina’s brand flavor compared to competitive brands

Source: Authors

The questions in the third part of the “Survey 1” were designed so that the participants could evaluate the potential for Dorina brand loyalty.   The potential for Dorina brand loyalty Dorina, among other methods, could be determined on the basis of two fundamental questions. Those are willingness for repeated purchase and willingness for the recommendation. Repeated purchases and positive recommendations can be a solid foundation for building a loyal relationship and identification with the brand. It is very difficult to evaluate the situation, since this is a consumer product and in a lower price category. Consequently, these are only indications and current trend, and not the data that could be fully relevant and credible. By analyzing the results of willingness of consumers to repeat purchase it can be concluded that there is a large percentage of those who are “relatively willing to” re-buy Dorina brand, but are not completely sure. This category includes 66 respondents (46.7%). Only 14 respondents (11.2%) stated with absolute certainty that they will repeatedly buy Dorina brand. By analyzing the results of the willingness of consumers to spread a positive attitude and recommendations for Dorina brand, it can be concluded that the highest percentage are those who do not have the habit of talking positively about the product regardless of the level of satisfaction. Only 4% of respondents expressed their intention of recommending brand. Based on the results we can conclude that there is currently no identification with the brand, although it is necessary to build loyalty. Furthermore, “Survey 2” consists of questions that are primarily focused on the search for positive characteristics of Dorina brand that can be used to build a positive image in order to maintain customer loyalty. Graph 8. Reasons for buying Dorina brand

Source: Authors

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Analyzing the data about reasons for buying Dorina brand it can be concluded that loyalty to Croatian product is the most common reason and initiator of purchase. This result supports the conclusion that there is a possibility that the image of the Dorina brand was built more by Croatian Chamber of Commerce, with their project “Buy Croatian” than with marketing campaigns of the Kraš Company. Graph 9. Emotional reactions that consumers associate with Dorina brand

Source: Authors

Analyzing the data about emotional reactions that consumers associate with  Dorina brand, it can be concluded that 39.42% of respondents associated Dorina brand with a sense of satisfaction. In a broader sense, the result can be interpreted as a positive reaction to what a consumer expects from a brand, and that is primarily satisfying cravings for sweets. The obtained data supports the result that the flavor of Dorina brands was the best evaluated element of identity, and that nothing in this segment should be significantly altered.

4.3. The interpretation of research results based on focus groups Discussion on the existing brand image of Dorina has led to the conclusion that most “reprimanded” is the visual brand identity of Dorina. Due to poor design and packaging Dorina is rarely bought as a gift but rather for personal consumption. Large Dorina (250g.) in the “bad” packaging cannot possibly compete with Milka in cardboard packaging with commemorative designs. Discussion of opportunities for brand differentiation of Dorina has resulted in a series of proposals for expanding assortment of flavors that are specific for Croatia. Proposed chocolate flavors are with fig, cherry and almonds. Distinctive taste should be also followed by specific visual identity. The debate over this issue has confirmed that consumers criticize the monotony of Dorina brand that has an image of an old and boring brand that does not follow trends and consumer demands. The debate over competing brands, which turned into an interesting discussion, led to the conclusion that the Dorina brand is compromised by competing brands, and despite its taste quality can hardly compete with the market trends. The debate over the emotional responses that focus group participants fixated with Dorina brand has not resulted in particularly severe emotional reactions. It is a sign that the brand image is not strong enough to ensure loyalty at the level of enthusiasm. Discussion about the need for subjective identification with a particular brand has led to the conclusion that such a link occurs only in exceptional cases when it comes to consumer products. Those products must by their differentiation provide emotional reactions that are unique in the way of production or placement. In the discussion about the element of identity that is the most important in the selection of chocolates, all unanimously agreed that it should be accompanied by an appealing visual identity followed by a specific advertisement slogan. If differentiation is then achieved, taste and assortment become less important, provided that the long-term trends in market and consumer requirements are being followed. According to the results of this discussion it can be concluded that consumers in relation to Dorina brand have only an inertial loyalty, which is far from identifying and enthusiasm with the brand.

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5. CONCLUSION The research work is based on the perceived problem of insufficiently profiled and differentiated brand image among consumers of Dorina. Summary of the hypothesis emphasizes a strong, unbreakable connection between the constructed brand image and brand loyalty. Analysis of secondary sources leads to the conclusion that the brand image is systematically built with refining or emphasizing of some elements of its identity as its specific value. In this way, the brand distinguishes itself with its unique characteristics from its own product category. Research in this case shows that consumers desire changes. That desire is most expressed when it comes to changing the visual identity of the Dorina brand and its adaptation to modern trends in design and packaging. In addition to the visual identity, the consumers believe that the promotion is significantly worse than the competitions and that there is no element that would produce a specific emotion and provide identification with the product. It is emphasized that the management of the Dorina brand must seek inspiration from the brands which, despite belonging to a group of consumer goods, have managed to secure the loyalty of consumers. In accordance with this fact, consumers believe that there is room and a real possibility for improving the brand image of Dorina because the potential is great, but underused. Existing inertial loyalty, from a strategic point of view, is not sufficient for market success. Although it appears that the respondents will make repeated purchase, it is not the result of identification with the brand, it is rather because the brand only satisfies the needs of personal consumption and due to good availability in retail outlets.

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

Keller, K.L., (2008.), Strategic Brand Management, Upper Saddle River, New York Kesić, T., (1997.), Marketinška komunikacija, Mate, Zagreb Kesić, T., (2005.), Integrirana marketinška komunikacija, Opinio, Zagreb Kesić, T., (2006.), Ponašanje potrošača, Opinio d.o.o., Zagreb Kotler, P., Barih, H., (1991.), Okvir za marketinški menadžment imagea, Tržište, Zagreb Skoko, B, (2002) Poslovni magazin-RRIF, „Kvalitetnim brandom do ugleda tvrtke“, Zagreb Vugrinec, V., (1997.), Image i reputacija, RRIF, Zagreb

DETAILS ABOUT AUTHORS: DIANA PLANTIĆ TADIĆ, PHD PROFESSOR UNIVERSITY OF APPLIED SCIENCES VERN’ ZAGREB, CROATIA diana.plantic-tadic@vern.hr JADRANKA IVANKOVIĆ, PHD MEMBER OF THE MANAGEMENT BOARD PODRAVKA D.D. KOPRIVNICA, CROATIA jadranka.ivankovic@gmail.com KORNELIJA KOVAČIĆ, MM MANAGER FLORENS ZAGREB D.O.O. ZAGREB, CROATIA kornelija.kovacic@gmail.com

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ECONOMIC COMPETITIVENESS IN THE CEE REGION PETRA PLATZ TAMAS TOTH

ABSTRACT By the writing of this study we had an objective to set up a model which is able to explain the location decisions in the Central and Eastern European region. As an initial presumption we have connected the local capital flow to the regional competitiveness and have analized the location factors behind the decision makings. After uncovering the theoretical background we set up a 6 factors model which consists of the industrial traditions, business environment, labor market, taxation, infrastructure and local supplier network. As a final conclusion we have tried to set a ranking with the 10 analized countries. KEYWORDS: Capital flow, Location indicators, Regional development level.

1. INTRODUCTION The purpose of our study is to identify the economic indicators which are able to infuence the industrial location decisions. The focus of the analyzes is on the Central and Eastern European region compared to the control group the developed Western European German and Austrian markets. In the first part of the study we build up a general competitiveness report among the regional countries which basis is the stock and flow of yearly foreign direct invested money. After collecting these macroeconomic details we tried to collect the location indicators and set up a model that explains the flow of capital. Excepted the industrial traditions and local supplier network we could provide general economic figures but in this two areas we had to choose a leading industrial sector. We have choosen the automitive industry because beside its leading position it has a tight connection to the German and Austrian market and has a huge contribution to the regional economic performance.

2. Flow of capital The economic literature offers heaps of possibilities to measure competitiveness, considered as a general economic index. It is widely spread especially in the field of finance. The most common is to follow the flow of direct international capital investments. This clearly describes the appeal of an economy (Lengyel 2003). During the past two decades since the significant changes in the regime of the Eastern-European countries a general flow of capital can be experienced. Its main driver is the cost efficient production. By the beginning of the 90’s the Western-European companies reached the inner boundaries of their growth. Its result was that they opened towards Eastern Europe – they found new markets and outsourced a part of the production for cost efficiency reasons. (Lemoine 1998; Kinkel–Zanker 2007). The opening of new markets in the region happened in different timescale depending on the development and predictability of an economy. The table 1 gives a summarizing overview of this process, which took 20 years. In this context the international direct capital investment is shown in separate regions, differentiating between the current substance and the inflow per year. The chart shows that the performance level of the German and Austrian economy is far higher than any Eastern European countries. Both of the two countries have the highest indexes in terms of current substance and inflow per year. Though the CEEC’s appeal has sharply risen. The Czech Republic, Poland and Hungary strictly fall into line with the top, so as the other countries of the region tend to increase their competitiveness (Pavlinek 2004). It is worth examining the proportion of the capital inflow to the GDP, which can be a guideline by estimating the growth potential of an economy. Based on the above mentioned facts it can be claimed that Germany and Austria are still able to increase their national economy’s growth potential, while there is a significant potential in CEEC, which can be used under stable economic circumstances.

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Table 1. Foreign direct investment stock and flow Flow (million USD)

Stock (2010)

2001-2005

2006-2010

(million USD)

GDP %

Austria

36 029

99 917

170 581

Bulgaria

182

1 279

1 575

3,3

Czech Republic

1 580

10 375

14 018

7,3

Croatia

1 407

1 915

5 416

8,9

Poland

4 769

28 509

30 983

6,6

Hungary

5 633

13 627

19 423

15,1

Germany

156 179

580 308

1 394 225

42,5

Romania

907

1 455

0,9

Slovakia

540

2 668

3 316

3,8

Slovenia

2 129

4 574

7 318

15,6

Source: Own countruction after World Bank (2011).

However to determine the general competitiveness we choose the direct capital investment, the competitiveness and deployment factors are depending on the characteristics of the industry. An area from the angle of competitiveness can be attractive for a multinational company, which deals with services – while for other reasons (like human resources or infrastructure) is not satisfying for a vehicle factory. The next chapters of the study deal with the production sector, the indicators of the deployment of the automotive industry, taking the advantages/disadvantages and the future of the developed and the transformed countries into consideration. Location indicators Both the theories and the practice oriented models emphasize the identification of the deployment factors, their analysis, because in one hand it helps the regions to keep their automotive industrial companies and in another hand it helps to find new investors. Bossak és Bienkowski (2004) conducted a research on the deployment factors of the manufacturers: • low transaction costs, • low investment risk, • developed market of capital, • ensured ownership, • high input into R&D, • developed infrastructure, • liberal economic policy, • no barriers to enter or to leave the market, • institutions, which help innovation, are available • low taxes and incidental expenses, • well-educated experts, • expanded local market, • stable political and economic circumstances, • positive vision about the development of the country. In the case of companies operating in the field of manufacturing vehicles special factors also count, like the number of suppliers with ISO 9000/2000 standard, the distance from the centers, the availability of raw material, the guarantees given by the government, the operating clusters, so as the cooperation between the role players of the industry, the universities, the R&D institutions and the consultancies. According to a research of Murray et. al (1999) the relevant location factors for the vehicle manufacturers can be categorized in 3 groups. Those indicators belong to the first group, which influence the level of the operating costs, for example salaries (the average and the minimal), overhead, price of the raw materials, upcoming costs due to the real estate, and taxes. Furthermore there are the work productivity, nivou and availability of the infrastructure belong to the first group. There is the regulation environment, the distance from the markets, demographical characteristics, and the volume of urbanization. The third group contains the factors regarding the standard of living, like the condition of the natural environment, the possibilities of education and criminal rate.

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The German Investment Agency also recited most of the above mentioned factors in its study from year 2008. According to the study of this institution the following points should be considered: • nearness of the markets, • proper educated human resources, • R&D institutions, • the development of R&D support, • availability of other manufacturers and suppliers in connection with vehicles and their market position, • infrastructure, • stable investment environment, and different motivation systems. KPMG also conducted a research in this field in 2009. Its main goal was to examine the deployment strategies of the vehicle industrial suppliers. It says there are 4 main factors to observe, which appear on a different scale in a different country: the nearness of the markets, the costs, the ability for innovation (meaning the advantages or disadvantages of a given location), and finally the low political, economic and social risks (KPMG 2009). Werner (2003) emphasizes the nearness of the markets (like the EU) in his study, the advantages ensured by the government, the well-educated workers, and the favorable economic expectancies. These expectations are influenced by many factors, that is why the indicator described by Werner (2003) is a summarizing category, its elements should be identified individually. The Allen & Overy (2008) study concentrates on the CEEC region. Within this framework the taxation system, the availability of the EU structural and cohesive system, the adequate human resources, the transportation infrastructure, the availability of the buyers and the stable economy represent importance. Rechnitzer et al. (2003) divides the factors in two big groups and named them hard and soft deployment factors (Table 2). Table 2. Classification of location factors Hard location factors

Soft location factors

Industrial traditions Logistic, and infrastructiral network Potential local suppliers Taxation system Labor market Business environment

Attractiveness of the region, city Value of free time Cultural factors Quality of government Living environment R&D basis Opportunity for industrial cooperations Innovation potencial

Source: Own construction after Rechnitzer et al. (2003).

Based on the literature we struggled to design a model which simply and clearly describes the motivations by the deployment, and counts with the factors, which help making the decision. In the followings we examine 6 different deployment factors (industrial traditions, economic environment, taxation system, infrastructure, human resources, supplier network), which explain the process of the flow of capital (Gombos et al. 2012).

3. Industrial traditions The automotive industry has great traditions in the CEEC area, which can be a baseline by the choice of the location both in the case of a West-European and a Far East company (ACEA 2011). The European and the Asian car manufacturers built spare-part manufactures and assembly capacities based on the competitive advantages of the region. One of the most important competitive advantages the ability to adapt new production technologies, so it is good to count with the automotive industrial traditions in each country, which was a stable basis for the greatest car manufacturers. The used-to-be Czechslovakia had the strongest traditions in this field: the Skoda car manufacture was established in 1899, and by 1990 it had become the the biggest and oldest car manufacturer among the CEE countries (Werner 2003). It was the first which specialized for designing vehicles. The Tatra factory produces vans. It is also a relevant company in this region. The Trnavské automobilové závody (TAZ, manufacturer of trucks), and the Bratislavské automobilové závody (BAZ) operating with Skoda license models are the determining companies in the Czech Republic (Jakubiak-Kolesar et al. 2008). Poland also has great traditions: the first Fiat manufacture was established in the 1930s. The inexpensive and well educated human resource, the large inner market and the highly qualified human capital were available – all of these factors

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contributed to give the country an acknowledged and preferred position on the market (KPMG 2007) In Yugoslavia an engine manufacture was established in 1929, which operated with licenses. Another important year is 1954, when the production on cars had begun based on the Fiat license (ibid). Before World War II. in Slovenia the first vehicles were produced in the capital city. The Avtomontaža factory manufactured autobuses, and after that they manufactured vans also. Those times the Avtomontaža have already dealt with international companies. These partnerships nowadays are still living. The production of cars has begun in 1954 in Novo Mesto. Another milestone is that they started to manufacture caravans and commercial vehicles together with the French Renault (ACEA 2011). Romania has a 60-year-old past in terms of car manufacture. It began with the production of Dacia models based on Renault licenses in 1967. The car manufacture was launched in 1927 in Bulgaria. Later on the activity was expanded to assemblage based on western and soviet licenses (ibid). In the case of Hungary the story of the Rába Magyar Vagon- és Gépgyár (nowadays it is called Rába Holding Rt.) is prominent. Győr was an excellent venue for establishing bigger works, because there was an important railway crossing and 4 rivers meet in the city. After the establishment of the factory the main product of the next time was the railway carriage, and they also have begun to make vans and cars. The other prominent car manufacturer was Ikarusz, which was the biggest autobus manufacturer in Europe with its 15,000 bus per year in the ’90s. The roots in the automotive industry int he CEE region origin from the first decades of the 20th century. Its dynamic development and competitiveness were withdrawn by World War I. and II. and the economic policies of the Soviet Union. The socialist industrialization considered the automotive industrial traditions, which played a determining role in the life of every concerned country. They wanted the countries to manufacture their own cars, which could be exported through the use of Western-European and Asian licenses. Despite the great support this industry decreased after the End of Communism, in order to turn this process back foreign capital needed. (Husan 1997). Assembly industry was installed on the own production capacities in greenfield investment framework. Thanks to these efforts the automotive industrial districts came alive after the End of Communism and development could be experienced again. The investors were foreign companies like Fiat, Citroen, Renault. They have already domiciled automotive industrial factories in the region during the socialism. Their activity is still operating in the 21th century. Table 3 gives an overview of the role-players of CEEC’s automotive manufacturers, emphasizing the timing of their establishment. The operation of the companies in brackets is over, or due to a transaction (fusion, acquisition) they lost their independence. The data of the chart exemplify that the Czech Republic, Poland and Hungary have the greatest traditions. In the lives of these countries the automotive industry played an important role during the time of the communism. The industrial positions remained strong. Such a positive process can not be seen in Romania, it adds a little value to the GDP since the End of the Communism. The greenfield investments were changed by brownfield investments. The volume of foreign capital flow to Slovakia decreased, because the only car manufacturer, Renault, was present before the End of Communism. Unlike the other 2 countries Slovakia had no automotive industry at all – after the End of Communism Volkswagen, PSA Peugeot – Citroen and Hyundai-Kia abruptly appeared. Table 3. Vehicle manufacturing companies in Central-Eastern Europe Estimating of vehiche industry companies Before 1990

Between 1990 and 2000

After 2000

Tedom, Tatra, Avia Ashok Leyland Motors, Skoda

Fiat, Volkswagen AG, SOR

Toyota Peugeot Citroen, Hyundai

Fiat, (FSO)

Solaris, Opel-GM, Volkswagen, MAN, Scania, Volvo

Toyota

Hungary

(MÁVAG), Rába, (Ikarusz)

Suzuki, Audi, GM

Mercedes-Benz

Romania

Dacia-Renault, ARO, (MARTA, Citroen)

(Daewoo)

Ford

Slovakia

Volkswagen

PSA Peugeot-Citroen, Hyundai-Kia

Slovenia

Renault

Czech Republic Poland

Source: Own construction (2012).

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4. Business environment One of the most important competitive disadvantages of the CEEC is that the economic and social culture does not follow the western trends at all, so the instability of the economic environment causes them a relevant competitive disadvantage on the global scale. Independent studies mention corruption and white-collar criminality as primary sources of risk – but there are also difficulties in a company start-up. (PWC 2007). Table 4 is a ranking by the World Bank which shows the elements of a business-friendly environment (the ranks can be seen in the brackets) with the number of company start-ups form 2009 assigned. Table 4. Business environment Business-frendly environment ranking (2011)

Registered business set up (2009)

Austria

3 228

Bulgaria

35 545

Czech Republic

21 717

Croatia

7 800

Poland

14 434

Hungary

42 951

Germany

64 840

Romania

56 698

Slovakia

15 825

Slovenia

5 836

Source: Own countruction after World Bank (2011).

4.1 Corruption The global flow of capital has a relevant barrier: corruption, which seems to be invincible. By the analysis of the economic circumstances corruption can not be skipped, because it negative effect can be so efficient, that no other factor can compensate it. Corruption is especially strong in the public sphere – there is no countable transaction time and the financial planning is also lubber in the fields of public procurements and other licensing. The law salaries of the governmental employees enable bribery to be a daily habit. Because from the side of the society no serious efforts are taken against, corruption and its most common form, bribery blossom in the CEEC. Besides the critical mass government agencies should oppose corruption – unfortunately many members of this sphere are also concerned in it. Its proof is a survey of Transparency International (2011), which examined the measures against corruption in different European countries. Almost all of the participants received negative qualifications. Corruption interrupts the normal process of corporate procurement in the B2B relations of the CEE region – it is particularly disagrees with the culture of the Western-European and American parent company. The counteraction of subornation in the private sector is not the states’ responsibility – it belongs to the internal controlling division of a company (Transparency International 2011). Table 5 shows the continuously up-dated corruption index collected by Transparency International. It clearly shows the different attitude of West and East. The investors should decide about the volume of risk taking – not only monetary, but in time measurement represented.

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Table 5. Corruption index and ranking, 2011 Ranking

Index

Austria

7,9

Bulgaria

3,6

Czech Republic

4,6

Croatia

4,1

Poland

5,3

Hungary

4,7

Germany

7,9

Romania

3,7

Slovakia

4,3

Slovenia

6,4

Source: Own construction after Transparency International (2011).

4.2 Business start-up A corner stone of certain and predictable economic environment is the simplicity of the company start-up process. The government agencies’ company incentives’ main goals can be the destructions of the formation constraints, the minimization of the authority processes and transit time. Table 6 shows that the CEEC pay particular attention to ensure a business-friendly environment – so they simplified the process of the start-up. Though large enterprises are less sensitive for such monetary and temporal inputs, a dynamic development of the SMEs can be observed thanks to this actions. Table 6. Corporate set-up process, 2012 Time to set up a business (days)

Process to set up a business (steps)

Austria

Bulgaria

Czech Republic

Croatia

Poland

Hungary

Germany

Romania

Slovakia

Slovenia

Austria

Source: Own countruction after World Bank (2011).

5. Labor market 5. 1 Blue-collar workers The low wage demand of the blue-collar workers was that helped the outsourcing trend of the automotive industry to rise sharply. In the frame of the socialist systems the quality education was hard to reach, the obligate employment took the market’s regulation and selection ability away. The total employment induced inner unemployment, which fell down to the real market causing mass unemployment. This shock was also a possibility for the investors: they had the chance to choose the most appropriate employees. Their main characteristics were low wage demand, middle education, high productivity (MacNeill–Chanaron 2005).

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The differences between the western and eastern wage are still present. There is no compulsory wage minimum in Austria, in Germany its level is determined by profession and education the differences can be felt all over Europe. Another typical feature of the CEEC is that the unions bring pressure on the companies and on the government, which results that the minimum wage can not be substituted by the market’s selective power, like it have already happened in the Western-European countries (World Bank 2011). Table 7 contains the minimal wages of CEEC. Their extent itself gives information, furthermore compared to the average wage and connected to the corporate added value it represents the competitiveness of the local blue-collar workers. Based on these facts we can claim that the officially determined minimum wages’ dispersion is high. In accordance with the productivity it makes the added value predictable (World Bank 2011). Table 7. Minimum wages on the labor market, 2011 Monthly minimal wage (€)

Minimal wage to avarage wage

Minimal wage to valeu added

Bulgaria

123

40,4%

22%

Czech Republic

319

35,0%

21%

Croatia

381

37,8%

32%

Poland

349

35,7%

27%

Hungary

281

38,8%

25%

Romania

157

30,5%

24%

Slovakia

317

33,5%

23%

Slovenia

748

43,5%

37%

Source: Own countruction after World Bank (2011).

5.2 White-collar workers As we mentioned the mass of inexpensive blue-collar workers among the most attractive indicators of the 90’s, the main base of the location factors is the educated employments in the 21th century. The traditional CEE education is high-level (particularly in the Czech Republic and in Hungary), it has become available for a wide range of the society. The result is that the investors can easily find the right white-collar workers. This class is a stable and reliable segment of the market, above all their wage demand is not much higher than the wage demand of the non-educated employees (Gauselmann– Knell–Johannes 2010). In today’s innovative economic environment a national economy can not keep its competitive advantage only because of the low wages. In the knowledge intensive industries, like automotive industry the human challenging the governments. The right education system and strategy can ensure competitive advantage for a country on a global scale. The modernization and customization of higher education can form a base for the investments. The educational expenses in table 8 orient to the performance of the national economy in each region. The participants spend 4-5% of the GDP for public education – from pre-school to the universities (OECD 2011). Table 8. Portion of graduates on the labor market, 2009 Number of graduates in a year

Proportion of graduates to the population

Graduates in real areas

Education expenditure to GDP (2008)

Austria

52 157

0,62%

26%

5,5%

Bulgaria

57 803

0,76%

25%

4,6%

Czech Republic

96 207

0,92%

26%

4,1%

Croatia

31 693

0,72%

24%

4,3%

Poland

574 972

1,51%

21%

5,1%

Hungary

68 158

0,68%

20%

5,1%

Germany

466 196

0,57%

30%

4,6%

Romania

310 886

1,45%

22%

n/a

Slovakia

75 364

1,39%

23%

3,6%

Slovenia

18 103

0,88%

25%

5,2%

Source: Own countruction after World Bank (2011).

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By the choice of a car manufacturerâ&#x20AC;&#x2122;s location the availability of graduates is important. The consequences of table 8 are there is no strong correlation between the number of fresh graduates and the volume of foreign capital input. But the education of work craft labor is an important task in each country â&#x20AC;&#x201C; it it wants to prevail on the global market. The efforts take to strengthen higher education in the CEEC can be seen from the rate of graduates. We have to admit that there is a lack of economic and engineer experts. Besides this positive process we have to mention the differences of the demand and supply sides of the labor market in the CEE region, which can be felt in higher-education. Putting the reforms into effects and the reconstruction of the educational system requires serious efforts from the decision-makers and executives. The conformity is the only way to get and sustain the competitive advantage (OECD 2007).

6. Taxation The indicatiors connected to the human resources are playing admittedly a very important role by the location decisions of the industrial companies but in the point of view of the cash flow and financial return we have to examine some fiscal aspects as well like the tax system of the analized country. The tax burden settled by the states is measurable with exact figures but showing the real indexes it is essential to take into account different taxes and rates. Although the European Union force the unified tax system since the establishment the implementing has failed so far all of the member states are working with the own different taxation systems. The new member CEE states stand out especially which taxation is so complicated and intransparent that it makes more difficult the financal planning (relating the investments) both in a short and long run (LimpĂłk 2010). A department of the World Bank is following up continuously the changes of the mentioned national economies and examines the total tax burden separated into 3 classes (World Bank 2011). According to the table 9 we can identify that in the developed welfare countries (Austria, Germany) we can meet the ordinary high burdens and in the CEE region we can face govenments with hardly 30 percent total tax rates (Bulgaria, Croatia). Hungary and Czech Republic stand out among the CEE region countries using a high total tax burden that seems repulsive from the perspective of the investors but as we previously presented the FDI figures are showing actually the opposite processes. The reason of the relatively attractive business environment that in the last 15-20 years the goverments of the analized countries provided tax benefits for the invester companies that could reduce the burden making more attractive the country for investing foreing capital. This practice had visible outcome, however the directives of the EU are refusing it so the method can not be applied in the future. Table 9. Corporate taxes, 2011 Taxes on profit

Taxes on work

Other taxes

Total tax rate

Austria

15,0%

34,8%

3,4%

53,1%

Bulgaria

4,9%

19,2%

4,1%

28,1%

Czech Republic

7,5%

38,4%

3,2%

49,1%

Croatia

11,5%

19,4%

1,5%

32,3%

Poland

17,4%

23,6%

2,6%

43,6%

Hungary

14,8%

34,1%

3,5%

52,4%

Germany

19,0%

21,8%

5,9%

46,7%

Romania

10,4%

31,8%

2,2%

44,4%

Slovakia

7,2%

39,6%

2,0%

48,8%

Slovenia

14,1%

18,2%

2,4%

34,7%

Source: Own countruction after World Bank (2011).

We can summarize that although the tax policies of the analized countries are different both in theoretical and practical approach we can not recognize close contact between the foreign direct investments and the total tax burdens. Checking the growing paths of the different countries we could not wait for the single EU taxation system in the near future because the goverments would loose one of the most important fiscal instrument with they could be able to regulate the operating of inside markets. The expectations of the EU however sharply separate the concept regulation and interventions so we could not calculate with a technique in the future with the goverments would be able to intervene the operation of a sector prefering this way an invester company.

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Probably the most essential factor of the taxation policy is the predictability in a long run that can facilitate the checking up of the cash flow and fosters the influx of the foreign direct investments. Both the European Union and the member states must force the single taxation system in the future because with this common policy the transforming regions could become more competitive in the viewpoint of foreign investors.

7. Infrastructure Because of the intensive material flow the industry puts serious expectations to the logistics and transport. The existence of appropriate transport connections, railway and highway networks and airports are basic requirements. The efficiency and competitiveness of the production is determined by the availability of the remote sales markets the transaction costs and the contact with the different headquaters (Klauber 2008). One of the most determinative element of the location decisions is the availability of the sites because this way the competitiveness is raising inside the industry. The easy availability and the right intermodal connections can boost the influx of foreign direct investment place into the focus the time factor because it brings closer the purchase and sales markets and ensures more space to the workforce mobility. Examining the quality and quantity criterions of the road and railway infrastructure we can summarize that CEE has a perceived competitive disadvantage against Western Europe. The analized Central and Eastern Europe countries have noticeably different highway supply figures that shows the table 10. We can see that the pre-accession funds had a positive effect on the highway constructions, the CEE economies could connect to the european area, its availability was improved so they could become a potencial site of the Western European az Asian multinational companies. According to the Eurostat figures from 2009 Hungary has a 1.273 km long highway line that means the best result in the region and Romania is standing on the worst position with 321 km. Beside the quantitative datas we should investigate the changing of lengths. Among the CEE countries this value has tripled in Hungary in the last 10 years period but Croatia and Romania could also exceed owing to the constructions between 1999 and 2009. Table 10. Total length of motorways between 1998 and 2009, km 1999

2004

2009

Change (%) 1999=100

Austria

1 634

1 677

1 696

Bulgaria

324

331

418

29%

Czech Republic

499

546

729

46%

Croatia

382

742

1 097

187%

Poland

448

569

1 273

184%

Hungary

11 515

12 174

12 813

11%

Germany

317

552

849

168%

Romania

113

228

321

184%

Slovakia

399

483

747

87%

Slovenia

295

316

391

33%

Source: Own countruction after World Bank (2011).

The density of the highway lines (table 11) is concentrated mainly to the capital city regions that results from the crossing of the roads. By the location decisions the distance to the capital cities was determinative almost in every CEE countries: in case of Hungary it shows the location of Audi in GyĹ&#x2018;r, in Slovakia the Volkswagen in Bratislava and the Skoda in Mlada Boleslav in Czeck Republic.

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Table 11. Density of motorways and railway network, 2008, km Density of motorway lines 2008, km/1.000 km2

Density of railway lines 2008, km/1.000 km2

Austria

20,7

Bulgaria

3,9

Czech Republic

9,3

122

Croatia

20,1

Poland

2,7

Hungary

13,7

Germany

35,9

106

Romania

1,4

Slovakia

8,5

Slovenia

38,6

Source: Own countruction after World Bank (2011).

Checking the railway networks we can summarize that density of the network is relatively low in the Central and Eastern Europe region beside that the fleets are old and in poor condition. The proportion of the electrified lines is also low and has a need for modernization. However the lines between their own and other Western European capital cities are satisfactory so the automotive industry companies have a special attention to the proximity of the railway junctions.

8. Local supplier network In the industrial area is basically important whether in the sector exist the local supplier competitive market and whether there is an opportunity to bulid it up or not. One of the main principle in the industrial production is that the finished product manufacturing plants are producing only essential components they purchase the other parts from the suppliers. There manufacturers have special meets and expectations to the partners and have stricht technical requirements and deadlines (Klauber 2008). The finished product manufacturing plant does the assembly function schedules the procurement and organizes the logistic tasks. This special manufacturing organization results in a very competitive production where the supplier are organized in a multilevel system highlighted the outsourcing and specification functions in the 21 century. The CEE region became a target area by the multinational inverstors in the last 2 decades and could integrate to the supplier pyramid. The region has a competitive advantage through the cheep and flexible workforce and because of the fast availability of the sales markets (Gyukics-Klauber et al. 2011). The supplier companies located in the region have built up an at least 3 levels pyramid. The most of these corporations are subsidiaries in the CEE region we could hardly find locally owned companies. However the second and lower levels are available they have a lot of benefits but only for the partners which are able to fulfill the conditions. The quality is not negotiable the finished product manufacturers put very stricht requirements in the area of flexible deliery and production. The competition among the part suppliers is excessively heavy they could be replaced anytime that generates continuously a chance to decrease the purchase prices. Primarily the companies are able to survive and ask for higher sales prices which are producing complex special highly innovated products and do that with applying systems of quality standards (Gyukics-Klauber et al. 2011). The chart 12 shows the proportion of ISO certificated companies in the analized countries. We can summarize this region can not meet the quality requirements so far and the dispersion is also remarkable high among this figures.

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Table 12. ISO certification ownership, 2009 ISO certificated companies proportion (%) Bulgaria

19,9

Czech Republic

43,5

Croatia

16,5

Poland

17,3

Hungary

39,4

Romania

26,1

Slovakia

28,6

Slovenia

28,0

Source: Own countruction after World Bank (2011).

The proximity of the suppliers also makes more flexible and easier the programming of the production and even the logistics and purchasing functions so numerous supplier want to locate close to its main sales market. The table 13 gives a summary about the 10 biggest automotive supplier companies in the CEE region detailed their activities and locations.

Profile

Poland

Hungary

Romania

Slovakia

Countries

Bosch (Germany)

Automotive electronics, Chassis, Break systems

Denso (Japan)

Air conditioning

Delphi (USA)

Integrated systems, modules

Johnson Controls (USA)

Seat, door technics, Dashboard

Magna (Canada)

Chassis, Seats, lighting systems

Aisin Seiki (Japan)

Seats, Electronic systems

Visteon (USA)

Inside accessories, Driving systems

Faurecia (France)

Seats, Exhausting

TRW (USA)

Break systems, Steering wheels

Slovenia

Company

Czech Republic

Table 13. Best 10 vehicle industry supplier of the CEE region

X X

Source: Own construction after Unicredit Group (2011).

The key for the success is the presence of the innovation and the build-up of tight collabirative strategies. It is excessively important by the location decisions to find the strategically appropriate supplier partner. The key for long term partnership is the R&D potencial and the technological development. The automotive industry dictates the one of the fastest technical progress in the industrial sector, the claims are continuously changing it is easy to loose the market if someone can not keep up. The table 14 summarizes the regional R&D activities which most widely used index is the expenditure to GDP beside that we often apply the number of hired researchers per million people.

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Table 14. R+D activity, 2008 R&D expenditure (GDP %)

Number of researchers (per million people)

Austria

2,66

4 123

Bulgaria

0,49

1 499

Czech Republic

1,47

2 886

Croatia

0,90

1 514

Poland

0,61

1 623

Hungary

0,96

1 733

Germany

2,54

3 532

Romania

0,59

908

Slovakia

0,47

2 331

Slovenia

1,66

3 490

Source: Own construction after World Bank (2008).

There is some exremes in the supplier networks of the CEE region the located Western European and Asian companies usally bring our own suppliers and rely hardly on the local network. Sometimes the local companies do not force the partnership even the multinational company locates in its region (Klauber 2008). The main reasons for the low number of business relationships are the lack of capital and the language and communication deficiencies. Beside the low activity numerous corporations want to integrate to the supplier pyramid. One of the most fashionable solutions are the clusters which are organized from inside as a buttom-up modell. This organization is not so widespread in the Central and Eastern European region but has serious traditions in the Western part of Europa. For example the clusters have own management and budget in Germany and Austria and are using decentralized decision-making processes. The clusters as business froms are not so popular in Hungary there is a low willingness to cooperation in social and business areas as well (Grosz 2005).

9. Conclusions We have checked on itemized the indicators which play important role at location decisions in the study but an investor’s decision can not based only on the review of objective factors. Subjective indicators, the governmental and local governmental lobby often overwrites the return and risk which can be express with figures, in turn the calculable, long-term sustainable economic environment can compensate the short-term competitive disadvantages which stem from other factors’ adverse effects (Schwab 2010). During making decisions about enterprise location the economic environment and the economic region could be attractive but over the examination of the mentioned factors we also have to calculate up the status of the location’s saturation. Practically, it’s no use of existing a labour market with stable base in the long run and a well developed infrastructural environment in the region, if the earlier settled industry took up the labour force and the infrastructure is also at the top of utilization. The saturation process can redraw the economic map of a state and can open gates for regions which produced lower industrial efficiency earlier. Consequently decisions are made by considering the objective and subjective, real and human fields but the result of the process is strongly influenced and deformed by the saturation data and the governmental lobby. The capital’s flow clearly observes the direction from west to the east, in turn the meso level, regional centers saturate, developed with this the economic map of the vehicle industry. As the sealing of the study we sets up a ranking for all six location factors which shows the achievement the examined ten countries in each category (table 15).

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Table 15. Ranking of regions after location factors Industrial traditions

Business environment

Taxation

Labor market

Infrastructure

Supplier system

TOTAL

Germany

Austria

Czech Republic

Poland

Hungary

Slovenia

Slovakia

Croatia

Romania

Bulgaria

Source: Own construction (2012).

The table shows that exception of the tax load in the case of all location factors Germany and Austria completed on the top, proven with this the capital flow processes presented at the beginning of the study. The eastern and central european region can be competitive on the global market first of all because of the blue and white collar labour force with low wage demands and favorable tax system but his doubtful economic environment can be unattractive for the foreign capital investments. It is gratifying that the real direction of location in the vehicle industry and the capital’s flow are consistent with the conclusions of our modell which proves that we have choosen the factors of the analyses right.

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.

ACEA European Automobile Manufacturer’s Association (2011) http://www.acea.be/ Allan & Overy (2008) http://www.allanovery.com/ Bossak, J. W.-Bieńkowski, W. (2004) „Międzynarodowa zdolność konkurencyjna kraju i przedsiębiorstw”. Szkoła Główna Handlowa, Warszawa. Eurostat (2011) http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ Gauselmann, A.-Knell, M.-Stephan, J. (2010) Investment motives of FDI into Central East Europe. – 11th Bi-Annual Conference of European Association for Comparative Economic Studies, Comparing Responses to Global Instability, 26-28 August, 2010, Tartu. Gombos Sz.-Füzi A.-Tóth T. (2012) The Role of local supplier network among location factors. RSA Conference, 2012. 05. 13-16., Delft. Grosz A. (2005) Klaszteresedés és klaszterorientált politika Magyarországon – potenciális autóipari klaszterek az észak-dunántúli térségben. Doktori értekezés. Győr-Pécs. Gyukics R.-Klauber M.-Palócz É.-Páczi É.-Vakhal P. (2011) A magyar kis és középvállalatok beszállítói szerepének erősítéséről szóló stratégia kidolgozása a gép- és gépjárműipari ágazatban: a jelenlegi helyzet tanulságai és a lehetőségek kihasználásának eszközei. Kopint Konjunktúra Kutatási Alapítvány, Budapest. Husan, R. (1997) Industrial policy and economic transformation: The case of the Polish motor industry. – Europe-Asia Studies 1. 125–39. o. Invest in Germany (2008) The Automotive Industry in Germany – Driving Performance ThroughTechnology. Invest in Germany GmbH, Berlin. Jakubiak, M. – Kolesar, P. – Izvorski, I. – Kurekova, L. (2008) The Automotive Industry in the Slovak Republic: Recent Developments and Impact on Growth. Working Paper No. 29. Commission on Growth and Development. Kinkel, S.-Zanker, C. (2007) Globale Produktionsstrategien in der Automobilzulieferindustrie. Springer-Verlag Berlin Heidelberg, Heidelberg. Klauber M. (2008) A járműipari ágazati stratégia kialakítását megalapozó szakmai átvilágító tanulmány. Kopint-Tárki Konjuktúrakutató Intézet, Budapest. KPMG (2009) Global location strategy for automotive suppliers. KPMG. KPMG (2007) The Automotive Industry in Central and Eastern Europe. KPMG. Lemoine, F. (1998) Integrating CEE. Working Paper No. 107, BRIE Working Paper Series, Berkeley Roundtable on the International Economy, UC Berkeley. Lengyel I. (2003) Verseny és területi fejlődés: térségek versenyképessége Magyarországon. JatePress, Szeged. Limpók V. (2010) A működőtőke és az adópolitika kapcsolata, különös tekintettel Magyarországra és Ausztriára. Doktori értekezés. Széchenyi István Egyetem, RGDI, Győr. OECD (2007) Entrepreneurship and Higher Education. OECD. OECD (2011) Local Economic and Employment Development (LEED). OECD Publishing, Paris. MacNeill, S.-Chanaron, J. (2005) Trends and drivers. – International Journal of Automotive Technology and Management. 5. 83-106. o. Murray, M. N.-Dowell, P.-Mayes, D. T. (1999) The Location Decision of Automotive Suppliers in Tennesse and the Southeast. Center for Business and Economic Research College of Business Administration, University of Tennessee, Research paper Pavlinek, P. (2004) Regional development implications of foreign dierct investment in Central Europe. – European Urban and Regional Studies, 11. 47-70 o. PWC (2007) Eastern Influx. Automotive manufacturing in Central and Easter Europe. PWC. Rechnitzer J.-Edelényi B.-Németh K.-Smahó M. (2003) Új típusú telepítési tényezők és a gazdasági szereplők térpreferenciái az ezredfordulón. – NYUTI közlemények 152/b. MTA RKK NYUTI, Győr.

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Schwab, K. (2010) The Global Competetiveness Report 2010-2011. World Economic Forum. Transparency International (2011) Progress report. Unicredit Group (2007) The automotive sector in CEE. Unicredit Group. Werner, R. (2003) Location, Cheap Labor and Government Incentives: A Case Study of Automotive Investment in Central Europe Since 1989. Columbia University School.

30. World Bank (2011) Doing Business. World Bank. DETAILS ABOUT AUTHORS: PETRA PLATZ ECONOMIC TEACHER SZÉCHENYI UNIVERSITY GYŐR, HUNGARY DEPARTMENT OF MARKETING AND MANAGEMENT platz@sze.hu TAMAS TOTH PHD STUDENT SZÉCHENYI UNIVERSITY GYŐR, HUNGARY DEPARTMENT OF ECONOMIC ANALYSES tamas.toth@sze.hu

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LOCAL RESIDENTS ATTITUDES OF DUBROVNIK AS A CULTURAL DESTINATION BARBARA PUH

ABSTRACT At the beginning of 21st century, cultural tourism, as a special form of tourism, is becoming a base of tourism policy for many tourism destinations, whether they are already a part of tourist market or are yet to become one. Growing competition among cultural tourism destinations affects demand dispersion and requires additional effort of destination management to attract a greater number of visitors and tourists and to achieve a better competitive position. In such surroundings, Dubrovnik, as a town of rich cultural and historic heritage, is undoubtedly able to compete. The aim of this paper is to examine the attitudes of local population of Dubrovnik as a cultural destination, their familiarity with cultural heritage and cultural manifestations of the town as well as possibilities of cultural heritage valorisation for tourism purposes. Furthermore, the aim of this paper is realized through analysis of collected data, using Kruskal Wallis tests. The results will serve to all stakeholders of cultural heritage offer in destination, especially destination management for better valorisation of cultural heritage in tourism purposes. As purposive sample has been used in the analysis, the results of the research can be considered indicative and cannot be generalized. KEYWORDS: Local residents’ attitudes, tourism destination, cultural tourism.

1. INTRODUCTION In the terms of globalization, at the beginning of the 21st century tourist market is facing changes. As opposed to mass tourism, which has characterized most of the second half of the 20th century and was based on sun, sea and leisure, today the accent is put on the development of selective forms of tourism which try to satisfy specific tourist needs. Socio- demographic changes as well as changes in a life style implicated the changes in tourism demand: modern tourists are becoming older and more educated; they are more demanding than before and want to experience the most of the destination with the less free time, as well as to find alternative activities beside sun and sea. Considering that, it is evident that developing tourism only on the „sun and sea“ is no longer enough to attract tourists and alternative forms of tourism must be consider in order to stay competitive in a global tourism market. Inclusion of cultural heritage as an input resource for development of cultural tourism has become a cornerstone of many tourism development policies in urban and rural areas as well as in already established and in emerging tourism destinations Affirmation of cultural heritage for touristic purposes can have a great financial effect which positively reflects in local economy and is becoming an important element of the preservation of autochthon culture as well as of identifiability of town, region or country. Considering above mentioned, cultural tourism, as one of the fastest growing forms of tourism, can have a significant role in tourism’s future development in a destination as well as help destinations to enhance their competitiveness and attractiveness. Dubrovnik, as one of the most famous tourist attraction in the Mediterranean, using its rich cultural and historic heritage can position itself in the top cultural destinations. Due to the fact that tourism leads not only to positive, but also negative outcomes on the local level as well as taking into consideration the community perception as an effective element in processes of community development, it is important to examine local residents attitudes towards developing cultural tourism. So, the objectives of this research are to examine the attitudes of local population of Dubrovnik as a cultural destination, their familiarity with cultural heritage and cultural manifestations of the town as well as possibilities of cultural heritage valorisation for tourism purposes.

2. LITERATURE REVIEW Cultural tourism, as a fast growing and lucrative form of tourism, today is recognized as one of the most popular tourism products1. The development of cultural tourism has its strength in the fact that it is not dependent of natural conditions which means avoiding the negative effects of seasonality that some other forms of tourism are affected. Estimations that World Tourism Organization2 gave more than two decades ago said that 37 per cent of all international travel included some form of cultural activity in 1995; now days there are authors that argue this number is as high as 70 per cent3. Tomljenović, R., Hendija, Z. and Razović, M.(2011) Domestic cultural tourism demand: The case of the county of Split – Dalmatia, Acta turistica, 23(1), pp.27-48 WTO(1985) The state’s role in protecting and promoting culture as a factor in tourism development and the proper use and exploitation of the national cultural heritage sites and monuments for tourists, WTO, Madrid. 3 McKercher, B. and du Cross, H. (2002) Cultural tourism: The partnership between tourism and cultural heritage management, Haworth Hospitality Press. 1 2

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The problem with defining the number of tourists included in cultural tourism lies in constant widening and all-encompassing definition of cultural tourism; there are as many definitions as cultural tourists.4 According to ICOMOS5 cultural tourism is „any form of tourism to another place that involves the visitor experiencing all of the cultural aspects about that place, its contemporary lifestyles, food, topography, environment, towns and villages, just as much its historic sites and cultural performances“6 McIntosh and Goldner see cultural tourism as „all aspects of travel, whereby travellers learn about the history and heritage of others or about their contemporary ways of life or thought.“7. WTO defines cultural tourism as „movements of persons for essentially cultural motivations such as study tours, performing arts and cultural tours, travel to festivals and other cultural events, visits to sites and monuments, travel to study nature, folklore and art and pilgrimages“8. McKercher and du Cross9 differentiate four approaches to defining cultural tourism: • Tourism derived definitions – place cultural tourism in a wider frame of tourism defining it as tourism of special interests in which culture is the base for attracting tourists. • Motivational definitions see cultural tourists as those who travel with intention to gather new information and experience to satisfy their cultural needs • Experiential or aspirational definitions claim that motivation itself is not enough for defining cultural tourism and that during its defining the aspiration that tourist is experiencing with his visit to a cultural site must be taken into consideration • Operational definitions define cultural tourism by participation in any one of an almost limitless array of activities and experiences. Motivation, purpose or depth of experience countless then participation. McKercher and du Cross10 define cultural tourism using four elements: • Tourism (as cultural tourism is a part of tourism) • Use of cultural heritage assets (without it cultural tourism could not develop) • Consumption of experiences and products (depending on the main motivation impulse for travelling e.g. culture) • The tourist (without tourists there is no tourism). It has to be accent that all definitions mentioned have its limits and that it is difficult to define cultural tourism in a few phrases due to the great diversity of cultural attractions and events as well as different cultural motivations tourists may have.

2.1. Cultural tourism in Europe Europe as the main emissive and receptive region of international tourism travel is an area of natural and cultural attractiveness which are spread all around the continent. The numerous attractions as a result of its long history and many ancient civilizations left marks that cause the attention of tourists. The cultural heritage of Europe is one of the oldest and most important drivers of tourism and it kept its role until today.11 The history of travelling of eminent individuals for cultural purposes only goes back into the ancient history: the journey of Anon from Cartage around Africa in the 5th century B.C; journeys of historian Herodotus to Aegean islands, Babylon, Palestine and Egypt which are described in his book History, the great journeys of Hecateus who travelled through all Mediterranean countries and described their nature, cultural heritage and customs in ten monographs known as Periegezis or the journeys of great art connoisseur Pausanias around Greece described in ten books also known as a first professionally written guide12. In the middle of 16th century Grand tour journeys developed as a form of travelling in which young members of aristocracy, mostly from England, travelled round the Europe to explore cultural and history heritage for educational purposes. This type of travelling is one of the first forms of tourism travelling that had characteristics of cultural tourism.

Ibid, pp.3 ICOMOS is an abbreviation of International Council on Monuments and Sites 6 WTO( 2005) City tourism and culture: The European experience, WTO, Madrid, pp.123 7 Ibid, pp.123 8 WTO (1985) The state’s role in protecting and promoting culture as a factor in tourism development and the proper use and exploitation of the national cultural heritage sites and monuments for tourists, op.cit, pp.6 9 McKercher, B. and du Cross, H., op.cit., pp. 4 10 Ibid, pp. 6 11 Richards, G.(1996) Cultural tourism in Europe, CABI, Wallington, GB 12 Alfier, D.(1994) Tourism: The selection of papers, Masmedia, Zagreb, pp.189 4 5

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By the beginning of the First World War, cultural motives were very strong but they had narrow effect because travelling for cultural purposes was still a privilege of wealthy class. After the war, an awareness awaking process started, reflecting on finding the new ways of communicating with the past and slowly affecting the tourism demand. 13 So, during the 20th century tourists became more experienced, they started seeking new experiences on holidays and began to recognise the value of culture as a potential mean of generating tourism.14 According to Alfier 15 culture is one of the main factors in forming tourism supply which is supported by the fact that first countries that were developed as receptive ones are those who had rich cultural heritage. There are few factors that influenced the growth of demand in cultural tourism16: • Growing awareness of heritage • The possibility of exploring individuality trough understanding of historical surroundings • Income growth • Increase in free time • Mobility • Art access • The need to fulfil the experience that modern technology offers to replace its disadvantages • Satisfying the psychological need to honour family history The researches of tourism supply and demand of cultural tourism in Europe showed that at the end of 20th century there is a constant and fast growth of production and consumption of heritage attractions and that in the documents defining tourism policy around Europe, since 1970s, cultural tourism is a new area of tourism demand.17 Today, cultural tourism is recognized as an important asset of economic and social changes in Europe. According to UNESCO’s World heritage list18, which includes many of the world’s most outstanding attractions and monuments, around 50 per cent of 745 cultural properties are situated in Europe. Countries with the highest number of protected properties are: Italy (44) Spain (39), Germany (34) and France (34), China (30), Mexico (27), India (23) and Great Britain (22). Among eight countries leading in the number of protected properties there are five European countries. It is important to emphasize that many European Union documents accent the primary role of European cultural heritage in a touristic valorisation for familiarising with the culture, tradition and customs of life in Europe19. For that purposes many cultural projects like „European cultural capitals“, are subsidized. In the beginning of 1990es ATLAS20 (Association for Tourism and Leisure purposes) launched a cultural tourism research project with a support of European commission. Since then the program has undertaken more than 40 thousand interviews with tourists in cultural sites in Europe to understand their motivations, profile and attitudes. The latest research was conducted in 200721 and it included participants from six European countries (Italy, UK, Portugal, Austria, Latvia and Romania), Mexico and Vietnam. This research, which included 4600 tourists, has shown the growth in the proportion of tourists taking cultural holidays, up from 17% in 1997 to 31% in 2007. This indicates that cultural tourism may be growing in importance in the market mix of destinations worldwide. Paris and Rome were the most favourite destinations for cultural tourists, followed by Florence, Athens, London and Venice. Almost 70% of participants had degree or higher degree which confirms the general trend towards increasing higher education participation in the population in general. The main trends identified by the ATLAS research are22: • The growth of number of „cultural holidays“ • Tourists have higher education and income levels • More use of Internet for information gathering • More visits to cultural events, festivals, due to the increased offerings • Growing interest in the „everyday culture“ of destination Nuryanti, W.(1996) Heritage and postmodern tourism, Annals of Tourism research, 23(2), pp.250 Richards, G. and Wilson, J. (2007) Tourism development trajectories: from culture to creativity? In: Richards, G. and Wilson, J., eds. (2007) Tourism, Creativity and Development, London: Routledge, p. 1-34. 15 Alfier, D., op. cit,, pp.191 16 Waitt, G.(2000) Consuming heritage: Perceived historical authenticity, Annals of Tourism research, 27(4) , pp.838 17 Richards, G.(1996) Production and consumption of European cultural tourism, Annals of Tourism research, 23(2), pp.261 18 http://whc.unesco.org/en/list/, accessed 07.08.2012 19 Hitrec, T.(1996) Cultural itineraries - an important segment of European tourism, Tourism, 44(3-4), pp.51 20 WTO: City tourism and culture: The European experience, op.cit. pp. 18-25 21 http://www.tram-research.com/atlas/previous.htm, accessed 07.08.2012. 22 ibid 13 14

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The recent OECD report on The Impact of culture on tourism23 noted that cultural tourism accounted almost 360 million international tourism trips in 2007, making it around 40% of global tourism. In the terms of value, it significance is even higher, since cultural tourists are estimated to spend more than average tourists. The same report also indicated that the main drivers for developing culture and tourism policies are24: • Valorising and preserving heritage • Economic development and employment • Physical and economic regeneration • Strengthening and/or diversifying tourism • Retaining population • Developing cultural understanding Today it is estimated that cultural tourism accounts for about 40 % of all European tourism25. Although cultural trips have declined in a last couple of years as a result of economic crisis it is evident from the data that this form of tourism has been less affected by the crisis. Global travel trends26 have shown a 5% drop in city trips which are usually related to cultural tourism in compare to 20% drop in rural tourism. The resilience of cultural tourism to the global crisis can be found in the wide range of motives for travel. So, instead of mass market for cultural tourism, there is a growing range of cultural tourism niches which are related to a specific aspect of culture that attract tourists to visit a specific destination.

2.2. Cultural tourism in Croatia Although Croatia is one of the European countries with a long history and rich cultural heritage, a little was done for developing cultural tourism from its independence until 2003. when the Strategy of Cultural tourism was developed. In that period, there were several authors who tried to stress the importance of developing cultural tourism in Croatia, but those were only individual efforts to closer the meaning of cultural tourism to scientific circles as well as to include croatian tourism in the new tourism trends. Hitrec27 emphasised the importance of developing cultural tourism which can lead to a financial and organizational independence of cultural institutions as well as its importance in strengthening the awareness about the value of native culture among local population. Bošković and Šerović28 accented the importance of presenting cultural and historic identity of Croatia as a tourism destination in whole because, according to them, it is not well known outside the borders of Croatia. Brooks29 presented the principles which could be used to promote the development of cultural tourism: • Focusing on authenticity and quality • Preserving the resources • Reviving the cities • Finding a balance between community and tourism • Development of partnership and cooperation Tomljenović and Čaušević30 in their paper presented the guidelines for development cultural tourism in Poreč and Ban and Vrtiprah31 presented the base for developing cultural tourism in Dubrovnik. According to Tomas survey from 200232, 7.3% of tourists are coming to Croatia motivated by cultural heritage although there is a greater number of those tourists that visit some cultural attractions and manifestations. British and Dutch were the tourists most interested in familiarising with cultural heritage of Croatia and 54% of foreign tourists visited cultural sights. Only 36% of tourists were satisfied with sights marking and a little more of one third with a variety of cultural manifestations. The results also showed that 31% of the representatives of cultural institutions think that attracting Richards, G. and Wilson, J.: Tourism development trajectories: from culture to creativity, op.cit., p.1 Richards, G. (2011) Cultural tourism trends in Europe: a context for the development of Cultural Routes. In: Khovanova -Rubicondo, K. (ed.) Impact of European Cultural Routes on SMEs’ innovation and competitiveness. Strasbourg: Council of Europe Publishing, 2011, pp. 21-39. 25 Ibid, , pp.27 26 IPK (2009) , Global trends in Europe, Pisa meeting 27 Hitrec, T.(1998) Tourism in a cultural policy of Croatia, Tourism, 46(2), pp.106 28 Bošković, D. and Šerović, R(2000) Restructuring and Adoption of the Croatian Tourism supply to European and Global Trends Tourism, 48(2), pp.153-167 29 Brooks, R.(2000) Heritage tourism in villages and towns in Croatia: challenges, opportunities and potentials, Tourism , 48(4), pp.349 30 Tomljenović, R. and Čaušević, S.(2003) World cultural heritage, tourism and revitalization: Euphrasian basilica in Poreč, Tourism, 51(3), pp.389-398 31 Ban, I. and Vrtiprah, V.(2002) A role of cultural heritage in tourism, Culture: a driving force for urban tourism: Application of experiences to countries in transition, Institute for International relations, Zagreb, pp.107-117 32 Tomljenović, R. et al.(2003) The strategy of cultural tourism: From tourism and culture to cultural tourism, Institute for tourism, Zagreb, pp. 7-15 23 24

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tourists in too difficult in compare to the benefit it makes. These results had big influence in understanding the importance of developing cultural tourism which resulted in making of The strategy of Cultural tourism development in 2003.This strategy in six chapters defines cultural tourism and cultural tourist as well as analyses the advantages and disadvantages of the elements needed to develop cultural tourism products which can contribute to a higher level of attractiveness of destinations. It also presents strategic priorities and actions with the purpose of creating the cultural image for the numerous historical sites and manifestations. In 2008, Institute for Tourism, used TOMAS survey33 to examine the attitudes and consumption of visitors to cultural attractions and manifestations in Croatia. The survey was conducted on 37 cultural attractions, museums and galleries as well as at cultural manifestations on 2450 visitors. The results showed that majority of visitors were middle (47%) and young aged (30%), with high education (60%). There were motivated by intention to learn together with the image of the attraction as well as with curiosity. They gather information from relatives and friends and trough Internet. More than third of tourists (37%) can be considered tourists motivated by culture. 83.6% of visitors consider Croatia as a country with rich cultural heritage, 71,2% as a country with unique customs and tradition, 70.9% as a country of museums and cultural sights and 62,9% as a destination in which tourists travel motivated by culture. The average expenditure is 56.88 euros daily including accommodation. The latest TOMAS survey conducted in 201034 showed a slights decrease in visits motivated by culture from 10 % to 7% in a period 2007-2010. The British and Russian tourists were the most motivated to visit Croatia for cultural purposes in 2010. Between 50% - 70% of tourists visited some cultural attractions but they were not satisfied with the variety of cultural manifestations (no chance in compare to 2007). The quality of marking sights and presentation of cultural heritage were among elements with which tourists were not satisfied in 2007 and the level of satisfaction changed to high in 2010.

2.3. Cultural tourism in Dubrovnik Dubrovnik is a town in which tourism and culture were always closely linked. More than thousand years of history makes Dubrovnik european cultural centre. It has always been a destination that attracted tourists and visitors from all over the world due to its rich cultural heritage. In addition, it is an urban centre of the highest value. The Old town of Dubrovnik was registered as a world cultural heritage site by UNESCO in 1979. This fact is very important for the touristic valorisation as cultural resources have great power of attraction. Many cultural attractions include numerous monuments, p0alaces, churches and museums which together with cultural manifestations like St Blasius festival (which is a part of UNESCOâ&#x20AC;&#x2122;s intangible heritage list since 2009.), Dubrovnik Summer festival and folkloric ensemble LinÄ&#x2018;o make Dubrovnik a world known attraction. The City walls are one of the most attractive historical monuments of Dubrovnik. Built between 8th and 16th century they are 1940 metres long with its five bastions, three round and twelve square shaped towers are the most visited monument in Croatia in 2011. According to the Central Bureau of Statistics there were 723125 visitors in 2011. which is 1% less than in 2010 when the city walls were visited by 729704 visitors. Dubrovnik museums are also the most visited museums in Croatia35. In 2010 they had more than 350 thousand visitors which is an increase of 3 % in compare to 2009. The number of individual visitors in 2010 was 13.5 % more than 2009. making it around 40% of all visits made to museums in 201036. At 2010 Dubrovnik was visited by 677489 domestic and foreign tourists.37 According to TOMAS survey from 201038 more than a half of them have college education, 42% are coming with family, and their monthly household income in above 2000 euros. Almost 2/3 are coming with aeroplanes and the dominative motives for their visit are passive vacation, relaxing, new experiences and experiencing the natural beauty. Cultural heritage is becoming more important element in visiting Dubrovnik since 61.5% of tourists chose Dubrovnik for this motive in compare to only 30% of them in 2004. The average tourist spends 138 euros daily including accommodation which is highly above the expenditure at the croatian level. Tomas survey (2009) Cultural tourism 2008., Institute for tourism, Zagreb. Tomas survey (2011) Attitudes and consumption of tourists in Croatia - Summer 2010, Institute for tourism, Zagreb 35 http://www.mdc.hr/UserFiles/Image/projekti/statistika/Broj%20posjeta%202010_prema%20broju_sredjeno_15092011.pdf, accessed 09.08.2012 36 www.dubrovnik.hr/data/1301569813_333_m.doc accessed 09.08.2012 37 Tourist Board of Dubrovnik 38 Tomas survey; Attitudes and consumption of tourists in Croatia - Summer 2010, op.cit. 33 34

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2.4. Local residents’ attitudes Residents’ attitudes toward tourism development have received an increasing interest from academics, policy makers and tourism managers.39 The main reason can be found in the fact that subjective perceptions of tourism development held by residents are very important because they can affect the behaviour of residents towards tourists40 reflecting in the level of tourist satisfaction/dissatisfaction with a destination. Residents can perceive tourism in a positive way because of its potential to create jobs, income and enhanced community infrastructure41 or in a negative way due to sociocultural and environmental costs42. More likely, residents will be aware of positive and negative impacts tourism has on local community and they will draw their conclusion based on the relative importance they attach to each positive or negative outcome. The awareness of residents’ perceptions of tourism development can help tourism planners to identify and select those developments which optimise the benefits and minimize the problems. Today, many tourism researchers are favouring community based tourism where communities are in the centre of tourism planning and management. In that way benefits of tourism development stay within local community (employment growth, small business development), traditional lifestyles and values are respected and tourism can be developed in a sustainable manner.43

3. DATA AND METHODOLOGY This research aimed to analyse local residents’ attitudes towards Dubrovnik as a cultural destination, their familiarity with cultural heritage and cultural manifestations of the town as well as possibilities of cultural heritage valorisation for tourism purposes. A semi-structured questionnaire with 13 questions was used as a research instrument and the research was carried out in Dubrovnik in a period April-May 2012 on the purposive sample of 465 respondents. The questionnaire included not only sociodemographic characteristics of the respondents but also questions regarding attitudes of citizen towards cultural tourism in Dubrovnik and their knowledge of and participation in cultural manifestations of the town. A part of questionnaire used open questions to give respondents possibility to list the attractions they think could be valorised in touristic purposes, to list autochthon souvenirs of Dubrovnik as well as to give their suggestions for improving cultural offer of Dubrovnik. Five point Likert scale was used for measurement of the degree to which the respondents agree with a statement (1 = strongly disagree, 5 = strongly agree) together with dichotomous (yes-no) answers for examination of knowledge and participation in cultural manifestations. For collection and analysis of data following methods were used: inductive, deductive, descriptive, analytical, synthesis, comparative and statistical methods. To obtain the research results the statistical package SPSS was used. Since the purposive sample was used in the research, the results obtained cannot be used for making definite conclusions on the basic item but can only be considered as indicative.

4. RESULTS The research included 465 inhabitants of Dubrovnik, out of which 40.4% male and 59.6 % female population. The largest number of respondents is in the age group 18-25 (37.4%), followed by the age group 26-35 (22.8%). 17.4% of respondents are aged 46-55 and 12.5% 39-45. The smallest group of respondents was the age group 66 and over (2.8%). 30.3% of respondents are students, 27.3% are employees in a private sector, and 15.5% are employees in public sector. Private entrepreneur are represented by 7.3%, unemployed by 6.2%, followed by retired respondents (5.4%) and housewives (4.9%). Almost half of respondents have higher education (49.9%), 41.7% have completed secondary education, and 4.9% has master or doctoral degree. More than half of respondents live within the town limits outside the Old City (52.3%), 21.3% live in the suburban places: Mokošica, Komolac, Rožat and Primorje (Dubrovnik Littoral), 19.1% live in Župa dubrovačka, Cavtat and Konavle, and 4.7 % of respondents declared to be living in the Old City. Zamani Farahani, H. and Musa, G.(2008) Residents attitudes and perception toward tourism development: A case study of Masooleh, Iran, Tourism Management, 29(6), pp.1234 40 Andriotis, K. and Vaughan, R.D.(2003) Urban residents’ attitudes toward tourism development: The case of Crete, Journal of Travel Research, 42(2), pp.173 41 Mitchell, R.E. and Reid, D.G.(2001) Community integration: island tourism in Peru, Annals of Tourism Research, 28(1), pp. 113-139 42 Chen, J.S.(2000) An investigation of Urban tourism residents’ loyalty to tourism, Journal of Travel and Tourism Research, 24(1), pp.5-19 43 Bender, M.Y. et al.(2008) Local residents attitudes toward potential tourism development: The case of Ansted, West Virginia, Proceedings to the 2008 Northeastern Recreational Research Symposium, 2008 ,March 30 - April 1; Bolton Landing, NY, pp.85-94 39

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Table 1. Attitudes of local population about Dubrovnik as a cultural destination Average value

Total (%)

1. Dubrovnik is a destination of cultural tourism

3.90

1.7

3.9

23.9

43.7

26.9

100

2. The existing supply of autochthon souvenirs is satisfying

2.73

16.2

27.9

29.4

20.3

6.3

100

3. The existing supply of cultural manifestations is satisfying

3.35

2.8

12.9

38.5

38.1

7.7

100

4. Cultural heritage of Dubrovnik is adequately valorised in touristic purposes

3.38

1.7

12.9

39.4

37.8

8.2

100

5. I am well familiar with Dubrovnik cultural heritage

3.36

2.2

11.4

41.7

37.6

7.1

100

6. I frequently visit cultural manifestations of the city

3.56

17.6

29.9

32.9

17.2

2.4

100

7. Cultural heritage of Dubrovnik is adequately preserved

3.01

6.5

23.0

39.6

25.2

5.8

100

8. Local authorities and Tourism Board are adequately and sufficiently promoting Dubrovnik as a cultural destination

3.10

5.2

20.0

42.2

24.9

7.7

100

9. Local population is well familiar with its cultural heritage

2.82

7.1

29.0

42.4

17.4

4.1

100

10. Large crowds of tourists in the Old City may have a negative impact on the historical monuments due to uncontrolled exploitation

3.47

5.2

13.3

32.9

26.2

22.4

100

11. I’m proud that Dubrovnik is a part of UNESCO’s World heritage list

4.44

1.3

2.8

8.8

24.9

62.2

100

12. I think that cultural supply should be expanded outside Old town

4.36

0.9

3.0

10.3

31.0

54.6

100

13. The ticket prices of Dubrovnik’s museums are adequate

3.56

8.6

7.3

33.0

28.9

22.2

100

Statement

Agreement with a statement in (%)

Source: Elaborated and calculated on the basis of data collected from questionnaires.

Table 1 indicates that 70.6% of respondents see Dubrovnik as a cultural destination and 87.1% are proud that Dubrovnik is a part of UNESCO’s World heritage list. More than 5/6 of respondents think that cultural supply should be expended outside the Old town and 48.6% think that too many tourists in the Old town may have negative impact on the historical monuments due to uncontrolled exploitation. Less than half of respondents (44.7%) think they are well familiar with town’s cultural heritage and although 45.8% think that existing supply of cultural manifestations is satisfying, less than 1/5 (19.6%) frequently visit cultural manifestation in the city. Also, only 21.5% think that local population is well familiar with its cultural heritage and little over 1/4 of respondents (26.6%) are satisfied with the existing supply of autochthon souvenirs. Less than half of respondents (46%) think that cultural heritage is adequately valorised in touristic purposes and less than 1/3 (31%) that is adequately preserved. Less than a 1/3 (32.6%) think that Local authorities and Tourism Board are adequately and sufficiently promoting Dubrovnik as a cultural destinations. From the Table 1 it can also be seen that large number of respondents do not have particular opinion regarded presented statements. In the nine statements the number of respondents with no particular opinion is larger than 30%. These percentages are indicative and can be interpreted as ignorance or neglect for the tourism development in Dubrovnik.

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Table 2. Familiarity and attendance of cultural manifestations in Dubrovnik by local population44 Familiarity in (%)

Attendance in (%)

Yes

1. Dubrovnik Summer festival

96.1

3.9

88.7

11.3

2. Festival of chamber music „Julian Rachlin and friends“

80.8

19.2

30.3

69.7

3. Dubrovnik masked festivals

92.9

7.1

69.0

31.0

4. Saint Blaise Festivity

94.6

5.4

92.4

7.6

5. Masked sporchi macaroni preparing competition

55.5

44.5

24.6

75.4

6. Wine and gastronomy festival

60.3

39.7

25.5

74.5

7. Christian culture days

42.8

57.2

19.4

80.6

8. Oyster festival

72.4

27.6

34.3

65.7

9. Mediterranean festival of healthy food

77.5

22.5

51.2

48.8

10. Easter fair

71.7

28.3

43.8

56.2

11. Libertas film festival

82.5

17.5

35.0

65.0

12. Aklapela- Vocal groups festival

43.8

53.2

15.8

84.2

13. La petit festival

20.5

79.5

7.1

92.9

14. Festival „Ana in Dubrovnik“

27.9

72.1

7.6

92.4

15. Dubrovnik Film Meeting

55.7

44.3

19.0

81.0

16. Re-action festival of urban culture

31.3

68.7

15.3

84.7

17. Festival of jam and marmalade

44.1

55.9

19.0

81.0

18. Dubrovnik gastro table

66.1

33.9

36.1

63.9

19. Christmas fair

78.2

21.8

51.4

48.6

20. Night of museums

82.5

17.5

46.2

53.8

21. Dubrovnik International opera festival

25.1

74.9

11.4

88.6

22. Mussels festival

59.2

40.8

23.6

76.4

Cultural manifestation

Table 2 indicated that more than 90 per cent of respondents are familiar with Dubrovnik summer festival, Saint Blaise festivity and Dubrovnik masked festival, all of which have long tradition of existence in Dubrovnik. More than 4/5 is familiar with Festival of chamber music “Julian Rachlin and friends, Libertas Film festival and Nights of museum. Less than a half of respondents said they are familiar with Christian culture days, Aklapela vocal group festival, la petit festival, Festival “Ana in Dubrovnik”, Re-action festival of urban culture, festival of jam and marmalade and Dubrovnik International opera festival. Saint Blaise festivity was visited by 92.4% of respondents making it the most visited cultural manifestation, followed by visitation to Dubrovnik Summer Festival (88.7%) and Dubrovnik masked festival (69%). Christmas fair and Mediterranean festival of healthy food are visited by more than 50 % of respondents and other cultural manifestations mark visitations below 50 % The least known and visited cultural manifestation is La petit festival.

The list of cultural manifestations was downloaded from the Dubrovnik Tourist Board page

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Table 3. The results of Kruskal Wallis tests for the statements 3, 6 and 7 from Table 1 according to the age of the respondent: Test statistics a, b

Chi Square

The existing supply of cultural manifestations is satisfying

I frequently visit cultural manifestations of the city

Cultural heritage of Dubrovnik is adequately preserved

15,437

10,677

12,136

Df Asymp. sig

0.009

0.049

0.033

a Kruskal Wallis test b Grouping variable: Age Source: Calculated on the basis of data collected from questionnaires

The results of Kruskal Wallis tests indicate that there is a statistically significant difference in attitudes of respondents to the said statements with respect to their age , the significance being less than Îą=0,05. From the Table 4 is can be seen that respondents from the age group 56-65 and age group 66 and more are those who frequently visit cultural manifestations of the city. Also, these two age groups agree the most that cultural heritage of Dubrovnik is adequately preserved and they are the least satisfied with the existing supply of cultural manifestations in Dubrovnik. Table 4. Ranks for statements 3, 6, and 7 from Table 1 according to the age of respondent Ranks

I frequently visit cultural manifestations of the city

Cultural heritage of Dubrovnik is adequately preserved

The existing supply of cultural manifestations is satisfying

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Age

Mean Rank

18-25

174

229,39

26-35

106

218,81

36-45

228,58

46-55

229,83

56-65

263,90

66-

275,63

18-25

174

217,93

26-35

106

243,74

36-45

231,42

46-55

225,51

56-65

254,82

66-

335,58

18-25

174

223,22

26-35

106

264,92

36-45

245,62

46-55

224,92

56-65

176,59

66-

222,21

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Table 5. The results of Kruskal Wallis test for the statement 6 from Table 1 according to the area of living Test statistics a, b I frequently visit cultural manifestations of the city Chi Square

12,588

Asymp. sig

0.013

a Kruskal Wallis test Source: Calculated on the basis of data collected from questionnaires

b Grouping variable: Area of living

Table 6. Ranks for statement 6 from Table 1 according to the area of living Ranks

I frequently visit cultural manifestations of the city

Area of living

Mean Rank

Old town

260,07

Parts of Dubrovnik outside the Old town

242

223,59

Mokošica, Komolac, Rožat i Primorje

257,80

Župa, Konavle, Cavtat

234,69

Other

136,58

Source: Calculated on the basis of data collected from questionnaires

Table 5 indicates that there is a significant statistic difference in attitudes of respondents to the said statement with respect to their area of living, the significance being less than α=0,05. Table 6 indicates that those who live in the Old town agree the most with the given statement, followed by those who live in suburban parts of Dubrovnik. The least agreement with the given statement show those respondents who live within city but outside the Old town. The results from the open questions indicate that autochthon souvenirs of Dubrovnik are: St. Blaise’s statue, Dubrovnik jewellery, the statue of Orlando, Dubrovnik emblem, dolls in national costumes of Konavle and Primorje, delicacies of Dubrovnik (soar orange jam, dried figs, arancini – the candied sour and sweet orange peel, Dubrovnik rozata). The cultural sights that can be better valorised in touristic purposes mentioned by respondents are: villas, fortresses, churches, Sponza palace, archaeological findings near Dubrovnik, the island Lokrum and Lazareti. Suggestions for improvement of cultural supply of Dubrovnik are summarized as follows: • Better promotion of Dubrovnik as a cultural destination all year around with greater effort of Dubrovnik Tourism board, opening the agency for cultural tourism as a part of Dubrovnik Tourism Board • investment in reviving old crafts , better promotion of folklore and national customs, illumination of the city walls and the production or autochthon souvenirs exclusively in Dubrovnik • running projects that will introduce local population with cultural supply of town, control the ticket prices for better valorisation of cultural manifestations, expand the cultural supply outside Old town • control the number of cruise ships, control the number of tourists in the Old town at the same time, move away the traffic further of the Old town.

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5. CONCLUSION As already highlighted the purpose of this survey was to analyse local residents’ attitudes towards Dubrovnik as a cultural destination, their familiarity with cultural heritage and cultural manifestations of the town as well as possibilities of cultural heritage valorisation for tourism purposes. The study results indicate that 70.6% of local population thinks Dubrovnik is a cultural destination and less than half of respondents (44.7%) think they are well familiar with town’s cultural heritage. The cultural sights that can be better valorised in touristic purposes mentioned by respondents are: villas, fortresses, churches, Sponza palace, archaeological findings near Dubrovnik, the island Lokrum and Lazareti. Although 45.8% think that existing supply of cultural manifestations is satisfying, less than 1/5 (19.6%) frequently visit cultural manifestation in the city and more than 5/6 of respondents think that cultural supply should be expended outside the Old town. Saint Blaise festivity was visited by 92.4% of respondents making it the most visited cultural manifestation, followed by visitation to Dubrovnik Summer Festival (88.7%) and Dubrovnik masked festival (69%). Christmas fair and Mediterranean festival of healthy food are visited by more than 50 % of respondents and other cultural manifestations mark visitations below 50 % The least known and visited cultural manifestation is La petit festival. The study results also showed that the frequency of visitation to cultural manifestation depends on the age and the area of living of the respondents: older respondents and those who live within city walls of Dubrovnik visit cultural manifestations frequently; older respondents are the least satisfied with the existing supply of cultural manifestations and they think that cultural heritage of Dubrovnik is adequately preserved. Respondents think that improvement of cultural supply of Dubrovnik can be realised through the better promotion of Dubrovnik as a cultural destination all year around with the greater effort of local Tourism Board (opening the agency for cultural tourism) as well as through reviving old crafts and the production or autochthon souvenirs exclusively in Dubrovnik. Also, running projects for the purpose of introducing local population with cultural supply of town, expanding the supply outside city walls and controlling the ticket prices are the suggestions for better valorisation of cultural heritage and manifestations of the town. The main limitations of the conducted research are convenience sample, unbalanced sampling structure and the number of sample units. Considering the stated limitations the results can be considered indicative and they represent the basis for further research. Continuous research of the development of cultural tourism in Dubrovnik will contribute to its better management and sustainable development. Since cultural tourism in Europe is showing high and steady rates of growth it is necessary to better understand and manage the changes according to the trends on the tourism market to enhance attractiveness and gain better competitive position among cultural destinations.

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

Alfier, D. (1994) Tourism: The selection of papers, Masmedia, Zagreb. Andriotis, K. and Vaughan, R.D. (2003) Urban residents’ attitudes toward tourism development: The case of Crete, Journal of Travel Research,42(2), pp.172-185 Ban, I. and Vrtiprah, V. (2002) A role of cultural heritage in tourism, Culture: a driving force for urban tourism: Application of experiences to countries in transition, Institute for International relations, Zagreb, pp.107-117. Bender, M.Y. et al.(2008) Local residents attitudes toward potential tourism development: The case of Ansted, West Virginia, Proceedings to the 2008 Northeastern Recreational Research Symposium, 2008 ,March 30 - April 1; Bolton Landing., pp.85-94 Bošković, D. and Šerović, R.(2000) Restructuring and Adoption of the Croatian Tourism supply to European and Global Trends, Tourism, 48(2), pp.153-167 Brooks, R.(2000) Heritage tourism in villages and towns in Croatia: challenges, opportunities and potentials, Tourism, 48(4), pp.347-352 Chen, J.S.(2000) An investigation of urban tourism residents’ loyalty to tourism, Journal of Travel and Tourism Research, 24(1), pp. 5-19 Hitrec, T.(1996) Cultural itineraries - an important segment of European tourism, Tourism, 44(3-4), pp. 47-60 Hitrec, T.(1998) Tourism in a cultural policy of Croatia, Tourism, 46(2), pp.106-107 http://whc.unesco.org/en/list/, accessed 07.08.2012 http://www.mdc.hr/UserFiles/Image/projekti/statistika/Broj%20posjeta%202010_prema%20broju_sredjeno_15092011.pdf, accessed 09.08.2012 http://www.tram-research.com/atlas/previous.htm, accessed 07.08.2012. IPK, (2009) Global trends in Europe, Pisa meeting. McKercher, B. and du Cross, H. (2002) Cultural tourism: The partnership between tourism and cultural heritage management, Haworth Hospitality Press. Mitchell, R.E. and Reid, D.G.(2001) Community integration: island tourism in Peru, Annals of Tourism Research, 28(1), pp.113-139 Nuryanti, W.(1996) Heritage and postmodern tourism, Annals of Tourism Research, 23(2), pp.249-260 Richards, G. and Wilson, J. (2007) Tourism development trajectories: from culture to creativity? In: Richards, G. and Wilson, J., eds. (2007) Tourism, Creativity and Development, London: Routledge, pp. 1-34. Richards, G. (1996) Cultural tourism in Europe, CABI, Wallington, GB. Richards, G. (2011) Cultural tourism trends in Europe: a context for the development of Cultural Routes. In: Khovanova -Rubicondo, K. (ed.) Impact of European Cultural Routes on SMEs’ innovation and competitiveness, Strasbourg: Council of Europe Publishing, 2011, p. 21-39. Richards, G.(1996) Production and consumption of European cultural tourism, Annals of Tourism research, 23(2), pp. 261-283 Tomas survey (2009) Cultural tourism 2008, Institute for Tourism, Zagreb. Tomas survey (2011) Attitudes and consumption of tourists in Croatia - Summer 2010, Institute for tourism, Zagreb. Tomljenović, R. et al.(2003) The strategy of cultural tourism: From tourism and culture to cultural tourism, Institute for tourism, Zagreb

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24. 25. 26. 27. 28.

Tomljenović, R. and Čaušević, S.(2003) World cultural heritage, tourism and revitalization: Euphrasian basilica in Poreč, Tourism, 51(3), pp. 389-398 Tomljenović, R., Hendija, Z. and Razović, M.(2011) Domestic cultural tourism demand: The case of the county of Split – Dalmatia, Acta turistica, 23(1), pp.27-48 Waitt, G.(2000) Consuming heritage: Perceived historical authenticity, Annals of Tourism research, 27(4), pp.835-862 WTO (2005) City tourism and culture: The European experience, WTO, Madrid. WTO (1985) The state’s role in protecting and promoting culture as a factor in tourism development and the proper use and exploitation of the national cultural heritage sites and monuments for tourists, WTO, Madrid. 29. www.dubrovnik.hr/data/1301569813_333_m.doc accessed 09.08.2012. 30. Zamani Farahani, H. and Musa, G.(2008) Residents attitudes and perception toward tourism development: A case study of Masooleh, Iran, Tourism management, 29(6), pp.1233-1236 DETAILS ABOUT AUTHOR: BARBARA PUH, B. SC. UNIVERSITY OF DUBROVNIK DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS DUBROVNIK, HRVATSKA barbara.puh@unidu.hr

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THE INFLUENCE OF BACKGROUND MUSIC ON THE MOOD AND PURCHASING INTENTIONS OF CONSUMERS IN SERVICES ORGANIZATIONS IN DUBROVNIK IVANA RAKIDZIJA MARIJA DRAGICEVIC

ABSTRACT Many service organizations focus exclusively on some combination of traditional “marketing mix”, that contains of product, place (distribution), promotional activities and price, although traditional “Four P’s” do not cover personnel, customer service, and physical facilities. The impact of service providers’ physical facilities (environments) on customer behavior and satisfaction has gained attention. Of the multitude environmental stimuli to which a customers may be exposed in a service setting, music has been identified as one of the most influential elements. Research conducted over the years provides some empirical evidence to support the existence of the effect of the music, especially in service environments. The aim of the paper is to explore the influence of the background music on the mood and purchasing intentions of the customers in service organizations in Dubrovnik. For that purpose we have carried out the primarly research including the sample of 250 customers. The results of the research show that there is a significant influence of music on the consumers behaviour in Dubrovnik. KEYWORDS: music, influence, mood, purchasing intention, Dubrovnik

1. INTRODUCTION Contacts between services companies and consumers are interactive and numerous, and each contact creates the perception of service. The traditional concept of marketing mix that was developed in accordance with the needs of companies whose products are predominantly material, in the service sector has perceived modifications and is includes more various variables. In services sector marketing mix for instance might be created of product, price, sales, physical evidence, people and processes.1The marketing mix have to be the combination of elements that meet and overcome the expectations of the target market segment. From a variety of stimuli from the environment the music is considered as one of the most influential and most manipulative elements2, so we find interesting just to include music in our research. The aim of the paper is to point out the importance of music and its’ influence on the consumers’ mood and purchasing intentions, based on the empirical research carried out in Dubrovnik. In our research we have included the sample of 250 customers. For the purpose of this paper we have stated the following hypotheses: H1. “Consumers who use services in Dubrovnik consider that music is important in their everyday life and they better perceive the services evidence when music is playing.” H2. “Music influence on mood and purchasing intentions of the consumers in Dubrovnik“. For proving hypoteses we have used in the secondary and primarly data. For analysing data we have used methods of descriptive and inferential statistics based on the chi-square testing.

2. CLASSICAL AUTOMATIC ADJUSTMENT MECHANISM 2.1. Some specific features of physical evidence Decison about physical evidence strategy must be connected with the marketing company goals and provides functionality in the services business. The physical evidence, therefore: 1. packages the service with tangible clues that communicate an image to the consumer; 2. facilitate, through design, the flow of activities that consumers and employees need to accomplish; 3. socialize customers and employees alikein terms of their respective roles, behaviours and relationships; 4. differentiate the firm from competitors and communicate this image to the core target segment.3 Hoffman, K., Bateson, J., Wood, E., Keynon, A. (2009.) Services marketing, concepts, strategies & cases. EMEA, United Kingdom Herrington, J. D., Capella, L .M. (1996.) Effects of music in service environments: a field study. The Journal of Services Marketing, 10(2), pp. 26. 3 Bitner, M. J. (2000) In Hoffman, K. D., Bateson, J., Wood, E., Kenyon, A. (2009). Services marketing, concepts, strategies & cases. EMEA, United Kingdom, pp. 265. 1 2

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Environmental psychology it is essentially focused on the impact of environment on people. Mehrabian-Growth dynamics model4 defines the behavior of consumers in physical environment. There are three basic emotional states: pleasure – displeasure, when emotional state reflects the degree to which consumers and employees feel satisfied with the service experience; arousal-nonarousal, as the state reflects the degree to which consumers and employees feel excited and stimulated; dominance–submissiveness, reflects feelings of control and ability to act freely within the service environment. Ideally, service firms should create physical evidence to built environments that appeal to pleasure and arousal states, and stay away from creating atmosphere that creates submissiveness. For example, the psychological impact of colour which is considered as extremely important element of the physical environment is the result of three properties: hue, value and intensity. Hues refers to the actual family of the colour, such as red, blue, yellow, or green.5 Hues are classified into warm (red, yellow, orange) or cool colours (blue, green, purple). According to the values colours are divided into light and dark. Intensity defines the degree of gloss.6Bright colours, bright lights, noise, bustle and movement, are all typical elements of environment that creates adventurous mood, while opposite are characteristics of an environment creating relaxing mood.7 Although the music is an important element in all cultures, in each culture ithas a different role, different meanings and different level of importance. It supports the process of communication and allows people to work together more effectively. The music was actually alternative means of communication between individuals and groups, although this communication can be limited to those who understand the specific meaning of used musical genre8. Studies about effects of music set up three main questions: how music can change the retention of customers in the store, whether there have been changed the perception of the brand with music and whether there are consequences in product choosing caused by music9. A review of the literature dealing with the effects of music on shopping behaviour reveals different findings. Kotler10(1973), find out that atmosphere can be influential in the purchase decision. Linsen11(1975) points out that shoppers may feel that they spend less time standing in queue if the stores provide background music, because customers feel that service organization care about their customers. Bruner12(1990) concludes that music is an important element that influences mood and behaviour. Bitner13(1992) also suggested that the physical surroundings (atmosphere) of services businesses have a large impact because customers frequently consume services within the firm’s environment. Baker et al.14(1992) find out that music can influence on consumer behaviour and willingness to buy. Hui, Dube and Chebat15(1997) have proved that regardless of its valence, music ameliorates emotional evaluation of the service environment which in turn positively affects approach behaviour towards the service organizations. Bitner16(1992) finds out that consumers spend more money when the music “fits” with the product. The same was foundation of Areni & Kim17(1993). Yalch & Spangenberg18(1993) point out that customers buy products/services that closely matche musical preferences of shoppers. Areni19(2003) has also explored the managers’ theories of how atmospheric music affects perception, behaviour and financial performance. According to the result of the reseach carried out by mail survey and including sample of 221 australian hotel and pub managers he has concluded that atmospheric music influences interaction with staff, music must vary according to the time of day, can draw customers into an establishment or drive them away, music makes customers stay longer than they otherwise would, music eliminates unacceptable silences, influences the revenues, gross margins and operating profits of their establishment. The belief that music should vary according to the age of target segment was actually negatively correlated with its perceived effect on financial performances, but varying music by the time of day was correlated with financial performances. Mehrabian-Growth dynamics model In Donovan, R., Rossiter, J. (1982.) Store Atmosphere:An Environmental Psychology Approach, Journal of Retailing, 58 (1), pp. 34-47. 5 Hoffman, K., Bateson, J., Wood, E., Keynon, A., A. (2009.) Services marketing, concepts, strategies & cases. EMEA, United Kingdom, pp. 269. 6 Hoffman, D., Bateson, J.E.G. (1997.) Essentials of Services Marketing, The Dryden Press, Forth Worth, pp. 225. 7 Booms, B., Bitner, M. (1992) Marketing services by Managing the Environment, Cornell Restaurant and Hotel Administration Quarterly, may, pp. 35-39. 8 http://www.zamp.hr. (accessed 15.11.2011.) 9 Santoro, Ch. Occhio all’orecchio, parlera’ al cuore, http:// www.mymarketing.net (accessed 5.02.2012.) 10 Kotler, P. (1973.) Atmospherics as a marketing tool. Journal of Retailing, 49, pp. 48-64. 11 Linsen, M.A. (1975.) Like our music today Ms. shopper?, Progressive Grocer, October, pp. 156. 12 Bruner, G.C. (1990.) Music, mood, and marketing. Journal of Marketing, 54, October, pp. 94-104. 13 Bitner, M.J. (1992.) Servicescapes: the impact of physical surroundings on customers and employees. Journal of Marketing, 56, April, pp. 57-71. 14 Baker, J., Levy, M. and Grewal, D. (1992.) An experimental approach to making retail store environmentDecisions. Journal of Retailing, 68, pp. 445-460. 15 Hui, M., Dube, L., Chebat, J.-C. (1997.) The impact of Music on Consumers’ Reaction to Waiting for Services. Journal of Retailing, 71(1), pp. 87-104. 16 Bitner, M.J. (1992.) Servicescapes: the impact of physical surroundings on customers and employees.Journal of Marketing, 56, pp. 57-71. 17 Areni, C.S. Kim, D. (1993.)The influence of background music on shopping behavior: classical versus top-forty music in a wine store”, McAlister, L. and Rothschild, M. (Ed.): Advances in Consumer Research, 20, pp. 336-340. 18 Yalch, R. ,Spangenberg, E. (1993.) Using store music for retail zoning: a field experiment, L. McAlister, M. Rothschild (Ed): Advances in Consumer Research 20, Assosiationn for Consumer Research, Provo Utah 1993, pp. 632-636. 19 Areni, C. (2003.) Examining managers’ theories of how atmospheric music affects perception, behaviour and financial performance. Journal of Retailing and Consumer Services, 10, pp. 263-274 4

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Combining melody, harmony and rhythm to the listener can act in many ways: by changing the mood, provoking a sense of balance, happiness, pleasure, or restlessness, anxiety and sadness.20Generally, slow and quiet music has a tendency to encourage relaxation and reduce anxiety and restlessness, while stimulating music typically increases the level of excitement. It is very difficult to determine exactly which musical structure causes a certain mood.21Care must be taken on the individual preferences of individual customers or segments. Herrington and Capella22(1996) just suggest sellers to adapt their strategies to different age structures taking care and about the different parts of day when customers visit them. Bad choice, especially for the older segment of consumers is loud music, which acts irritating to them. An individual’s preference for a musical composition is dependent on a number of factors. Musical preferences tend to vary. Wright23(1975) has concluded that musical preferences depend on the cultural background. Influence on musical preferences has complexity24, such as familiarity with the music25and structural characteristics of music.26Musical preference tends to vary according to the listener’s age27and musical training.28 Gerald Gorn in the book, “The Effect of Music in Advertising on Choice Behaviour” point out that 80% of people are choosing the products/services which defines and characterizes sales place, and can strengthen identity. For example, Indian music used in the environment whit typical Indian products creates an overall picture of an environment in which the product originates. In some instances expenditures, are influenced by the volume29and tempo30of background music. There are lot of examples of good business practice such as El Torito restaurant. Using bright colours and music creates a celebration atmosphere which leads to higher sales of margarita. Some stores create speciall sound atmosphere for children so they are not bored while their parents choose products.31Starbucks has demonstrated excellent approach. They are equipped with comfortable chairs, their coffee shop is actually more like a comfortable space for lounging, and the soundtrack is carefully chosen to create desired atmosphere and to guarantee a relaxed atmosphere.32In the next text we will provide the results of empirical research about importance of music and its influence on the mood and purchasing intentions of consumers in services organizations in Dubrovnik.

3. RESULTS OF EMPIRICAL RESEARCH CARRIED OUT IN DUBROVNIK 3.1. Research Methodology The aim of the empirical research was to determine the importance of music and effects of music on consumer behaviour in services organizations in Dubrovnik. Data were collected from the sample of 250 customers in Dubrovnik. The questionnaire consisted of 19 questions. We have explored the attitudes of the consumers only in certain types of services organizations (mostly food shops, cloth shops, souvenir shops, restaurants, cafe bars), what we consider as the limitation of the research. For analysing the data we have used descriptive and inferential statistic based on chi-square testing.

3.2. The results of the research and discussion In the research we have carried out in Dubrovnik on the sample of 250 customers, the part of 44% belongs to the men and 56% to women. According to results of the research most of the respondents (30%) are between 26-34 years old, than follow those between 16-25 year (28%), 35-43 years (10%), as well as other categories, that is the customers up to 15(9%), between 44-53(9%), between 54-63 (10%) and older than 64 (9%).

Rojko, P. (1982). Psihološke osnove intonacije i ritma, Muzicka akademija, Zagreb http:// www.thepowerofmusic.co.uk. (accessed 2.02.2012.) 22 Herrington, J. D., Capella, L. M. (1996.) Effects of music in service environments: a field study. The Journal of Services Marketing, 10 (2), pp 26. 23 Wright, D. F. (1975.) Musical meaning and its social determinants. Sociology, 9, pp. 419-435. 24 Burke, M. J., Gridley, M. C .( 1990.) Musical preferences as a function of stimulus complexity and listeners’ sophistication. Perceptual and Motor Skills, 71, pp. 687-690. 25 Davies, J. (1991.)The musical mind. New Scientist, 129, pp. 38-41. 26 Kellaris, J. J. (1992.) Consumer esthetics outside the lab: preliminary report on a musical field study. Advances in Consumer Research, 19, pp. 730-734. 27 Yalch, R., Spangenberg, E. (1990.) Effects of store music on shopper behavioor. Journal of Services Marketing, 1, pp. 31-9. 28 Vanderark, S.D. , Ely, D. (1993.) Cortisal, biochemical, and galvanic skin responses to musical stimuli ofdifferent preference value by college students in biology and music. Perceptual and Motor Skills, 77, pp. 227-234. 29 Smith, P. C., Curnow, R., (1966.) Arousal hypothesis’ and the effects of music on purchasing behaviour, Journal of Applied Psihology, 50, pp. 255-256. 30 Milliman, R. E., (1986.)The Influence of Background Music on the Behavior of Restaurant Patrons. Journal of Consumer Research, 13, pp. 286–289.; Milliman, R.E. (1982.) Using background music to affect the behaviour of supermarket shoppers. Journal of Marketing, 46, pp. 86-91. 31 htpp://wwwfilaks (accessed 12. 05. 2012) 32 http:// wwwliderpres / (accessed 12.05.2012) 20 21

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Table 1. The age of respondents The age

Number of customers

Up to 15

8.8

16-25

28.4

26-34

30.0

35-43

10.0

44-53

8.8

54-63

9.6

64 and more

9.4

Total

250

100

Source: Authors

Table 2. The importance of music in customersâ&#x20AC;&#x2122; everyday life Importance

Number of customers

Very important

30.8

Important

128

51.2

Not important at all

18.0

Total

250

100

Source: Authors

The main part of respondents (82%) consideres music as an important and extremely important, while only small part of them (18 %) consider that music is unimportant. We can conclude music has high importance for the customers in Dubrovnik. Table 3. Frequency of listening the music Frequency of listening the music

Number of customers

Rare

13.6

Often

216

86.4

Never

Total

250

100

Source: Authors

The largest number of respondents (86%) often listens the music, while only a small number of respondents (14% ) rarely listen the music, as visible via table 3. The main number of the customers (87%) consider it is very important to keep music playing in the service environment and only small number of customers ( 13%) thinks it is not important. Table. 4. Type of music the customers like (Multiple responses, N =250) Type of music

Number of responses

Classic

36.4

Folk (Country)

19.6

Dalmatian

118

47.2

Techno

15.2

Rock-and-roll

185

74.0

Else

11.6

Source: Authors

According to the results of the empirical research, the most customers prefer rock-and-roll (74% ), then dalmatian songs (47%), that follows classical music (36%) and than techno (15%) such as other kinds of music (12%).

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Table. 5. Better perception of the services environment when music is playing Better perception

Number of

30.8

Yes

225

90.0

10.0

Total

250

100

customers

Source: Authors

The largest number of respondents (90%) considered that they perceive better services atmosphere when music is playing, while the small number (10%) thinks it is not important for better perception of the services organizations’ atmosphere. According to the chi-square testing,(α= 0, 05), there is no correlation between ages and the level of importance of music, so we can conclude that music has the same importance for young and older customers. Table 6. The influence of music on the decion to enter into the services organization Influence

Number of customers

In a great deal

23.6

Partly

146

58.4

Small influence

6.4

Does not influence at all

11.6

Total

250

100

Source: Authors

The most of customers (59%) believes that music partly affects their choice to enter into the place where they buy, although the significant part (23%) of customers thinks that music influences their entering in a great deal. Only small part of them (12%) believes that music does not affect their choice or has small influence (6%), so it is obvious that music is important element for choosing the place where they intend to buy. Chi-square testing (α= 0, 05) shows that there is no correlation between ages and importance of the music when they decide about services ennvironment, but according to the results of chi-square testing (α= 0, 05) there is a correlation between age and the genre of music the customers prefer and expect in the services environment. According to the Herrington and Capella various categories of music tends to vary by age, income, education and ethnical background.33Our research indicates the necessity of adopting the music according to the age of customers. Young customers especially prefer buying while the certain type of music is playing and it influence significantly on their perception of service environments. Table 7. Influence of music on customers feelings Feelings

Number of customers

Happy and satisfied

204

95.0

Depression and anxiety

4.8

No feelings

13.2

Total

250

100

Source: Authors

The music awakens feelings of happiness and satisfaction according to the opinion of largest part of respondents (95%). A small part of them (13%) said that music can not influence on their feelings and a small part of respondents (5%) think they feel depression and anxiety. The data about the desirable volume of the music shows that the most of the respondents (62%) prefer medium volume music, 12% prefer quiet and 5% prefer very quiet music, 23 % like loud and 7% very loud music. According to the chisquare testing (α= 0, 05) there is no correlation between rhythm and increased consumption of the article, but there is a correlation between loudness of music and lower consumption, because the consumers which do not prefer loud music stay less and spend less money. The respondents think that bad music always effect that they stay less in the shop and spend less, but if they like music they stay longer and spend more money. The respondents’ answers show that most of them (70%) believe that music can influence the reduction of negative emotion while they stay in a queue. Analyzing the attitudes of respondents about the impact of music on their retention in the service facility, it is visible that most of 33

Herrington, J. D., Capella, L. M. (1994.) Practical applications of music in service settings. The Journal of Services Marketing, 8 (3), pp 50-65.

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them (68%) believe that music affects their retention. The services organization managers in Dubrovnik should better adopt the characteristics of music towards customer preferences. Wrong choice can influence that customers leave the place where they buy and spend less. Table 8. The attitudes towards the promotion messages with/without music Attitude

The number of customers

Do not care if the message is with/without music

14.4

Allways prefer promotional messages with music

156

62.4

Sometimes is important that the message is with musical bacground

23.2

Total

250

100

Source: Authors

According to the results of the research given in table 8. it is visible that most of the customers consider that it is important to include the music in the promotional messages. Table 9. Customers preferences according to the products/services remind on music Giving advantage

The number of customers

Allways

14.0

Sometimes

32.4

Rarely

39.6

Never

14.0

Total

250

100

Source: Authors

The significant part of customers (40%) rarely give a higher priority to the products connected with the music, small part of them (14%) do not give priority to the products connected with music and music can not inspire them to buy such product. We have to point out that the most of them (46%) sometimes and allways give priorities to the products connected with the music. We find interesting the segment of the customers which sometimes buy products connected to the music and consider it is necessary to improve marketing strategy (promotional and other) to initiate them buying more products connected with the music. Authentical music can be stimulus for increased purchasing of authentical products from Dubrovnik area.

5. CONCLUSION Important principle for successful design of the physical environment of services companies is recognizing the external and internal elements which are important in creating atmosphere. To create an overall impression and cause desirable consumer behaviour, it is important to achieve synergy of all elements of physical evidence applying holistic approach According to the results of the research carried out in Dubrovnik it is confirmed that music is very important in everyday living and the consumer expect to be part of physical evidence in services. According to the result of research carried out in Dubrovnik it is obvious that there is a need to adopt the music better according to the age of the segments. Music keeps customers staying in a shop and reduces negative emotions while they are waiting for services. Bad music forces them to retain less and spend less. The significant part of consumers gives priority to products which are associated with the music. Music mostly awakes feelings of happiness and satisfaction. Precisely because of these emotional reactions to certain music, it is important to choose the appropriate. Care must be taken on the individual preferences of segment. In todayâ&#x20AC;&#x2122;s competitive business environment service companies in Dubrovnik should have better use of music as the stimulus in the physical evidence and make servicesâ&#x20AC;&#x2122; place recognizable and creating different atmosphere where the customers will feel like they are at home. In certain shopping situations the atmosphere may be more influential than the product itself in the purchase decision. We found out that it is necessary to carry out the depth analysis according to the different types of the services organizations in Dubrovnik including detailed analysing of the preferences of market segments. On the other side, Dubrovnik is well known tourist destination so it should be interesting to find out the attitudes of tourists, not only residents. We also would like to point out that classical music has been shown to contribute to a prestige-image ambient environment34 and even disliked classical music is able to improve consumersâ&#x20AC;&#x2122; emotional Baker, J., Levy, M. and Grewal, D. (1992.) An experimental approach to making retail store environmentDecisions. Journal of Retailing, 68, pp. 445-460.; Baker, J., Grewal, D., A. Parasuraman, A. (1994). The Influence of Store Environment on Quality Inferences and Store Image. Journal of Academy of Marketing Science, 22 (4), pp. 328-339. 34

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evaluation of the services environment35. In Dubrovnik is the cultural city and the cultural tourist destination, where the classical music has huge importance especially during the manifestations. We consider that it is neccesary to examine the influence of the background and alive music on the residents and tourist behaviour in services environment. All this we consider as the limitation of our research, but can be subject for the further researches.

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.

Areni, C. (2003. Examining managers’ theories of how atmospheric music affects perception, behaviour and financial performance. Journal of Retailing and Consumer Services, 10, pp. 263-274. Areni, C.S. Kim, D. (1993.)The influence of background music on shopping behavior: classical versus top-forty music in a wine store”, McAlister, L. and Rothschild, M. (Ed.): Advances in Consumer Research, 20, pp. 336-340. Baker, J., Grewal, D., A. Parasuraman, A. (1994). The Influence of Store Environment on Quality Inferences and Store Image. Journal of Academy of Marketing Science, 22 (4), pp. 328-339. Baker, J., Levy, M. and Grewal, D. (1992.) An experimental approach to making retail store environmentDecisions. Journal of Retailing, 68, pp. 445-460. Bitner, M.J. (1992.) Servicescapes: the impact of physical surroundings on customers and employees. Journal of Marketing, 56, April, pp. 57-71. Bitner, M. J. (2000) In Hoffman, K. D., Bateson, J., Wood, E., Kenyon, A. (2009). Services marketing, concepts, strategies & cases. EMEA, United Kingdom Booms, B., Bitner, M. (1992) Marketing services by Managing the Environment, Cornell Restaurant and Hotel Administration Quarterly, may, pp. 35-39. Bruner, G.C. (1990.) Music, mood, and marketing. Journal of Marketing,54, October, pp. 94-104. Burke, M. J., Gridley, M. C .( 1990.) Musical preferences as a function of stimulus complexity and listeners’ sophistication. Perceptual and Motor Skills, 71, pp. 687-690. Davies, J. (1991.)The musical mind. New Scientist, 129, pp. 38-41. Donovan, R., Rossiter, J. (1982.) Store Atmosphere:An Environmental Psychology Approach, Journal of Retailing, 58 (1), pp 34-47. Herrington, J. D., Capella, L. M. (1994.) Practical applications of music in service settings. The Journal of Services Marketing, 8 (3), pp 50-65. Herrington, J. D., Capella, L. M. (1996.) Effects of music in service environments: a field study. The Journal of Services Marketing, 10 (2), pp 26. Hoffman, D., Bateson, J.E.G. (1997.) Essentials of Services Marketing, The Dryden Press, Forth Worth Hoffman, K., Bateson, J., Wood, E., Keynon, A., A. (2009.) Services marketing, concepts, strategies & cases. EMEA, United Kingdom Hui, M., Dube, L., Chebat, J.-C. (1997.) The impact of Music on Consumers’ Reaction to Waiting for Services. Journal of Retailing, 71(1), pp. 87-104. Kellaris, J. J. (1992.) Consumer esthetics outside the lab: preliminary report on a musical field study. Advances in Consumer Research, 19, pp. 730-734. Kotler, P. (1973.) Atmospherics as a marketing tool. Journal of Retailing, 49, pp. 48-64. Linsen, M.A. (1975.) Like our music today Ms. shopper?, Progressive Grocer, October, pp. 156. Milliman, R.E. (1982.) Using background music to affect the behaviour of supermarket shoppers. Journal of Marketing, 46, pp. 86-91. Milliman, R.E., (1986.)The Influence of Background Music on the Behavior of Restaurant Patrons. Journal of Consumer Research 13, pp. 286–289. Rojko, P. (1982). Psihološke osnove intonacije i ritma, Muzicka akademija, Zagreb Santoro, Ch. Occhio all’orecchio, parlera’ al cuore, http:// www.mymarketing.net . (accessed 5.02.2012.) Smith, P. C., Curnow, R., (1966.) Arousal hypothesis’ and the effects of music on purchasing behaviour, Journal of Applied Psihology, 50, pp. 255-256. Vanderark, S.D. , Ely, D. (1993.) Cortisal, biochemical, and galvanic skin responses to musical stimuli ofdifferent preference value by college students in biology and music. Perceptual and Motor Skills, 77, pp. 227-234 Yalch, R., Spangenberg, E. (1990.) Effects of store music on shopper behavioor. Journal of Services Marketing, 1, pp. 31-39. Yalch, R. ,Spangenberg, E. (1993.) Using store music for retail zoning: a field experiment, L. McAlister, M. Rothschild (Ed): Advances in Consumer Research 20, Assosiationn for Consumer Research Provo Utah 1993, pp. 632-636. Wright, D. F. (1975.) Musical meaning and its social determinants. Sociology, 9, pp. 419-435. htpp://wwwfilaks (accessed 12. 05. 2012) htpp:// wwwliderpres /accessed 12.05.2012) http://www.thepowerofmusic.co.uk.,pristup, (accessed 2.02.2012.) http://www.zamp.hr. (accessed 15.11.2011.)

DETAILS ABOUT AUTHORS: IVANA RAKIDZIJA DUBROVNIK, CROATIA ivanarakija@net.hr MARIJA DRAGICEVIC ASSISTANT PROFESSOR UNIVERSITY OF DUBROVNIK, DEPARTMENT FOR ECONOMICS AND BUSINESS ECONOMICS DUBROVNIK, CROATIA marija.dragicevic@unidu.hr

Hui, M., Dube, L., Chebat, J.-C. (1997.) The impact of Music on Consumers’ Reaction to Waiting for Services. Journal of Retailing, 71(1), pp. 101.

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QUALITY MANAGEMENT AND INTEGRATED INFORMATION SYSTEM AS SUCCESS FACTORS OF PORT AUTHORITIES DEŠA RATHMAN ANA MATULIĆ

ABSTRACT Port Authority as a non-profit institution established to manage the port. Within the national port system its business process is determined by its formal background. The quality management system as a subsystem of the organization management improves its performance by directing the actions of all elements towards the purpose and objectives of the organization. In the case of port authority, the business purpose is management of the public maritime domain for optimal results in the terms of social benefit. Although such business purpose is a detachment from strictly economic market principles as the basis for the formation of the objectives, it involves, as one of the most important, the principle of creating added value. In relation to profit organization, the principle of creating is redefined through relationship with the stakeholders, where the public comes both as user and as owner. Quality management as a philosophy induced by modern, highly dynamic conditions of globalization aims to design business systems capable of continuous improvement and sustainability. The information system has to be designed in order to allow the creation of adequate information base that is understandable, accessible and usable to all levels of decision making. The interaction between the information system and the quality management system is of the crucial importance as it backups the functionality of the information system, and provides the conditions for long term, successful and sustainable management of the organization. KEYWORDS:: information system, quality management system, continual improvement, organization, business process

1. INTRODUCTION Port systems are part of national economy and national and international transport and logistics chains with extremely high economic multiplier effects. Precondition for an efficient approach to the development of ports and port systems, is determined by objective and value, and the result is properly organized business system oriented to the requirements of all stakeholders. Improvement of the national port system requires the definition of the appropriate port policy which will have clearly defined and elaborated objectives. They must be relevant, measureable, and achievable within a certain timeframe. Consistent port policy, based on legal solutions with real and clearly defined objectives, as well as the mode of financing of the port system, is the path for achieving competitiveness and market positioning. In fact, it is optimising the allocation of resources in the public domain in terms of social benefits.

2. BUSINESS SYSTEM OF THE PORT AUTHORITY Basic features of the port system management mode are legally conditioned, but within these general postulates there are a number of issues which are interpreted and resolved differently from port to port. Part of the difference is determined by the content and elements of the business environment, however, the most part is the result of a partial approach to solving problems that requires standardization and consistency at a higher level. Examples of such problematic entities are: managing the tariff policy and economic effects; the ways and mechanisms of management of actions and performance of private sector, and the assortment and quality of services, feasibility criteria of investment projects; modalities of regulating the degree of market freedom; unevenness of the vessels and passengers acceptance procedure in the port.

2.1. Characteristics of the port system in the Republic of Croatia In the system of the Republic of Croatia port aria of the ports opened to public traffic is determined as a public maritime domain.1Management of ports varies with the character of the port. Ports open to public traffic are managed by port authority. There are six port authorities of special (international) economic interest for the Republic of Croatia, and 22 port authorities of county importance.2Way to manage ports and organization and structure of the port authorities, respecting administrative structure in which they are embedded, depends on the classification of the ports with respect to their importance in the transport and Croatian port system, which is determined by the size and type of port traffic, Maritime Domain and Seaport Act, Official Gazette , 2003, No. 158th, art.2. The decision on the criteria for categorization of ports open to public traffic, „Offical Gazette“, 2011, No.32nd

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size and state of the port facilities and port’s connection with hinterland. Port authority is a bearer of the management functions, coordination and control, while performing operations are entirely left to the private sector. The basic function and role of the port in terms of creating market supply is realized by the fact that it is a basic infrastructure facility and receptive capacity of destination. Ports invest great deal of money into major and ancillary facilities which serve passengers – terminals, infrastructure, parking lots, equipment. Facilities, infrastructure, equipment, and organization used by cruise participants are important marketing instrument.3 Port management system refers to: • Management of the private sector, and work of the concessionaire, • Managing the behaviour of the concessionaire, • Managing the behaviour of users of the port area, • Managing the maintenance and development of port infrastructure and superstructure • Managing vessels and passengers acceptance procedure in the port, • Managing safety standards, • Managing strategic development and marketing plans for the port.

2.2. The mission and the objectives of the port authorities Mission or the purpose identifies basic functions and tasks of the organization. This is the most general category of business system that derivate the hierarchy of goals with a vision and strategy as the highest budgeted category. To form such a regulated system of objectives successfully, it is necessary to perceive the basic parameters which affect the business process. Port system management process correspond the business process of the port authority, which legally defined role is port management. The basic characteristic of the port authority’s business system arises from the fact that it is a nonprofit institution, and from the characteristics of the business environment. In terms of functionality, the port management is oriented to the management of public property and achieving social benefits, and in terms of content of business activities it’s preoccupied with positioning the port to market which it belongs. Basic characteristics and uniqueness of business operations of non-profit institutions: • Business in non-profit institutions always has a social mission, • Objectives of non-profit institutions are in service of socially useful values and not primarily oriented to economic but the public benefit, • Doing business in non-profit institutions is characterized by the absence of its own interest which arises from the ownership, • Non-profit institutions have positional authority and non-reciprocal revenues, and operate in a less competitive environment than profit institutions. Planning involves selection of missions and objectives, and actions to achieve them. Question of the mission, policy and strategy of the organization is related to shaping its behaviour in accordance with economic principles on the way to achieving socially beneficial objectives. For non-profit institutions economic indicators, although essential to the functioning of the business processes, are not the basic criteria for business success. Value oriented behaviour becomes, however , the requirement in the context of modern business trends brought about globalization and increased market dynamics, and thus the increasing requirements in terms of competitiveness. Static, inflexible business structures are replaced by continuous and dynamic perception and adaptation of business processes that must comply with the requirements of the risk management. Therefore, the orientation of a business process, designed primarily to be used as a public good, must be moderated by the demands for efficiency, respectively achieving objectives with the least amount of resources, rather than mere effectiveness or achieving objectives regardless of the relationship between inputs and outputs. The planning process must be based on the following assumptions: • Rational management of maritime domain form the standpoint of the public interest inevitably involves the economic aspect. • Increased competitiveness of the environment in which ports are working, market openness, liberalization of services and openness to users, as a phenomena that occur within the globalization process, create the need for the efficient organization of business processes, as well as designed services according to the user’s requirements, and also customer. 3

Ibid, p. 59th

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• There is a desire for greater transparency of operations and reducing the cost of a business process and rational management of resources.

• Increased market dynamics stipulate need for constant adjustment to market requirements, and designing products and services according to the market requirements, and thus for market research activities.

From all of the above specified the mission of the port authority is shaped and defined. The mission (purpose) of the institution is optimal port management using economic principles to achieve social beneficial objectives shaped by principles of sustainable development, and taking into account requirements of all stakeholders. In the regulated system all elements are in a synergistic interaction and business plan and program with associated objectives as a measurable and controlled values, are the elements of the system. The task of management is to determine the objectives which arise from well-defined purpose of the organization, and create system suitable for directing all elements toward specific objective. In order to make business plans objective, sustainable and eligible to all stakeholders, perception, defining and description of the elements of the system are an essential part of planning activities. Elements of port authority business system are: • Vision, mission and objectives, • Organization, • processes, • employees, • information system, • business environment, business partners, social environment, • Owner (State).

3. QUALITY MANAGEMENT AS SUCCESS FACTOR OF PORT AUTHORITY Quality management presents coordinate activities of the management to direct and control an organization, with respect to the quality of business plan. Quality management system is a set of interrelated and interdependent elements oriented towards quality objectives or measurable values to which organization strive in the need for continuous improvement and the on-going work to increase capacity to meet the requirements. The primary objective of quality management is to ensure the functioning of the organization according following principles: • Customer focus • Leadership • Involvement of people • Process approach • System approach to management • Continual improvement • Factual approach to decision making • Mutually beneficial supplier relationships.

3.1. Application of ISO 9001 standards on the port authority’s business process In order to achieve recognition in the business environment and fulfil requirements for product, organizations are adopting the quality system management according ISO 9001:2008. This international standard promotes the adoption of a process approach, in way that organization by continuous developing, implementing and improving the effectiveness of a quality management system enhance customer satisfaction by meeting his requirements, what finally results with total quality management (TQM). Upgrading ISO 9001standard with involving standards which support environmental protection and safety at work results with sustainable TQM. One of the basic links between these standards is process approach and identification and management of the relationships between processes. The concept of quality management has evolved in parallel with market conditions, by the change of relationship between supply and demand and by the evolving the role of the customer. Development course of business philosophy has gone through phases in which the addiction developed specific concepts, such as quality management, marketing concepts, controlling concept. Although focused on different objects, all of these concepts are based on the same parameters. Basic developmental stages that are favoured their evolution, alternated depending on the orientation of the

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business entity to: • Satisfying demand • Satisfying customer • Satisfying five interested parties (owner, employees, partners, society, users) • Satisfying five interested parties and producing added value (business excellence). 1. Quality control Maximizing operational performance in terms of unsaturated market is accomplished by increasing production and reducing costs. Under these conditions, quality was not important but reducing cost of inputs. Quality control and quality management are related to the technological process, in the function of reducing costs. Controlling function was reduced to an analysis of current situation, as well as finding opportunities to rationalize. The need for quality control arose with balancing supply and demand, and with appearance of substitutive products. Quality control aims to consistently ensure providing product that meets customer and applicable statutory and regulatory requirements. 2. Quality assurance Product surplus and the emergence of competition conditions highlight customer as the product creator. Customer becomes more demanding, interested in business processes and suppliers, and quality certificate ensures confidence. Quality management system is aimed at defining the processes that ensure traceability. Controlling focuses on directing business with preparation of organizational base which is based on internal figures and perception of the environment. 3. Quality management Under conditions of intense competition, a large number of substitutes and constant changes and needs for adaptation, the main interest is totality of operations. (Image, service, customer and supplier interaction) in order to satisfy the interest of all stakeholders. Total quality management concept has developed within globalization conditions which produced the need for the universal identification of confidence criteria. Only documented and certified quality management system can assure trust between supplier and buyer. However, the potential for business optimization can be found beyond process chain buyer-supplier, and it is related to other interested parties (employees, society). Extending the quality concept through the introduction of the safety aspect and environmental protection aspect, results with TQM philosophy focused on sustainable development. As a part of a new business philosophy, quality won several dimensions:

• Product quality (size, image – customer’s trust) • Service quality (product characteristics • Process quality (company performances) Standards enable quality system evaluation by the third party as well as certification. Certification has become a competitive factor in the market. Port authorities are doing business in the environment which is characterised by higher level of competitiveness, and the importance of introducing quality management system into their business can be viewed form different positions:

• Ensuring the efficiency of business processes, that enables long-term sustainability, continuous improvement and market positioning

• Certification as a competitiveness factor • Establishing, implementing and controlling the standard of services on the port area.

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3.2. Business processes of port authorities and TQM Objectives and contributions of implemented quality system in the port managing process, and the development of TQM, are compatible with efforts to create basis for the development of an integrated information system. The objectives of the development of quality management system and process approach to the organization are as follows: • Identify and describe processes • Precise definition of the objectives of the organization • Standardize the handling of documents • Establish mechanisms for controlling and monitoring the implemented standards and feedback in terms of the level of quality achieved • Align the objectives with business objectives • All processes, functions and levels of action must be object oriented • Establish functional mechanism of parsing tasks, planned values and responsibilities for functions, processes and hierarchical levels • Uniquely define responsibilities , tasks and interactions at the workplace • Establish the basis for measuring the effectiveness of revenue centres, organizational units and employees. • Establish the basis for a functional information system and reporting database suitable for strategic, tactical and operational consideration, planning and decision making. Business processes of the organization can be divided into: • Core processes through which the purpose of the organization is realized, • Control processes which must have functional and unique lines of responsibility and information as the basis for the success and efficiency, • Support processes which role must not be confused with the core processes because it leads to the wrong direction of business in terms of clearance purpose. Within the business process of the port authority the port system is managed on the several levels. The highest managing level makes managing rules and regulations, and approves them. Middle managing level makes rules and regulations. Lower managing level enforce rules and regulations and gather feedback and formation of quantitative and qualitative indicators that serve as guidelines in designing system and objectives. Below is a proposal for the structure of business processes of the port authorities. Core processes:

• • • • • • •

Coordination of acceptance of vessels and passengers in port Concessions management Maintenance and investments Design and implementation of tariff policy Design and implementation of development policy Management and control of behaviour of port users Safety standards management

Core processes are the processes through which the purpose of business of the port authority is achieved. Through them it can be directly monitored the relationship between input and output variables. Success indicators of the core processes are also success indicators of an organization. Universal criteria for evaluating the quality of the core processes in the port authority:

• Customer satisfaction with output (output of other business whose activities are subject to organization and coordination),

• Compliance with the legal background, • Minimum of emergencies that cannot cover the documented procedures or regulations. Control processes:

• Managing the overall business process • Managing human resources • Quality management and controlling Control processes are related to processes within the organization management system, which are consisting of planning, organizing, leading, informing and human resources management.

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Support processes: • accounting • supply • legal support • Marketing Support processes do not directly realize the purpose of institution’s business, but are necessary for the performance of the core processes. It is very important to confine support processes with core processes because their replacement leads to the wrong direction of business in terms of clearance purpose

4. IMPLEMENTATION OF AN INFORMATION SYSTEM AS A SUCCESS FACTOR FOR PORT AUTHORITY Inefficiencies and deficiencies that occur within port system are related to the mechanisms and management tools, and consequently to the core process. Management tools needs to be developed on the basis of suitable organizational background, in order to design a documentation and organizational unit as a support to the implementation of a centralized management system. Regarding the massiveness and dynamics of the operational level elements that are subjects to regulation and control, an important role has the option of using the data in real-time business event from which it arises. Therefore, implementation of the informational technology, and unique and integrated information system, with appropriate organizational background, is a necessary base for improvement or implementation of certain functions. In order to consider in practice principles of continuous improvement, it is necessary to have a well-organized system of business management. Flexibility and efficiency of management system is within ability to adapt to the changed requirements and the conditions of an early realization of the need for adaptation. Appropriate information background is necessary for an active approach to establishing and boosting relationship between management functions of planning and controlling at all levels, as well as establishing functional quality system. Implementation of an integrated informational system design a numerous quality mechanisms of operational and strategically management, and it becomes a necessary precondition for successful coordination of all elements of the system which is at the same time, the fundamental purpose of the quality management system.

4.1. The characteristics of an integrated port information system The process is a set of activities which are using resources with established rules, in order to transform inputs to outputs. Quality management process involves clearly defined inputs and outputs, as well as the checkpoints through the course of the process, and the point of interaction between processes. A large amount of operational data and the requirements for dynamics at the operational level, emphasize the importance of the information basis that allows the use of information in real time. Appropriately designed reports using the reporting criteria related to the objectives of the process, are the instruments for process management. The structure of an integrated information system must be designed in a manner that supports the management functions at all levels as well as the realization of the core and supporting processes. (Table 1) Table 1. Functional and managing levels of integrated information system Setting rules • Defining the basic elements of the system • ordinances • the legality of concessions, procurement, tariff system, bookkeeping system… • connections and relations between documents Procedures and documentation • Process steps and course of action • Type of document • Contents of the document • The relations between documents • Uniqueness of the document Core processes • User interface • The interaction among users in accordance with the sequence of actions and responsibility/authority matrix

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The reporting database, reports organized according to different criteria and designed for specific management/ operational levels.

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4.2. Information system as a support for the management system One of the management instruments is precise definition of rules and laws, and ensuring their implementation within the system implementation. The most general and highest level of IS refers to setting a set of basic rules of functioning. Instruments of this level of management, which are prerequisites for the transfer rules at the operational level of the system, as part of an information system are: A. System administration: • Grant permission to access and work, B. Defining basic parameters of each subsystem: • Organization of links between documents • Organization of communication channels / information flow C. Defining processes: • Defining of the course of activities, • Check points per process steps and their contents.

4.3. Is as a support to the implementation processes In accordance with the fundamental processes of the port authority, integrated port information system consists of a series of modules that support specific business processes and are related to the following topics:

• • • • • • • • • •

Acceptance of vessels, passengers and vehicles in the port, Concessions Procurement , Bookkeeping , Tariff policy, Records of the employee presence, Finances, Planning and plan implementation, Salaries and personnel, Licenses for movement through the area of international border crossings.

Implementation of integrated information systems forms high quality mechanisms for operational and strategic management, and it becomes a necessary prerequisite for the successful coordination of all elements of the system. As a support of the core processes operational management mechanisms are related to process of accepting vessels, concessions system, monitoring of investment projects and maintenance projects. Numerous mechanisms of strategic management are designed on the reporting basis which is suitable for prompt and transparent insight in all aspects of the business as well as predicting trends, both at the level of individual ports and at the level of the national port system.

4.4. Possibilities of improvement of the national port system by introducing an integrated IS Operation of the port authority as a carrier of port management system is the primary subject of improvement and modernization in the context of maritime transport. Acceptance of the vessels in the harbour is a set of activities, procedures, and documents that are occurring / arising in arrival, stay and departure of the vessel from port. The basic elements of this set of activities are defined at the level of the law laid down by the relevant Ministry and approved by the Government. Many elements are different, however, from one port to another, depending on their purpose, meaning, and general characteristics, as well as the category of the vessel over which performs reception procedures. These elements are defined at the level of special regulations and management of documents issued for each port separately. Usage and striving for standardization are expressed through a commitment to state-level statutes prescribe generally applicable rules and regulations, which are then, worked out according to the specificities of each management unit, in this case the port. The process of accepting vessels includes many subjects, representatives of the public sector and service carriers. In terms of documentation the coordination and functional arrangement between individual departments and concessionaires is very poor. Indeed, although there are very good technical prerequisites for the creation of a single database, each entity has its own way of recording events and publishing documents, and data sources are also uneven and poorly defined. Therefore, it is necessary to integrate those involved in the functioning of the port system in single system documentation.

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The purpose of establishing such an integrated system is the following:

• • • • • •

the ability to look at all aspects of port management through a unified reports and a single database, complete control of all the elements and activities within the vessel acceptance procedure at each port of call, the unique billing system of port charges and fees, contribution to the establishment of safety, contribution to the establishment of quality standards in port services, ensuring accurate traffic data from a single source and to unambiguously defined categories.

Using a unique database that integrates all the functional elements of the port system provides the ability to create and implement control points related to individual process steps. This creates an information technology basis for the realization of a comprehensive port management role as coordinator of activities, standards and quality of services, and business policy holders in the port system.

5. CONCLUSION The need to increase the efficiency of the national system of public transport shipping line arises from the characteristics of the environment, i.e., the wider economic wholes into which has been incorporated. The trend of globalization and internationalization is becoming more relevant environmental moderator, driven primarily by Croatian involvement in the European integration process. Successfully coping with market principles and rapidly changing dynamics of business conditions is becoming a necessity for all entities operating system, and the criteria that must be reckoned with management process. Implementation of modern leadership and value-oriented concept involves establishing principles of feedback control and continuous improvement through a high level of system integration, taking into account the requirements of all stakeholders, as well as internal and external factors as a function of on-going market positioning and maintain the level of competitiveness. Information technology and appropriately designed information system, combined with standardized elements of the system, are an essential foundation and the base of functionality of these principles.

LITERATURE As referred in the foot notes to the text. DETAILS ABOUT AUTHOR: DEŠA RATHMAN, M.SC. ADVISER FOR COMMERCIAL AND OPERATIVE AFFAIRS AND DEVELOPMENT PORT AUTHORITY OF DUBROVNIK, DUBROVNIK dpa.desa@portdubrovnik.hr ANA MATULIĆ, B.SC. HEAD OF THE PRINCIPAL OFFICE PORT AUTHORITY OF SPLIT, SPLIT ana.matulic@portsplit.com

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THE ROLE OF THE PORT AUTHORITY WITHIN CRUISE DESTINATION MANAGEMENT DEĹ A RATHMAN KATARINA VAREZ

ABSTRACT Cruise destination is defined through physical, administrative and logistic elements. All these elements produce an integral destination product offered on the cruise market, which is made up of tourist offer and the service elements. From the aspect of a visitor, the tourist offer is of the primary interest. Service elements and the functioning of the destination, although not primarily considered by a visitor, make up a very important part of the integral product. From the aspect of a cruise company the service elements represent very important criteria for assessing destination. A port is the main infrastructure resource of the destination and an unavoidable condition for developing cruise industry. Port authority is the institution that manages port area. In order to define the role of the port authority within the destination management, the question is put which are the objectives and the limits of port authority influence. The functioning of the destination involves activities of diverse subjects belonging to either private or public sector. They all have a different interest that needs to be joined in delivering a unique integral destination product. To achieve that, the common level of decision making is unavoidable media. Regardless of the shape of its appearance, destination management is an entity that coordinates and joins all the subjects involved in destination functioning. The modern role of port authority is shaped in the direction of strategy and policy makers instead of just conserving and ruling port area. Conceptual aspect of its functioning tends to emphasize the price policy, concession policy and investment planning as a part of wider local and regional picture. All these arguments point out the important role of the port authority within the destination management that needs to be properly recognized and positioned in order to assure the management performance. KEYWORDS: cruise destination management, port authority, tourist offer, infrastructure background, policy maker, management performance

1. INTRODUCTION Today cruises represent increasingly popular form of tourism and maritime transport services. They represent one of the most dynamic segments of the global tourism market in the last thirty years and certainly the most modern type of tourist product of all coastal countries. Although this form of tourism occupies a symbolic stake in the classic tourism, its extremely dynamic growth contributes to the growing influence and importance. Cruising represents a new form of tourism with the highest rate of growth. Its attractiveness arises from resources and differentiation of tourist facilities on board and the desire of tourists for traveling and learning about new destinations, cultures and customs. They emphasize active holiday for tourists interwoven with many experiences and changes. Dynamism and diversity of supply and tourist satisfaction are condition of their return and attracting a growing number of passengers. North America cruises hold dominant position thanks to the strong presence in the U.S. market. The European market has a huge potential for development as a destination and point of departure. Europe as a region allows tourists to visit a number of destinations during a single trip in relatively short time. Last year Croatia recorded a significant increase of cruise ships arrivals. The largest portion of the total traffic of tourists on cruises in Croatia is carried out in the port of Dubrovnik. Analysis of the World Tourism Organization (WTO) indicates an increase in demand for cruises in the world, and the Mediterranean, which is after the Caribbean, the second most frequent destination of navigation. Therefore in Dubrovnik, which is an attractive cruise destination, further increase in demand can be expected. Over the last decade cruise tourism development trends give special significance to cruising as one of the segments of tourism industry which is characterised by impetuous growth and development. In the context of modern way of life and owing to the intensive development of technology and technical predispositions, the interest in spending leisure time in this way becomes more and more important to wide society groups. Massification, building of mega-cruisers of 3.000 GT and larger, relatively short stay in the ports and at the same time request for a sophisticated and comprehensive tourist product are some characteristics of cruising today.

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2. DEVELOPMENT PERSPECTIVES OF DUBROVNIK AS A CRUISE DESTINATION Due to its valuable cultural and historical resources as well as favourable geographical position, Dubrovnik represents important potential for developing into a renowned cruise destination. Sea ports represent a highly important part of contents offered to the passengers and an indispensable infrastructure for cruise-ships. The eastern coast of the Adriatic Sea is atypical of the Mediterranean. With its islands, which follow the coast from its proximity, its climate and location, which marks the meeting of two civilizations, the archipelago keeps tracks of history that has resided on this area for centuries. Croatian coast and islands are a unique tourist symbol recognized throughout the world of tourism. Already spoken of and written about as Croat d â&#x20AC;&#x2DC;Azur (A.Mourby, Sunday Mirror, 2008), Croatian Riviera is a place of beauty, pleasure and adventure. Within the itineraries of the worldâ&#x20AC;&#x2122;s cruise companies, Croatian Adriatic area becomes interesting primarily because of the Adriatic geographical position, relatively short distance between the ports of call and / or home port and cultural and historical sites and natural attractions. Dubrovnik is leading cruise destination on Croatian Adriatic coast, at the very top among Mediterranean destinations, which generates around 80% of total turnover on Croatian Adriatic area. In 2008 Dubrovnik occupied 10th position on the world list according to transit cruise passengers numbers (844.000) and is the 3rd port in the Mediterranean after Livorno and Naples. Dubrovnik port is today recognized and highly valued in European ports, and thus the world market of maritime cruises and attracts great interest in shipping companies. With the overall increase in traffic and passenger ships in the Mediterranean and with interesting Dubrovnik as a destination, ideally located on the way to Venice, realized the realistic assumption of continued traffic growth and, therefore, revenue. Since the structure of the ships that sail the Mediterranean and visited Dubrovnik extensively changes and the average size of ships increases considerably, Dubrovnik port, as well as a tourist destination in its entirety, should be adapted to the new trends and requirements. Croatia, especially Dubrovnik, in recent years become an unavoidable destination cruise ships at sea. Maritime cruises are newer types of tourism which is becoming increasingly popular and occupies an equal position with other forms such as congress or health tourism. The most important features of cruising trends are an increasing number of passengers and the wider availability status strata, which led to the exceptional popularization; then increasing demands on the side of demand that is required to be better quality when selecting a port which is becoming more and seasonality, which is not so much emphasized in this form of selective tourism. Tourist attractions and brand Dubrovnik, Dubrovnik as well as attractive surroundings are undoubtedly a key for developing cruise tourism and advantage for its future development, which is already confirmed the involvement of former Dubrovnik International cruise. Besides the attractive resource base, there is a well developed tourist infrastructure and superstructure, as a result of years of development of tourism in the region and city. On the other hand, Dubrovnik port already has a somewhat equipped for reception of cruise ships at sea, and what definitely an advantage further development of cruise tourism in the existing investment in port infrastructure, but also the fact that the restoration of the port infrastructure, as one of the priorities development in the city. Dubrovnik wants to develop cruise tourism, as well as dozens of other destinations that have a basis for its development. From tourist point of view in recent years Dubrovnik is a highly desirable destination, and it is realistic to assume that it will be so in the future. Cities with architectural, cultural and natural heritage, unique history are the most attractive on international tourism market. Given its tourism identity in the world, great maritime position and developing the overall tourist offer, Dubrovnik will be increasingly in a long-term demand as a cruise destination. It is necessary to respond to such trends appropriately, because without quality receptive facilities it will not be possible to meet growing demand. Dubrovnik currently does not sufficiently meet all existing requirements, however by carrying out of the project of construction of passenger terminal and other receptive facilities needed for quality reception of all passengers, visitors and tourists, Dubrovnik will meet main prerequisites for faster development of port activities and all related activities. The biggest deficiency in the future development of cruise tourism in Dubrovnik, from which even now derives the greatest number of problems with cruise tourism is low level of organization of all those who are actively involved in cruise tourism. Poor organization of participants in the development of cruising and inadequate transport infrastructure are the cause of one of the biggest problems associated with cruise tourism, which is traffic congestion in the city, including pedestrian traffic. However, it should be noted that the traffic problems in Dubrovnik do not arise solely as a result of the large number of visitors from cruise ships, they are the consequence of a number of other one-day visitors which are

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present in Dubrovnik, as well as stationary tourists in the city and its immediate vicinity. Gradual elimination of negative impacts and limiting factors for the development of tourism in Dubrovnik cruise control and demand growth will contribute to the sustainable development of this form of tourism and extending the tourist season. Cooperation and better organization of all those involved in cruise tourism to align their interests, resolve potential problems that can occur especially in ports / cities in which a large number of mega-ship calls and eliminate negativity and limiting factors are present. Are still underutilized great opportunities acceptance of ships and passengers in periods outside the main tourist season? Many of the ports / cities can accommodate more visitors from ships because of the lower number of overnight tourists, which is in favour of promoting the concept of year-round cruising the Mediterranean and lengthening the tourist season in the Mediterranean destinations. Taking into consideration the development trends, natural resources, port infrastructure development project, the level of cruise tourism development so far, as well as the strategic orientation to develop into a cruise destination in the future, this segment of tourism presents one of the most respectable economical branches in Croatia. By completion of Dubrovnik port infrastructure development project, the port is now able to respond to needs of cruise tourism today and is able to accommodate several cruise ships simultaneously. However, the port must dispose of new modern terminal, without which a cruise destination cannot be imagined. The project of Dubrovnik passenger port modernization envisages the construction of passenger and bus terminal. Thus Dubrovnik should expect more traffic and more demand as a cruise port. According to the number of cruise passengers, there is no doubt that cruise tourism is a respectable form of tourism in Dubrovnik. It can undoubtedly be expected that Dubrovnik will become a port with increased number of ships and passengers, thereby gaining the possibility of becoming a homeport. Since the cruise industry is an area which implies interaction of a wide range of institutions at local and national levels and business entities, it is necessary to achieve the coordination of all parties involved in the formation of the tourist product, especially the cooperation between the private and public sectors. The idea is to establish an association, whose members would be port and city authorities, travel agencies and other holders of economic activities, the purpose of which would be to create the appropriate level of activity which would enable the integrated cruise destination management.

3. SPECIAL CHARACTERISTICS OF THE CRUISE PORTS Port systems are subsystems of national economy. They shouldn’t be perceived separately, considering only the characteristics of the port and its business. It is necessary to view them interdisciplinary, including the standpoints of all users and participants in the traffic and port operations. As the economy subsystems, ports combine a number of economic factors in a specific unit.1The specific characteristics of the cruise ports primarily come from the interaction of the port system and tourism as economic segment. At the local level, this refers to functioning of a port as a part of a tourist destination. Destinations are places with real or imaginary borders, such as physical boundaries, political boundaries or artificially created market demarcation.2The strategy of sustainable development of tourist destinations must establish a balance between efforts to achieve good economic results and to preserve the attractiveness of destinations that shouldn’t be compromised by taking advantage of the mass.3It is the concept of sustainable development of cruising that is unavoidable to consider when assessing the needs for receptive capacity, as well as the type of passenger facilities and services in the port. According to the latest marketing concept of social marketing, organization must define the desires, needs and goals of consumers and the entire community in which it operates, and to realize their benefit in a way that is more efficient than the competitors do.4 The economic effects of cruising are important in local and regional context. This type of tourism is a driving force for development of many service industries, and a source of revenue for private and public sectors. A large portion of these revenues come within the port system, and then, through the port management are placed directly in the functioning of ships and passengers acceptance and the development of port reception facilities process. Ports are also directly involved in the development of the cruise destinations, managing of transport infrastructure as an essential condition for the development of cruising industry. They are becoming the centres of economic development of cities and regions. Port infrastructure is designed in line with trends in cruising, adjusting their facilities to the acceptance of the biggest vessels with the capacity of over 100,000 GT, and 3 thousands of passengers. Investments in port facilities must be in line Mitrović, F., Kesić, B., Jugović, A., Menadžment u brodarstvu i lukama, Split, Euroakma, 2003., str. (5.7.) Kotler, P., Bowen, T.J., Makens C., Marketing for Hospitality and Tourism, 4. izd., 2006., New Jersy, str. 726. 3 Ibidem, str. 730. 4 Kotler, P., Bowen, T.J., Makens C., Marketing for Hospitality and Tourism (2006.), 4. izd., New Jersy, 27. 1 2

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with the local development and urban infrastructure, otherwise it may become an unattractive destination not only for cruise passengers, but for all other groups of tourists. In accordance with the concept of sustainable development, the port development plan, must be incorporated into the higher level development plans (local and national), particularly tourism development plans. Business environment of the cruise ports is largely conditioned by their market orientation. It consists of a number of subjects that participate in cruise industry, such as shipping companies, tour operators, maritime and travel agents, potential investors, other ports, the entities operating within the destination, etc.

3.1. Characteristics of the management of cruise ports Management is the process of designing and maintaining an environment in which individuals, working together in groups, carry out the goals efficiently. Process of managing can be broken down into five managerial functions: planning, organizing, staffing, leading and controlling. Port Authority is an institution whose role is legally defined as managing of a port. The basic characteristics of the business process of the port authority arise from the fact that it is a non-profit institution. The management of the port is oriented to the management of public property and achieving social benefits. The business activities are oriented to positioning the port, and, indirectly, to the destination in the cruise market. Basic characteristics and special operations of non-profit organizations: • the activity of non-profit institution has a social mission, • aims of non-profit institution activity are driven by social values, not primarily oriented to economic, but the public benefit, • business is characterized by the absence interest arising from the ownership. Planning involves defining objectives and actions to achieve them. The mission, policy and strategy of un-profit organization is related to applying economic principles on achieving socially beneficial objectives. The economic indicators, although important, do not represent the main criterion for success in business. Value-oriented behaviour becomes, however, the requirement in the context of modern business trends induced by globalization and increased market dynamics, and thus the increasing demands in terms of competitiveness. Therefore, the orientation of a business process, designed primarily as a function of the public good, must be moderated for achieving goals efficiently with the least amount of resources. A successful planning process is based on the following assumptions: • Rational management of maritime property from the standpoint of the public interest inevitably involves the economic aspect. • Increased competitiveness of the environment characterized by market openness, liberalization of services, opening to users, as phenomena that occur within the process of globalization, creates the need for the effective organization of business processes in the ports, as well as designing services according to user’s and customer’s requirements. • There is a desire for greater transparency of operations and reducing costs of business processes, and rational management of resources. • Increased market dynamics dictated by the need for constant adjustment to market requirements, and designing products and services according to market requirements, and thus for market research activities.

4. MODEL OF CRUISE DESTINATION MANAGEMENT Cruise destination product is carried out by many entities involving representatives of public and private sectors. Sustainable destination development is a comprehensive term that must take into account the tourist destination, the traffic, quality assurance requirements to other groups of visitors, the demands of the local population, as well as all other requirements of the functioning of the local community. In order to increase competitiveness in the market, many destinations included in the tourist market during the season subordinate the everyday life of its inhabitants to the demands of tourism. Business entities, as holders of tourist activities, in accordance with the nature of the profit companies behave in the function of their own economic interests, so this process of destination management is often out of control due to insufficient and poorly defined set of formal – institutional framework. Raising awareness about the need for a systematic approach and attention to common interests is necessary, however, to achieve long-term sustainability. It is needed, therefore, to approach with global view of the situation, expanding awareness of the need to care for common

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interests, but also have mechanisms for designing of individual behaviour in the function of community. Appropriate institutional structure, primarily at the local level, is a necessary prerequisite for a coordinated and systematic approach to the allocation of socio-cultural and economic effects of cruising. To achieve the coordination of all parties involved in the formation of the tourist product, it is necessary to form the association, whose members would be the port and city authorities, travel agencies and other holders of economic activity, and would address all issues of mutual interest related to cruise tourism, such as problem solving of urban traffic, organized and targeted marketing statement and the creation of image quality and cost control, development and enrichment of tourist attractions, the study of consumer attitudes and satisfaction levels of service. Destination management includes: • Determination of development goals, compatible with the existing strategic planning documents, and laws and limitations of sustainable development (destination image, the structure of demand, setting quantitative restrictions, etc.) • Understanding of theoretical principles and phenomena through continuous and systematic monitoring of trends, scientific - research and collect similar experiences and collaboration with other destinations, with the involvement of competent and qualified persons • Defining mechanisms of action and management (tariff policies, promotional activities, the determination and implementation of standards, collaboration with airlines, cruise destinations, ...) • Continuing to define and adjust the operational objectives and modus operandi The aim of DM is to create the appropriate level of management that would enable the integrated management of cruise destination, and create an appropriate business environment for optimal results of operations of all businesses, through organizing, coordinating and controlling their actions. Functions of DM: • Development and management of business processes, and management of price and quality • Coordination of all carriers offer • Effective information sharing • Definition of short and medium term goals that are consistent with the plans of higher order (strategic plans at city, county, state) • System verification and identification performance Activities of DM: • Defining a strategic marketing plan • Coordination of all holders tender in order to achieve homogeneity service package - the harmonization and standardization • Marketing Research and Analysis • Ongoing monitoring and testing the market • Program of creative involvement, informing and educating the local population in order to achieve more efficient participation in the tourist industry • Standardization and certification of quality • Promotion of destinations (participating in exhibitions and trade fairs, publication of promotional materials, web pages) • Organizing a welcome to cruise ships • Proposals for projects to improve port infrastructure and superstructure • Organize a welcome for travellers on a cruise • Information and professional development of members • Coordination of activities of common interest • Marketing Research and Analysis • Consumer satisfaction survey

5. PORT MANAGEMENT AS PART OF INTEGRATED CRUISE DESTINATION MANAGEMENT Tourist product of the destination represents one element of the total all - inclusive package offered in the cruise market. It is essential, therefore, that the product destination by its quality and modality can fit into the entire cruise arrangement. Consideration of the issues of the cruise destination markets supports the recognition of the port management as an important component of destination management given that a significant portion of the total destination product is realized in the port area or in relation to it.

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The role of the port is very important in structuring factors of destination competitiveness. Given that the business of tour operators is always oriented to the satisfaction of the consumer, when choosing destinations the company will primarily take into account the attractiveness of tourist resources. However, in addition to the tourist product, the company takes into account issues related to the functionality of business process, as well as prices of those factors for which the company bears the cost. Ports are a significant factor with regard to the organization of ship and passengers handling, as well as maintenance and construction of port receptive capacities. The development process of the port area defined through the medium and long term business and marketing plans, carried out by the port authority, and implies far-reaching direct and indirect effects of this institution. Therefore, the strategic port development planning must be integrated into the wider city and regional business - economic context. The economic exploitation of the port area is carried out on the bases of concession system in the port area. Port Authority considers the concessions system in two dimensions, within the short-term (one-year) period it defines the manner of granting concessions, the number, type and conditions for a particular activity in order to be more efficient on the operational level. Through the concession system, port management is in a position to dictate the standards and prices, as well as service available for ships and passengers in port area. In this way the port management has the direct impact on the products of the cruise destinations. In order to achieve coordination of all parties involved in the formation of the tourism product, it is necessary to organize the decision-making level that enables a global view of the situation, spreading awareness of the need for taking care for the common interests, but also providing a mechanism to compromise shaping individual behaviour of the private subjects.

6. CONCLUSION IThis paper looks into the influence of the role of the port authority within cruise destination management. It especially researches the positive and negative effects of cruises on a tourist destination and evaluates possible integrated cruise destination management. By emphasizing the expansion of cruises, while at the same time being aware of their influence on a tourist destination, the paper emphasizes the importance of adapting to strategy and policy-making and to elements of sustainable development, through the role of port authority within the destination management that needs to be properly recognized and positioned in order to assure management performance. Ports are very complex social and economic systems, whose operations involve a large number of actors and activities. Although very specific in many ways, these systems cannot operate in isolation. They are part of local and regional entities. Successful business of the ports is conditioned by the successful integration of their numerous social and economic functions. Ports are often of a crucial economic importance for an area and determine the direction of development. Their actions have multiple effects. In order for these effects to be positive and consistent with the optimal goals of sustainable development, it is necessary to operate the port system at all levels. This is especially emphasized due to contemporary globalization trends that shape more and more demanding operating conditions.

LITERATURE: As referred in the foot notes to the text.

DETAILS ABOUT AUTHORS: DEĹ A RATHMAN, M.SC. ADVISER FOR COMMERCIAL AND OPERATIVE AFFAIRS AND DEVELOPMENT PORTH AUTHORITY OF DUBROVNIK DUBROVNIK dpa.desa@portdubrovnik.hr KATARINA VAREZ, M.SC. ADVISER FOR MARKET RESEARCH AND SALE PORTH AUTHORITY OF DUBROVNIK, DUBROVNIK dpa.katarina@portdubrovnik.hr

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THE LOW LEVEL OF COMPETETIVENESS AS A RESULT OF INADEQUATE IMPLEMENTATION OF BUSINESS LOGISTICS BOZIDAR ROCA NIKOLA MILICEVIC

ABSTRACT The growth of market efficiency contributes to increasing the competitiveness of both individual countries and regions, and individual market participants. The main goal is to create such an economic environment that will enable continuous and stable economic growth, social development and growth of living standards. However, the growth of economic efficiency, as one of the most expected transition effects is absent in most countries of “CEFTA” group. In these circumstances, financial economic crisis has brought new problems, further aggravating already unbearable market positions of various business entities. One of the reasons is an inefficient and inadequate implementation of business logistics. As an instrument of economic development, business logistics offers specific solutions, which in a relatively short period of time can provide greater economic efficiency. In all “CEFTA” countries much more attention should be dedicated to establishing modern logistics systems that can increase efficiency and certainty of product and information flows in many supply chains. KEYWORDS: business logistics, competitiveness level, logistics systems, product flow

1. INTRODUCTION Increasing efficiency in order to rise the level of competitiveness in regional and global environment has become one of the main objectives to individual business subjects, and entire national economies. The region’s level of competitiveness, since the beginning of the transition process, has been very low, as evidenced by numerous economic indicators. One way to overcome the current situation and increase the economy’s competitiveness, is the improvement of the logistics sector. There is a need for more comprehensive approach to fundamental importance and requires that in every socio-economic system contemporary logistics, as theory and science, inflicts. Establishing different business-sector logistics systems should enable the rational production of logistics products and services, by increasing the level of economic efficiency in the region.

2. THE LEVEL OF COMPETITIVENESS AND ECONOMIC EFFICIENCY IN THE REGION The competition can be represented as game in which each participant tends to achieve the best possible market position. It is also one of the main market regulators, which contributes to increasing business innovation and overall economic growth. Competitiveness, on the other hand, is defined as the ability to achieve success in the markets, that increases productivity in the economy and improves living standards. It can be analyzed by the micro and macro aspects (Galic and Fabris, 2006, p.1) • Micro competitiveness is the competitiveness of one business subject, or its relative advantage over other market participants (relative efficiency of companies that sell their products and services on markets where international competition is present); competitive advantage can be achieved, by delivering equal value to customers at lower costs comparing to its competition (the lower cost advantage), or by differentiation, giving greater value to customers with average production costs; therefore, lower production costs and higher factor productivity growth are typical micro factors of comparative advantage. • Macro competitiveness (national competitiveness) represents the competitiveness of the national economy as a whole; the compatitive advantage of the overall economy refers to the ability of achieving higher factor income in terms when local companies are exposed to direct impact of international competition; in this case, main elements of competitiveness are based on achieving a balance or surplus in trade account with the simultaneous realization of factor incomes to compete with the incomes of countries with which foreign trade is conducted. The competitiveness increase is the process of improving the business environment that should enable a steady and sustainable economic growth, social development and growth of living standards. It is influenced by several factors including the expertise of the workforce, infrastructure, institutions, macroeconomic stability, business sophistication, market size, health and primary education, goods market efficiency, labor market efficiency, financial market development, innovation and technological development. All of them are classified into three categories, key factors, efficiency-driven

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factors and innovation-driven factors. Based on the analysis and evaluation of those factors, “The World Economic Forum,” for each country since 2005, has been establishing a Global Competitiveness Index (GCI). All states, depending on the value of gross domestic product per capita, are divided into five different groups (three primary and two intermediate groups). The Republic of Serbia, as well as most countries in the neighborhood, including Albania, Macedonia, Montenegro, Bosnia and Herzegovina, is located in the second group, with GDP per capita from 3.000 - $ 9.000. Only Croatia, among the participants of “CEFTA” agreement, is in the following “transitional” group of countries with the value of GDP per capita from 9.000 to 17.000 $ (Schwab, 2011, p.11). Serbia has a higher index of global competitiveness (3.88) from Bosnia and Herzegovina (3.83) and is located on the 95th place out of 139 ranked countries. This represents a deterioration compared to previous years, when it was on 93th, and 85th position. The Republic of Croatia, compared to previous report advanced for one position, while Montenegro has experienced a decline from the 49th ato 60th place, with a value of GCI index of 4.27. However, all these countries significantly lag behind the leaders, including Switzerland (5.74), Singapore (5.63) and Sweden (5.61). Table 1. GCI index for 2011. Countries

Rank

Score

Montenegro

4.27

Croatia

4.08

Albania

4.06

Macedonia, FYR

4.05

Serbia

3.88

Bosnia and Herzegovina

100

3.83

Source: Schwab, K. (2011). The Global Competitiveness Report 2011–2012. Geneva: World Economic Forum.

From twelve factors, which are evaluated by „The World Economic Forum“, The Republic of Serbia is ranked worst in terms of business sophistication and market efficiency. Besides goods market efficiency, labor market efficiency is also poorly evaluated in Croatia. While Macedonia and Montenegro have problems with the market size, Bosnia and Herzegovina and Albania are the lowest ranked, in terms of development of financial markets and the implementation of innovative solutions. On the other hand, in most of these countries, the highly rated factors include health and primary education and technological readiness. Table 2. GCI Factors Factors

Montenero

Croatia

Albania Macedonia

Serbia

Bosnia and Herzegovina

Institutional environment

121

109

Infrastructure development

Macroeconomic Environment

Helath and primary education

Higher education and traning

Goods market efficiency

114

132

115

Labour market efficiency

116

112

Financial market development

107

124

Technological readiness

Market size

130

101

107

Business sophistication

105

130

108

Innovation processes

123

105

104

Source: Schwab, K. (2011). The Global Competitiveness Report 2011–2012. Geneva: World Economic Forum.

Economic efficiency significantly affects the level of competition of, both, the individual market subjects (micro competitiveness), and the country as a whole (macro competitiveness). Based on several indicators (including the Index of Economic Freedom of “Heritage” Foundation, the indicator of economic freedom of “Fraser“ institute, “GCI” index, the index of business simplicity and country risk rates), the Index of Economic Efficiency (IEE) for individual countries is determined (Cottam, 2011, p.1). In 124 rated countries, Hong Kong (0.957) and Singapore (0.951) occupie two top posi-

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tions. Among European countries, the top-ranked are Switzerland (0.877), Denmark (0.869) and the United Kingdom (0.846). Most countries in the region have lower index of economic efficiency than the average European value, which is 0.66. The Republic of Serbia is located on the 35th place in Europe, with a score of 0.476. From the members of “CEFTA” group, Serbia is only higher ranked than Bosnia and Herzegovina (0.399), while Macedonia (0.554), Croatia (0.533), Albania (0.526) and Montenegro (0.502) are slightly better rated. Table 3. The Index Of Economic Efficiency (IEE) Country

IEE

Rank (Europe)

Rank (World)

Switzerland

0,877

Denmark

0,869

Great Britain

0,846

Macedonia, FYR

0,554

Croatia

0,533

Albania

0,526

Montenegro

0,502

Serbia

0,476

Bosnia and Herzegovina

0,399

Ukraine

0,368

102

Source: Cottam, T. (2011). Economy Politics 2nd annual index of Economic Efficiency of the World. www.economypolitics.com/p/economic-efficiency-index (accessed 20.06.2012.)

One of the reasons of the low economic efficiency in the region is an inadequate implemenattion of logistics components. Lack of knowledge of its principles and modalities results in slow and in worrying proportions inefficient management of trade flows in the European and regional scale. Bearing in mind that logistics is under-used area for cost reductions and raising levels of micro and macro competitiveness, special attention should be paid to the improvement of this sector.

3. THE POSITION OF LOGISTICS SECTOR IN THE REGION There are many definitions of logistics, but it can always be represented as every area of human life and labor in which new values can be created on the principles of increased competitiveness. By it we can consider the process of planning, organizing and controlling the efficient and cost-effective flow and storage of raw materials, semi-finished products and related information from point of delivery to receipt point, in accordance with the requirements of customers. Also, the logistics can be defined as a set of planned, coordinated and controlled intangible activities, which are functionally connecting all the partial processes to overcome the spatial and temporal transformation of materials, intermediate goods, products, knowledge, capital, labour and information in a rational, unified logistics processes and flows from sender (point of delivery) to reciever (reception point), in order to minimize invested resources and meet market demands (Zelenika, Pupovac, 2008, p.16). Economic development of the country, and its competitiveness level is in a large extent influenced by the degree of development of the logistics system and its performance. The logistics system within a country should allow its subjects to use adequate resources, knowledge and activities in a rational production of different logistics products as in the national logistics market, and the logistics markets of economic integration and multinational corporations. However, despite the great importance that is attributed to logistics, it is unjustly neglected in the regional countries. Starting from contemporary principles of modern logistics concept, on both the micro and the macro level, its inappropriate application is demonstrated by: • The lack of knowledge and the abilities of all the subsystems of the entire logistics system, and all of its space-time dimensions, that results in inefficient production of goods and services, regardless from the logistics sector they come. • The ignorance of technological, organizational, financial, economic, legal, environmental and other phenomenas, such as those related to intellectual capital and management, implies the design and functioning of inappropriate, unreasonable and suboptimal logistics systems in global scales. • Insufficient level of competition in the region due to the lack of knowledge of principles and activities in distribution chanels. • Inadequate and insufficient knowledge of basic elements and the importance of transport and logistics chains.

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Inadequate development of logistics sectors in “CEFTA” member countries, is witnessed by numerous indicators of various international organizations. Evaluations of national logistics performances, for several years, have been reported by the World Bank through the project “Trade Logistics in the Global Economy.” Since 2008, in cooperation with International Federation of Freight Forwarders Associations (FIATA), the Global Express Association, the Global Facilitation Partnership for Transportation and Trade (GFPTT), ten major international logistics companies, and a large group of medium-size logistics companies worldwide, it conducted surveyes in 155 countries, specifying for each one “logistics performance index” (LPI) and its component indicators. The LPI is a multidimensional assessment of logistics performance, rated on a scale from one (worst) to five (best). It uses more than 5,000 individual country assessments made by nearly 1,000 international freight forwarders to compare the trade logistics profiles of 155 countries.The survey is conducted every two years to improve the reliability of the indicators and to build a dataset comparable across countries and over time. The World Bank’s Logistics Performance Index (LPI) summarizes the performance of countries in six areas that capture the most important aspects of the current logistics environment (Arvis, Mustra, Ojala, Shepherd, 2010, p.12): • Efficiency of the customs clearance process. • Quality of trade and transport-related infrastructure. • Ease of arranging competitively priced shipments. • Competence and quality of logistics services. • Ability to track and trace consignments. • Frequency with which shipments reach the consignee within the scheduled or expected time. Table 4. Logistics performance index scores (LPI) Factors

Croatia

Macedonia

Serbia

Bosnia and Herzegovina

Albania

Montenegro

LPI value

2,77

2,69

2,66

2,46

2,43

Customs

2,62

2,55

2,19

2,33

2,07

2,17

Infrastructure

2,36

2,55

2,30

2,22

2,14

2,45

International shipments

2,97

2,83

3,41

3,10

2,64

2,54

Logistics services

2,53

2,76

2,55

2,30

2,39

2,32

Tracking abilities

2,82

2,67

2,68

2,39

2,44

Shipments frequency

3,22

3,10

2,80

3,18

3,01

2,65

Source: Arvis, J. Mustra, M. Ojala, L. Shepherd. (2010). Connecting to Compete 2010 Trade Logistics in the Global Economy. Washington. The International Bank for Reconstruction and Development/ The World Bank.

Top rated factors in all of these countries are related to the ease of arranging competitively priced shipments, as well as frequency with which shipments reach the consignee within the scheduled or expected time. On the other hand, most countries have problems with low quality of trade and transport-related infrastructure, which complicates the implementation of various goods and information flows. The following table presents the positions of these countries, depending on the value of “LPI” index. Table 5. LPI index ranks Country

LPI INDEX RANK

SCORE

Macedonia, FYR

2,77

Croatia

2,77

Serbia

2,69

Bosnia and Herzegovina

2,66

Albania

119

2,46

Montenegro

121

2,43

Among these countries, top rated are Macedonia (2.77) and Croatia (2.77), which are ranked on the 73rd, ie, 74th place. Serbia is on the 83rd position that, compared to the research conducted in 2008, represents the progress (2008. Serbia was on the 115th place). Lower LPI index from Serbia, among “CEFTA” countries, have Bosnia and Herzegovina (2.66), Albania (2.46) and Montenegro (2.43). However, despite small differences in the LPI values, these countries are still much behind the leaders, which LPI values exceed number 4. Germany is on the first position, with the value of logistics

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performance index of 4.11. It is followed by Singapore (4.09), Sweden (4.08) and Netherlands (4.07). The lowest ranking countries are Sierra Leone (1.97), Eritrea (1.70) and Somalia (1.34). Their logistics performance index does not exceed the value 2. In addition to the similarities of the LPI values, the share of the transport, storage and communication in the gross domestic product of Serbia, Croatia, Bosnia and Herzegovina and Montenegro are also not significantly different. In all countries, this percentage does not exceed 10%. Figure 1. Summary of transport, storage and communication participation in GDP in the region, 2009.

Source: www.monstat.org, www.fzs.ba, www.hgk.hr, http://webrzs.stat.gov.rs, (accessed 20.07.2012.)

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However, despite these specifics, the ratings of most performances are unsatisfying, indicating a low degree of development of the logistics systems. Logistics, as one of the important factors of development and efficiency increase, is not devoted an adequate attention. There is a need for a strategic approach for improving the logistics sector, which aims to create a favorable environment for raising the competitiveness of the whole economy.

4. LOGISTICS SECTOR IMPROVEMENT Technological development and globalization have contributed to the creation of new business conditions. In such circumstances, special attention is given to sectors that represent a significant source of cost savings. Therefore, the logistics in the last few decades has become more important. Unlike Germany and Hungary, where it was declared as the third and sixth sector, the logistics in the region is completely neglected. Improving the logistics sector remains one of the most important tasks, whose solution would improve the economic status of â&#x20AC;&#x153;CEFTAâ&#x20AC;? group members. It is necessary to implement intermodal transportation systems, develop a regional logistics centers and establish a business-sector logistics systems.

4.1. Implementation of intermodal transportation systems To take full advantage of main corridors in the region, they have to be infrastructurly and transportationaly connected into a single logistic unit. Otherwise, the Eurasian flows of goods will bypass them, using alternative roads and rails. Therefore, there is a need for establishing integrated transportation systems with the use of modern technology. The main link of such integrated system is intermodal transport, which erases the boundaries between different transport branches. Its implementation increases the level of transportation efficiency and quality of transport services, with lower gas emissions. Successful implementation of all intermodal transportation subsystems requires a coordinated transportation policy at all government levels (states, regions, cities), their support and investments. Countries should ensure an appropriate environment for the development and promotion of modern intermodal transportation technologies, including containerisation. In this regard, special emphasis should be placed on the development of rail and river transport in the region. Without railways, it is impossible to realize the functions of intermodal terminals and ports. In recent years, in European Union, numerous projects have been taken in order to increase the flow of goods by rail, through the establishment and modernization of a number of line trains. In this regard, it is necessary to define an action plan for revitalization and

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modernization of regional railways (adjusted to countries the possibilities). Besides rail transport, water transport should also be modernized through the implementation of river information system and establishing line routs, primarily designed for container transport. Due to the realistic expectations that the Mediterranean and Black Sea ports will start to service containerized freight of south and southeast Europe with the Middle East more intensively, the increase of water transportation would result in the development of transport and logistics in the whole region. In order to establish intermodal transportation system, Croatian port “Rijeka” and Serbian port “Legat” have developed the project called “Pannonian door.” Due to the good road and rail links to major traffic destinations, regional distribution terminal was built in Sremska Mitrovica (in Serbia), which also can be used by other countries in the region. At the port, special cranes, designed for container moving and handling, have been brought from Rijeka and installed. The project anticipates that containers will be shipped from Rijeka (“Adriatic Gate”) to Sremaska Mitrovica (“Pannonian door”) by rail, after which they can be transported to the end-users by trucks. In order to realise these activities more efficiently, a number of warehouses and storages are opended in “Legat” port, together with a special customs unit, which should facilitate business exporters and reduce transportation costs.

4.2. The development of product-transportation logistics centers Modern transportation systems represent the basis of the implementation of efficient and effective product flow. However, for their succesfull coordination, regional logistics centers should be built and modernized. They are intermodal terminals, which allow loading transport units from one to another transportation mode. Location, economy development, market size, structure of product flows, the existence and accessibility of transportation infrastructure, the level of logistic servicing and technology determine the type of logistics center. Most often the differences are made between international, regional and local centers. The importance of logistics centers (product transportation centers) in international product flows, has resulted in the establising of the European Association of logistics centers under the name “Europlatforms” in 1991. (Stojic, Vesković, 2011, p.23). Today, this association includes over 60 centers in 10 different countries, where more than 1,200 transportation and logistics companies operates. In logistics centers many micro and macro product flows are linked and rerouted. Their most frequent customers are shippers, carriers, service providers and others. Logistics centers provide many services in order to increase the efficiency of product flows. Among them, Surjan and Micic (2011) stated the following services: • Personnel services, • Information services, mediation, and preparation of documents, • Financial services, • Additional services (services that add value to goods). Establishing a network of logistics centers will significantly affect the development of the region’s economy. Improving transportation infrastructure and increasing the efficiency of the entire distribution system can provide a greater inflow of investments, knowledge transfer and new technologies, and thus the increase of employment.

4.3. Establishing business-sector logistics systems In the transport network of the country or region, it is necessary to develop adequate logistics systems that will provide coordinated operations of logistics centers and continous product flows. Depending on the type of activity, various logistics systems can be established. Among them Zelenika and Pupovac (2008) differ primary, secondary, tertiary, quarterly and quinterly systems. Primary logistics system refers to the extractive sector: agriculture, hunting, forestry, fishing and mining. This actually means that in the focus of the primary logistics are the objects under, above and in the earth. It is associated with product and information flows of the internal business systems and business systems that provide logistic distribution of raw materials, semi-finished and finished products of listed extractive industries. Primary logistics systems consist of specialist logistics: agricultural logistics, the logistics of hunting and fishing, forestry and mining logistics. Secondary logistics represent the sophisticated upgrade of the primary logistics. It refers to the processing industry (food, beverages and tobacco products, textiles, footwear and clothing, leather and leather products, wood processing and paper production, chemical production, plastic and rubber production, production of tools and electrical equipment), electric power, gas and water supply and the construction industry. Products and services of secondary logistics

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are the basis for logistics of the tertiary, quaternary and quinterly system. The need for establishing different logistics within secundary logistics system is reflected in the varying participation of logistics costs in the sale of different industries. Figure 2. Logistics cost in diferent industry sectors

Source: http://dsi-tms.com/shipping-brokers. (accessed 22.07.2012.)

As percentages of sales, logistics costs are the highest in the telecommunication sector, as well as in the household appliance sector, where they have reached levels of 14% of sales. On the other hand, the lowest share of logistics costs in the sale, occurs in the automotive industry, with an average 9%. In other sectors, the level ranges from 10 to 13%. Tertiary logistic includes trade, transportation, manipulatory, warehousing, distribution, shipping and service agencies, logistics, tourism and other tertiary economic sectors. It is the foundation of all logistics activities, because without trade and transport logistics there can be no other kind of logistics. In quarterly logistics system there are numerous specialist logistics, educational, scientific, cultural, health, social, sports, utility, housing and many others. On the other hand, quinterly logistics systems differ administrative logistics, military, judicial, fire, financial and security and logistics, social security logistics and various logistics of sustainable development. The establishment of various business-sector logistics systems, including primary, secondary, tertiary, quaternary and quintarly, is of great importance for both the individual business subjects, and for the economy of the entire country. They provide support for product, services and information flows in different economic areas. Greater attention is given to logistics and its activities, which can lead to increased business efficiency and meeting customers’ needs and demands. In such logistics environment, it is much easier to establish long term relationships and cooperations, which increases, not only the competitiveness of individual enterprises, but also the entire systems.

5. CONCLUSION Indices of global competitiveness of “CEFTA” member states are not satisfactory. According to the World Economic Forum evaluation, they significantly lag behind the developed countries. The low level of global competitiveness is followed by poor economic efficiency. It is confirmed by the results of research conducted in 124 countries, in which they rank among last countries in Europe. One of the reasons for poor positions in both cases, is the neglection of the logistics sector. Values of indices of logistics performance (LPI) confirm that. However, with the modernization of transportation infrastructure, development of logistics centers and the establishment of business-sector logistics systems, it is possible in a short period of time to improve the logistics sector and raise the competitiveness of the whole economy. Development and implementation of modern transportation technology is one of the primary requirements for inclusion of the region’s economy in the European trade. The construction of special logistics centers, equipped with adequate technology, supports intermodal transport and other logistics activities. Integration of such logistics systems established in different economy sectors, will enable continous material and information flows in the region.

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

Arvis, J. Mustra, M. Ojala, L. Shepherd. (2010). Connecting to Compete 2010 Trade Logistics in the Global Economy. Washington: The International Bank for Reconstruction and Development/ The World Bank. Cottam, T. (2011). Economy Politics 2nd annual index of Economic Efficiency of the World. Preuzeto sa sajta http://www.economypolitics.com/p/ economic-efficiency-index. DSi (2010). Shipping Brokers & Freight Logistics Management - Best In Class Performance. Preuzeto sa sajta http://dsi-tms.com/shipping-brokers. Federalni zavod za statistiku Bosne i Hercegovine. (2010). Bruto domaći proizvod u Federaciji Bosne i Hercegovine za 2009. godinu. Preuzeto sa sajta www.fzs.ba. Galić, J. Fabris, N. (2006). Politika deviznog kursa kao instrument konkurentnosti? Preuzeto sa sajta www.ekof.bg.ac.rs/nastava/osnovi_makro_ ekonomije/radovi. Hrvatska gospodarska komora. (2009). Preuzeto sa sajta www.hgk.hr. Republički zavod za statistiku Republike Srbije. (2011). Bruto domaći proizvod Republike Srbije, 2006-2009. Preuzeto sa sajta http://webrzs.stat. gov.rs. Roca, B. (2004). Marketing logistika, Bački Petrovac: Kultura. Schwab, K. (2011). The Global Competitiveness Report 2011–2012. Geneva: World Economic Forum. Statistički ured Republike Slovenije (2009). Preuzeto sa sajta www.stat.si. Statistička kancelarija Mađarske. (2009). Preuzeto sa sajta www.ksh.hu. Stojic, G. Veskovic, S. (2011). Saobracajna infrastruktura u funkciji razvoja logistickog koncepta AP Vojvodine. Vojvodina CESS, Novi Sad Surjan, E. Micic, D. (2011). Znacaj i funkcija logistickih centara. Vojvodina CESS, Novi Sad Zavod za statistiku Crne Gore. (2010). Statistički godišnjak 2010. Preuzeto sa sajta www.monstat.org. Zelenika, R. Pupavac, D. (2008). Menadžment logističkih sistema. Rijeka: Ekonomski fakultet.

DETAILS ABOUT AUTHORS: BOŽIDAR ROCA PROFESSOR FACULTY OF ECONOMICS, UNIVERSITY OF NOVI SAD SUBOTICA, SRBIJA broca@ef.uns.ac.rs NIKOLA MILIČEVIĆ ASSISTANT FACULTY OF ECONOMICS, UNIVERSITY OF NOVI SAD SUBOTICA, SRBIJA milicevic.nikola@ef.uns.ac.rs

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WEALTH, POVERTY AND HAPPINESS IN THE CONTEXT OF THE DIFFICULTCONDITIONS OF THE EARLY 21st CENTURY DARIA ROZBORILOVÁ

ABSTRACT Wealth, poverty and happiness, as well as their interdependencies, respectively the mutual interrelations have attracted the interest of philosophers, economists, psychologists, sociologists, but also scientists from other disciplines, politicians and policy makers. The beginning of 21st is associated with the formation of new economies. The formation of new economies presents very complex, dynamic and costly process which, moreover, takes place in conditions of strong globalization trends as well as in conditions of the global financial and economic crisis. The beginning of 21st century is associated with continued deepening polarization within individual countries, regions, but also in global context. This strengthens the position of a minor elite, weakens the position of the middle class and increasing number of people who are at risk of poverty. Complexity of the conditions requires special attention. The aim of the paper is to contribute to the ongoing debate about the need for a new perception wealth, poverty and happiness, the need to respect their mutual relations and compliance, the need to identify the causes of having to change their perceptions and the consequences of these changes. On the basis of generalization of acquired theoretical and empirical knowledge to identify the possible alternatives for further development, that will correspond with the needs of the formation of new economies in the difficult conditions in the early 21st century. The processing of the issues supposes the application of a multidisciplinary approach. A multidisciplinary approach is based mainly on knowledge of economics, sociology, positive psychology, political science. To check the hypothesis that there is a relationship and conditionality between wealth, poverty and happiness we use a wide spectrum indicators on the example of the EU. KEYWORDS: Wealth, Poverty, Happiness, New economy, Polarization, Minor elite

1. INTRODUCTION The end of the first decade and the beginning of the second decade of the 21st century can be characterized as a period for which is symptomatic a shift from positive expectations to more or less negative expectations in the national, regional and even in global context. The negative impacts of the global financial and economic crisis have affected all countries, all subjects although to varying degrees and in different directions. Scientists need to correct their vision of forming new economies, integration and globalization processes. Scientists must justify the need for orientation on real resources and their effective use. In this scenario, it can be expected not only an increase of the competitiveness of individual economies, but also the growth of prosperity, and of well-being just some individuals or some economies, as well the positive development in the global context. Scientists must intensify their effort in the direction of correction of their perception, because the real resources are limited. Appropriate choice of their use, the elimination of the inefficiencies and the fairer distribution can lead to the restoration of positive expectations.

2. SOME ASPECTS OF THE PERCEPTION OF WEALTH, POVERTY AND HAPPINESS 2.1. The perception of wealth, poverty and happiness and their determinants (methods) The aim of the paper is the identification of the particularities of perception of wealth, poverty and of happiness, of their interdependencies and mutual conditionality, as well as the identification of the main determinants that affecting them. Therefore, it was necessary to apply the general and specific theoretical methods as a method of scientific abstraction, analysis and synthesis, induction and deduction. It was desirable to apply the logical - historical approach in order to obtain correct knowledge. Based on the analysis of works and of the elimination of irrelevant knowledge, as well as, on the basis of synthesis of generalized knowledge, and consequently, their comparisons be to identify the shifts in the perception of wealth, poverty and happiness, also to identify the need for a redefinition of these categories with regard to changed conditions. Specification of mutual conditionality was performed by comparing of a wider range of indicators, using statistical data The paper was elaborated within the project VEGA No. 1/0174/11 Determinants of forming the Knowledge Economy in the Context of the New Economic Strategy “Europe 2020” and within the framework of the OPV and V called A creating of excellent economic research for solving the civilizational challenges in the 21st century (ITMS 26240120032). We support the research activities in Slovakia. Project is financed by the EU. 1

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and by their interpretation. Application of multidimensional approach meant the application of specific methods appropriate to specific disciplines (empirical surveys, tests).

2.2 Theoretical aspects of the perception of wealth, poverty and happiness (results). The limited scope of the paper does not capture the full area of diverse views on wealth, poverty and happiness, yet we try to point out a few insights that we consider to be inspiring. It is desirable to indicate that the theory does not provide a clear definition of wealth and poverty as well as happiness. We meet with the narrower or broader definitions, also with the definitions that are contingent of particularities of different sciences. Many scientists defined the wealth. J. Tobin defined wealth as a continuous spectrum of assets, the assets of various types that individual subjects freely confuse depending on their expected returns, the expected risks, as well as on the transaction costs. F. Modigliani defined wealth as the sum of current assets, the current labor income and the current value of expected future income, I. Fisher described the wealth as the current value of the future stream of income, or M. Friedman defined wealth by supporting the five structural components of wealth - money, securities, bonds, movable and immovable assets, and human capital. Generally, wealth can be defined as the monetary value of all assets that an individual or household has at some point. The extent of the assets is not identical for all authors.2 Scientists are looking for answers to questions affecting the motives of creation and accumulation of wealth, particularly the creation of enormous wealth in the hands of minor elite. American economist K. Galbraith very concisely wrote that the motive for wealth accumulation is the satisfaction from the power, honors and the possession of things that a person acquires due to wealth (Galbraith, 1967). Undoubtedly, exists a wide range of other motives such as: a sense of freedom of choice without the borders; the possibility of further acceleration of wealth due to a greater number of opportunities, as the ability to conduct business on a global scale, where they can succeed only the strongest players; the opportunity to meet all needs without need to seek a compromise; the possibility of participation on the global information and knowledge resources; the possibility of self - realization; an enhance of self-esteem; the strengthening its position within the company; the opportunity to ensure the safety, security and health. At the same time exists a number of motives that leading to the formation of enormous wealth, but not necessarily in full accordance with the law or with the ethical principles. The wealth allows them to hire the best lawyers, accountants or other professionals who are able to legalize the revenues from illegal, but highly profitable activities. Based on the generalization of knowledge can be stated that the main resources of enormous wealth are: a huge capital concentrated in the hands of a few individuals, the high profits from high-risk investments or the extremely high wages of young experts or some managers operating in the financial markets. The elite of the financial sector also benefits from the existing rules. In some cases, the wealth was not acquired by efforts and an extraordinary commitment, but it was obtained through a system that does not provide the border. The scientists have long been pointed out the need for correction of the definition of poverty. It should be noted that there is no consensus on the definition of poverty. We may encounter with a very narrow definition of income poverty, but also with more complex view of the definition of poverty. Several authors point to the fact that poor people cannot make the choice that is common for wealthy individuals, respectively wealthy households. In general, poor people are more at risk of various diseases also they are more vulnerable and unable to lead honorable life. These people are not able to perform their functions in society, respectively do not wish to participate on the activities of society (Dahrendorf, 1991, Sen, 2006, Payne, 2006). Scientists do not pay attention only to the definition of poverty, but also to the identification of the various causes that lead to poverty. If the cause of poverty is the freedom of trade or globalization; the loss of competitiveness of firms and the growth of unemployment, particularly of long-term unemployment; the emergence of new economies and the associated lack of qualifications in relation to the needs of the market, for example computer illiteracy or an ignorance of foreign languages and the limited ability of mobility (search for employment outside the home´s country); the financial costs of acquiring knowledge and skills that correspond to market conditions, while these conditions are constantly changing and without lifelong learning is the keeping of job unrealistic; the loss of breadwinner; the serious illness; the disability; old age; a different starting position; a different talent or the various physical assumptions is required different approach than in the cases, if the cause of poverty lies in a lack of interest in work; or people consciously work towards it to become poor. Rozborilová, D. (2005). Teória spotreby, úspor, investícií a vládnych výdavkov, s. 21 – 70, 71 – 86. True wealth incorporated money, health, relationships, time to do the things you want to do, having meaning and purpose in your day to day. Schneider, K.: Happiness creates wealth. Mhtml:file://G:\ Happiness creates wealth.mhtml 2

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The knowledge of the causes of poverty creates better conditions for to detect the consequences of poverty and for its elimination. Eliminating poverty is not very realistic, but what can be regarded as real is poverty alleviation. To the most serious consequences of poverty can be classified: inability to meet needs beyond the basic needs; decrease in purchasing power due to reducing of business activity and employment; the upward pressure on government spending, respectively expenditures and activities of other entities; crisis of values; family crisis; apathy; depression; suicidal tendencies; respectively addiction; aggression; crime; low chance of achieving of sound lifestyle, which is reflected in a higher risk of serious diseases that may threaten the entire society; the lack of interest of participation in the activities of society; social exclusion, with all the negative impacts on individuals as well as on the society. Although this is only a fraction of the different effects of poverty, their significance is undeniable. Poverty is seen as one of the most important phenomena of today. Poor individuals, respectively households often get into situations that can be characterized as social exclusion. It is an allocation to the margin of society that excludes them from participation in the activities of the society. The seriousness of social exclusion is in the difficulty of its identification because can be examined in the context of different levels (local, regional, national and global) as well as in the context of different dimensions (economic, political, cultural or spiritual.) Similarly, scientists from different fields of science looking for answers to the questions: What determines human happiness? Which determinants play the dominant role? Jeremy Bentham, an important representative of utilitarianism, wrote that the best society is one where the people are happiest, and the best policy is one that produces the greatest happiness. The aim of the society is to ensure the highest level of happiness for as many people as possible. He pointed out that in peopleÂ´s lives are present both pleasure and suffering and also he suggested the methodology as to test the happiness. Bentham concluded that the level of each suffering or pleasure can be measured on the basis of the following categories: intensity, duration, certainty, proximity, productiveness, purity and extent. He cover pleasure and suffering to both aspects, to the material as well as to the spiritual aspects. Bentham believed that the government can intervene if creates a space to achieve a sustainable level of happiness. The ideas of Bentham were elaborate by others authors such as the great English economist John Stuart Mill. Mill evaluated a success of government on its ability to create equal opportunities3 for all and to prevent excessive concentration of wealth. Further contribution to the theory of happiness provided by the authors of the old and new school of the welfare economics. Arthur Cecil Pigou proclaimed that the goal of welfare economics is the study of determinants which influence economic welfare. He approved of government intervention in case that the obstacles would arise to facilitate the increase of welfare. J. R. Hicks and N. Kaldor, authors of the new school of the welfare economics, distinguished between individual and social welfare and stressed that the maximization of individual welfare does not have necessarily to coincide with the social welfare maximization. They designed the compensation test, which have been subjected to considerable criticism (Kaldor, 1939, Hicks, 1975). The approaches of institutionalists, neoinstitutionalists, and also of the authors of positive psychology (Fordyse, 1997, Seligman, Peterson, Steen, Park, 2005, Haidt, 2006, Diener, 2000) or of the authors of the theory of public choice (Pestieu, 2006, Besley, 2001) can be seen as the alternative approaches. Institutionalists and neoinstitutionalists apply a holistic approach to examining the ability of government to pursue a policy that is ultimately for the benefit of the whole society. The authors analyze the ability of government to use the institutional factors to desirable behavior that ensures maximization of happiness (Galbraith, 1967). Significant benefits can be attributed to authors of positive psychology who apply a holistic approach to finding the answers to questions: What is happiness? Can we define happiness? Can we measure the intensity of happiness? What is the most important thing in life? The authors of positive psychology have attempted to specify the definition of happiness and to identify the determinants that affect happiness in different countries of the world. Jonathan Haidt, professor of psychology, identified the definition of happiness: pleasure + engagement + meaning = happiness (Haidt, 2006). Happiness is perceived as a positive emotion that can be described also in other words as contentment, satisfaction or well-being. In their view, the most important determinants are income, wealth, social relations, employment, health, age, social status and freedom. Several scientists have shown the impact of income and wealth on happiness. American sociologist Richard Easterlin wrote that happiness was found to be an increasing function of income however the marginal impact on happiness was found to decline with the increasing income (Easterlin, 2001). Easterlin also concluded that people are less happy de-

The equity is the category which is provoked and continues to provoke much heated debate. In order to avoid sharp rejection encountered in the theory and practice of substituting the term by another term, which is milder and more accept. The concept of equity is usually replaced with the concept of fairness. 3

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spite the fact that they are richer. Extra wealth has not brought extra well-being. It could even be making matters worse. British economist Richard Layard perceived income and personal relationship as the important determinants of happiness. Higher incomes are generally the basis of higher happiness, but it is not completely a linear relationship. The richer societies are not happier than poorer societies in the case when the average income is above 10 000 £ per head because people compare their incomes with the incomes of other people. In rich societies, the quality of personal relationships affects happiness (Layard, 2005). Angus Deaton analyzed the data on health satisfaction and life satisfaction to national income, age, and life expectancy. In some aspects, the findings aligned with the conventional wisdom that wealth brings happiness. The citizens of richer countries are on average more satisfied with their lives than the citizens of poorer countries. Each doubling of national income is associated with a near one unit increase in average life-satisfaction. He came to an interesting conclusion. Deaton´s findings on life satisfaction are directly contrary to the idea that countries with high adult mortality rates would have correspondingly a low ranking in life and health satisfaction. In fact, it has little effect (Deaton, 2006). The scientists also pointed out that the combination of some determinants can increase happiness, but in other cases can lead to its decrease for a given individual, or for other individuals. The social scientists discovered that the levels of life satisfaction gradually decline over the last quarter of a century.4 American psychologist Ed Diener is one of these scientists who foresee the possibility to measure happiness by asking people how happy they are. Diener prepared a test that consists from five the statements. People must decide whether they agree or disagree using a 1 – 7 scale. Test is available on the internet. Anyone who is interested can be tested, and can learn what can do to be happier and those the determinants may contribute to greater happiness. Some researchers prefer a different approach. People must describe in their own words what happiness means to them.

Table 1. Test your Happiness by Ed Diener The statement of the test: 1. In most ways my life is ideal. 2. The conditions of my life are excellent. 3. I am satisfied with my life. 4. So far I have gotten the important things I want in life. 5. If I could live my life over, I would change almost nothing. 7 scales: 1.Strongly disagree, 2. Disagree, 3.Slightly disagree, 4.Neither agree nor disagree, 5. Slightly agree, 6. Agree, 7. Strongly agree. Source: Happiness test by Professor Ed Diener from the University of Illinois. http://www.goodnewsfor.com/san-clemente/happiness-test.php

2.2.1. A spectrum of the indicators – an assumption of identification of interdependencies and the mutual conditionality Scientists from different fields of science looked for the answers to the questions: What determines wealth, poverty and happiness? Which determinants play a dominant role at different levels of economic development? We can consider about a mutual conditionality between wealth, poverty and happiness? Scientists are looking for the best indicators that identifying the situation in individual countries, not only in the terms of ensuring a long-term economic growth, but particularly in terms of the conditions for the growth of prosperity of society and of well-being of individual members of society. The understanding of mutual conditionality eliminates the problems of a simplified view on the situation in the individual countries, eliminates a simplified perception of economic growth, as well as an increase of the competitiveness of individual economies, and the ongoing integration and globalization processes that reflect an automatic growth of wealth and prosperity. The aim of paper was also to verify the hypothesis that higher income and more wealth while mean increase happiness for the individual members of society, but beyond a certain limit of income or wealth leads to marginal increase of happiness.

Mhtml: file://F\BBC News Programmes Happiness Formula Britain´s happiness in decli...

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OLS****

LPI 2011

LPI 2009

30.462

81.5

10.6

16.1

46.5

6.8

81.5

4.9

6.8

Germany

0.905

34.854

80.4

12.2

15.9

47.2

6.7

80.4

4.6

6.7

Italy

0.874 24

26.484

81.9

10.1

16.3

46.4

6.4

81.9

4.5

6.4

Belgium

0.886 18

33.357

80.0

10.9

16.1

37.1

6.9

80.0

7.1

6.9

Netherlands

0.910

36.402

80.7

11.6

16.8

43.1

7.5

80.7

6.3

7.5

Luxemburg

0.867 25

50.557

80.0

10.1

13.3

29.0

7.1

80.0

10.7

0.863 28

33.296

80.2

9.3

16.1

47.9

7.0

80.2

4.7

7.0

Denmark

0.895 16

34.347

78.8

11.4

16.9

36.6

7.8

78.8

8.3

7.8

Ireland

0.908

29.322

80.6

11.6

18.0

47.4

7.3

80.6

6.2

7.3

Finland

0.882 22

32.438

80.0

10.3

16.8

42.7

7.4

80.0

6.2

7.4

Sweden

0.904 10

35.837

81.4

11.7

15.7

46.2

7.5

81.4

5.7

7.5

Austria

0.885 19

35.719

80.9

10.8

15.3

47.1

7.3

80.9

5.3

7.3

Spain

0.878 23

26.508

81.4

10.4

16.6

44.7

6.2

81.4

4.7

6.2

Portugal

0.809 41

20.573

79.5

7.7

15.9

38.7

4.9

79.5

4.1

4.9

Greece

0.861 29

23.747

79.9

10.1

16.5

46.5

5.8

79.9

4.9

5.8

Slovenia

0.884 21

24.914

79.3

11.6

16.9

40.2

6.1

79.3

5.2

6.1

Czech Republic

0.865 27

21.405

77.7

12.3

15.6

39.4

6.2

77.7

5.3

6.2

Slovakia

0.834 35

19.998

75.4

11.6

14.9

40.1

6.1

75.4

4.7

6.1

Poland

0.813 39

17.451

76.1

10.0

15.3

42.6

5.8

76.1

3.9

5.8

Hungary

0.816 38

16.581

74.4

11.1

15.3

37.4

4.7

73.3

4.0

4.7

Lithuania

0.810 40

16.234

72.2

10.9

16.1

34.6

5.1

72.2

4.4

5.1

Latvia

0.805 43

14.293

73.3

11.5

15.0

34.9

4.7

73.3

4.0

4.7

Estonia

0.835 34

16.799

74.8

12.0

15.7

34.9

5.1

74.8

4.7

5.1

Malta

0.832 36

21.460

79.6

9.9

14.4

43.1

5.8

66.6

2.6

5.8

Cyprus

0.840 31

24.841

79.6

9.8

14.7

45.5

6.4

79.6

4.4

6.4

Bulgaria

0.771 55

11.412

73.4

10.6

13.7

34.1

4.2

73.4

3.6

4.2

Romania

0.781 50

11.046

74.0

10.4

14.9

42.2

4.9

74.0

2.8

4.9

HPI

0.884 20

***

France

* Life expectan

GNI per Capita PPP $

Countries

HDI 2011

Indicators

Ranking

Table 2. Human Development Index, Happy Planet Index, Index of Wellbeing – Overall- Life satisfaction and Legatum prosperity index

7.1

Source: Human Development Index and its Components. Statistical Tables – Table 1.pp. 127 – 130, Human Development Report 2011. HDI world 0,682; Human development Index groups: Very high human development 0,889; High human development 0,741; Medium human development 0,630; Low human Development 0,456. Gross national income (GNI) per capita (constant 2005 PPP $), * life expectancy at birth, ** means years of schooling, *** expected years of schooling. Happy Planet Index a/ experienced well-being, b/ Life expectancy, c / ecological footprint. The 2011 Legatum Prosperity Index TM an Inquiry into Global Wealth and Wellbeing. Legatum Institute. High ranking countries (top 30), medium ranking countries (middle 50), Low ranking countries (bottom 30). Ranking of countries in years 2009 and 2011, s. 43. www.prosperity.com. In 2011, data for 110 countries in which lives 93% of the world´ s population. **** Well-Being - Overall – Life Satisfaction 2006 – 2010 (0 - least satisfied, 10 – most satisfied). Perceptions about Well-Being and the Environment, table 8, pp. 154-157. The value of OLS for the world is 5.3. Human Development Report 2011. Gallup´s methodology ensures that the reported data are representative of 95% of the world´s adult population.

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The Human Development Index is a composite index that measures an average achievement in three basic dimensions of human development – along and healthy life, knowledge and a decent standard of living. All countries of EU, except Bulgaria and Romania, have very high human development. Bulgaria and Romania are among the countries with high human development. The ranking of countries shows that the very high human development is not connected always with countries that have the highest economy level. In the top ten ranking were placed – Netherland, Denmark, Finland and Sweden, and in the twenties were placed Ireland, United Kingdom, Austria, Germany and Belgium. The Happy Planet index is an indicator that identifies the experienced wellbeing, life expectancy, and ecological footprint. Ecological footprint reflects the amount of natural resources that are needed to maintain the life style of a country. Some countries consume much more than would correspond to their share of natural resources. Between these countries are placed Luxemburg, Denmark and Belgium. In comparison, the goals set for 2050 - the average value of HPI 89, life expectancy 87, experienced well- being 8,0, and ecological footprint 1,7. The Legatum Prosperity Index TM provides the world global assessment of prosperity based on income and well-being, what makes this index unique. LPI creates an area for capturing a holistic prosperity unlike the traditional indicators of prosperity. From our point of view is important to remember that prosperity is not about money, it is also about satisfaction with life. LPI is also the first global index that provides an empirical basis for an intuitive sense that true prosperity is a complex blend of income and wellbeing. The advantage of this index is that examines the correlations of both income and wellbeing across different dimensions of society and explores how factors influence an income of country and happiness of its citizens.6The ranking of the countries reflects their ability to create the conditions for the growth of prosperity. In the period 2009-2011, the position of the majority countries of EU deteriorated, except France, Denmark, Austria, United Kingdom and Portugal. The highest deterioration occurred in Italy, Greece, Lithuania, but especially in Romania and Latvia.7On the other hand, the most favorable environment for the growth of prosperity and the growth of the welfare of citizens is in the Nordic countries, and in Netherlands. The findings suggest that the political integration by European policymakers have done little to equalise economic or institutional differences among European countries. The income gap between the richest and poorest member states of EU remains vast. In the countries of the Mediterranean area is high levels of corruption, low rates of social trust, low level of rule of law and inefficient public sector. The current financial troubles reflect in several objective and subjective variables of the index. The certain variables tend to be more long-term or permanent by nature and therefore are less affected by temporary fluctuations in the global economy. A recession should not have a major impact on the rank of countries, unless it shakes the foundations of long-term prosperity.8 The comparison of a wider range of indicators created a space for identifying countries that could to create conditions for growth performance and competitiveness in the global environment and the conditions for a happy and satisfied life despite a various income inequality.

The 2011 Prosperity index consists of eight sub-indices (economy, entrepreneurship and opportunities, governance, education, health, safety and security, personal freedom and social capital). Each sub – index has be identified as a foundation of prosperity or each sub-index give an answer to the question of how the local area will contribute to higher level of income and the greater personal wealth. Each from eight sub-indices is equally weighted. The creation of LPI, the more detailed explanation of the methodology and the data sources, country´s profiles, and tools that allow you to explore the data can be found at www.prosperity.com. 7 The situation isn´t favorable due to lower level of tolerance for immigrants and ethnic minorities, but also less satisfaction with their freedom of choice and own life. 8 Human Development Report 2011, 2008 Financial Crisis – Impact and Legacy, p. 36 6

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50% median

60 % median

13.0

2.831

7.308

13.725

Germany

28.3

27.0c

4.3

15.0

3.860

8.518

14.342

Italy

36.0

32.0c

6.5

19.0

6.917

12.085

20.335

Belgium

33.0

28.0d

4.9

15.0

3.670

8.078

16.117

Netherlands

30.9

5.1

11.0

3.750

6.306

11.607

Luxemburg

26.0d

13.0

3.249

8.773

13.779

United Kingdom

34.0d

7.2

19.0

5.336

11.566

19.195

Denmark

24.0d

4.3

12.0

2.348

5.582

13.191

Ireland

34.3

32.0d

5.7

16.0

5.629

13.209

21.974

Finland

26.9

29.5b

3.8

14.0

2.521

6.546

13.541

Sweden

25.0

23.0d

4.0

12.0

2.641

5.596

11.969

Austria

29.1

26.0b

4.4

12.0

3.461

7.127

13.383

Spain

34.7

32.0d

6.0

20.0

7.764

14.084

20.580

Portugal

38.5b

7.9

18.0

Greece

34.3

33.0d

6.2

20.0

6.973

12.454

19.690

Slovenia

31.2

24.0d

4.8

12.0

3.492

7.103

12.673

Czech Republic

26.0d

3.5

0.010

9.0

2.987

5.801

11.445

Slovakia

26.0d

4.0

0.000

11.0

3.910

6.996

12.065

Poland

34.2

34.9d

5.6

16.6

Hungary

31.2

28.0d

4.8

Lithuania

37.6

36.0d

6.7

Latvia

35.7

36.0d

6.3

0.006

Estonia

36.0

34.0a

6.3

0.026

Malta

26.0b

29.0d

Cyprus

40% median

5.6

% people in risk of poverty

32.7a

France

a/ b/

MPI

Countries

Quintile Income Ratio

Indicators

GI 2000 –2011

Table 3. The Indicators of the Income Inequality, Poverty and their Components

17.0

6.413

11.510

17.748

12.0

4.099

7.411

12.476

20.0

5.9

26.0

19.0

7.369

12.623

20.058

15.0

16.0

0.016

Bulgaria

45.3

30.7b

10.2

1.0

12.8

21.0

Romania

31.2

32.0

4.9

0.5

13.8

23.0

3.588

8.090

14.107

Source: Inequality-adjusted Human development Index. Multidimensional Poverty Index: Population below Income Poverty Line: a/ PPP $ 1.25 a day in the years 2000 - 2009, b/ National Poverty Line. Human Development Report 2011, Table 5, pp. 143 – 145. Table 8, pp. 154 – 157. Distribution of family income – Gini Index 2011 Country ranks, CIA World Factbook, 2011.

The most commonly applied indicators of poverty - an indicator of absolute and relative poverty – represent a narrow definition of poverty. Absolute poverty is defined in relation to a certain minimum standard. It is usually defined in the form of money amounting to $ 1.25 / day, respectively 2 or 2.5 USD / day and is also defined as the quantity of basic goods that are deemed necessary. Absolute poverty reflects a real hardship, reflects the state of the inability to satisfy basic needs or is required as a condition of survival. Relative poverty means that someone is poor compared with other people. The threshold of relative poverty is defined as 40, 50, respectively 60% of median net disposable income. Relative poverty provides information on the population that is at risk of social exclusion. Absolute and relative poverty are the indicators, which are currently considered to be indicators that do not allow adequately identify a situation in which individuals or households are located. Therefore, it is necessary to use other indicators that specify the situation in more detail: the depth of poverty, income poverty by type of household, the share of income of the upper and lower quintile or the dispersion around the at-risk-of poverty. Criticism of a simplified view on poverty leads to a search of new indicators of poverty, capable of capturing the complexity of the situation in which an individual or a household is. Multidimensional Poverty Index (MPI)9 is a new international

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indicator of poverty, which specifies not only those who are multidimensional poor, but also as are multidimensional poor. In the construction of the index were applied three dimensions of poverty, more specifically through the ten indicators. The individual dimensions have the same weight (1/3), as well as the individual indicators within each dimension. If an individual (household) is deprived for multiple dimensions can be classified as the multidimensional poor. But this is not about some deprivation, a deprivation is exactly specified. If a deprivation is less than 30%, the individual (household) is not poor in a given dimension. Only if the deprivation is higher than 30% at least in two dimensions can be an individual (household) described as multidimensional poor. The advantage of this indicator is that provides information on the situation in the individual countries, individual regions or in global measure. Identification of deprivation in specific areas creates the conditions for makers of economic policy to allocate the limited resources as efficiently as it is possible. Another advantage of this index is that allows identify the situations when the deprivation may prevent individuals or households to make a free choice, respectively accurately identify a situation in which individuals or households are located. The advantage of this index is that there are no hurdles to the change or to supplement of dimensions in the future. Some countries constructed the national multidimensional poverty indices that allow the choice of dimensions. The indicators create a space for a more accurate identification of the most acute problems, and can also take into account local, political, economic, cultural, climatic and other specifics. In connection with the construction of the index there is a discussion which affects a range of dimensions and indicators; a discussion whether the change will affect the results, as also discussion which refer to the possibility of changes in the dimensions and indicators. The search for answers by the empirical tests can be found in the work of authors Alkire, S. and Santos, M. E., Yalonetzky, G.: Is the Multidimensional Poverty Index Robust to different weight? [Alkire, Yalonetzky, Santos, 2010]. Data in the table show that in the EU countries are not identified the significant negative values of indicator of absolute and relative poverty, but also of indicator multidimensional poverty. The situation is less favorable in the case of the indicator which specifies those who are at risk of poverty. More as 20% people is at risk of poverty in six countries of EU. Also, the values of the Gini index do not reflect a substantial income inequality. Another situation occurs when we examine a quintile shares. Incomes 20% of the richest to incomes 20% of poorest are higher between 3.5 times (CR) to 10.2 (Bulgaria) or 7.2 times (UK).

2.3. The some principal problems of the perception of wealth, poverty, happiness and their determinants (discussion) In the present period can be identified the some major issues covered to wealth. One serious problem is the precise identification of wealth. If a greater share of wealth present the financial assets, especially the virtual assets, is difficult to identify the exact value of wealth. It is also necessary to take into account the fact that in today’s turbulent world occurs in a short time to a significant change in the value of wealth. Other serious problem is the concentration of wealth by minor elite and the changing structure of wealth in favor of virtual assets in symbiosis with the wealth effect can have a big impact on the further development not only within countries, but also in a globalized world. Scientists are stepping up efforts to clarify the nature of these trends as well as to clarify the modification of the structure of wealth. Especially in the current period exacerbated the problem related to the exaltation of wealth. Glorification of wealth is not sustainable in the long term, especially if the trend should be characterized on a global scale. This is due to the fact that the glorification of wealth in developed countries translates into glorification of high demand. Glorification of wealth ignores the needs of people in other countries and also the needs of future generations. In identifying problems related to wealth cannot leave out the problem of confusion between wealth and well-being. It should be noted that many scientists pointed out the need of the solution of this problem. Pigou pointed out the differences between the desire to maximize wealth and effort to maximize welfare. He rejected the hunt for wealth and for personal advantages, because from his point of view, an abundance of material goods does not mean the growth of prosperity. Pigou expressed the proposition that an economic theory should attempt to qualitatively evaluate the various forms of wealth that can ensure the prosperity. The higher and more stable incomes are achieved if the income distributed more evenly. From his point of view, the maximization of individual welfare does not necessarily maximize social welfare. It is possible in cases where the maximization of individual welfare is in a conflict with the maximization of social welfare, or if the scarce resources are used for the production of goods, that does not increase well-being, as well as in cause if exists a highly uneven a distribution of incomes. These issues are the subject of interest of many scientists: A. Marshall, V. Pareto, N. Kaldor, J. Mead, J. Hicks or A. Bergson.10 Calculation of the index: MPI = A x H, where A – average intensity of MPI poverty across the poor (%), H – percentage of people who are MPI poor. Čaplánová, A., et al. (2011.) Teória verejnej voľby. Bratislava: Vydavateľstvo Ekonóm, pp. 98-122.

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A counterpart of wealth is poverty. Risk of approach to the poverty line is realistic especially in the period of the strongly pessimistic expectations. The causes of pessimistic expectations can have economic or non-economic character. The accumulation of different problems in a global context intensifies the fears, but also intensifies an effort detect and specify the complex causes which lead to the volatility of positive expectations and to the loss of illusions, as well as to the search of constructive solutions of accumulated problems. In this difficult situation, the issue of poverty is even more urgent, as well as the modification of the perception of poverty and its alleviation. The discussions lead to the wider definitions of poverty, and to the identification of the causes and the consequences of poverty. The discussions also relate to other issues - whether it is only a problem of individuals or a problem of society, whether it is possible to talk about the deepening divide between the extremely poor and extremely rich, whether it is appropriate and possible take measures to eliminate or to alleviate poverty.11On the one hand are the views that refuse the relevance of interventions towards the elimination of extreme poverty, on the other hand are the views that the opportunities to improve human society are unlimited and that are the justified interventions in favor of those who are at risk of poverty. Discussions also address the question of what the possibilities and forms of reducing poverty are acceptable, respectively at what level (national, regional or global level) it is possible to find the most effective solutions.12 To capture real poverty is also necessary to specify particular forms of poverty, whether is transitive or permanent poverty, primary, secondary or acquired poverty, old or new poverty, economic, human or spiritual poverty. The acquired knowledge can contribute to finding the most effective solutions to this serious problem.

3. CONCLUSION A new perception of wealth is reflected in the integrity of material and spiritual wealth, in a preference of real wealth before virtual wealth, in closer linkage between wealth and happiness. New perception of wealth can eliminate the negative side effects of the last approach. It is particularly important to ensure an increase of the efficiency of use of scarce resources. Also is necessary to prevent the social exclusion of part of population from society, to prevent the growth of social conflicts, which are inextricably linked to the increasing polarization. The problem of poverty can be identified as a complex problem of a global nature, and therefore the solution of the problem of poverty must have a comprehensive and global dimension. A solution implies identification and analysis of endogenous and exogenous causes, objective and subjective reasons which lead to the fact that individuals, households and countries are becoming poorer. The solution of the problem of poverty implies the identification and specification of the consequences of poverty, not only in the short term but also in the long term, because the severity of the consequences of poverty can significantly escalate over time. It is also necessary to identify and to analyze: economic, ethical, social, political options to solve this problem in different national economies and in the global context; the alternative possibilities of application of scarce resources; the alternative institutions and instruments mitigation, respectively elimination of poverty. The complexity of the problem leads to that the adoption of specific measures can be very low. Many individuals lost the motivation to a work, especially if a work does not guarantee the change their position. They lost a sense of participation in activities that would help them to change their fate. Some poor people prefer the social benefits, often a life on the street. It is important to remember that exists often a predisposition to such a way of life. The very serious problem is a problem of inter-generational poverty that cannot be solved in the short term. A solution is real in a period of several generations. The most effective way to reduce poverty is the prevention, and an education to personal responsibility for their fate. The importance of prevention is based on the recognition that effort to get out of poverty is not sufficient for the escape from poverty. The absence of relations with people from other classes and a lack of the ability to communicate with people is a serious obstacle. Without understanding of a significance of the intergenerational transmission of knowledge that could change their behavior and without the development of skills cannot think of moving out of poverty. Although the term happiness has been a frequently used term colloquially, when trying to put term into the analytical framework, we are left with the necessity to look for its adequate definition. The diversity of approaches is reflected in the different nature of the definitions. There is no strict conceptual identity. There is also an ambiguous view on the possibility of measuring happiness and an explanatory ability of the results. Same may be said that there is a wide diapason Thomas Robert Malthus in the first edition of his work An Essay on the Principle of Population, 1798 wrote that all efforts to improve the existing situation are futile. As a result of the necessary laws of nature a part of people must suffer from shortage. These people are the unfortunates who drew a blank ticket in a large lottery of life. On the great feast of nature is not spreaded for their. Nature dictates them to move away and neotame in carrying out his orders. These ideas, however, in later editions (1803, 1806, 1807, 1817 and 1826) of this work hasnÂ´t been presented. 12 A. Smith, in his work On the Nature and Causes of the Wealth of Nations wrote that no society can surely be flourishing and happy of which the far greater part of the member are poor and miserable. Also wrote, that a person is rich or poor according to the degree to which it can afford the necessary living resources, items pleasant the life and enjoyment of life (Smith, p. 95, 51). 11

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of view of which determinants, how much and in what direction affect happiness. On the other side there is a consensus on the positive impact of happiness. Happiness is positively correlated with optimism, positive expectations, and willingness to overcome obstacles. The consensus affects the need for change in the thinking of individuals and governments. In many cases is the consensus that the governments can effectively contribute to happiness of the people. Comparison facilitates an analysis of the perception of happiness in national, regional and global context, also an impact of various determinants, both in time and between countries, but its contribution can be minimized, if is not adequately and fairly presented. It should lead to the motivation of individuals and governments in the direction of correction of behavior, if the results of several surveys show that resources are used effectively and the people are not satisfied with their lives. Comparison can encourage behavioral change and ensuring greater happiness, but it can also discourage and happiness decreases.

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.

Alkire, S., Santos, E. M. (2010.) Acute Multidimensional Poverty. A New Index for Developing Countries. OPHI Working paper No 38, 2010. http:// www.economist.com/note/166/3283 Alkire, S., Santos, M. E., Seth, S., Yalonetzky, G. (2010.) Is the Multidimensional Poverty Index Robust to Different Weight? OPHI. Research in Progress Series 22a. Bentham, J. (1789.) Introduction to the Principles of Morals and Legislation. The Works of Jeremy Bentham. 1838-1843. London: John Bowring. Besley, T. J. (2001.) Welfare Economics and Public Choice. London: London School of Economics and Political science. Čaplánová, A. et al. (2011.) Teória verejnej voľby. Bratislava: Vydavateľstvo Ekonóm. Čaplánová, A., Rozborilová, D. (2009.) The Significance of Institutional and Economic Factors in the Determination of Individual Happiness (Empirical Approach). V. International Conference on Applied Business Research, September 21 –September 25, 2009, pp. 271 – 287, ICABR 2009, Mendel University in Brno, Czech Republic. Davies, J.B. (2008.) Personal Wealth from a Global Perspective. Oxford University Press. Deaton, A. (2006.) Income, Aging, Health, and Wellbeing around the World: Evidence from the Gallup World Poll. Diener, E. (2000.) Subjective well-being: the science of happiness, and proposal for a national index. American Psychologist, 55, pp. 55-72. Diener, E., Kahneman, D., Hellival, J. (2010.): Well-Being and Public Policy. International Differences in Well-Being. Oxford: Oxford University Press. Easterlin, R.A. (2001.) Income and Happiness: Towards a unified theory. Economic Journal, 111, pp. 465-484. Fordyce, M.W. (1997.) Human Happiness, its Nature and its Attainment. http://www.gethappy.net/freebook.htm Grusk, D. B., Kanbur, S. M. R., Sen, A. K. ((2006.) Poverty and Inequality. Studies in Social Inequality. Stanford : Stanford University Press. Haidt, J. (2006.) The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom. Mhtml: file://F\The Hypothesis - Jonathan Haidt.mht Hills, J., Sefton, T., Stewart, K. (2009). Towards a more equal society? Poverty, inequality since inequality since 1997. Case Studies on Poverty, Place and Policy. Bristol: Policy Press. Malthus, Th. R. (1798). An Essay on the Principle of Population. Oxford World´s Classics reprint. Oxford: Oxford University Press, 2008 Kaldor, N. (1939.) Welfare, Propositions of Economics and Interpersonal Comparison of Utility. Economic Journal, 49, pp. 549 – 552. Layard, R. (2003.) Happiness: Has Social Science a clue? Comparison of happiness across countries evidence from neuroscience, trends in happiness. Lionel Robins Memorial Lectures 2002/3, London: London school of Economics. Layard, R. (2005.) Happiness: Lessons from a New Science. New York: Penguin Press. Payne, R.K., DeVol P.E. Smith, T.D. (2006.) Bridges out of Poverty. Strategies for Professionals and Communities. Highlands:Aha! Progress Pigou, A.C. (1920.) The Economics of Welfare. In: Dome, T.: History of Economic Theory. A critical Introduction, pp. 179 – 193. Aldershot: Edward Elgar Publishing Limited. Pestieu, P. (2006). The Welfare State in the European Union: Economic and Social perspectives. Oxford: Oxford University Press Rozborilová, D. (2005.) Teórie spotreby, úspor, investícií a vládnych výdavkov. Bratislava: Iura Edition. Rozborilová, D. (2010.) The specification of changes of the perception of wealth, poverty and happiness at the beginning of 21st century and identification of the economic and extra economic interactions (theoretical and empirical approach).VI.. International Conference on Applied Business Research, November 29 – December 3, 2010, pp. 837 – 849. . www.icabr.com Rozborilová, D. (2012.) The phenomenon of strengthening the positions of minority elite – national, regional and global context. The New Economy, No.1, March 2012, Volume V., pp. 122-133. University of Economics, Bratislava. Seligman, M.E.P., Steen, T.A., Park, N. Peterson, Ch. (2005.) Positive Psychology Progress. Empirical Validation of Interventions. American Psychologist 60 (5), pp. 411-421. Seligman, M.E.P. (2002.) Authentic Happiness. New York: The Free Press. Smith, A. (1958). Pojednání o podstatě a původu bohatství národů. Praha: SNPL. The 2011 Legatum Prosperity Index. www. Legatum.com

DETAILS ABOUT AUTHOR: DARIA ROZBORILOVÁ ASSOCIATE PROFESSOR NÁRODOHOSPODÁRSKA FAKULTA, UNIVERSITY OF ECONOMICS, BRATISLAVA BRATISLAVA, SLOVAKIA daria.rozborilova@euba.sk

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DEVELOPMENT OF GROUP BUYING IN POLAND EDYTA RUDAWSKA KRISTINA PETLJAK IVANA STULEC

ABSTRACT Group buying can be defined as buying with the aim of receiving quantity discount. The grouping phenomenon was launched in 2008 by the American website Groupon.com, which marked the beginning of group buying development. Group buying is offered by a group buying website which acts as an intermediary between seller and buyers. Group buying websites and the producers agree on the offer of products and/or services, the amount of the discount, and on the minimum number of buyers needed for the offer to become valid. The group buying website publishes the offer on its website, and if enough people are interested in buying the product and/or service, they all receive high discounts on the advertised items (usually 50% up to 90%). The offer is valid for a limited time. The buyers get a coupon via email or on their user account, which enables them to claim their discount at the retailer. In order to accelerate dissemination of information, group buying websites offer daily deals and send them via email to the registered buyers, advertise on social networks (Facebook, Twitter) and through SMS messages. In Poland, group buying websites emerged in 2010. Over the years, the group buying market has become extremely attractive, which prove around 66 currently active group buying websites and 29 websites aggregators. The paper gives an overview of the development of the group buying market in Poland. The group buying websites and the specific qualities of doing business in the observed market will be presented. KEYWORDS: group buying, group buying websites, social networks, Poland.

1. INTRODUCTION The Internet has brought many benefits for consumers: simplified search for information about products and services, fast and easy comparison of products’ characteristics and prices, and easy exchange of experiences among consumers which can all result in big savings of time and money for consumers. With the global recession the consumers have faced a decreasing purchasing power and they have been encouraged to exploit the advantages of the Internet, to group together, and to strengthen their position against the retailers in order to receive quantity discounts. The phenomenon of online grouping was launched in 2008 by the American website Groupon.com, even though the concept of group buying can be noticed even earlier among Eastern collectivistic cultures. That is the reason why group buying is also known as collective buying. Online group buying is part of an innovative wave of online market-based mechanisms along with auctions, reverse auctions, and ‘name your own price’ schemes (Anand and Aron, 2003). However, online group buying websites are different from traditional auction services and Internet shops in many respects. Specific characteristics of the assortment are an essential element that at the same time determines the success of those websites. This is because group buying most often includes services. Therefore, they are particularly profitable for service providers. And so the costs and very high discounts which yield large savings are the most important quality that characterizes group buying (Bilinska-Reformat and Reformat, 2011). In a short period of time, many group buying websites have emerged and spread throughout the world (Erdogmus and Cicek, 2011). Owing to the development of the aforementioned websites, it can be observed that, nowadays, the market of group buying is one of the segments of the trade developing most rapidly. The market enthusiasm for online group buying peaked when Groupon.com declined a $6 billion offer from Google (Bilinska-Reformat and Reformat, 2011). The phenomenon of online group buying was rapidly adopted in Poland. The first Poland group buying website was launched in 2010 and the number of group buying websites has continued to grow rapidly. It is hard to indicate the exact number of group buying websites in Poland, but according to the latest data, prepared by GoDealla.pl in July 2012, there were around 66 active group buying websites (adeal.pl, adventure-group.pl, alebomba.com, b2bdeal.pl, beauty-deal.pl, bonbuy.pl, bookson.pl, buywithme.pl, buzzinga.pl, citeam.pl, coopydoo.com, crazydeal.pl, cuppon.pl, cuthotel.pl, dailyoffer.pl, deal24.pl, dealonline.pl, dealxxx.pl, e-sale.com.pl, eurobon.pl, evoucher.com.pl, eyahoo.pl, ezogroup.pl, familyspace.pl, fandeal.pl, fastdeal.pl, freedeal.pl, freekupon.pl, frupi.pl, getdealtoday.pl, gogroup.pl, groupon.pl, grubszyportfel.pl, grupamis.pl, gruper.pl, gruplin.pl, happyday.pl, hitdeal.pl, in-group. pl, infobuzer.pl, instantbon.pl, killer-deal.pl, klubznizek.pl, kupbon.pl, kuponik4you.pl, kuponykuchenne.pl, kupujtaniej. pl, malacenka.pl, mojekupony.pl, mojeokazje.com, mrrabat.pl, mydeal.pl, ofeteria.pl, okazik.pl, okazje.eholiday.pl, okazje.firmy.net, okazjoteka.pl, pandadeal.pl, playpal.pl, podrozujemytanio.pl, sweetdeal.pl, taniejnaslasku.pl, turbodeal.pl, wyjde.pl, zakupon.pl, zakuponik.pl).

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In addition to group buying websites, in the group buying market, there are also aggregator websites (alfadeal.pl, bestdeal.pl, cenado.pl, ceneo.pl, cenookazja.pl, dailydealdirectory.net, darmocha24.pl, deal.pl, dealbroker.pl, dealcollector. pl, emy.pl, GoDealla.pl, grupeo.pl, grupery.pl, grupik.pl, grupnij.pl, hunterzy.pl, kuponik.eu, ofelix.com, prettydeal.pl, rabatkowo.pl, radarofert.pl, scoupon.pl, snuper.pl, sumos.pl, wesave.pl, zakupygrupowe.edu.pl, zakupy-grupowe.net.pl, znizkomania.pl) which present offers of all group buying websites in Poland at one place. The paper gives an overview of the Polish group buying market, profiles the leading group buying websites and chronologically presents group buying market development and growth in Poland. Furthermore, it gives a profile of a typical group buyer in Poland.

2. ONLINE GROUP BUYING Group buying can be defined as buying in group in order to achieve quantity discounts. High discounts and attractive bargains are the essence of group buying (Kauffman and Wang, 2001). The concept of online group buying is also that simple, the only difference being that a group buying website comes as an intermediary between sellers (producers, local retailers and service providers) on one side and buyers (customers) on the other (Stulec and Petljak, 2010). Group buying websites cooperate with sellers in order to agree on the products and services that will be offered at discount and on the amount of discount granted, and on the minimum number of customers needed for an offer to become valid. Those being agreed upon, the group buying website publishes the offer on the Internet. If enough people sign up for buying a particular product or service, the offer becomes valid and people that signed up for buying receive a large discount. The sellers typically grant a discount of 50% to 90%, and a minimum number of interested customers is usually determined so as to cover cost-effectiveness threshold. For some products and services, it takes only 5 to 10 interested people for an offer to become valid. The sellers, in agreement with the website, can also determine the maximum number of people who can apply for a specific offer. After becoming valid, every offer has a specified lifespan. In most of the group buying websites the time frame per deal is one day to one week. It is a common practice that group buying websites offer a new product or a new service every day (which is called â&#x20AC;&#x2DC;the deal of the dayâ&#x20AC;&#x2122;) and given that some offers can last for several days, it is possible to have multiple deals at the same time. A customer that has purchased a deal of the day receives on his/her e-mail address or customer account a coupon that allows him/her to get a discount. All the customer has to do is to print the coupon and show it to the seller when purchasing the product or service. The distinctness of FastDeal.pl is its distribution of discount vouchers. This website has an original method of distribution of vouchers because they do not have to be printed but are sent via text message (Bilinska-Reformat and Reformat, 2011). Many group buying websites, in order to attract as many customers as possible, besides publishing the offers online, also offer the possibility of informing customers about the deal of the day via e-mail, popular social networks and SMS messages. Some have gone even further in their effort to attract customers by providing rewards for the existing customers if they bring in new ones. The rewards are often in the form of credit points that can be used in future purchases. A customer who wants to participate in group buying has to open an account with the respective group buying website. The account allows the group buying website to access customers` identity data and track their activity, whereas the customers gain easy access to previous purchases and are allowed to print the coupons and edit their account settings. Customers who signed up for buying a particular deal cannot withdraw their intent of purchase. By expressing their buying intention, the customers give consent to charge their credit cards in case the offer becomes valid. Customers` credit cards are charged only if the offer becomes valid, i.e. if a minimum number of customers express their buying intention. If a particular offer does not reach the specified minimum number of customer requests, credit cards of customers who have already signed up for purchase are not charged. Lately, many group buying websites also allow payment via the Internet banking and slip payment. Group buying websites do not charge sellers for presentation of their products and services by publishing the deals of the day on the Internet. Websites are compensated for their services only after the offer becomes valid - when a minimum number of customers sign up for purchase the website charges the seller a certain percentage of each deal sold. If not enough customers sign up for the purchase, the sellers have no financial obligation to the website

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2.1. History of group buying The phenomenon of group buying, in the form that has become popular among shoppers worldwide, was launched by the American website Groupon.com in the year 2008. However, the concept of group buying can be noticed even earlier in Eastern collectivistic cultures. Levy and Weitz (2009) argue that shoppers from collectivistic cultures are more inclined to buy in groups than shoppers from individualistic cultures. As collectivistic cultures authors list cultures of Eastern countries, while individualistic cultures are considered those of Western countries. Price sensitivity and prudence are values that are traditionally being appreciated in collectivistic cultures (Ackerman and Tellis, 2001) and such cultural characteristics have contributed to the acceptance of bargaining as a common form of trading (Fang, 1999). For example, Jacobs et al. (1991) report that more than 50% of stores in Hong Kong, Taiwan and Singapore allow bargaining. In Western cultures, by contrast, bargaining is acceptable mainly in market places. Chinese shoppers were the first shoppers who organized themselves in large groups in order to gain lower prices from retailers on wanted merchandise. This practice, known under the original term tuangou, started on Internet forums and chat rooms where shoppers grouped themselves around similar needs and elaborated plans for the collective purchase of furniture, appliances, food, and even cars (Areddy, 2006). After having formed a sufficiently large group, the members of the group would agree the time and place of physical meeting and would visit a retailer, without former notice, requesting a discount. In the western hemisphere, the idea spread in a slightly modified form, including the group buying websites as mediators in the whole story. In a very short time, the concept of group buying has gained fans around the world. Today in North America alone there are about a hundred group buying websites. Over the years the concept of group buying has spread to Europe, South America, Africa and Australia and has returned to China and other Asian countries in a somewhat modified and simplified form.

2.2. Benefits for sellers and buyers Group buying provides various benefits for both sellers and buyers. Moreover, given that group buying websites are paid based on a percentage of each successful deal, it can be said that the group buying concept provides a win-win outcome. The online group buying act is characterized by the dual value creation philosophy of marketing (Kotler and Armstrong, 2009) that both sellers and buyers benefit through it (Anand and Aron, 2003). Below are listed benefits of group buying for buyers and sellers. Benefits for buyers are more than obvious. The major benefit of group buying is that customers gain great discounts (Stulec and Petljak, 2010). Furthermore, the concept of group buying allows customers to discover their city and enjoy the things that before they were not even aware of or were not able to afford. The assortment of group buying websites is diverse and includes health services, beauty services, dinners at restaurants, tickets for concerts and theatrical performances, subscriptions to magazines, gym memberships, photo services, dance courses, foreign language learning, cleaning services, etc. Merchandise is far less present in websites` offers than services and, if present, it is most commonly of low monetary value. Benefits for sellers are harder to define unambiguously because they are not exclusively of a financial nature. First, it is important to mention that the group buying websites are an excellent way of promotion (Stulec and Petljak, 2010). For an offer to become valid, a minimum number of interested customers must sign up for buying. In this way, interested customers are self-motivated to inform their friends, family and acquaintances of an interesting offer. In other words, customers themselves serve as an effective channel of promotion of products, manufacturers and retailers as well as services and service providers. Furthermore, this form of promotion allows companies to reach new customer segments that are more likely to notice an advertisement on a computer screen than in printed form because of their lifestyle (Stulec and Petljak, 2010). Group buying websites` customers are computer literate persons, mostly younger aged who do not have an aversion towards electronic commerce and are mostly members of social networks (Stulec, Petljak and Vouk, 2011). Because of the social networks the reach of information dissemination is almost unlimited. If a particular social network user decides to keep track of daily deals through the social network, the deal of the day will not be visible to him/her only but to all his/her friends (people to whom the user has allowed access to his/her profile) as well. Businesses like the group buying because they get a short-term boost that can lead to new, long-term customers. Since group buying websites publish offers free of charge, group buying can be considered a form of free promotion. Unlike traditional forms of promotion, which require payment regardless of achieved results, group buying websites take compensation only if minimal specified results are achieved. It must be kept in mind, however, that when the offer becomes valid sellers suffer profit loss because products and services are often being sold on the verge of profitability.

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Benefits are especially great for small businesses that cannot afford advertising through mass media, so group buying websites can be seen as an excellent way of familiarising potential customers with products and services of small businesses (Stulec and Petljak, 2010). Understanding group buying as an innovative market niche, small and medium enterprises (SMEs) make an attempt to cooperate with particular buying services looking for their sources of competitive advantage in this way (Bilinska-Reformat and Reformat, 2011). On the other hand, the question remains what are the motives of well-known enterprises to participate in this form of commerce. Their well-known and credible name enables them to charge full price for their products and services, but if they decide not to follow the market trends it is possible to lose some of the customers. Moreover, as it was already mentioned, a new channel of promotion can allow them to access new market segments. So it is possible to see well-known companies, even market leaders, to offer their products and services at large discounts.

3. POLISH GROUP BUYING MARKET The high dynamics of Internet economy development and as a consequence e-commerce boom are strengthened by a quick development of group buying websites. According to the research results of Gemius Company (Klepka, 2012) in three selected countries: Poland, Russia and Latvia, this way of purchasing has experienced a significant growth in 2011 and this trend is expected to continue (Baranowska, 2012). According to Marta Krauze from Citeam.pl, the region of central and eastern Europe (CEE) is very attractive to group buying websites because of the high price-sensitiveness of the customers and the fact that CEE customers are getting used to online purchasing and e-payments. As far as the three countries analysed are concerned one can say that the phenomenon of group buying development has different characteristics. In Russia this e-commerce segment is dominated by the domestic service – Biglion.ru, which leaves its second ranked international opponent far behind. While Biglion.ru reach (the number of Internauts1 entering group buying services web page) in August 2011 was almost 14%, it increased to 32% in December 2011. As Gemius indicates its popularity goes hand in hand with the engagement of users – potential users tend to spend more time on this website than on other similar services available on the Russian market. In the same time the international group buying website – Groupon.ru has increased its reach by 6% (from 10% in August 2011 to 16% in December 2011. The other analysed market – Latvia is a very competitive market as far as the number of group buying websites is concerned. Currently, on Latvian Internet market operate about 40 group buying websites, which is an impressive number considering the small size of this market. The main market players are: perkamkopa.lv (9,4% of reach), CityLife.lv (8,9% of reach) and cherry.lv (7,8% of reach). Polish group buying market has been dynamically developing. Research conducted by Polskie Badania Internetu (engl. Polish Internet Research) has indicated that both the number of visits to websites which have existed for over two years, and the number of businesses providing group buying websites have increased. The dynamic development of this form of buying is also reflected by an increasing number of offers provided by these websites. The first group buying websites, such as Gruper.pl and CityDeal.pl (shortly after the company had started it was taken over by the American service Groupon.com) appeared in Poland in April 2010. Within less than two years they attracted over 6 million users, thus becoming one of the most frequently visited e-commerce websites in Poland (Sikorska, 2012). In November 2011, 32% of Internet users visited and shopped at group buying websites. Research run by Megapanel PBI/Gemius in 2011, has indicated that Polish Internet users have gained much greater familiarity with group buying websites. While in December 2010 one third of the respondents were familiar with group buying websites, over the following year the number of Internet users familiar with group buying websites increased to 78%. Similarly, familiarity with the names of group buying websites has changed (Sikorska, 2012). While in 2010 half of the respondents failed to recognize any listed website, in 2011 the ratio decreased to 15% (Figure 1)2.

Internauts – people who use Internet. DCited results are taken from research by Megapanel PBI/Gemius conducted in December 2010 in a group of 502 Internet users aged 18-54 and in December 2011 in a group of 504 Internet users aged 18-54. 1 2

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Figure 1. Knowledge of group buying websites in Poland (in %)

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Source: Polskie Badania Internetu (2012) *in 2010 data for Groupon.pl/Citydeal.pl, in 2011 data for Groupon.pl **there are no data for this group buying website in 2010 ***there are no data for this group buying website in 2011

3.1. Polish group buying websites Groupon.pl, which is recognized by 75% of the respondents (Figure 1), is the market leader among group buying websites operating in Poland in 2011. Citeam.pl, a part of Allegro Group, which is the e-commerce market leader in Poland, comes second, and Gruper.pl comes third. There is an increasing number of Internet users who are attracted by new websites, such as HappyDay.pl, which belongs to a leading Polish media company Agora Group. Rapid development of group buying services has been reflected by the results achieved by Citeam.pl, which attracted 850 users one month after it had been launched (January 2011), and had 2 million users per month the following year. Offers are most frequently provided in cities or bigger towns; there is a relatively small number of companies which prepare offers for more than several towns. Services at bargain prices are most frequently offered. Groupon.pl, which is the biggest group buying website in Poland, operates in over 30 towns, and is used by more than 3 million Polish Internet users. Its users are invited to participate in a partnership program, which enables them to earn money by attracting new users (PCworld.pl, 2011). Groupon.pl, like Gruper.pl, charges a 50% commission on the value of a purchased voucher, which is the highest commission charged by Polish group buying websites. Gruper.pl provides the widest range of offers. Its offers are available in more than 50 towns, including smaller ones. Gruper.pl as the first group buying website offered its users a discount coupon to buy a car. The website portfolio also includes: coupons for the purchase of real estate, a driving course, or the early pre-sale album Yugopolis 2. MyDeal.pl stands out because of the highest customer service and much larger, compared with other websites, offers targeted at men. The service is available in over 20 towns, and the commission charged is 30%. Buzzinga.pl is a less known buying website providing offers of cultural activities and events. It cooperates with theatres, clubs and concert organizers to provide cheaper theatre or event tickets. b2bdeal.pl specializes in group buying for firms. It offers up to 80% discounts on services provided by computer graphic designers, programmers and marketing specialists. The income of group buying websites in Poland amounted to 345 million zlotys in 2011. Two thirds of this sum was earned by the Polish version of Groupon.com. The remaining websites operating in Poland earned only 120 million zlotys (Mambiznes.pl, 2012) Group buying websites are currently competing with one another, especially Groupon.pl, by decreasing their commission. b2bdeal.pl charges a 25% commission, while the commission charged by Citeam.pl may

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be as low as 10%. Moreover, HappyDay.pl and Okazik.pl fix their commission towards customers individually. The minimum discount offered by nearly all websites amounts to 50%. Rapid development of the group buying market motivates competitors to search for better ways of attracting customers. Recently an increasing number of websites have decided on vertical specialization, which means that they provide subpages categorized into tourism, business and cultural activities. Websites, especially smaller ones, are likely to be successful and differentiate from their competitors by focusing on providing services to one business or providing one kind of service.

3.2. Polish group buyer profile It is said, that the group buying website users are mainly young people, ambitious, conscientious, who buy on impulse and are looking for bargains – so called ‘smart’ shoppers. Managers of group buying websites, based on their market observations, suggest also that the typical client of group buying websites is a young woman, single, educated and earning a middle - to - high income salary. Women are much better online customers than men. They constitute 60% of online buyers in Poland and are more loyal clients than men. Although a vast range of products and services are offered on deal-of-the-day websites Polish customers usually focus their attention on services from the health, fitness and beauty industries. Hair salons, depilation and cosmetic dentistry are especially popular in Poland. According to the research run by Groupon.pl women enter group buying websites every day (48%) or several times a week (33%). Newsletters and social media (Facebook, Twitter) are the main source of information about the offer for them. They use mainly middle and high price offers and buy from 2 to 5 offers (41%). As far as buying decisions are concerned, it must be noticed that the price is the main determiner of their behavior (87%). The willingness of fulfilling the need (74%) and the quality of the producer or service provider (54%) are also very important. Women benefit from the offer by themselves (47%) or with the closest person (44%) (Groupon.pl, 2012). Based on research run by GoDealla.pl – an independent group buying aggregator - it is also worth noticing that group buying websites in Poland (GoDealla.pl, 2012):

• Connect people in pairs – although it may sound irrational a lot of people declared that they met their ‘second half’ while using the group buying coupon. The other ‘half’ was also using such a coupon.

• Allow children to buy presents for their parents - normally young people would not be able to buy such presents without a discount. A 50% discount gives them possibilities they did not have before.

• Allow people to discover new places – for many people group buying services create possibilities to discover new places in the city.

4. CONCLUSION Online group buying, a new and successful trend in the Polish market, is one of the most widely commented phenomena of the last several months. The idea of group buying in just two and a half years has completely revolutionized thinking about sales on the Internet, making millions of Internet users constantly monitor group buying offers and make real purchases on the web. Nowadays, there are around 70 group buying websites in Poland. Still, the main competition is played between two major websites, Groupon.pl and Gruper.pl which were the initiators. It is estimated that, these two market leaders control around 80% of the market. The market observation arrives at the conclusion, that the most important determiner of the quality of an offer and the ability of each website to acquire real users is the number and value of transactions generated by active users. On the other hand the most important elements determining the website’s success are systematic expansion of the portfolio of goods and services available on the website and taking care of the highest quality of the presented offers. As far as the future of group buying services is concerned, one should say that in the coming months the development of websites in new directions and market segments will be observed. Still more and more often one can benefit from offers dealing with real estate, personal finance and culture. New websites with limited scope, dedicated to a certain industry, have also emerged lately. For example, users of Weddingdeal.pl website have the opportunity to purchase coupons for products or services needed to organize the wedding ceremony; Cuthotel.pl offers promotions for tourism and BeautyRabat.pl bonuses for hairdressing services, cosmetic services and spa. Another trend in the group buying market in Poland relates to structural changes on the market. Market fragmentation influences the process of consolidation and acquisitions. The strongest players will strengthen their market position, smaller ones will have to search for new, stronger business partners or will have to change their strategy and focus on narrow specialization, counting on niche customers.

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The new challenges, which are faced by group buying websites, are strictly connected with the changing and increasing customer demands. They expect that purchases will be easy, quick and free of too many formalities. The competitive advantage will be gained by those websites, which will ahead customers’ expectations. Some of the websites consider creating an offer more opened for customers, e.g., which is time unlimited, and implementing mobile solutions and applications. It is estimated that within a few years mobile devices will realize most of the buying transactions. Though, group buying websites, which will be able to face this technological challenge, will manage to survive on the market and enlarge their customer base.

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

Ackerman, D., Tellis, G. (2001) Can culture affect prices? A cross-cultural study of shopping and retail prices. Journal of Retailing, 77 (1), pp. 52-82. Anand, K.S., Aron, R. (2003) Group buying on the web: a comparison of price-discovery mechanisms. Management Science, 49 (11), pp. 15461562. Areddy, J.T. (2006) Chinese Consumers Overwhelm Retailers With Team Tactics, http://online.wsj.com/article/SB114106170222284388.html, accessed 26 June 2012 Baranowska, A. (2012), Zakupy grupowe w Europie Środkowej i Wschodniej, www.e-gospodarka.pl/article/articleprint/79983, accessed 31 May 2012 Bilinska-Reformat, K., Reformat, B. (2011) Group Buying as a Source of Competitive Advantage of Polish Small and Medium-Sized Enterprises, Proceedings of ‘19th Annual Conference on Marketing and Business Strategies for Central & Eastern Europe’, University of Economics and Business Administration, De Paul University, Chicago Illinois, USA, Vienna, 2011, pp. 3-19. Erdogmus, I.E., Cicek, M. (2011) Online Group Buying: What Is There For The Consumers?. Procedia-Social and Behavioral Sciences, 24 (15), pp. 308-316. Fang, T. (1999) Chinese business negotiating style, Sage Publications, Inc., California GoDealla.pl (2012) Polish consumers and group buying, www.godealla.pl, accessed 31 May 2012 Groupon.pl (2012) Zakupy grupowe Polek, www.groupon.pl, accessed 31 May 2012 Jacobs, L., Keown, C., Worthley, R., Ghymn, K-Il. (1991) Cross-Cultural Color Comparison: Global Marketers Beware!. International Marketing Review, 8 (3), pp. 21-30. Kauffman R.J., Wang B. (2001) New buyer’s arrival under dynamic pricing market microstructure: The case of group buying discounters on the Internet. Journal Management INFORM Systems, 18 (2), pp. 157–188. Klepka, M. (2012) Group buying in CEE – one phenomenon with various development models, Gemius News Release, http://www.gemius.sk/pl/ news/2012-04-16/01, accessed 26 June 2012 Kotler, P., Armstrong, G. (2009) Principles of Marketing, Prentice Hall, Upper Saddle River Levy, M., Weitz, B. A. (2009) Retailing Management, McGraw-Hill, New York Mambiznes.pl (2012) Zakupy grupowe, czyli jak pokonać Groupon, www.mambiznes.pl, accessed 4 April 2012 PCworld.pl (2011) Zakupy grupowe: 10 najlepszych serwisów w Polsce, www.pcworld.pl, accessed 31 May 2012 Polskie Badania Internetu (2012) Zakupy grupowe w Polsce, Megapanel PBI/Gemius, www.pbi.org.pl, accessed 31 May 2012 Sikorska, K. (2012) Zakupy grupowe w Polsce 2011, www.egospodarka.pl/article/articleprint/77053/-1/39, accessed 10 June 2012 Stulec, I., Petljak, K. (2010) Moc grupne kupovine. Suvremena trgovina, 35 (6), pp. 22-25. Stulec, I., Petljak, K., Vouk, R. (2011) The role of Internet in empowering consumers: the case of group buying, Proceedings of ‘MSKE 2011 - Managing Services in the Knowledge Economy’, Universidade Lusíada de Villa Nova de Famalicão, 2011, pp. 730-741.

DETAILS ABOUT AUTHORS: EDYTA RUDAWSKA DR HAB. PROF. US UNIVERSITY OF SCZECIN, FACULTY OF ECONOMICS AND MANAGEMENT SZCZECIN, POLAND edyta@rudawska.pl KRISTINA PETLJAK TEACHING AND RESEARCH ASSISTANT UNIVERSITY OF ZAGREB, FACULTY OF ECONOMICS AND BUSINESS ZAGREB, CROATIA kpetljak@efzg.hr IVANA STULEC TEACHING AND RESEARCH ASSISTANT UNIVERSITY OF ZAGREB, FACULTY OF ECONOMICS AND BUSINESS

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ANALYSIS OF USE OF TOURIST BOARD WEB SITES IN THE REPUBLIC OF CROATIA IVAN RUŽIĆ ANTUN BILOŠ IVAN KELIĆ

ABSTRACT Achieving recognisability, getting attention and creating trust of the community in an online environment is a challenge for all business entities, including tourist boards. The development of computer technology and Internet marketing has made it possible for economic operators to improve business processes and has created prerequisites for communication with consumers. Through development of Internet marketing users can receive information in real-time view on the screens of their devices (computers, laptops, mobile phones or tablets), and consequently they can create their own content and disperse it to others. Answering the question to what extent business entities involved in the development of Croatian tourism use Internet marketing – represents the fundamental problem on which the paper is based. Therefore, the fundamental purpose of this paper is to collect and analyse the data and to give an overview of the potential of using Internet marketing in Croatian tourism. KEYWORDS: Web site, Internet marketing, Web 2.0, Croatian National Tourist Board.

1. INTRODUCTION The beginning of the third millenium and general acceptance of the Internet as a means of conveying messages resulted in synergistic connection among the key media – image, sound, graphics, animation and text, thus creating a unique unit known as multimedia on the Internet. In the latest doctrine of mass communication it is now entirely clear that mass communication cannot be realised without using the Internet and multimedia on the Internet. Combining tools and techniques on the Internet results in a strong marketing tool that is susceptible to adjustments to fast changes, following the development of technology at the same time. In the past years we have witnessed changes in the way information is obtained; all information content has to be adjusted to application of new solutions in the field of information and communication technologies. The content remains the same, however, media elements change. Development of technology and possible applications in all social spheres, including tourism, have provided a strong tool for consumers, both for acquiring and dispersing information to others. Generally, information can be defined as processed data providing some knowledge to a user. Through development of Internet marketing users are able to receive information in real-time view on the screens of their devices (computers, laptops, mobile phones or tablets), and consequently – they can create their own content and disperse it to others. Internet marketing can be related to development of WEB 2.0 technologies. Tim O’Reilly defines WEB 2.0 as “the business revolution in the computer industry caused by the move to the internet as platform, and an attempt to understand the rules for success on that new platform”1. The web is treated as a platform where a participant changes from a passive to an active user who uses applications entirely through a browser and has control over the content used. Content user is here encouraged to contribute to creation of information. Therefore, a question is raised about how tourist boards, being specific business systems, can utilise new trends in business. Answering the question about the extent to which business entities involved in development of Croatian tourism use Internet marketing represents the fundamental problem on which the paper is based. The paper is focused on the key problem – question to what extent business entities – primarily tourist boards – use tools of Internet marketing on their own web sites. Research goals have been set based on the problem definition. Therefore, the fundamental purpose of this paper is to collect and analyse data and give an overview of potential of using Internet marketing on web sites of particular tourist boards. Further, the goals are also to research and define: • the extent to which activity holders among users involved in the Internet within the system of tourist boards have recognised possibilities offerered by WEB 2.0. • the average age of a web site, depending on the organisational structure of a tourist board office • the amount of funds invested into online activities • the extent to which tourist boards use their own web sites as promotion tools.

O’Reilly, T. (2006): Web 2.0 Compact Definition: Trying Again, Volume: Rerievd, Issue: 99, Publisher: O´Reilly, (available at http://radar.oreilly. com/2006/12/web-20-compact-definition-tryi.html) (05.01.2012) 1

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Starting from the defined goals, the following hypothesis has been set: • Within the system of tourist boards there are significant quality differences among web sites of particular tourist board offices, depending on the organisational structure, which opens the space for achieving better and more efficient online promotional activities through additional investments into development of web sites. The hypothesis takes into account that the use of Internet marketing techniques within the system of tourist boards in the Republic of Croatia contributes to two-way communication to a large extent, i.e. holders and users of the content are here of special importance. It is necessary to recognise great significance of built relationships with buyers, users of applications on the Internet as a specific form of information distribution and flow. The derived goals of the paper are analysis of the results obtained in the research as to what extent tourist boards, depending on the organisational structure (county, city, municipal and regional boards), use tools and techniques of Internet marketing. Based on the conducted research, framework goal of the paper is to provide answers to questions about the quality, strength and speed of growth of marketing activities on the Internet by tourist boards as specific economic operators, and to find out to what extent they accepted new ways of using multimedia on the Internet and whether they and to what extent use possibilities of interaction with consumers.

2. DEFINITION OF TOURISM AND TOURIST BOARDS Being one of the fastest growing sectors, tourism today represents a social and economic phenomenon which creates a complex phenomenon by combining various elements. Tourism is a newer phenomenon in economy and it positioned itself in the system of scientific research as late as in the second half of the 20th century. Therefore it is no wonder that one of its key properties is changeability. Although there is no key definition of tourism, many authors have tried to provide definitions that will satisfy academic requirements based on key properties. Definition of tourism that is accepted in most of the countries is the one proposed by UNWTO: “Tourism comprises the activities of persons travelling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes not related to the exercise of an activity remunerated from within the place visited”.2 Definition presents tourism as an economic activity that defines participants participating in tourism development – tourists i.e. travellers. Considering the place of stay of an individual, there is a tourist destination – area of concentrated tourism offer resulting from increasing number of visitors. Definition of the mentioned terms leads to a conclusion that tourism has become one of the trends joined by millions of individuals on daily basis. One of the oldest definitions of tourism is that tourism is “the sum of the phenomena and relationships arising from the travel and stay of non-residents, insofar as they do not lead to permanent residence and are not connected with any earning activity“.3 The core of this definition is divided in two parts. The first part, the stay of a visitor in a particular place, is based on the sum of relations and phenomena related to tourism as economic activity, and the other part is the stay of this person in time framework that does not relate to economic activity that defines participants: tourists who enjoy the benefits of tourism on one hand and tourist workers who use tourism as economic activity to earn income on the other hand. Although this is one of the key definitions of tourism, it does not include the essence of tourist stays. According to Ružić, tourism is not nor can it be a separate economic activity, as the needs of travellers as well as other travellers are met through aggregation of several activities.”4 Based exactly on the above definition, tourism must be observed as a dynamic phenomenon susceptible to strong oscillations, that is, together with simultaneous development of technology in the constant change of trends. Due to strong and fast growing offer toward consumers, it is necessary to seek for channels of information distribution toward consumers. Being the systems that provide information to the public, tourist boards are key content creators and they disperse that content to the public, its consumers, clients and potential users of services. Tourist boards as systems combine activities that can be interesting to a potential tourist. As such, they become key points of searching for and obtaining information. Internet as means of information flow becomes the means – tool that tourist boards, among other, accept and begin to use. The Croatian National Tourist Board (CNTB) has been organised according to the Tourism Promotion Act. Tourist boards in Croatia are legal entities whose members are legal and natural persons operating in tourism sector on the area where they were established. The key purpose of tourist boards is to promote tourism professionally and efficiently, with guarWorld conference of the measurement of the Economic Impact of Toutism, Nice, 1999 Marković, S; Marković Z. (1967): Osnove turizma, Školska knjiga, Zagreb, 1967, p. 10 4 Ružić, D. (2007): Marketing u turističkom okruženju, Gradska tiskara Osijek, Osijek, 2007, p. 27 2 3

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anteed sources of financing. The aim of a tourist board as an economic and organisational unit is to meet the needs of consumers - guests. Tourist board as a driving force of development of a tourism destination acts as a mediator in providing information in its field of activity between subjects of tourist supply and demand. As a specific organised body, it is motivated by benefits for general society, which makes it a non-profit institution. Motivated by general good, system of tourist boards of the Republic of Croatia can be seen as the management system whose task is, among other, to prepare information to be dispersed to the public. As the system of tourist boards is focused on activities that will result in recognisability, raising awareness on the importance of a destination and providing economic activities, it is necessary to create prerequisites that will develop these items. One of the trends increasing strong involvement of consumers includes activities on the Internet. Work of tourist boards in future should be based on investments into applications that will provide the starting point for consumers when making a decision to visit a destination or not. By providing information in the area where they are active, tourist board offices create clear picture of their long-term organisational dream about where they would like to position themselves, what guests they would like to attract and in what way they can ensure quality to everyone in their area, from people employed in tourism to the end consumer.

2.1 Electronic marketing in tourism Numerous factors depend on the development of a product development strategy. Tourism as a specific mix of activities is characterised by numerous information that are available in business decision-making – some of them being punctuality, due time and reliability. Marketing information system is an organised range of procedures and methods applied to collect, analyse and interpret data continuously and in an organised way and to evaluate, store and distribute information that are used in business decision making.5 The focus is on the availability of important content. Nowadays when all economic sectors are affected by crisis, including tourism, it is assumed that ICT technology is of key importance for overcoming difficulties that tourist destinations and operators in tourism face all over the world. Internet, i.e. online booking is expected to grow much as well as the demand for online virtual business meetings or videoconferences, as the greatest decrease in demand will be in the sector of business travels.6 The answer on how to overcome problems is in increasing e-marketing activities. Owing to extremely fast development of ICT technology and implementation of technology in online distribution, marketing and sale, all participants in tourism can develop strong market penetration. According to estimates, total online booking in Europe will grow at rates exceeding 15%7, which leads to increasing development and investments into web centres and Internet tools of tourist operators. Marketing as a business strategy is conditioned with an organisation being focused on the market and the consumer, and all employees within the organisation should be focused on the consumer. Through its applications electronic marketing uses data bases and technologies to contact consumers in order to provide detailed insight into consumer’s properties and behaviours. Unlike traditional – analogue offline marketing that is based on market research, electronic marketing facilitates definition of strategic target groups of consumers and fast adjustment and flexibility of all marketing activities exactly according to their needs. Electronic marketing can be defined as a process of creating offer, setting prices, distribution and promotion aimed at profitable meeting of buyers’ wants and needs by using possibilities offered by digital technology and Internet. According to a group of authors Strauss, J., El-Ansary, A. and Frost, R., e-marketing “is the process of using information technology to create, communicate and deliver value to customers and to manage customer relationships in ways that benefit both the organisation and its interest groups. This is application of information technology to traditional marketing practice.”8 The term Internet marketing is only one of the language phrases – electronic marketing (e- marketing) being the most frequently used term. In addition to e-marketing (digital marketing), often the expression online marketing is used as a synonym and collective term for all types of marketing on the web. Other expressions include: cyber marketing, Internet marketing and web marketing.9 One of possible wider definitions of e- marketing is the one suggested by Panian: “Electronic marketing (e-marketing,telemarketing) is a means of realizing company’s marketing activities through intensive application of information and telecommunication (internet) technology”.10 Marušić, M., Prebežac, D. (2004): Istraživanje turističkih tržišta, Adeco, Zagreb, 2004, p. 6. Šalamon, B. (2009): Turizam i ICT u doba krize, Institut za turizam, 2009, p. 60. 7 European Online Travel Report 2007, EyeForTravel Research, (2007), (available at http://www.infotrend.hr/clanak/2009/4/turizam-i-ict-u-dobakrize,29,686.html) (accessed on 17.06.2012) 8 Strauss, J., El-Ansary, A., Frost, R. (2006): E-marketing, TKD Špahinpašić, Sarajevo, 2006, p. 21 9 Reedy, J., S. Schullo, K. Zimmerman (2009): Electronic Marketing, Integrating Electronic Resources, into the Marketing Process, The Dryden Press, Harcourt College Publishers, 2009, p. 7 10 Panian, Ž. (2000): Internet i malo poduzetništvo, Informator, Zagreb, 2000, p. 87 5 6

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It can be concluded that we are witnessing great changes in market competition, primarily owing to development of Internet technologies where participants are invited to participate in creation of the content. Participant becomes an active user who uses applications entirely through a browser, and has control over the content being used. The key characteristics of WEB 2.0 are openness, freedom and collective intelligence. The architecture of WEB 2.0 itself relies on users having control over data on a web site. The use of applications that encourage group interaction have become popular in the past few years, and modern business models have taken over applications whose success is based on the following characteristics:11 • They are free or cheap • Most often they rely on web as a platform • They are relatively easy to use • They work at individual level, but also provide some new and often extremely rich forms of integration. Forms of marketing on the Internet are more or less hybrid solutions in which marketing possibilities of the Internet are used in different ways and to a different extent, depending on specific properties of an economic operator. In other words, marketing on the Internet complements traditional marketing values. In his book “Here Comes Everybody” Clay Shirky claims that self-organisation is the key to understanding influence of the Internet on the society: “Now it is possible to organise without organisations.” Virtual links have made it possible to consumers to become recognised in cyber space. New consumer is exposed to a large number of media. He/she is constantly under the influence of numerous ads, which makes it harder to attract the consumer. Some authors think that new consumer has become a strong influence factor on product price formation. Marketing turned toward modern consumer is a new approach to satisfying consumer’s needs, and it is much different than traditional approaches and strategies typical of production and sales orientation. It is primarily focused on individual consumers which are treated as the starting and the final point of development of a marketing strategy.13 It is in these relations that value is created, efficiency found, knowledge developed and relationships formed. Every link is a connection and with each link a new network of contacts emerges or the existing ones become stronger.

3. RESEARCH OF USE OF INTERNET MARKETING TOOLS IN THE SYSTEM OF TOURIST BOARDS To provide clear overview of activities of tourist boards in creation of marketing activities on the Internet by using their own web sites, a research was conducted on the sample of 101 tourist board offices at various levels of organisational structure – county tourist boards, city tourist boards, municipal tourist boards and (regional) tourist board areas (Figure 1). The research also included the Head office of the Croatian National Tourist Board. The sample included 14 county tourist boards, 45 city tourist boards, 39 municipal tourist boards, and 2 offices of tourist board areas and the Head office of the Croatian National Tourist Board. Data were collected by means of a Google spreadsheet questionnaire that was sent to official e-mail addresses of tourist board offices in May 2012. The questionnaire comprised 62 questions, 9 of which were open-ended questions that required the respondent to write an answer, whereas the remaining questions were close-ended questions with offered answers. Figure 1. Graphic account of the research sample

Source: Developed by authors

Ružić, D., Biloš, A., Turkalj, D. (2009): e-Marketing, II. Izmjenjeno i prošireno izdanje, Factum d.o.o. Osijek, 2009, p. 32 Shirky, C. (2008): Here Comes Everybody: The Power of Organizing without Organizations. New York: Penguin, 2008 13 Krkušić, A.: Contemporary Concept of Consumer Attitudes Research, Civitas: časopis za društvena istraživanja, broj 1, 2011, pp. 197 – 198 11 12

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The starting point in the segmentation process was definition of a segment – intentional sample, as the research was related to research of use of tools and techniques of Internet marketing in the system of tourist boards. The research was based on a sample of experts/people with knowledge employed in the system of tourist boards, as mentioned research implied selection of experts in the field of research for which it is expected that their knowledge and opinions will be useful in terms of the set hypotheses - to what extent system of tourist board offices uses tools and techniques of Internet marketing. The aim of the questionnaire was to examine whether respondents, heads of online promotion of tourist board offices, use applications offered by WEB 2.0, what applications are used and to what extent, and to find out about the attitude of respondents about advantages and disadvantages of mentioned applications.

3.1 Average age of a web site To enter the very core of the research, the authors wanted to find out about the average age of web sites, i.e. when design or redesign was last made (Figure 2). Research showed that most of the tourist board offices (71% respondents) redesigned or created new sites a year ago (or less), which is certainly a positive trend, as development of technology was followed by development of web site development programmes. Web sites can be distinguished by their graphic layout and content. Accordingly, web sites can be divided into dynamic and static web sites. Figure 2. Overview of design/redesign of web sites through the period of five years

Source: Developed by authors

However, some concerning data can be also observed in the research results. They show that 20% of tourist board offices redesigned (or designed their web site) 4 or 5 years ago and have not done it since, and these sites are mostly static sites. Static web sites are developed in the way that desired content is entered manually or by means of a programme tool between HTML marks. The combination of the content and the programme code is then stored in a database. The procedure is repeated for several databases as needed, which are then connected with links.14 The problem with this approach to development of a web site occurs in the process of changing the content of the web site. It is a long-lasting procedure which requires specific knowledge, as the procedure has to be repeated with every HTML database in which content is to be changed. The problem with such sites is that they are often out of function, which cannot be allowed for any business entity, including tourist board offices. Considering the research results, there is a positive trend that shows that most of the sites designed by tourist boards are actually in the domain of dynamic web sites that were redesigned in the past two years. Most of the offices have recognised the potentials offered by such sites. Dynamic web sits are divided into sites executed at both the client and the server side. As a rule, combination of the above divisions is used because part of the content has to be processed on the server and part through the browser. Dynamic web sites are mostly Content management systems - CMS. When using dynamic web sites, content can be managed by almost anyone within the system of the Croatian Tourist Board, which is the ultimate goal – to create flexible organisation that will be able to create content on pages that can be quickly dispersed to the public, without additional needs for transferring and delegating work to IT specialists, administrators, etc. Overview in the figure below (Figure 3) provides the percentage ratio of when redesign was last carried out by organisational structure of tourist boards.

Vučetić, N., Savjeti i trikovi za Web, Časopis Vidi, on-line edition, (available at http://arhiva.vidi.hr/vidimag/81/27_dinweb81/27_dinweb81txthtm. php3) (accessed on 21.06.2012) 14

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Figure 3. Overview of design/redesign of web sites in the five-year period by the organisational structure of tourist boards

Source: Developed by authors

In relation to time, the county tourist boards follow development of web sites to the largest extent. Among the county tourist boards, 93% invested funds in web sites over the past two years, which is certainly the tendency that shows recognition of the importance of following this kind of promotion. Further, city tourist boards also invest significant funds, where 71% of the given tourist board offices redesigned their web sites in the past two years. Devastating fact is that regional tourist boards showed worst trends in terms of age of their web sites. Namely, all regional tourist boards replied that they redesigned their web site 5 or more years ago, indicating the fact that these sites are certainly static and unable to provide fast and good information and content, equally as we have mentioned advantages and possibilities on the dynamic web sites.

3.2 Investing into marketing activities on the Internet As any other industry, investment into Internet marketing requires certain financial funds. However, it should be noted here that these funds are much lower than funds required for implementation of traditional marketing activities (promotion on the media such as television, radio, billboards, newspapers; market research by sending out questionnaires, telemarketing; hiring agencies and mediators, etc.). Of course, in the previous text it was stated that online marketing activities complement traditional marketing activities. The authors have raised the question about what percentage of the budget is used for online activities. Results show that the average share of online promotion budget in the total budget of most tourist boards is between 5 and 10 percent (Figure 4). Figure 4. Overview of budget percentage intended for online activities

Source: Developed by authors

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Although online promotion requires lower financial funds, the stated amounts are insufficient to undertake strong activities and online market penetration. Negative trend shown by research results is 13% of tourist board offices that do not spend any funds on online promotion, which is in today’s market environment inadmissible. Through development of a good campaign and narrowing down the target group of consumers which business operators wish to address it is possible to achieve strong success at small cost. Only 8% of tourist boards spend between 40 and 45 percent of the total budget on online activities. The lack of answers and explanations points to the fact that there are strong oscillations in the income of different tourist board offices in relation to geographic location. To put it simply, an office of a tourist board in a tourist destination at the Adriatic coast generates large number of visits and overnight stays and earns greater income than tourist boards in the continental part of Croatia, thus having greater funds and greater budget for promotion, and the share in the budget of these two boards is not equal.

3.3 Using web sites of tourist boards as a communication tool The fact is that these web sites can be used as a means of communication activities in a tourism destination. The survey also included the question whether tourist products of a tourist destination where a tourist board is active are sold on the web site (Figure 5). From the above results it is obvious that system of tourist board offices fails to use the full potential of their own web sites as the means of promotion of products and services offered to potential consumers by a destination in their area; 93% of respondents stated that on their web site there are no information that would generate offer of products or services. Figure 5. Overview of sale of tourist products on web sites of tourist boards

Source: Developed by authors

Tourist board should be a generator in strengthening local tourism markets and mediation in all forms of communication where it should provide information on products offered in the area. This should strengthen its position as the driving force of economic, i.e. tourism activities. Among other activities implemented by tourist boards, Internet web sites of tourist boards are also media for mediation between a potential tourist and economic operator providing tourism products and services. Whatever is true about markets is also true about specific tourism market. Tourist boards still fail to perceive the importance of networking the system at all levels. It is this complexity that is typical of tourism and successful linking of all factors is of key importance to development of a good strategy in which investments into online strategies of any tourist board will contribute to global strength of destination promotion and attracting of potential consumers.

3.4 Monitoring web site traffic analysis in the system of the Croatian Tourist Board Through development of WEB 2.0 and by perfecting the ICT technology marketeers have, among other applications, obtained tools for monitoring web site visits – that was later generated into interaction analysis software. The key purpose of the set of mentioned tools and applications is to monitor behaviour of all web site visitors in analytical form without their knowledge and without disturbing their work. Statistical reports on all aspects of visitor’s behaviour are later obtained from these tools. The starting point when creating a marketing strategy is information analysis. Now there are various methods and tools that are used to monitor statistics and analyze the system and every business entity must select the ones that are most appropriate for its needs, depending on the strategy. The purpose of analytical software is to answer some of the following questions:15 • How many visitors arrive over search engines and what is the quality of these visits? 15

Analytical software for web sites, (available at http://www.pulsemediaweb.com/analiticki-softver-za-web-stranice/) (accessed on 20.06.2012)

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How many visitors are new and how many come back on a regular basis? How many visitors arrive through links from other sites? What key words attract visitors to the site? What countries, regions or towns are service users from?

These are some of the items that can be analyzed and regularly monitored by means of a good analytical software that should provide direct information about how efficient marketing campaigns really are. The research below shows to what extent tourist boards use analytics software. According to research results, (Figure 6) only 53% of tourist boards use the above software to track success of their web site, whereas 47% do not use these tools. Results are causing concern as use of these tools is part of the key values that are needed for a web site to be efficient. The task of the above tools is to monitor page view statistics, visits and unique visitors, and progress is measured by means of traffic increase over time. Exactly this information presents the core content that will help all employees in the tourist board offices to see clear picture of what is of interest to web site visitors. It can be also found out what content is viewed by their visitors and what information is interesting to them as larger marketing efforts can be made to distribute the mentioned content through some other tools (blogs, geolocation applications, social networks). These tools also monitor engagement statistics such as time on site and page views per visit to provide insight into the extent that visitors read the content of the site when they visit it. Figure 6. Use of web analytics software to track traffic on web sites

Source: Developed by authors

Research results were separated according to organisational level of a board to provide better insight into the problem (Figure 7). Figure 7. Web traffic analysis software on web sites, by the organisational level (percentage)

Source: Developed by authors

Research results confirm that there is a statistically significant difference in using applications, depending on the organisation level, where some offices use the above software to a larger extent, except in municipal tourist boards where 59% of tourist board offices do not have software for traffic analysis. As mentioned tools have not been implemented in web sites, the web sites fail to fulfil their purpose – to create a communication link toward visitors and to provide information at the same time. Without such software administrators are “blind” as there is no expert review of the web site design, content distribution, and the content itself as well as other technical details. Analysis of a web site provides to employees of tourist board offices the answer to the question whether there is a need for further redesign process or development of a new site, as web site is the basic element in creating an Internet marketing strategy, after web site is opened, functioning as the central point – brochure that will attract visitors.

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4. CONCLUSION Using own web sites tourist operators have gained the opportunity to sell their products and services to a large number of users, thus creating advertising space and earning a minimum commission as well as withdrawing minimum value from the service so it could develop up to maximum size and value. On the other hand, consumers have gained strong means of obtaining information that saves them both time and money, getting them privileged prices of products and services they buy. Possibilities offered by online sale are available to almost all operators offering tourism products and services: transportation providers, accommodation providers both at micro and macro level, hotel chains, catering facilities, travel agencies, event organisers, etc. The system of tourist boards in the Republic of Croatia has no efficient control over the use of tools and techniques of Internet marketing and there are significant differences in the level of use of their own web sites as the foundation for communication with consumers. The results in support of the hypothesis include the finding that one third of web sites was designed or redesigned three or more years ago, thus reducing their ability to implement WEB 2.0 applications in their sites and provide the possibility to users to select the information flow channel. Over 60% of tourist board offices spend between 5 and 10 percent of the total budget available for online promotion, which is insufficient for creation of online activities. Almost half of the offices do not use software for web site traffic analysis. The fact that 47% of offices do not use web site traffic analysis shows that administrators of online content do not use the key tool offered by WEB 2.0, i.e. the user analysis. The lack of such analyses results in the lack of tendency that would initiate online activities, as return on investment is unknown. In online search system on the Internet, by a single click of a mouse individuals can acquire relevant information about the country they are visiting, customs, money value, habits of the local population, weather, etc. By using the above mentioned technologies and services consumers of tourist products and services will not only insist on best prices, but also on rich content of useful information that they will primarily seek on the web site of a particular tourist board, depending on the destination. Therefore it is necessary to invest funds so that tourism operators could increase their recognisability in the cyber space.

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

Web analytics software, (available at http://www.pulsemediaweb.com/analiticki-softver-za-web-stranice/) (accessed on 20.06.2012) European Online Travel Report 2007, EyeForTravel Research, (2007), (available at http://www.infotrend.hr/clanak/2009/4/turizam-i-ict-u-dobakrize,29,686.html) (accessed on 17.06.2012) Krkušić, A.: Contemporary Concept of Consumer Attitudes Research, Civitas: časopis za društvena istraživanja, broj 1, 2011, pp. 197 – 198 Marković, S; Marković Z. (1967): Osnove turizma, Školska knjiga, Zagreb, 1967, p. 10 Marušić, M., Prebežac, D. (2004): Istraživanje turističkih tržišta, Adeco, Zagreb, 2004, p. 6 O’Reilly, T. (2006): Web 2.0 Compact Definition: Trying Again, Volume: Rerievd, Issue: 99, Publisher: O´Reilly, (available at http://radar.oreilly. com/2006/12/web-20-compact-definition-tryi.html) (05.01.2012) Panian, Ž. (2000): Internet i malo poduzetništvo, Informator, Zagreb, 2000, p. 87 Reedy, J., S. Schullo, K. Zimmerman (2009): Electronic Marketing, Integrating Electronic Resources, into the Marketing Process, The Dryden Press, Harcourt College Publishers, 2009, p. 7 Ružić, D. (2007): Marketing u turističkom okruženju, Gradska tiskara Osijek, Osijek, 2007, p. 27 Ružić, D., Biloš, A., Turkalj, D. (2009): e-Marketing, II. Izmjenjeno i prošireno izdanje, Factum d.o.o. Osijek, 2009, p. 32 Šalamon, B. (2009): Turizam i ICT u doba krize, Institut za turizam, 2009, p. 60 Shirky, C. (2008): Here Comes Everybody: The Power of Organizing without Organizations. New York: Penguin, 2008 Strauss, J., El-Ansary, A., Frost, R. (2006): E-marketing, TKD Špahinpašić, Sarajevo, 2006, p. 21 Vučetić, N., Savjeti i trikovi za Web, Časopis Vidi, on-line izdanje, (available at http://arhiva.vidi.hr/vidimag/81/27_dinweb81/27_dinweb81txthtm.php3) (accessed on 21.06.2012) World conference of the measurement of the Economic Impact of Tourism, Nice, 1999

DETAILS ABOUT AUTHORS: RUŽIĆ, IVAN PHD AGROKOR WINES ZAGREB, CROATIA ivan.ruzic@agrokorvina.hr

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BILOŠ, ANTUN UNIV.SPEC.OEC. UNIVERSITY OF J. J. STROSSMAYER; FACULTY OF ECONOMICS IN OSIJEK OSIJEK, CROATIA abilos@efos.hr

d u B r o v n I k , C r o at I a

KELIĆ, IVAN UNIV.SPEC.OEC. UNIVERSITY OF J. J. STROSSMAYER; FACULTY OF ECONOMICS IN OSIJEK OSIJEK, CROATIA ikelic@efos.hr

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MODELS FOR MEASURING OF KNOWLEDGE MANAGEMENT AND E-BUSINESS SYSTEMS SUCCESS OTILIJA SEDLAK MARIJA ČILEG TIBOR KIŠ IVANA ĆIRIĆ

ABSTRACT The resulting model of the measurement of knowledge management system success is used to classify the abundant variables described in a large number of empirical studies and comprises six components. On the basis of some resources and on the basis of this literature review, the DeLone/McLean model for information system (IS) success measurement is selected and discussed. We also give a figure to show that the six categories are interrelated and describe a process view of knowledge management success, a series of constructs which include temporal and casual influences in determining success. The clear structuring of the measures and especially the interrelationships hypothesized in DeLone/ McLean model have been subject to repeated criticism. Finally some critics are reviewed and developed of extensions to this model. We have extended the original DeLone/McLean model, respecified parts of the interrelationships, and even presented alternative models that follow an entirely different logic. The new model allows for a much more comprehensive analysis of independent factors influencing knowledge management system success and takes into account most of critique directed at the original DeLone/McLean model. KEYWORDS: Knowledge Managemet, Quality, Competences, e-economy

1. INTRODUCTION Skepticism about the value of e-business and information technology (IT) has been renewed recently, in part due to the gap between substantial firm spending on IT-particularly on Internet-related technologies-and the widespread perception about the lack of value of value from e-business. Today more than ever, IS research face strong pressure to answer the question of whether and how e-business investments create business value. Although innovation diffusion represents a complex process, much of the existing research has focused on the adoption decision and on measures such as “intent to adopt” and “adopting versus nonadoption” (Fichman 2000). We need to view e-business diffusion as a multistage process that starts at adoption and extends to usage and value creation. There is a lack of empirical evidence to gauge e-business usage and its impact on firm performance, partly because of the difficulty of developing measures and collecting data. A related issue is the lack of theory to guide empirical research. Although showing recent signs of advancement, the linkage between theory and measures is still weak in the e-business literature. Clearly, there is a need for a theoretically rigorous and empirically relevant framework for examining the use and value of e-business in organizations. Prior research argued that theories developed in the context of mature markets and industrialized economics need to be reexamined in the context of developing countries, because these countries may have very different economic and regulatory environments challenges the presumption of conceptual equivalence across cultural and economic barriers in management science research. We believe it is important to investigate whether innovation theories can be generalized and empirical findings are applicable in different economic contexts. To achieve this, we study e-business experience of organizations in developed and developing countries that might represent different stages of e-business transformation, for results in Vojvodina. The gaps in the literature limit our understanding of the process of e-business innovation and consequently of e-business value. Key research questions that motivated our work are: (1) What framework can be used as a theoretical basis for studying e-business use and value? (2) Within this theoretical framework, what factors can be identified as key antecedents of e-business use and value? (3) How would these factors vary across different economic environments like Vojvodina? To better understand these issues, we developed a conceptual model for e-business use based on the technologyorganization-environment (TOE) framework (Tornatzky and Fleischer 1990). We also analyzed e-business value creation, from a resource-based perspective, that stems from the unique characteristics of the Internet.

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A host of variables, indicators and measures to assess the success of an IS: • user (information) satisfaction of system acceptance, • user engagement, user participation or user involvement, • (perceived) information quality or system quality, • perceived service quality: user satisfaction, • usage of IS, usage to support specific tasks, • task-technology fit, • success of specialized IS: impact on individual, group or organizational performance, such as decision support systems, group (decision) support systems and group communication support systems, office systems, Creativity Support Systems, computer-mediated communication or End-User Computing. DeLone and McLean went to the trouble of a comprehensive analysis of all the different streams of research about IS success and proposed an integrated model for information system success. This model is one of the most cited and empirically tested frameworks of IS success, in spite of many respectifications and extensions mostly in its original form, probably due to the fact that it is comparably well-defined, theoretically founded and yet simple and easily tailored to specific situations.

2. E-BUSINESS AND KNOWLEDGE MANAGEMENT A theoretical model for e-business use needs to take into account factors that affect the propensity to use e-business, which is rooted in the specific technological, organizational, and environmental circumstances of an organization. The TOE framework identifies three aspects of a firm, s context that influence the process by which it adopts, implements, and uses technological innovations: (a) Technological context describes both the existing technologies in use and new technologies relevant to the firm. (b) Organizational context refers to descriptive measures about the organization such as scope, size, and the amount of slack resources available internally. (c) Environmental context is the arena in which a firm conduct its business-its industry, competitors, and dealings with government. There are three types of innovations: Type I innovations are technical innovations restricted to the IS functional tasks (such as relational databases, CASE); Type II innovations apply IS to support administrative tasks of the business (such as financial, accounting, and payroll systems); and Type III innovations integrate IS with the core business where the whole business is potentially affected and the innovation may have strategic relevance to the firm. We consider e-business a Type III innovation, in the sense that e-business is often embedded in a firm’s core business processes (e.g., making use of the open standard of the Internet protocol to streamline information sharing among various functional departments); e-business can extend basic business products and services (e.g., leveraging Internet-enabled two-way connectivity to offer real-time customer service); and e-business can streamline the integration with suppliers and customers. E-business is a new Type III innovation and warrants investigation along with these innovations. In particular, the migration toward the Internet and the transformation of traditional processes require firms and their subunits to orchestrate the coevolutionary changes to their technologies in use, business processes, and value chain structures to successfully assimilate the Internet technologies into their e-business initiatives. The TOE framework is appropriate for studying e-business usage. Based on the TOE framework, the use of e-business in organizations will be influenced by three types of antecedents: technological factors, organizational factors, and environmental factors. The Internet is characterized by open standard (versus proprietary standard), public network (versus private network), and broad connectivity (back end and front end). These characteristics may have very different impacts on customer reach and richness of information. The global reach of the Internet enables cost-efficient means of reaching out to new markets, attracting new customers, and delivering products and services, as well as improving coordination with suppliers and business partners.

2.2. E-Business Value and the Resource-Based Theory The resource based view (RBV) provides a theoretical basis for linking e-business use and value. Rooted in the strategic management literature, the RBV of the firm posits that firms create value by combining heterogeneous resources that are economically valuable, difficult to imitate, or imperfectly mobile across firms.

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The value hierarchy depicts the unique characteristics of the Internet and how these characteristics enable value creation via e-business. In contrast to e-business, less connectivity, and a private network configuration â&#x20AC;&#x201C; creates business value mainly through improving transactional efficiencies and reducing costs in procurement (Figure 1). We examined the unique characteristics of the Internet and linked them in three ways through which e-business may create value-transactional efficiencies, market expansion, and information sharing. Combining them with the RBV, we developed an e-business value hierarchy, as shown in Figure 1. Open-standard information exchange can results in a more synchronized information flow will make materials move efficiently along the supply chain, thereby reducing the bullwhip effect. Such e-business value may lead to improved firm performance in sales, procurement, and internal operations, as shown in the top layer of the value hierarchy in Figure 1. Figure 1. E-Business Value Hierarchy

â&#x20AC;Š

3. BASIC ELEMENTS FOR DIFFUSION OF E-BUSINESS Technology Context. The literature suggests that IS capabilities consist of infrastructure, human resources, and knowledge. Firms with a higher degree of technology competence tend to enjoy greater readiness to use e-business in their value chain processes. As a result, they would be more likely to achieve a greater extent of e-business usage. This leads to the following hypothesis. H1. Firms with greater technology competence are more likely to achieve a greater extent of e-business use. Organization Context. Firm size is commonly cited in innovation diffusion literature, yet different opinions exist as to the role that firm size plays in the process of innovation diffusion, due to the tension between resource availability and organizational inertia. On one hand, large firms generally possess slack resources that can facilitate implementation and usage. On the other hand, firm size is often associated with inertia; that is, large firms tend to be less agile and flexible than small firms. The possible structural inertia associated with large firms may slow down organizational usage and may therefore retard e-business value creation. Because our model has controlled for technological and financial resources that large firms may possess, the notion of structural inertia leads us to expect that large firm size may deter e-business usage and value creation. This leads to the following hypothesis. H2. Controlling for resource availability effects, larger firms tend to achieve a lesser extent of e-business use. Firms conducting business in multiple markets have to manage demand uncertainty in all segments simultaneously, which requires a high degree of integration, flexibility and responsiveness in their information systems, as well as the broader information infrastructure linking the firm with its customers, trading partners, and distributors. As documented in the literature and consistent with our value hierarchy in Figure 1, e-business may help to create these capabilities within the firm and with its trading partners as a result of common standards, lower cost, and greater ease of implementation of Internet-based applications. In sum, retail companies that expand globally would have a greater incentive to use ebusiness to leverage their existing IT capabilities for a competitive advantage. This leads to the following hypothesis.

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H3. Firms with greater international scope are more likely to achieve a greater extent of e-business use. Financial resources constitute another important factor recognized in the innovation literature. In this study, we tailor this factor to financial resources specially committed to e-business. Implementing e-business requires investment in hardware, software, system integration, and employee training. Sufficient financial resources dedicated to e-business helps companies to obtain these necessary resources and develop them into superior e-business functionalities. Thus, firms with greater financial commitment are more likely to achieve successful e-business implementation and thus tend to achieve a greater extent of usage. Hence, we have the following hypothesis. H4. Firms with greater financial commitment are more likely to achieve a greater extent of e-business use. Environment Context. Competitive pressure refers to the degree of pressure that the company feels from competitors within the industry. The use of e-business may induce changes of industry structure through disintermediation and reintermediation, offer new means of competing and altering competition rules through lock-in, electronic integration, and brick-and-click synergy. Thus, competitive pressure plays a significant role in pushing firms toward using e-business. H5. Firms facing higher competitive pressure are more likely to achieve a greater extent of e-business use. Regulatory support is another critical environmental factor that tends to affect innovation diffusion. This concept is similar to government policy theorized to affect IT diffusion in Umanath and Campbell (1994) and empirically tested in Dasgupta et al. (1999). The latter found that companies operating in an environment where government policies are restrictive have low IT adoption. H6. Firms facing higher regulatory support are more likely to achieve a greater extent of e-business use. Linkage from E-Business Use to E-Business Value. We draw on the RBV to explain the connection between usage and value. RBV suggests that the greater the extent of IT use, the greater the likelihood that organizations will create IT capabilities that are rare, inimitable, valuable, and sustainable, thereby contributing to value creation (along with organizational compliments). Through deeper usage in organizations, IT creates asset specificity, which provides a competitive advantage. A classic model for general IS success developed by DeLone and McLean (1992) suggested that there tends to be a strong link between system use and system impact. H7. Firms with greater e-business use are more likely to generate higher e-business value. E-Business Value. The ultimate goal of using e-business is to improve the business performance of the organization. As shown in the value hierarchy of Figure 1, e-business helps companies develop appropriate functionalities to leverage the Internetâ&#x20AC;&#x2122;s characteristics. E-business functionalities are categorized into two groups: front-end functionality and back-end integration. Back-end integration helps firms achieve technology integration and enables information sharing within the firm and along the value chain. Thus, one would expect that superior front-end functionality and back-end integration help firms improve business performance. This leads to the following hypothesis. H8. Greater e-business capabilities, including both front-end functionality and back-end integration, are positively associated with higher e-business value. Although both have the potential to create e-business value, front-end functionality and back-end integration may vary in importance, as suggested by the resource-based theory. Front-end functionality is public and open on the Internet, and thus could be easily observed and imitated by competitors. As a result, front-end functionality could become commodity-like as more competitors adopt e-business. In comparison, the process of back-end integration is far more difficult to imitate, because its success requires quality complementary resources. In addition, the integration process is often tailored to a firmâ&#x20AC;&#x2122;s strategic context and woven into the organizationâ&#x20AC;&#x2122;s fabric, which is not transparent to competitors. Therefore, we propose the following hypothesis. H9. Back-end integration will have a stronger impact on e-business value than front-end functionality. International Effects: Differences between Developed and Developing Countries. Given that the Internet is an open platform with global connectivity, we believe it is important to incorporate an international dimension in this study. H10. The strength of the antecedents of e-business use and value will differ for developed and developing countries.

4. MEASUREMENT MODEL The development of the measurement model included successive stages of theoretical modeling, statistical testing, and refinement (Straub 1989). Measurement items were developed on the basis of a comprehensive review of the literature as well as expert opinion. We then tested multi-indicator constructs using confirmatory factor analysis (CFA)1. Based on the assessment of CFA, the measurement model was further refined and then fitted again.

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Several constructs deserve further explanation. First, technology competence is instrumented not only by physical technologies, but also by IT human resources that possess the knowledge and skills to implement e-business. Such a design is consistent with the theoretical rationale discussed. Our study used the major items in the first three dimensions to instrument front-end functionality, and the fourth dimension corresponded to our back-end integration. Table 1: Measurement Model: Factor Loadings, Reliability, and Convergent Validity Measurement Model: Factor Loadings, Reliability, and Convergent Validity Constructs (reliability) Technology competence (0.81) International scope (0.81) Financial commitment to e-business (0.83) Competitive pressure (0.86) Regulatory support (0,80)

Back-end integration (0.86) E-business use (0.78)

Front-end functionality (0.80)

Impact on sales (0.88) Impact on internal operations (0.90) Impact on procurement (0.87)

Indicators

Loadings

Convergent validity (t-start)

TC1 TC2 TC3 FS1 FS2 FS3 FR1 FR2 CP1 CP2 RE1 RE2 RE3 RE4 BI1 BI2 EU1 EU2 EU3 EU4 EU5 FF1 FF2 FF3 FF4 FF5 IS1 IS2 IS3 II01 II02 IP1 IP2 IP3

0.79*** 0.79*** 0.71*** 0.64*** 0.86*** 0.78*** 0.86*** 0.82*** 0.87*** 0.87*** 0.68*** 0.69*** 0.71*** 0.74*** 0.87*** 0.86*** 0.64*** 0.50*** 0.46*** 0.83*** 0.75*** 0.63*** 0.65*** 0.67*** 0.72*** 0.68*** 0.86*** 0.84*** 0.81*** 0.89*** 0.91*** 0.85*** 0.85*** 0.79***

46.76 37.10 24.90 36.65 160.80 52.66 29.07 15.84 74.04 73.89 21.30 24.87 22.91 30.76 80.53 79.54 18.44 6.67 4.85 35.95 13.55 15.92 25.76 26.00 24.31 20.46 76.46 51.62 41.92 81.85 123.42 50.11 74.50 37.90

* p < 0.10; ** p < 0.05; *** p < 0.01. Insignificant factors are dropped (FS4 and FS5).

To empirically assess the constructs theorized above, we conducted CFA using structural equation modeling. We assessed construct reliability, convergent validity, discriminant validity, and validity of the second-order construct. The measurement properties are reported in Table 1. (1) Construct Reliability: Construct reliability measures the degree to which items are free from random error and therefore yield consistent results. In our measurement model (Table 1), all constructs have a composite reliability over the cutoff of 0.70, as suggested by Straub (1989).

For the purpose of testing the robustness of our measurement model, we also ran eyploratory factor analysis on all indicators. Principal component analysis with equamax rotation yielded a consistent grouping with CFA. 1

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(2) Convergent Validity and Discriminant Validity: Convergent validity assesses the consistency across multiple operation. As shown in Table 1, all estimated standard loading are significant (p<0.01), suggesting good convergent validity. To assess the discriminant validity-the extent to which different constructs diverge from one another-we used Fornell and Larckerâ&#x20AC;&#x2122;s (1981) criteria: average variance extracted for each construct should be greater than the squared correlation between constructs. Table 2: Measurement Model: Second-Order Construct Table 2 Measurement Model: Second-Order Construct Second-order construct

First-order construct

t-stat

Composite reliability

E-business value

Impact on sales Impact on internal operation Impact on procurement

0.865*** 0.805***

77.68 44.08

0.88

0.844***

55.52

* p < 0.10; ** p < 0.05; *** p < 0.01 (3)Validity of the Second-Order Construct: Table 2 shows the estimation of the second-order construct, e-business value. The paths from the second-order construct to the three first-order factors are significant and of high magnitude, greater than the suggested cutoff of 0.7. Our model has a very high T ratio of 0.99, implying that the relationship among firstorder constructs is sufficiently captured by the second-order construct. Therefore, on both theoretical and empirical grounds, the conceptualization of e-business value as a higher-order, multidimensional construct seems justified. In summary, our measurement model satisfies various reliability and validity criteria. Thus, constructs developed by this measurement model could be used to test the conceptual model and the associated hypotheses proposed earlier. Empirical tests are on the Integrated Model of E-Business Use and Value. Our model has a very high T ratio of 0.99, implying that the relationship among first-order constructs is sufficiently captured by the second-order construct. Therefore, on both theoretical and empirical grounds, the conceptualization of e-business value as a higher-order, multidimensional construct seems justified. In summary, our measurement model satisfies various reliability and validity criteria. Thus, constructs developed by this measurement model could be used to test the conceptual model and the associated hypotheses proposed earlier.

5. ANALYSIS AND INTERPRETATIONS We tested the conceptual model by structural equation modeling using both the full sample and the sample split between developed and developing countries. Although theory and prior research led us to expect differences, we did not know a priori that there would be differences between the full and split samples; therefore, we needed to do the analysis for both. It also enabled us to relate our finding to the broader IT literature. The strong statistical power enhanced our confidence in the result of hypotheses rtesting, which is based on the examination of the standardized paths shown in Figure 2. For e-business use, five of six TOE factors-technology competence, size, financial commitment, competitive pressure, and regulatory support- have significant paths leading to the dependent construct. Size has a negative path, while the other factors have positive paths. The path associated with international scope is positive but statistically insignificant (p>0.10). E-business value is also shown to have significantly positive associations with front-end functionality and back-end integration. Hence, Hypothesis 8 is supported. To test hypothesis 9, we compared the standardized path from front-end functionality to e-business value with standardized path from back-end integration to e-business value. Back-end integration is found to have much higher magnitude than front-end functionality (0.239*** versus 0.141***). Thus, Hypothesis 9 is supported. Within the TOE framework, technology competence, financial commitment, competitive pressure, and regulatory support are found to have significant influence on the extent of e-business use. Among these, technology competence appears to be strongest factor.

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As indicated by their significant and positive paths in Figure 2, firms with higher levels of technology competence tend to achieve greater extent of e-business use, as do firms facing competitive pressure and regulatory support. Among all the TOE factors, technology competence is the most significant factor, as indicated by its path loadings and significance levels (p < 0.01), followed by regulatory support. Within the organizational context, our study reveals a negative effect of firm size on e-business use. While it has been commonly believed that large firms have more slack resources for committing required investments, our results show that large firms are also burdened by structural inertia, possibly due to fragmented legacy systems and entrenched organizational structures. Our model has controlled for technological and financial resources, and thus the net effect of firm size in our model might be dominated by structure inertia. These results suggest that the proposed research model in Figure 2 is a useful theoretical framework for explaining factors that affect the use of e-business by companies. 2. The linkage from e-business use to e-business value is found t be significant, suggesting that use would be a “missing link” if not included. As theorized earlier, firms with higher e-business use-tend to achieve greater value from e-business use tend to achieve greater value from e-business. Our results from both the full sample and the split sample consistently show a significant and positive linkage from e-business use to e-business value. This means that higher degrees of e-business use are associated with improved business performance. This also confirms the earlier postulation that actual use may be the “missing link” to IT payoff. This significant linkage also supports our research design, in which use and value are evaluated together in one model. 3. Both front-end functionality and back-end integration contribute to value creation of e-business. Using a large dataset, our analysis has identified two ways in which e-business creates value-front-end functionality and back-end integration. This finding is supported by the significant and positive linkages from front-end functionality and back-end integration to e-business value. Front-end functionalities help firms provide timely information to customers, facilitate personalization and account management, expand existing channels, and improve transactional efficiencies; back-end integration enables technology integration within the organization and facilitates information sharing with suppliers and business partners. As a result, these two types of e-business capabilities help firms improve performance by affecting intermediate achievements such as customer intimacy in the front end and operational excellence in the back end; both are critical for firms to achieve performance improvement. 4. The importance of two factors-competitive pressure and regulatory support-differs across developed versus developing countries. This finding confirms that economic environment shape e-business use. This result might be explained as follows. First, competitive pressure is statistically significant for developed but not for developing part of the country. Such a difference could be explained by the distinct market environments of developed and developing part of the country. Prior research has shown that information asymmetry exists in less-developed markets, and market imperfections and inefficiencies may weaken the pressure from competitors. In developed area of the country, however, markets have evolved into mature stages over time, characterized by more transparent information flow and more stable legal frameworks and government policies. Therefore, firms in developed countries can obtain more information about competitors, e-business development, which may force them to adopt e-business to avoid competitive decline. Second, although the path loadings of regulatory support appear to be significant in both subsamples, more sophisticated analysis (group analysis) reveals that it is relatively more important in developing countries. This finding is related to the above discussion, that markets in most developing part of country are characterized by information asymmetry and immature institutional structure. As a result, government regulation (e.g., legal protection of online transactions), or the lack thereof, tends to be a greater force in developing countries. In light of these varying behaviors across the two subsamples, we have learned the significant role that economic environments play in shaping the extent of e-business use. This finding further confirms the usefulness of the proposed conceptual model for studying e-business, as economic environment is an important factor within the TOE framework. These results have several important implications for management. First, they offer a useful framework for managers to assess the technological conditions under which e-business is launched to better pursue business value. It is important to build up technology competence includes tangible technologies, intangible managerial skills, and human resources. Further, IT managers have struggled for ways to create value from Internet technologies. Our study sheds light on ways to realize value from e-business-greater breadth and depth of use, customer-facing Web functionalities on the front end, and tight integration on the back end. In particular, our empirical results highlight the importance of back-end integration among various back-office databases

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and enterprise systems, and information sharing with business partners. Our analysis has identified this as a major source of e-business value. It will become even more important as e-business develops into deeper stages, as suggested by the results that the significant of back-end integration is more pronounced in developed countries that seem to be at deeper stages of e-business development. These findings could serve as useful guidelines foe firms to develop their e-business capabilities. This is especially important in the retail industry, where firms have been building various legacy systems and using multiple IT platform over the years. Furthermore, managers need to assess the appropriateness of e-business to certain organizational characteristics (e.g., size scope), as suggested by our empirical findings. This implies that potential value of e-business investment could be affected by structural differences. Effective e-business programs rely on necessary organizational reconfiguration and business processes reengineering. As Internet technologies diffuse and become necessities, these organizational capabilities and structural differences will be even more critical. In particular, managers in retail firms with a wider scope should pursue e-business usage more proactively, given the greater potential to achieve benefits from e-business. This implication should be of special interest for retailers seeking global expansion into different regions and market segments. Such expansion means that retailers would face greater coordination tasks and could leverage e-business initiatives to facilitate coordination and achieve resource integration. Finally, our study also offers implications for policy makers. Regulatory support has emerged as an important factor for e-business use and value. This is even more important for developing countries. During our study, companies frequently cited significant obstacles to doing e-business, including inadequate legal protection for online transactions, unclear business laws, and security and privacy concerns. While this was important for all countries, it was a much more significant factor for developing countries. It also pointed to the need for establishing a broad legal and institutional framework that supports e-business. Governments, therefore, could accelerate the diffusion of e-business by establishing supportive business laws to make the Internet a trustworthy business platform (e.g., dealing with transaction fraud, promoting credit card use). This is particularly important at early stages of e-business development in an economy. Technological innovations are considered the primary driver of improvements in industrial productivity. Yet if promising innovations cannot be widely deployed, then the benefits resulting from their invention will be curtailed.

6. CONCLUSIONS Grounded in the innovation diffusion literature and the resource-based theory, this study has theoretically developed and empirically evaluated an integrative research model incorporating technological, organizational, and environmental factors, for assessing e-business use and value at the firm level. While these issues were typically studied separately in the literature, our results suggest that usage and value are closely link, indicating that this unified perspective helps us gain a more holistic picture of the postadoption diffusion and consequence of e-business. To realize e-business value, firms need to facilitate the usage of e-business in various value chain activities. For e-business use, our study has examined six factors, within the TOE framework, as drivers of e-business use. Some of these factors play different roles across different economic environments. This finding shows that, while e-business is a global phenomenon, its use is moderated by local environments. For e-business value, our study has demonstrated that the extent of e-business use and e-business capabilities, both front-end functionalities and back-end integration, contribute to value creation of e-business, but back-end integration has a much stronger impact. In summary, this study has developed an integrative theoretical framework for assessing e-business use and value, beyond initial adoption.

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DETAILS ABOUT AUTHORS: OTILIJA SEDLAK ASSOCIATE PROFESSOR FACULTY OF ECONOMICS SUBOTICA, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA otilijas@ef.uns.ac.rs MARIJA ČILEG FULL PROFESSOR FACULTY OF ECONOMICS SUBOTICA, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA mcileg@ef.uns.ac.rs TIBOR KIŠ FULL PROFESSOR FACULTY OF ECONOMICS SUBOTICA, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA tkis@ef.uns.ac.rs IVANA ĆIRIĆ PhD STUDENT FACULTY OF ECONOMICS SUBOTICA, UNIVERSITY OF NOVI SAD SUBOTICA, SERBIA czoran@ef.uns.ac.rs

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IS THERE A NEED FOR APPLYING A BROADER SET OF CRITERIA FOR EMU MEMBERSHIP – THE ROLE OF UNOFFICIAL EUROISATION VLADIMIR ŠIMIĆ

ABSTRACT The project of a single European currency has been the subject of much controversy since its very beginnings. This enormous experiment has to date remained a hot issue in both academic and policy circles, especially nowadays when questions of the euro future are considered very seriously. Given this it seems a bit surprising to see a number of the EU member states still dedicated to adopting the euro in near future. The countries wishing to enter the EMU have to fulfil the Maastricht criteria. Notwithstanding the recent worries and assuming that the euro will survive, this paper critically assesses the appropriateness of the Maastricht criteria and proposes that in the case of countries from Central and Eastern Europe an additional weight be given to unofficial euroisation which may have important consequences for the conduct of monetary and exchange rate policy. Therefore there is a need to explore its implications for the official introduction of the euro. This topic has been generally neglected in the literature and this paper fills this gap by investigating the need that the convergence criteria be modified in case of the euroised economies. These considerations are empirically explored using the case of Croatia. KEYWORDS: Unofficial euroisation, Maastricht criteria, monetary integration.

1. INTRODUCTION The project of a single European currency (the euro) has been the subject of much controversy since its very beginnings. The views on the need and appropriateness of a single currency differed markedly, on one hand questioning the readiness of Europe for a single currency and on the other hand suggesting that, although there will be costs, the benefits will prevail and that monetary integration was a natural step forward in Europe. This enormous experiment has to date remained a hot issue in both academic as well as policy circles, especially nowadays with the very hard times the EMU has been having with some of its members (Greece currently and a few more potentially). The times we live in are so grave that the questions of the euro future are considered very seriously. Given this it seems a bit surprising that a number of new EU member states are still dedicated to introducing the euro in near future (some members, like Slovenia, Slovakia and Estonia have already entered the EMU). The countries wishing to enter the EMU have to fulfil the Maastricht criteria. Notwithstanding the recent worries about the future of the euro and assuming that it will survive, this paper critically assesses the appropriateness of the Maastricht criteria and proposes that in the case of countries from Central and Eastern Europe an additional weight be given to a particular feature of these economies. Namely, foreign currencies (be it the euro or the US dollar) have been playing an important role in a number of transition economies of Central and Eastern Europe. This presence of foreign currencies (referred to usually as unofficial euroisation/dollarisation) may have important consequences for the conduct of monetary and exchange rate policy. Hence, there is a need to explore its implications for the official introduction of the euro (EMU membership). This topic has been generally neglected in the literature and this paper fills this gap by investigating the need that the convergence criteria be modified in case of the euroised economies. These considerations are empirically investigated using the case of Croatia and its experience with unofficial euroisation. The paper is structured as follows. Section 2 briefly considers the costs and benefits of monetary integration from a theoretical perspective. Monetary integration in Europe is explored in Section 3 with the emphasis on the Maastricht convergence criteria. Section 4 addresses the importance of unofficial euroisation as a potential criterion for monetary union. Concluding remarks are provided in Section 5.

2. COSTS AND BENEFITS OF MONETARY INTEGRATION – A THEORETICAL PERSPECTIVE The theory of optimal currency areas (OCA) is a natural starting point in considering the desirability of the introduction of a single currency. It can help in deciding whether a monetary union makes sense economically. Based on the seminal papers by Mundell (1961) and McKinnon (1963) and many subsequent contributions later on (see for example Bayoumi, 1994; Ricci, 1997; Alesina and Barro, 2002) this section briefly outlines the costs and benefits of monetary integration. The decision to fix its exchange rate can lead a country in question both to economic sacrifices as well as to benefits. The overall outcome will principally depend on the extent of a country’s integration with the rest of its potential partner countries. In order for an area in the world (a group of countries) to be considered an optimum currency area several

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criteria need to be fulfilled. Typically, the literature lists as the most important factors the following: the level of trade integration among the potential partners, integration of capital and financial markets, labour mobility, similarity of economic structure (the need for having synchronised business cycles) and fiscal federalism (the possibility of fiscal transfers between the member states). The difficulties may occur if these conditions are not met. The danger arises because if the partner countries are not an optimum currency area, i.e. if they are too diverse on the above mentioned criteria and they still decide to adopt a common currency there will be, sooner or later, significant economic costs (Wyplosz, 2006). Notwithstanding these worries let us for a moment concentrate on the potential benefits. One of the benefits is related to the monetary efficiency gain which arises from avoiding uncertainty, confusion and transaction costs in general in the presence of floating exchange rates which in consequence should raise trade. To this end, although it was held for a long time that the trade effect of exchange rate volatility was negligible, Rose (2000) found that the pro-trade effect of a currency union was huge, with a common currency boosting trade between nations by as much as 300%. Later studies showed that this large the effect may be exaggerated. These studies confirmed the existence of the effect but at a much smaller level (see for example Persson, 2001; Micco et al. 2003; Baldwin, 2006). Thus, it is probably warranted to accept the potential benefits of monetary integration on trade, but one should be cautious not to exaggerate them. Another reason why the high extent of monetary integration is beneficial is an easier international price convergence, which further results in importing low inflation from a targeted area’s currency. If a country fixes its exchange rate to the currency of a country with a strong reputation of low inflation it borrows credibility of the targeted currency and country and it is expected that this will lead to lower inflation. This credibility argument was used in the formation of the EMU with an assumption that the future European central bank would be strongly influenced by the Bundesbank and it would act as its successor with a strong credibility. All this is further expected to lower the interest rate, which in consequence should have a beneficial impact on economic activity. On the costs side of monetary integration the loss of monetary independence arises as the most important difficulty. A country adopting the common currency will not have an autonomous monetary policy to deal with the shocks faced by the domestic economy. Thus, it loses an important leverage in affecting the domestic economy developments, primarily the stabilisation role in the short term. These costs may be significant if a country’s business cycle is not synchronised with those of the common currency partners. Thus, if a country is hit with a negative aggregate demand shock, which may not be the case for the rest of the countries in the monetary union, it is very likely that the common monetary policy will not be geared towards the current needs of the country in difficulties. Another important loss is the own exchange rate policy. If a country is faced with a grave and lasting trade imbalance, there will be no possibility to devalue to correct these imbalances and improve its competitiveness. From a theoretical perspective, we can see that there are ex ante both potential benefits as well as costs regarding the process of monetary integration. In the following section we investigate these aspects focusing on monetary integration in Europe.

3. MONETARY INTEGRATION IN EUROPE – EMU AND THE MAASTRICHT CRITERIA For a long time monetary integration and a single currency in Europe was seen as a mission impossible by many economists, especially the American ones. The reasons for this pessimistic view rest upon the arguments which suggest that on many accounts Europe, unlike the United States, is not an optimum currency area. Early literature on monetary integration in Europe strongly advised against the introduction of a single currency in the EU (see for example Bayoumi and Eichengreen, 1992; Feldstein, 1997) or was rather reserved towards the success of this project (see for example Wyplosz, 1996). As suggested in these studies Europe was not ready to adopt the common currency as the established economic criteria for its success were not met. Politicians nevertheless decided to go for it and the euro was adopted in 1999. Concerning the entry criteria economists familiar with the OCA theory would have expected that entry criteria would identify labour mobility, labour market flexibility, trade openness and trade diversification as the crucial ones (Wyplosz, 2006). Unexpectedly, these criteria played a minor role in establishing the formal criteria for EMU membership. Instead, in order to become a member of the EMU every country has to fulfil a certain set of criteria that are contained in the Maastricht Treaty. The Maastricht Treaty established the following criteria (the Maastricht convergence criteria) that a country needs to satisfy to be admitted to the EMU: 1. Inflation criterion: an inflation rate not more than 1 ½% higher than those of the three best performing EU countries over the latest 12 months. 2. Fiscal convergence criteria: These criteria restrict the budget government deficit and the government debt to certain

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levels. A country which wants to participate in the EMU may not have a. a government budget deficit higher than 3% of GDP, b. a government debt ratio of more than 60% of GDP or sufficiently fast approaching that level. 3. Interest rate criterion: an average nominal long term interest rate that does not exceed by more than two percentage points that of the three best performing member states in terms of price stability. 4. Exchange rate criterion: participation in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) with the normal fluctuation margin without severe tensions for at least two years. A great deal of concern has been expressed about the Maastricht criteria and the use thereof when assessing the state of convergence required for the EMU accession. As often argued it was evident from the very beginning that Europe was not an optimum currency area (see for example Bayoumi and Eichengreen, 1992) and the OCA criteria were practically ignored1 when formulating the Maastricht criteria. The particular difficulty with these criteria is the control over fiscal policies of member states and the coordination of the single monetary policy with the individual fiscal policies. An attempt was made to exert some control over the EMU member countries (especially on their fiscal policies â&#x20AC;&#x201C; the two fiscal criteria) through the introduction of the Stability and Growth Pact. The underlying economic logic for its introduction stems from the wide evidence that large inflations are a consequence of high and increasing budget deficits that lead to an unsustainable public debt that in turn will need to be financed by the central bank. If this was to be avoided, the monetary authority in Europe needed autonomy not to be drawn into an inflationary process. Otherwise, the stability and sustainability of the euro area would be in great danger. Therefore, the Pact was meant to act as a control mechanism on public finances of the member states. As a consequence, it was often argued that these arrangements will make it difficult for EMU members to stabilise their economies with appropriate fiscal policy (they lose a countercyclical policy) and to provide adequate public investment. As early as 1993 Buiter et al. argued that the proposed fiscal rules were misguided in principle, arbitrary in choice of particular numerical thresholds and far more stringent than necessary. On the other hand, Gali and Perotti (2003) argue that their findings provide little support for this view by showing that discretionary fiscal policy in the EMU countries has become more counter-cyclical over time2. However, these optimistic findings need to be considered with caution, given that the period analysed in this study was practically not covering any important recessions in the euro area. Unfortunately, as warned by many studies (for example Buiter et al., 1993), the experience has shown that the Stability and Growth Pact was not enough to prevent the countries from misbehaving concerning the fiscal preconditions of the monetary union. The system left too many issues open and when the countries, especially large ones like Germany and France, breached the rules they were not fined, which sent a very bad message. Countries can misbehave, they will not be punished and with this endanger the very existence of the common currency3. Unfortunately, with the rise of the recent financial crisis, these warnings have found even more empirical relevance (see Schuknecht et al., 2011). The recent troubles the EMU has been having with Greece4 suggest that without fiscal prudence exercised by the euro area countries the future of the euro can be questioned. These developments seem to suggest that the EMU set-up as a whole has many deficiencies. The original sin of the euro area is the neglect of the OCA criteria in deciding the readiness of Europe for a single currency. Furthermore, the entry criteria were also established without a clear rationale on their target values. Besides these objections, there seems to be a clear and strong mechanism missing that would make the countries follow the fiscal prudence required for sustaining the common currency. Thus, it seems that there are many important improvements that need to be introduced to have a functioning and sustainable monetary union in Europe. The current institutional set-up seems not to be enough. The Maastricht criteria, even when fulfilled, evidently do not guarantee that the countries are or will stay ready to be a part of the euro area. The identified deficiencies seriously question the appropriateness of the Maastricht criteria when assessing the readiness of a country for membership in the euro area. This may particularly apply to future members from Central and Eastern Europe. Accession countries will become members of economic and monetary union under special status, which allows for their participation in the European Monetary System (EMS II) with its fixed parities and wide bands. However, as demonstrated in Frankel and Rose (1997, 1998) there is a possibility that the euro area still succeeds because of the endogenous nature of the various OCA criteria. These authors suggest that the countries are more likely to satisfy the criteria for entry into a currency union after taking steps towards monetary integration than before. The findings in De Grauwe and Mongelli (2005) provide further support for this optimistic view. 2 Papademos (2006) provides further support not only to the framework for national fiscal policies as laid down in the SGP, but also to the overall policy framework in the EMU. 3 Ioannou and Stracca (2011) suggest that fiscal profligacy in individual countries may have negative spillovers on other EMU participants. Their analysis also seems to suggest that that the SGP has not delivered and that important modifications will be needed. 4 The numbers do not appear worrying only for Greece. Thus, Schuknecht et al. (2011) show that the average euro area budget deficit increased by more than 5 percentage points, reaching 6% of GDP in 2010, and average public debt reaching 85% of GDP, almost 20 percentage points above the pre-crisis level. 1

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After a two-year waiting period, the state of convergence will be evaluated based on the Maastricht criteria and accordingly a decision regarding full membership in EMU will be made. However, given our discussion above, it seems appropriate to call for revisiting the Maastricht criteria, with a revision probably necessary even for the institutional set-up of the Euro system. Although the countries from Central and Eastern Europe may be assessed on the current or hopefully modified criteria, the discussion in this section seems to suggest that it may be more important for both these countries and the EMU as a whole to check the readiness of a country by applying the ‘forgotten’ OCA criteria. If these criteria are met, it could result in a success for the applicant and probably will not cause troubles for the monetary union. In addition, there is a particular feature of some of the CEE countries which suggests that these countries may have already achieved a high degree of monetary integration through strong presence of unofficial euroisation. The phenomenon of unofficial euroisation is investigated in the following section together with its possible relevance for an easier official adoption of the common currency. Although there are many concerns about the common currency in Europe, there is an important deal of the literature which emphasises that the benefits prevail. The studies that evaluated empirically the euro’s early performance suggest that the introduction of the euro has had beneficial effects. Thus, Mongelli and Vega (2006), by way of reviewing the findings from different studies on the effects of the EMU on economic and financial structures, institutions and performance, conclude that overall the effects of the euro are beneficial. A similar conclusion is reached by Wyplosz (2006) who suggests that by and large the eurosystem has delivered and it should be treated as successful, although there remain serious deficiencies present. However, caution should be exerted here as these studies cover only the early euro years, without any major shocks being imposed on the system, and this period may be too short for strong empirical conclusions. The last couple of years, with the global financial and economic crisis unbundling, appear to bring more worries and put additional question marks over the successes of the euro.

4. IS THERE A ROLE FOR UNOFFICIAL EUROISATION AS A CRITERION FOR MONETARY INTEGRATION? Ever since their introduction the official Maastricht criteria have been a subject of strong criticism. As suggested in the previous section, these criticisms have had strong theoretical foundations. The most serious of all was probably the ignorance of the OCA theory in assessing the readiness of Europe for a single currency and establishing almost arbitrarily the target values of the Maastricht criteria. The recent events in the euro area suggest that new members of the EMU should carefully weigh the costs and benefits before joining. Even if the prospective members will be able to fulfil the Maastricht criteria, they need to consider their readiness for adopting the euro from a broader perspective. What will be of crucial importance are the criteria that have been usually ignored (the OCA theory) and the achieved level of integration between the candidate countries and the euro area. As the new EU members from Central and Eastern Europe have already achieved high level of trade and financial integration with the EMU countries they will probably not face serious obstacles on these grounds. This section looks at an additional, potentially very important, feature of the countries in Central and Eastern Europe that might suggest that their level of integration with the EMU is much larger than is usually perceived. This feature is usually ignored in the euro area membership considerations and this section addresses this issue. Namely, it is argued that the presence of unofficial euroisation should be taken seriously when assessing the desirability and readiness of CEE countries for EMU membership. To that end we first investigate the presence of this phenomenon in Central and Eastern Europe, with a special emphasis on the case of Croatia. In addition, a rationale is provided for the claim that this particular feature qualifies these countries for successful adoption of the euro. This also suggests that the risks for the current members may be smaller when a candidate country is already ‘currency integrated’ with the euro area. The literature on euroisation distinguishes between several types of euroisation. The first distinction to be made is the distinction between official and unofficial euroisation. Official (de jure) euroisation5 refers to the introduction of foreign currency as the only legal tender in the economy, whilst unofficial (de facto) euroisation refers to the use of foreign currency alongside the domestic currency which is the only legal tender. Within the category of unofficial euroisation different types may arise: currency substitution and asset substitution. Currency substitution (or payments euroisation) refers to a situation in which foreign currency is used as a means of payment instead of the domestic currency. Asset substitution refers to a situation in which domestic residents hold assets denominated in foreign currency. Asset substitution can be seen as a part of a broader category known as financial euroisation by which it is meant that residents save and borrow in foreign currency (deposit and liability/loan euroisation). One of the main drivers of euroisation is macroeconomic instability. Thus, the literature considers euroisation as a rational response of economic agents to uncertainty caused by inflationary episodes and depreciations of domestic currency (De Nicolo et al., 2005; Rennhack and Nozaki, 2006). In this context, different types of euroisation may be seen

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as providing hedging opportunities and suggest that euroisation should not be discouraged. Unfortunately, euroisation also brings about risks and potentially high costs and hence raises concerns. These aspects will be explored later, after presenting the data on euroisation in Central and Eastern Europe. The presence of unofficial euroisation in Croatia and other economies of Central and Eastern Europe are investigated below. Table 1. Deposit euroisation in Central and Eastern Europe (FC deposits/Total deposits, in %) Bul

Cro

Cze

Est

Hun

Lat

Lith

Mac

Pol

Rom

Slo

1991

38.4

n.a.

33.7

21.6

n.a.

35.3

3.7

52.4

1992

29.1

n.a.

28.9

18.4

37.3

n.a.

33.8

18.4

49.0

1993

23.0

56.6

9.0

6.8

23.5

40.5

62.7

n.a.

40.2

36.2

49.3

1994

35.8

59.3

8.0

16.4

24.7

39.6

38.8

n.a.

39.0

27.2

41.0

1995

29.5

66.6

6.3

18.7

30.5

50.4

40.6

26.3

27.6

26.9

42.1

1996

53.3

67.6

7.1

21.5

27.0

52.5

38.2

25.3

22.6

27.7

39.5

1997

53.4

68.9

12.7

27.0

24.6

50.7

32.6

31.3

22.7

33.3

33.7

1998

53.2

73.8

12.7

28.3

23.9

43.8

36.4

33.2

18.6

37.1

30.2

1999

52.6

73.6

13.4

31.1

22.0

46.1

43.8

38.2

18.9

42.9

31.1

2000

54.3

71.1

13.2

34.0

21.8

45.2

45.7

34.9

17.5

46.7

34.5

2001

57.2

71.2

12.5

30.1

20.5

43.9

46.6

61.4

18.9

48.9

36.1

2002

49.6

67.7

11.3

28.7

15.4

40.9

31.9

50.9

16.2

45.3

32.5

2003

48.3

64.3

10.3

26.1

13.6

37.6

25.9

51.8

15.9

45.1

32.3

2004

49.1

61.6

10.2

26.6

13.8

38.0

25.1

53.3

14.1

44.6

34.3

Source: Levy-Yeyati (2006)8

Table 1 illustrates the presence of a high level of deposit euroisation in Central and Eastern Europe, with the highest level being in Croatia. Other countries that are also characterised by high levels of euroisation are Macedonia, Bulgaria, Romania and Latvia. Feige (2003) also compiled a set of euroisation indicators and his data also point to strong presence of euroisation in Central and Eastern Europe. Newer data on the importance of foreign currency (here foreign currency loans as an additional aspect of euroisation) in Central and Eastern Europe is provided in Figure 1. Figure 1: Bank loans in foreign currency in percent of total bank loans, 2007

Source: Ranciere et al. (2010), p. 611

â&#x20AC;Š

The data in Figure 1 indicate that the presence of foreign currency loans in 2007 was the highest in Latvia and Estonia with more than 80 percent of total loans being in foreign currency. Other highly euroised countries in the region with this share around 60 percent are Bulgaria, Hungary, Lithuania and Croatia. Countries like Poland and Czech Republic do This type is effectively the introduction of the euro (i.e. participation in the EMU) discussed in this paper. Some caution should be exercised regarding the data presented in this study. The figures provided seem to underestimate euroisation, e.g. in the Croatian case it amounts to 15-20 percentage points. Although problematic these figures give a sufficient idea on the presence and dynamics of euroisation in transition economies. 5 6

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not seem to have a high level of euroisation in their economies. Caution should be exercised when using the data on euroisation. As explained above, different types of euroisation exist and studies often report contradicting evidence due to the use of different sources. As the intention of this paper is to focus on one of the highly euroised economies in Central and Eastern Europe to explore the implications for the path towards the EMU membership we next focus on the presence of euroisation in Croatia. As shown above Croatia is characterised by a strong presence of euroisation. As suggested by Kraft (2003), the high level of euroisation in Croatia is a legacy from former Yugoslavia. Kraft (2003) calculated the ratio of foreign currency to foreign currency plus local currency in circulation to be 75.6% in 2001. Feige (2003) also showed that euroisation in Croatia is at a very high level, being the highest in the region. Figure 2: Euroisation in Croatia (foreign currency deposits in total deposits, foreign currency loans in total loans, %)

Source: Croatian National Bank and author’s calculations

Figure 2 presents the level of euroisation in Croatia. The data shown suggest that both deposit and loan euroisation are at a very high level. We take these data very seriously because it suggests that the euro has been playing a huge role in the Croatian economy. This high level of euroisation is among the highest in the world, and what is especially worrying is that although there was a declining trend, the level of euroisation suddenly started increasing with the first signs of the recent financial crisis. It appears that economic agents in Croatia are well accustomed to the use of the euro (most of the deposits and loans are in foreign currency, as well as the bigger transactions like car or apartments purchases; the prices are often quoted in euros) and with the uncertainty approaching they will stick to the euro and not the domestic currency. The data presented in this section suggest that in Croatia (and some other CEE countries) the euro has been playing an important role for a long time. The level of euroisation for highly euroised economies has been difficult to reverse (see for example Reinhart et al., 2003). This irreversibility has thus made unofficial euroisation a particular structural feature of a number of economies in Central and Eastern Europe and quite often had important consequences for the conduct of economic and exchange rate policies. As a consequence of euroisation monetary policy becomes less effective and monetary authorities are often subject to the ‘fear of floating’ phenomenon (Calvo and Reinhart, 2002). In addition, financial euroisation (particularly the strong presence of foreign currency loans) has recently become a source of concern due its potentially adverse implications for monetary and financial stability and overall economic performance (see for example Ranciere et al., 2010; Bussiere et al., 2004). As suggested above, due to a strong presence of foreign currency in the domestic economy (both in the form of currency and asset substitution) monetary policy may be less effective. The arguments in favour of this view are provided in De Zamaroczy and Sa (2003) and Leiderman et al. (2006). These studies suggest that in the euroised environment monetary authorities face two components of money supply – domestic and foreign, with a particular difficulty in controlling or even knowing the amount of foreign currency present in the domestic economy. Besides the limits on monetary policy, there are strong constraints on the exchange rate policy as well. Monetary authorities will probably try to avoid exchange rate fluctuations because of its potentially severe consequences. Namely, in the case of domestic currency depreciation there may be strong negative consequences on balance sheets of economic agents which are indebted in foreign currency (possibly leading even to bankruptcy). The above discussion implies that unofficial euroisation leaves very few degrees of freedom for an independent conduct of monetary and exchange rate policies. Therefore, the benefits of keeping the domestic currency should not be con-

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sidered too important. On the other hand, the risks regarding the movements in the exchange rate (depreciation of the domestic currency) seem very dangerous due to strong presence of debt in foreign currency, as shown above. Thus, it may be reasonable for highly euroised economies to consider the official adoption of the euro. As shown in this section, Croatia is one of the most euroised economies in Central and Eastern Europe. As a consequence monetary authorities have been targeting the exchange rate vis-à-vis the euro with a very low fluctuation band (the ‘fear of floating’ phenomenon). The data presented above, together with theoretical considerations of the consequences of unofficial euroisation, seem to suggest that Croatia may be considered already well ‘monetary and currency’ integrated with the EMU countries. Besides this form of integration, Croatia seems well integrated on other accounts as well. Namely, Croatia has achieved a high level of trade integration with the EU countries, with 60% of both exports and imports in 2010 being with the EU. Currency structure of Croatian exports and imports is largely denominated in euros (70% of foreign trade in euros). Foreign direct investment (FDI) in Croatia originates predominantly from the EU (FDI in Croatia from 1993 to 2011 is around 25 billion euro and 75% has come from the EU countries). Croatia is also characterised by a very strong presence of foreign banks in its banking sector. Namely, more than 90% of the banking sector assets are foreign owned, with the largest share of EU originating banks (Unicredit, Intensa Sao Paolo, Raiffeisen). These particular features further point towards the high level of integration of Croatia with the EU/EMU countries. The previous studies (Faulend et al., 2005 and Derado and Mlikota, 2007) that investigated the readiness of Croatia for EMU membership suggest that Croatia is likely to be able to reap the benefits of the EMU membership. Namely, Faulend at al. (2005) showed that considering the Maastricht criteria Croatia appeared to fare quite well. Derado and Mlikota (2007) further showed that these criteria would be fulfilled by Croatia, but also warned that in addition to the nominal convergence the real convergence would be an important precondition for successful adoption of the euro. When looking at the real convergence criteria these authors concluded that Croatia needs to improve with respect to trade integration and production structure similarity. Croatia has officially finished its EU membership negotiation process and is expected to become the 28th member on July 1, 2013. Upon its accession, Croatia will probably initiate the process towards the EMU membership shortly. As shown in this section, there are strong grounds on which this may be a reasonable step for Croatia, assuming, of course, the euro will still be in existence. However, given the current framework, it will take quite a while until Croatia becomes a member. Even if Croatia manages to satisfy the Maastricht criteria, it will take at least two years of participation in the ERM2. As shown in this study, the fulfilment of the Maastricht criteria may not imply that the country is ready for the membership. It was shown that the criteria should be modified along the ‘forgotten’ OCA criteria and especially given the investigated additional aspects of the level of integration (the unofficial euroisation) some of the candidate countries from Central and Eastern Europe may be assessed on these more economically relevant criteria with a possibility that their accession lasts shorter than it is currently envisaged.

5. CONCLUSION The European single currency project has drawn a lot of attention since its very beginnings. The questions of its sustainability have been raised very seriously recently, with some of the misbehaving EMU members being considered even for bankruptcy. It appears that the Eurosystem contains many deficiencies with the recent financial and economic crisis making these very apparent. These remarks suggest that further reforms regarding the whole system will be needed. The initial mistake of not implementing the OCA criteria in assessing the readiness of Europe for a common currency may be coming as a boomerang. This view is warranted for a number of the current members. This paper has established that the formal Maastricht criteria are not enough for establishing whether an applicant country is ready for participation in the euro area. Even when the formal criteria are fulfilled, this does not guarantee that the country qualifies to be a member economically or that it will not misbehave and breach the rules later on. This study warns that the ‘forgotten’ OCA criteria should be considered when a country considers its participation in the EMU in order to reap the benefits. The study particularly suggests that the entry criteria give some weight to the presence of unofficial euroisation when assessing the readiness of the countries in Central and Eastern Europe. As shown by using the example of Croatia, the euro has been playing a very important role as a parallel currency (often replacing the domestic currency in its functions of money: unit of account, store of value, means of payment) and with this unofficial euroisation affecting strongly the conduct of monetary and exchange rate policy. This particular feature suggests that this type of economies may be already strongly ‘monetary and currency’ integrated with the euro area. These aspects are not formally accounted for in the euro area adoption process even though they may be more relevant for successful adoption of the euro and successful integration in the EMU membership than the Maastricht criteria. Therefore, this study proposes that in addition to the general revision of the Maastricht criteria following the forgotten OCA criteria, some weight be also given to the presence of unofficial euroisation in the case of highly euroised economies in Central and Eastern Europe.

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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.

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DETAILS ABOUT AUTHOR: VLADIMIR ŠIMIĆ RESEARCH ASSISTANT FACULTY OF ECONOMICS SPLIT, UNIVERSITY OF SPLIT SPLIT, CROATIA vsimic@efst.hr

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THE PERCEPTION, ATTITUDES AND BEHAVIOUR OF ZAGREB`S TEENS TO APPAREL BRANDS AND THEIR LOYALTY - ARE ZAGREB`S TEENS “CRAZY” ABOUT CLOTHING BRANDS? MAJA STRACENSKI KALAUZ TIHOMIR VRANESEVIC MIROSLAV TRATNIK

ABSTRACT This paper focuses on the perception, attitudes and behaviour as building parts of phenomenon of loyalty. Specifically, this paper encompasses behaviour and attitudes of costumers to clothing brand(s) of T-shirts, jackets and trousers and clothing brand loyalty among younger teenagers age 13 and 14 year olds as a specific costumers segment with their characteristics. On the methodical platform of the model of measuring loyalty of younger teenagers to the clothing brands (Stracenski Kalauz, 2010.) this paper aim is to find out which clothing brands younger teenagers know, buy, love and which brands their pears buy and to which they are and wish to be loyal. The survey data was conducted among Zagreb`s (Croatian) younger teenagers (N=179), both genders, aged 13 or 14 years old. Respondents-younger teenagers (N=179) new 132 clothing brands (names) and the main results showed that younger teenagers love and are loyal to Nike, Adidas and Benetton. KEYWORDS: younger teenagers, clothing, brand, attitudes and buying behaviour, loyalty.

1. INTRODUCTION The concept of loyalty is complex, multidimensional, intriguing, always actual, never-ending story and has been in the focus of many researches long period of time (Stracenski Kalauz, et al., 2011.). Nowadays customer`s brand loyalty in fashion sector is still one of the challenging marketing interests. This is also important issue for both: companies and customers, i.e. all stakeholders in extremely complex fashion market. For this reason, the development of methods in analysing and forecasting customer attitude and buying behaviour, i.e. loyalty is really necessary, especialy among characteristic marketing segments. Thus, loyalty is much complex phenomenon that, because of it complexity, still doesn`t have unison definition among scientists and practitioner that work on it. Since Copeland (1923.), the most cited definition(s) of loyalty with small variations was/ere given by Jacoby and cooautors (Olson, Jacoby, 1971., Jacoby, Kyner, 1973., Jacoby, Chestnut, 1978.) during 1970’s. The concept of ‘loyalty’, however, may not be an absolute in the way it manifests itself in just consumer behaviour (behavioural aproach), but also consumer attempts to overcome the behaviour and express their loyalty by means of psychological attachment and by showing affection and consumer purchase involvement and intent (attitudinal approach). In the line with that McGoldrick and Andre (1997.) state that the term ‘loyalty’, when used loosely, ‘conjures up various notions of affection, fidelity or commitment’. A brand-loyal person may have a positive attitude towards a brand, buy a brand in preference to others within the market and have continued allegiance to a brand over long periods of time. It may be assumed that these must all be present for true loyalty to exist. The widely used definition of loyalty provided by Jacoby and Chestnut (1978.) adopts this approach. Cited by East (1997., 31), Jacoby and Chestnut (1978.) provided a conceptual definition of brand loyalty as: ‘. . . the biased behavioral response expressed over time, by some decisionmaking unit with respect to one or more alternative brands which is a function of psychological processes’. Respectable number of authors have in their research suggested and empiricaly tested that (positive) attitude should be included along with behaviour (repeated purchase) to define and measure loyalty, i.e. the covariance of attitudinal and behavioural loyalty (Day, 1969., Dick, Basu, 1994., Dick, Basu, 1995., Baldinger, Rubinson, 1996., Rundle-Thiele, Bennett, 2001., RundleThiele, 2005., Wood, 2007., Bandyopadhyay, Martell, 2007.), sometimes called hybrid approach. Thus, there are issues that anticipate in brand loyalty and are closely connected to modern and wider definition of it, such as consumer involvement in a spe¬cific product category (Laurent & Kapferer, 1986.) as a part (factor) of brand sensitivity (Kapferer, Laurent, 1992.), brand preference (Moschis et al., 1984.) and intend (Yoon, Uysal, 2005.). Brand sensitivity is a psychological construct that refers to the buyer’s decision-making process (Kapferer, Laurent, 1992.). Saying that an individual is brand sensitive means that brands play an important role in the psychological process that pre¬cedes the buying act (Lachance et al., 2003.).

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Additionally, Cunningham (1956.), Carmen (1970.), Palumbo and Herbig (2000.), Rundle-Thiele and Bennett (2001.) and Wool (2007.) suggested a relationship between product type and brand loyalty, so loyalty may vary depending on product category. Hammond et al. (1993.) found that demographic factors failed to discriminate between buyers of different brands within a category. Rundle-Thiele and Bennett (2001.) suggested that the characteristics of the product and market shape brand loyalty, as well as, they indicated that fast-moving consumer goods markets are characterised by multi-brand purchasing. In the line with that is research of Wool (2007.), where respondents indicated that they had more than one preferred brand within a product category, that there is a significant statistical difference in the degree of brand loyalty exhibited by younger consumers (18–24-year-old students) across product categories. Research of the dimensions (attributes) of brand selection shown, both jeans and trainers were distinct from the other product categories (soap, coffee, breakfast cereal and toothpaste) in that both self-image and brand image were important in understanding what drives brand selection (Wool, 2007.). This supports the findings of studies such as Auty and Elliott (1998.) and Noesjirwan and Crawford (1982.) focusing on the importance of clothing brands. The implication of this finding is that the results would be strongly influenced by the product categories chosen, when studies explore loyalty differences between age groups. Therefore, costumers` age is very important fact in exploring younger teenagers as costumers and future costumers. They have specific lifestyles, motivations and values (Zollo, 1999.). Consequently, the traditional marketing strategies used with baby-boomers are typically not efficient with young consumers (Bao, Shao, 2002., Neuborne, Kerwin, 1999.). Moreover, the distinctive buying habits they display today will likely follow them as they enter the high-spending years of young adulthood (Neuborne, Kerwin, 1999.). The literature wasn’t quite unison about teenagers (even inter-group) shopping perception, attitudes and behaviour. Taylor and Cosenza (2002.) found that for teenagers shopping is exciting, interesting and fun. But some others found that teenagers emotions about shopping can be positive, ambivalent and (for some) negative, and therefore their shopping attitudes and behaviour also vary (Stracenski Kalauz, 2010.). Some studies dealing with teenagers shopping behaviour, i.e. Mediamark Research Inc.’s Teen Market Profile, found out that teenagers mainly shop in malls and visit shopping canters more often than other age groups (Quart, 2003.). They seem to prefer shopping in malls than on the Internet or by catalogue - 44% of teenagers patronize their favourite mall during weekends (Zollo, 2004.). A relationship between age and the degree of brand loyalty was researched since the beginning. Jacoby and Chestnut (1978.) identified six studies, including Day (1969.), which indicated that older people were more brand loyal. At the beginning on brand loyalty failed to find any demographic correlates of brand loyalty (Cunningham, 1956., Frank, 1967.). More recently, Hammond et al. (1993.) found that demographic factors failed to discriminate between buyers of different brands within a category. Other studies have identified that age is positively associated with loyalty, suggesting that older people are disposed to be loyal but the lack of money obliges them to seek bargains. Their evidence indicated relatively higher loyalty in the 25–44 age group. Evidence from Wright and Sparks (1999.) suggested high loyalty in 35–44 year olds, and McGoldrick and Andre (1997.) state that loyal shoppers are more likely to be an unspecific ‘middle age’ group. Uncles and Ehrenberg (1990), however, found similar purchasing habits among younger and older consumers. Tweens and teens as adolescents represent the group that grants the greatest interest in clothing (Francis, Liu, 1990., Ossorio, 1995.). East et al. (1995.) identified a curvilinear relationship between age and loyalty that was mainly attributed to the fact that income is low among the young and the old. They also indicated that shoppers who are more concerned about price are less loyal, with high income groups being more loyal than low income groups. It is difficult to know from the varying results of these studies whether younger consumers (under 25) are less loyal than older consumers due to situational factors such as income, or whether the age group has a predisposition to be low loyal. Consequently, many questions remain unanswered. Tweens (pree-teens) and teens as adolescents represent the group that grants the greatest interest in clothing (Francis, Liu, 1990., Ossorio, 1995.). According to the research of Grant and Stephen (2006.), tweenagers are very fashion-sensitive and the approvals of their parents are key factors in buying decision. Also brand name and its associations strongly influenced on the purchase of fashion garments. Indeed, clothing plays a particularly important role for teenagers as they feel and act as if they were ‘on stage’, their behaviour and physical appearance being watched by an imaginary audience (Castelbury, Arnold, 1988., Lachance et al., 2003.). Although wearing prestigious brand names is not a recent trend for teenagers of the new millennium, it seems to have reached unprecedented proportions dur¬ing the last decade (Lachance et al., 2003). Just a few authors were dealing with the importance of these brand preferences for youth (Rosenberg, 2000., Zollo, 1999., Massé, 1998.). But, despite its popularity, little is known about this phenomenon, which has been rarely studied by academics, except that, for

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adolescents, wear¬ing brand names apparel seems to be a way of feeling adequate. (Daters, 1990., Forney, Forney, 1995., Frances, Burns, 1992., Smucker, Creekmore, 1972.). Parks, et al., (2005.) explore fashion-oriented impulse buying behaviour of consumers to clothing and they found connection with the purchase affective factors such as involvement in fashion (Han et al., 1991.), hedonistic consumption (Hausman, 2000.), positive emotions in purchase (Matilla, Enz, 2002.) and fashion fanship. According to that, the younger generation in the present context has higher purchase frequency, fashion fanship, and impulse buying as compared with other cohorts in the society (Pentecost, Andrews, 2010). The term fashion fanship in the scientific and medical literature about fashion, is associated with the concepts: awareness (of) mode (s) of which is used to measure the perceived level of modernity of person and includes hedonic, cognitive, affective and behavioural aspects of the model (Bakewell, et al., 2006.) and involvement in the fashion, which is related to an individual person’s involvement in some of the many concepts of fashion (or anti-fashion), and includes factors such as knowledge, skills, interests, and reactions in which it is often associated with the degree of fanaticism to fashion clothing (Redden, Steiner, 2000.) according to Stracenski Kalauz (2010.). This paper focuses on the perception, attitudes and behaviour as building parts of phenomenon of loyalty understood as a complex hybrid concept that encompasses behaviour and attitude of costumers to clothing brand(s) of T-shirts, jackets and trousers and it relation to the clothing brand loyalty. Specifically, this paper’s aim is to investigate younger teenagers age 13 and 14 year olds, as a specific costumers segment with their characteristics according to their perception, attitudes and buying behaviour attending to investigate which clothing brands (T-shirts, jackets and trousers) they know, buy, love and which brands their pears buy and to which they are, and wish to be loyal. The results of these studies will help marketing researchers and practitioners to get better insights in younger teenagers (13 and 14 years old) clothing market and clothing brand loyalty in this market segment better than before.

2. METHODICS AND ANALYTICAL METHODS 2.1. Analytical methods On the methodical platform of Method of measuring loyalty of younger teenagers to the clothing brands (Stracenski Kalauz, 2010.) this paper focused on the perception, attitudes and behaviour of younger teenagers, aged 13 and 14 years old in Zagreb, to clothing brands to find out and analyse the problem, i.e. which clothing brands respondents are aware of, which they know, buys, which their pears buys and to which they are and wish to be loyal. After the desk research, the model of measuring loyalty of younger teenagers to the clothing brands (Stracenski Kalauz, 2010.) is used and from the empirical research, that was conducted as a part of Ph.D. thesis researched, and part of data and analytical methodology was used in paper. Mentioned Model includes seven basic assumptions as well as four specific models, which can measure loyalty of younger teenagers to the clothing brands and examine their characteristics, which was done by testing the model in the empiric survey also used for this paper. The model of measuring loyalty of younger teenagers to clothing brands is design on four specific models that are created on seven basic assumptions within the entire model: I.

Exceptionality model of measuring loyalty of younger teenagers which include the implementation of the first four basic assumptions; 1. Loyalty of younger teenagers to the clothing brands should be done by the analyses of the entire sample of research respondents and the individual analyses of loyalty of each teenager – respondent. 2. The survey should include not only teenagers but their parents (guardians) and the pilot research should be done. 3. The preparation, inviting the respondents and their enrolment in the survey (both parents and their teenage children) should be planned and done based on the voluntary approach and anonymously, respecting the legal norms and having all the required permissions, together with ensuring the good feeling while doing the research. 4. Research questionnaire has to be written in a way that the number and the structure of the questions, the wording, question ethics, non suggestiveness of the questions and the intellectual demands for answering the questions in the questionnaire have to be adjusted to the suitable methods published in the literature and based upon the results of the pilot research and along with the required validity and reliability.

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II. Structural model with 50 defined questions, 20 variables and 10 factors in the loyalty measurement; 5. Based upon the literature data and the pilot research, the structural model of measuring loyalty among younger teenagers to the clothing brands is made out of twenty variables which are supported by 50 questions. The variables form 10 factors, which define the final criteria category – the brand loyalty with the types of loyalty and strength characteristics. III. Model of defining the loyalty types by specific set of questions and the combination of questions in the questionnaire; 6. Loyalty type’s classification model provides the loyalty types of each respondent according to the analyses of answers to certain questions and the question combinations from the survey questionnaire itself. and IV. Model of defining the loyalty strength by specific set of questions and the combination of questions in the questionnaire; 7. Research model of the loyalty strength by the points system marks individual loyalty strength of respondents, based upon the individual numeral points of each respondent’s answers to the questions within the foreseen question sets and the answers combinations in the questionnaire. Extracted parts of The model of measuring loyalty of younger teenagers to the clothing brands (Stracenski Kalauz, 2010.) is used for this paper researched problem i.e. which clothing brands respondents are aware of, which they know, buys, which their pears buys and to which they are and wish to be loyal and further statistically analysed to reach this paper aims. Out of P(II) 24 questions from questionnaire for teenagers (because in overall research there were surveys for parents too, with questions unsuited for children and targeted at parents, like material status i.e.) in mentioned study (Stracenski Kalauz, 2010.), 2 demographic questions (age and gender) and 8 thematic questions (of all 24 in P (II) questions) were used to deal and solve the problems that this paper is focused on. Out of 8 thematic questions, 5 questions were with open ended answers, and they asked: “How important is a brand to you?”; “Which brands you know?”; “Which brands you like?”; “Which brands you buy?”; and “Which brands your friends mostly buy?” and followed by 3 semi-structural questions asked: “Are you loyal to a brand of T-shirt and “name it (if the answer is “Yes”)”; “Are you loyal to a brand of jacket and name it” and “Are you loyal to a brand of trousers and if the answer is yes then name it”. The analytical and descriptive method and simple statistics (frequency, rank, percent and measures of central tendency) was conducted over data processed by SPSS 17,0 in order to research, analyze, describe and conclude.

2.2. Research sample The study was conducted in the school year 2006/2007, in classes of public and private schools in the Zagreb (Croatia). One step (single-stage) cluster sampling was used to get a sample, which consisted of elementary school male and female students which were going to 7th and 8th grades of public and private schools in Zagreb (Croatia). They were, at the time of examination, 13 or 14 years old and one of their parent or legal guardian was invited to participate in research. In this study, great deal of attention was paid to children’s rights and well being during the research considering they are underage, so after getting all required allowances and consents for implementation on field research (six instances: ministry, school principle, school ethic board, class mentor-teacher, at least one parent/legal guardian and respondent/ teenager) the further research (with students) was conducted. In the school year 2006/2007 in the city of Zagreb was 128 primary schools with a total of 15.389 students in 7th and 8th grade. It was randomly selected 6 schools, and in this study 4 schools was attended by participating. From these four schools, for the qualitative pilot (I) study (in wider text: P(I)) were chosen total of 40 students from 2 schools (20 from each), and other students (classes) from pilot chosen schools, that took the survey, were included in the quantitative pilot (II) study (in wider text: P(II)). Overall it has been possible to include 618 students in the P(I) and P(II) investigations, and processed was 227, while the remaining students did not have the necessary approvals and/or extracted from research. Out of 227 students, who have joined, 8 students was rejected from further statistical procedure, because they were 15 years old and therefore could not be included in further processing, which makes it 219 out of a possible 618 respondents, or 35.44%. Also, the statistical analysis was omitted 40 students, i.e., all of which are included in the P(I) study, since it required an initial, qualitative information, for which no statistical analysis was made. So, in a P(I) included a deliberate choice by the 40 respondents, and P(II) study 179 randomly selected respondents (which makes the sample proportion of 1.16% of the population).

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After the qualitative pilot study (focus groups interviews) conducted to find out primary topic idea and that was used for designing and implementing quantitative P(II) study. P(II) study was conducted in 3 regular, public elementary schools in Zagreb (out of four attended for P(I) and P(II) study and selected by method of single-stage cluster sampling). P(II) survey accomplished 179 younger teenagers both genders, aged 13 or 14 years, who were in the spring of the school year 2006/2007 in 7th or 8th grade. The survey was voluntary and anonimous, conducted with self-fulfilling questionnaire in school classes, during one school hour (45 min). Teenagers-respondents are previously over their teachers and parents informed with the maintenance, subject matter and objectives of the research. Also in the introduction to the questionnaire and at the beginning of survey, before they started to fulfil the questionnaires, it was explained to them, once again verbally by researcher and in the introduction to the questionnaire all required explanations about research objectives, terms used in anklet questionnaire and short instructions for filling out a survey, as well as their rights. Respondents could and sometimes did posed the questions about research and survey, on which they promptly get an answer from researcher or redrawn from research without explanation when ever they may wish, without any consequence. The respondents fulfilling the questionnaire have to chose or write their answer, and if they didn’t know the answer, leave it blank.

3. RESULTS The results relevant for this paper, i.e. clothing brands that younger teenager know, buy, love and which brands their pears buy and to which they are and wish to be loyal, are presented according to the empirical investigation which are results from P (II) part of wider research (Stracenski Kalauz, 2010.). Survey (P(II)) accomplished 179 younger teenagers both genders, aged 13 or 14 years, who were in the spring of the school year 2006/2007 in 7th or 8th grade. At the time of investigation 111 respondents (62,01%) went to the 7th grade and 68 (37,99%) to 8th primary school grade. Their distribution by age was: 83 respondents (46,37%) had 13 years and 96 (53,63%) had 14 years, the mean value was 13,54 years, Chi-Square test 0,944, degree of freedom (df) 1, asymptotic significance 0,331. It means that there was found no statistical difference by age in researched sample. Their gender was 81 (45,25%) male and 97 (54,19%) female, while one (0,56%) respondent didn’t gave an answer, Chi-square test 1,438, df 1, asymptotic significance 0,230, so, there was found no statistical difference by gender in researched sample. For participants in the P (II) study, the number of annually purchased T-shirt(s) ranged from 1-30 T-shirts. The mode value was 10 T-shirts per year (with proportion 26,82%, out of total), followed by 5 T-shirts (10,61%) and 20 T-shirts (8,38%). The annually purchased jackets per respondent ranged from 1-20 jackets. The mode was 2 jackets per year (49,1%), followed by 1 jacket (22,9%) and 3 jackets (14,5%). The annually purchased pants for one respondents were from 1-25 pairs of pants with mode 2 pairs of trousers per year (16,2%), followed by 2-3 and 3-4 pairs (each with 13,4% of total). The importance of brand clothing, respondents evaluated with the four-level scaled responses from nothing to strong. The mode was “medium”, with the proportion of 41.34% of all 179 respondents, then “little” (26,26%), “nothing” (20,67%), and with the answer “very” respond the smallest number (10,61%) participants, while two didn’t respond (1,12%). By answering at the entire posed questions in the P (II) questionnaire respondents-teens (N=179) wrote a total of 132 different clothing brands (apparel collections, clothing manufacturers or sellers of clothing, excluding shoes brands). The respondents-teens most often have named 6 different clothing brands (14,53%), than 4 brands (12,29%), 8 brands named further 12,29% of respondents. The number of brands spread from none (one respondent didn’t mention any brand fulfilling the questionnaire) to 16 different clothing brands (that one respondent named). Table 1 shows all those clothing brands which respondents wrote (in P (II) study for respondents-teenagers) over their answers fulfilling the questionnaire.

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Table 1. The overall clothing brands by their names, which respondents-teens wrote in (P (II)) in their answers and by alphabetic order. No.

Brand

No.

Brand

No.

Brand

Adidas

G-star

Paciotti

Amadeus

Gucci

Party City

And1

Guess

Paul & Shark

Ann Christine

Guru

Peek & Chlopentourg

Armani

H&M

Pele

Art

Hawk

Pepe Jeans

Baby Path

Helly Hausen

Play Life

bacci&abracci

Hugo Boss

Prada

Bad Mad

Hummel

Protest

Benetton

Independent

Puma

Big Star

Jaguar

R.Marks&Spencer

Black Bull

Joma

100

Ralph Laurent Pollo

Bosh

Kangaroo

101

Reads

C&A

Kappa (Robbe di Kappa)

102

Reebock

Champion

Kempa

103

Replay

Chanel

Lacoste

104

Roberto Cavalli

Circa

Lantea

105

S`Oliver

Cobra

Legea

106

Schers

Coconut

Levi`s

107

Scotch & Soda

Concept

Log.g. Sport

108

Scott

Converse (All Star)

Lotto

109

Seems

D&G

Little Big (LTB)

110

Sergio Tachini

Madona

111

Shoe be doo

di Caprio - Varteks

Mana

112

Sisly

Diadora

Mango

113

Skandal

Diesel

Marco Polo

114

Skechers

Dior

Marllboro

115

Spirit

Donna Karan (DKNY)

Merel

116

Sport

Dr.Marthins

Mexx

117

StreetOne

Dunlop

Miss Selfridge

118

TallyWeijl

Eeco

Miss Sixteen

119

Terranova

Elviton

Miss Thalitha

120

Tom Taylor

Emax

Morgen

121

Tommy Hilfiger

Motv誰

122

Top Shop

Esprit

Mustang

123

Umbro

Everlast

Naf-Naf

124

Urban jungle

Fila

Nes

125

Urban Republic (UR)

Fishbone

New Yorker

126

Valentino

Fotex

Nike

127

Vans

Fred Perry

Northland

128

Versace

Froot of the Loom

Oaklay

129

WGW

Funcky Fish

One to go

130

With Boy

GAP

Orsay

131

X nation

Gas

Overseas

132

Zara

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By nameing different clothing brands, the teenagers-respondents say they know from non (they didnt answer the question correctly, i.e. didn`t name any brand) to 15 diferent brands, shown in Table 2. Table 2. Number of clothing brands that teenagers-respondents named by saying to know by their rank, frequencyes and percentages No. of clothing brands that teenagersrespondents named by saying to know

Rank

Frequency

Percentage (%) of 179

Percentage (%) of 119

2 brands

3,35

5,04

3 brands

6,70

10,08

4 brands

8,37

12,61

5 brands

5-6

6,15

9,24

6 brands

9,50

14,3

7 brands

5-6

6,15

9,24

8 brands

8,93

13,45

9 brands

4,47

6,72

10 brands

2,23

3,36

11 brands

5,59

8,40

12 brands

11-12

1,68

2,52

13 brands

1,12

1,68

14 brands

0,56

0,84

15 brands

11-12

1,68

2,52

Total answers

119

66,48

100,00

Didn`t answer or didn`t name any brand

33,52

Total

179

100,00

(No. of teenagers by no. of brands they say to know)

Source: Author(s)

Thirty-three most common brand names of clothing that teenagers-respondents say they know and that are ordinally listed in the top five of their statements (Table 3.), among totally named 82 different brands, or 62,12% of all specified in P(II). Among first five statements there was the total of 795 mentioned statements/brands on this question. Three of these are the most common brands: Nike with the proportion of 14.96%, followed by Adidas with 11.82% and 7.67% with Benetton. It is interesting to see how some brands are placed in the mind of younger teenagers by the ordinal place during evocating clothing (T-shirts, trousers and jackets) brands (shown in table 3, following the rows), i.e. except Nike and Benetton at the first place when recalling the clothing brand, indicate that they have lieder positions at the market in teenagers mind. The highest frequency for each brand, ordered in row, for example, for Adidas is placed in second column/place in teenagers mind, for Puma at third column/place in teenagers mind, etc. position those brands as followers at Croatian younger teenagers clothing market compeering them to Nike. Ranking a brand of Amadeus, as a representative of domestic apparel industry, at thirteenth place (among total frequency of named brands). Table 3, below, shows teens clothing brand - respondents to question â&#x20AC;&#x153;Which brands you know?â&#x20AC;?.

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Table 3. Thirty-three most common clothing brands that younger teenagers-respondents say they know and that are listed among first five statements by name No./ Total rank

Clothing brand name that younger teenagers know

Frequency of on the first place listed brand

Frequency Frequency Frequency Frequency Total of on the of on the of on the of on the frequency of second third place fourth fifth place listed brands place listed brand place listed (among first listed brand listed brand brand five brands)

Nike

119

Adidas

Benetton

Puma

Reebok

Lacoste

7-8

Orsay

7-8

Terranova

Umbro

D&G

Esprit

S.Oliver

Amadeus

Leviâ&#x20AC;&#x2122;s

Urban Republic (UR)

16-17

Diadora

16-17

Lotto

18-20

Mango

18-20

Robe di Kappa

18-20

Tally Weijl

21-23

Champion

21-23

Fila

21-23

Hugo Boss

24-26

Diesel

24-26

Fishbone

24-26

Vans

27-32

Gucci

27-32

H&M

27-32

Mustang

27-32

Tom Tailor

27-32

Versace

27-32

WGW

And1

7 2

2 1

4 2

7 1

6 6

5 Source: Author(s)

Teenagers-respondents say that they love 63 different brands of clothing (apparel collections, clothing manufacturers or sellers of clothing) or 47,73% (of 132) and among 388 answers/statements, and it is shown in Table 4. In the individual respondents statement they indicated from non to 10 different clothing brands, with 2 as a modal value (most common indicated number of brands). Nike (20,62%), Adidas (11,60%) and Benetton (8,00%) are belovered brands among Zagreb`s younger teenagers.

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Table 4. Ten most common indicated clothing brands that teenagers-respondents say they love (388) 10 most common indicated clothing brand names loved by teenagers-respondents

Rank (10 most common indicated clothing brand loved by teenagers-respondents)

Frequency (10 most common indicated clothing brand names loved by teenagers-respondents)

Proportion (%) of all indicated clothing brands that teenagersrespondents love (388)

Nike

20,62

Adidas

11,60

Benetton

8,00

Puma

7,22

Terranova

3,87

Lacoste

3,61

Esprit

3,35

Urban Republic (UR)

3,35

Amadeus

2,58

Umbro

2,58

Total

66,78 Source: Author(s)

On the question: „Which clothing brand(s) he/she buy?“ answerd 136 (75,98%) teenagers, who named total of 61 diferent brands they buy. Individually respondents indicated from non to 16 brands. Mode was 1 brand (25,73% from 136 respondents) per respondent. Ten most common indicated clothing brands that teenagers-respondents say they buy (158, or 71,17% out of total of 222 statements), and in first five stated brands by individual teenager, they wrote Nike (30,38%), Adidas (17,72%) and Benetton (13,92%). Table 5. Ten most common indicated clothing brands which teenagers-respondents say they buy 10 most common indicated clothing brands that teenagersrespondents say they buy (in first 5 statements)

Rank (10 most common indicated clothing brand that teenagers-respondents buy)

Frequency

Proportion (%) of all indicated clothing brands that teenagersrespondents buy (222)

Nike

30,38

Adidas

17,72

Benetton

13,92

Puma

11,39

Terranova

6,33

Amadeus

4,43

Urban Republic (UR)

4,43

Esprit

3,80

S.Oliver

3,80

Lacoste

3,80

Total

71,17 Source: Author(s)

On the question: “What brands your friends mostly wear?” answering with brand, there were 131 (73,18%) respondentsteenagers answered and they named from 1 to 14 different brands in individual answer. All of them quoted total of 211 clothing brands (statements), in first five stated brands and among them, ten most common indicated clothing brands that teenagers-respondents say his/her friends were answered 176 (83,41%) respondents. Respondents-teenagers think that their friends mostly were Nike (33,52%), Adidas (21,59%) and Puma (17,61%).

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Table 6. Ten most common indicated cl. brands that teenagers-respondents say their friends were 10 most common clothing brands that teenagersrespondents say their friends were (in first 5 statements)

Rank (10 most common clothing brands that teenagersrespondents say their friends were)

Frequency

Proportion (%) of all indicated clothing brands that teenagers-respondents say their friends were (176)

Nike

33,52

Adidas

21,59

Puma

17,61

Benetton

8,52

Reebock

4,55

Umbro

3,8

Lacoste

3,41

D&G

2,27

S`Oliver

2,27

UR-UrbanRepublic

2,27

Total

83,41 Source: Author(s)

On the 3 general, direct questions: â&#x20AC;&#x153;Are you loyal to a clothing brandâ&#x20AC;?, specified by: 1) T-shirt, 2) jacket and 3) trousers, in P(II) answered total of 119 (66,48%) respondents and they say, they are mostly no loyal for all (examined) items of clothing; i.e. no loyal to T-shirts (71,43%), to jackets (79,83%) and to trousers (67,23%). Distribution of their (Yes/No) answers and their distribution by gender are shown in table 7. By the answers they gave, boys are generally more loyal than girls. The difference is statistically significant for T-shirts and jackets. Table 7 Respondents-teenagers answers to direct questions: Are You loyal to a clothing brand and specified by T-shirt, jacket and trousers, in P(II) and their distribution by gender Are You loyal to a clothing brand of T-shirt?

Are You loyal to a clothing brand of jacket?

Are You loyal to a clothing brand of trousers?

answer

Frequency

Percent (%)

answer

Frequency

Percent (%)

answer

Frequency

Percent (%)

71,43

79,83

67,23

Yes

28,57

Yes

20,17

Yes

32,77

119

Distribution of answers on question: Are You loyal to a clothing brand of T-shirt, jacket and trousers by gender Gender

For T-shirt

jacket

trousers

59,30%

71,20%

64,40%

Yes

40,70%

Yes

28,80%

Yes

35,60%

49,58%

100%

83,30%

88,30%

70,00%

Yes

16,70%

Yes

11,70%

Yes

30,00%

50,42%

100%

100% Source: Author(s)

Teenagers-respondents assert that they are mostly no loyal, or just 27.93% of them say that he/she is loyal to brand of Tshirt, to jacket 18.43% and 33.52% to trousers brand. 42 different brands were mentioned in teenagers answers to which they are loyal. Figure 1 shows 15 these brands and their frequencies by type of clothing (shirts, jackets and trousers). Respondents are most loyal to following brands: Nike (18,93%), Adidas (11,24%), and Amadeus (7,10%).

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Figure 1: Brands of T-shirts, jackets, trousers and total that respondents-teenagers say they are loyal to in school year 2006/2007

Source: Author(s)

According to teenagers answers, 31 (17,32%) respondent would like to be loyal to a brand if he/she could, and among them, they most commonly named one brand (28), while others (2) have named more than just one brand for each item of clothing and one didn’t gave a name of brand. Teenagers mostly desire to be loyal to Nike (45,16%) and Lacoste (12,90%), but some of   (all by 3,23%). them also named Adidas, Ann Christine, Benetton, Champion, D&G, Esprit, Mango, Puma, Terranova, Versace

3. DISCUSSION AND CONCLUSION On the methodological platform of measuring loyalty of younger teenagers to the clothing brands (Stracenski Kalauz, 2010.) this paper focused on the perception, attitudes and behaviour of younger teenagers, aged 13 and 14 years old in Zagreb, to clothing brands they know, buy, love and which brands their pears buy and to which they are, and wish to be loyal. The main results, based on quantitative research show that younger teenagers in Zagreb: • know a large number (132) different clothing brands of T-shirts, jackets and trousers and they named wide diapason from none up to 16, but mostly six different clothing brands per respondent, widely indicating their interest for clothing and fashion and that is in accordance with Francis & Liu, (1990.), Ossorio, (1995.), Grant, Stephen, (2006.), i.e. clothing brands (Rosenberg, 2000; Zollo, 1999; Massé, 1998); • although, one third of respondents didn’t answer on the direct question about their knowledge of clothing brand(s) to name them, it seems they just didn’t want to answer this question, because they eventually in their answers, except one respondent (0,56%), answered quoting the brand(s) • at the direct question, they say that the importance of clothing brand for them is mostly “medium”; • they mostly buy 10 T-shirts, 2 jackets and 2 pair of trousers per year; • how are some brands placed in the mind of younger teenagers, it is interesting to see: Nike is absolute lieder (14.96% of all brands teenagers say they know), followed by Adidas with 11.82% and 7.67% Benetton. But by the ordinal place during evocating clothing (T-shirts, trousers and jackets) brands, i.e. except Nike and Benetton at the first place when recalling the clothing brand indicative is, that in teenagers mind Adidas is mostly placed on the second place, Puma at third place, Reebok at forth place, Lacoste at fifth place etc. positioning as brands followers for younger teenagers at Croatian clothing market; • Zagreb’s younger teenagers mostly, especially boys, love and buy sport’s clothing brands; • their mostly beloved brands are Nike (20,62%), Adidas (11,60%) and Benetton (8,00%); • those brands (Nike, 30,38%; Adidas, 17,72%; and Benetton, 13,92%) teenagers say they also mostly buy; • respondents-teenagers think, that their friends mostly were sports brands: Nike (33,52%), Adidas (21,59%) and Puma (17,61); • on the general and direct questions about their loyalty to clothing brands they say, they are mostly no loyal to all (examined) items of clothing; i.e. no loyal to T-shirts (71,43%), to jackets (79,83%) and to trousers (67,23%) or loyal are just 27.93% to brand of T-shirt, to jacket brand are loyal 18.43% and 33.52%are loyal to trousers brand; • among loyal respondents are more boys than girls for all clothing items, and • respondents named 42 different clothing brands they are loyal to and among them they are mostly loyal to Nike (18,93%), Adidas (11,24%), and Amadeus (7,10%); • 17,32% express their desire to be loyal and among 12 different brands to which they wish, but can’t be loyal mostly are Nike (45,16%) as sports brand and Lacoste (12,90%) as prestigious brand and it is in accordance with findings of Lachance et al. (2003) . Study show the complexity of attitudes and purchase behaviour in researched target group/marketing segment considering clothing brands. It is important to note that all questions greatly resulted with multi-brand preference, but also there, where one could expect just single answer. The results of this study show that younger teenager’s perceptional, attitudinal and behavioural involvement and importance of clothing, fashion and clothing brands.

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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.

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Loyalty saturation in retailing: Exploring the end of retail loyalty cards. International Journal of Retail & Distribution Management, 27(10), pp. 429–439 Yoon, Y., Uysal, M. (2005.) An examination of the effects of motivation and satisfaction on destination loyalty: a structural model. Tourism Management, 26 (1), pp. 45–56 Zollo, P. (1999.) Wise Up to Teens, 2nd ed. New Strategist, Ithaca, NY. C’est quoi ton sigle? Elle Québec, 105, pp. 75-76.

DETAILS ABOUT AUTHORS: MAJA STRACENSKI KALAUZ ASSISTANT FACULTY OF AGRICULTURE, UNIVERSITY OF ZAGREB ZAGREB, CROATIA mskalauz@agr.hr

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TIHOMIR VRANESEVIC PROFESSOR FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF ZAGREB ZAGREB, CROATIA tvranesevic@efzg.hr

MIROSLAV TRATNIK PROFESSOR FACULTY OF AGRICULTURE, UNIVERSITY OF ZAGREB ZAGREB, CROATIA mtratnik@agr.hr

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STRATEGIC BRAND ANALYSIS IN DESTINATION IDENTITY CONTEXT - CASE STUDY OF ALBANIA SAIMIR SUMA KRESHNIK BELLO

ABSTRACT Tourism industry is one of the most prominent industries at the moment. Globalization has been playing a big role by mainly diminishing traveling barriers between countries. This trend had brought also an increase in competition between countries to identify themselves and to define how they want to be perceived by the tourists. In this case, developing a clear destination brand identity is crucial for success. Brand identity and brand image are two concepts that are related to each other but their meanings are different. There are several studies from the demand side concerning with destination brand image. Conversely, there is a lack of studies conducted in destination brand identity by considering the supplier side. Thus, the main purpose of this study is to investigate the brand identity creation from the supplier side. KEYWORDS: Destination branding, destination identity, Albania, strategic brand analysis, supplier side

1. INTRODUCTION International trade in a globalized economy is a critical factor in economic growth of a nation (Kotler, Jatusripitak and Maesince, 1997, p. 81). The progress of macro-economic development also involves several components of international trade. International tourism, which is major component of international trade, can be used as a strategy for economic development in developing countries (Jafari, 1974, p. 237-245). In highly competitive world economy, an enormous role is played by global tourism environment where developing a clear state identity is the key for being successful in this sector (Crockett and Wood, 2004, p. 185). This global tourism environment also offers likelihood for developing countries to leave the poverty cycle by a global brand formation and maintaining a continuous wealth-creation performance (Morgan, Pritchard and Pride, 2004, p. 29). In tourism management and marketing, Schubert, Brida and Risso (2010, p. 377) clarify the role of tourism as a positive influence on the long-term growth of small economies through various channels, e.g., foreign exchange earnings, positive impacts in investments, human capital gatherings and stimulators in various industries. Thus, focusing on tourism sector is crucial for developing countries. Tourism industry’s competitiveness has a rising trend and calls for marketers to create a center of attention for consumer-travelers (Pike and Ryan, 2004, p. 333). This issue also has reflections in tourism and marketing researches. During the last five years, place branding has been one of the newest research areas (Moilanen and Rainisto, 2009, p. 8), in spite of great popularity of branding studies. The implication is that destinations are now in a challenge of branding. Indeed, destinations can be counted as amalgams consisting mainly of tourism products and they serve combined incentives to travelers (Buhalis, 2000, p. 97), so destination branding involves branding of these products to consumer-travelers. Particularly concentrating on destination researches in branding and tourism literature, there are not many studies deliberating mobilizations and implementations through how local support can be analyzed and provided for a brand (Ooi, 2004, p. 108). This fact proves that exiguous studies implemented in destination identity compared to destination image. Pike (2009, p. 861) indicated three research areas, which are needed in destination branding: “destination brand identity development”, “destination brand positioning” and “destination brand equity measurement and tracking”. The sequence of these research areas also designates process of establishing a destination brand. Besides, Go and Konecnik (2008, p. 178) states that demand side perspective has been considered by vast numbers of researchers in destination studies and there are still research gaps concerning with identifying a brand for destination. Associating what Pike (2009) and Go and Konecnik (2008) point out, brand identity development should be investigated more in order to contribute to established theories in the literature. Aaker and Joachimsthaler (2000, p. 44) constructed a planning model for analysis, development and implementation of brand identity. Prior to development and implementation process, conducting strategic brand analysis (customer, competitor and self-analysis) is advised to present required features for planning. In attempt to highlight constructing tourism destination brand identity via supplier side, Go and Konecnik (2008, p. 179) introduced a theoretical framework for strategic brand analysis by adjusting brand identity planning model (Aaker and Joachimsthaler, 2000, p. 44). Slovenia was the case in that research and fundamental point of the view was formed by considering the supplier side. This framework matches with Pike’s (2009, p. 860) notification on concerning research gaps in brand identity construction in relation to supplier side perspective. However, Go and Konecnik (2008, p. 181) emphasize on the need for further improvements in practical and theoretical level. This

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study appropriately focuses on developing a new strategic brand analysis within application to the tourism destination identity framework by considering again supplier side perspective but in different country range. For the incorporation of brand identity in marketing, Alsem and Kosteljik (2008, p. 913) explain that the identity paradigm will bridge the gap among marketing science and practice; and might provide a balanced marketing paradigm mutually referring to supply and demand side. This statement also proves that identity-based brand analysis by means of how suppliers identify their brands will contribute to both practical and theoretical level.

2. BRAND IDENTITY CONCEPTS With respect to creating a strong brand, identity is crucial since it refers to the disposition regarding what the brand stands for (Aaker and Joachimsthaler, 2000, p. 40). This disposition is for desired positioning instead of how the brand is perceived (De Chernatony and Riley, 1998, p. 421). Upshaw (1995, p. 12) relatively defines brand identity as a design that shapes consumers’ comprehensive opinion of a brand. Illuminating features of that design are ideas, images, words and associations. Thus, specifying brand identity covers several aspects (see Figure 2). Brand identity collectively means widespread aspects by sending messages across products, slogans and actions (Kapferer, 1998, p. 91). In case of any need for modification of these aspects, Perry and Wisnom (2003, p. 5) emphasize on brand identity that it is composed of “controllable elements” designed for services, products or organization. As the notion of identity in branding is a current issue, many previous researches have been mutually conducted by academicians and practitioners (De Chernatony and Riley, 1998, p. 420). According to Kapferer (1998, p. 17), a brand cannot merely be considered as a product; it reflects product meaning by defining its identity. Hereby, brand identity is crucial for value transformation to receiver. Drawing attention to the importance of brand identity, Perry and Wisnom (2003, p. 5) also claim that “image is nothing without strong identity”. Particularly, Kapferer (1998, p. 18) points out that real brand management’s main notion is brand identity, instead of brand image, due to need for concerning strategy and collaborative vision. Subsequently, it is significant to say that identity building is critical for prosperous branding efforts.

3. STRATEGIC BRAND ANALYSES On the purpose of being effective, a brand should be capable of separating itself from others in the market by reflecting its identity that needs to resound through customers. Indeed, current and forthcoming ability of organization should be considered in those of capability elements (Aaker, 2002, p. 76). In that case, Cravens and Piercy (2009, p. 298) proposed “Strategic Brand Analysis” which consists of “market and customer”, “competitor” and “brand” analysis. This analysis considers that analyzing the brand is crucial since a brand might have a particular product, several products, a product line or portfolio of product lines. As brand reflects all dimensions, the identity should be analyzed in strategic level. Additionally, Aaker and Joachimsthaler (2000, p. 44) established “Strategic Brand Analysis” which is emphasized a lot in branding studies (De Chernatony and Riley, 1998; Ghodeswar, 2008; Go and Konecnik, 2008; Pike, 2009). This analysis facilitates to figure out insights of the customers, competitors and the brand by covering needful aspects for building identity of a commercial brand. Compared to Cravens and Piercy’s framework, it is believed that Aaker and Joachimsthaler’s analysis is more suitable for conducting a research of identity in branding. First, the analysis is assumed as an initial step for brand identity planning and then the concern passes through development and implementation of identity. This issue makes the systematic approach visible in this analysis. Second, the analysis fits better in practical field because it encloses brand identity characteristics in well-structured way by considering possible perspectives - product, organization, person and symbol (Aaker and Joachimsthaler, 2000, p. 44). In strategic brand analysis (Aaker and Joachimsthaler, 2000), set of brand associations are analyzed in order to build up apparent and prosperous brand identity. According to Ghodeswar (2008, p. 5), those associations are significant because:

• Some customers might perceive different benefits so, obtaining emotional value help for differentiation in the rivalry, • Brand associations are also related to understanding the competitors in order to see conditions, • Measuring strengths and weaknesses of brand illustrates beliefs and values which are hardest to be duplicated by others. 3.1 Customer Analysis Aaker (2002, p. 191) clarifies the analysis of customers into four categories: “trends”, “unmet needs”, “motivation” and “segmentation”. According to this categorization, understanding the insights and conceptions of customers is essential point for development of marketing strategy. As Cravens and Piercy (2009, p. 52) states, the existence of market happens if there are customers buying goods or services, which are provided to suit needs. This issue also indicates that building

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marketing strategy for competitive force should be concerned with focusing on customer needs. While the benefits of a product or service are valuable in the market, they should relatively contain the needs articulating demand (Cravens and Piercy, 2009, p. 52). Solomon (2002, p. 6) also emphasizes on that ensuring information about customers should be integrated into features of marketing plans. Hence, collected facts with reference to customers will help out.

3.2 Competitor Analysis In marketing actions, the need for observing, understanding and countering to competitors has been crucial issue (Nwokah, 2009, p. 21). While the image and position of brand are related to serious subjects in case of present certainty, outstanding spots are also to face with prospect measures in the analysis of competitors (Aaker, 2002, p. 193): “brand image/identity”, “vulnerabilities”, “strengths”, “strategies” and “positioning”. Competing brands’ impact is now much more powerful due to higher substitutability and greater straight effects to the rivalry (Cravens and Piercy, 2009, p. 53). The focal point is now concerned with strengths and weaknesses of relevant competitors as well as acquired identity (Nwokah, 2009, p. 21).

3.3 Self-Analysis In order to provide strong contributions to developing brand identity, organization and its own brand(s) should be internally analyzed. This analysis is conducted by measuring “existing brand image”, “brand heritage”, “strengths”, “organizational values” and “strategies” (Aaker, 2002, p. 196). The outcomes of self-analysis (or internal analysis) mainly present connected associations, the way of perception, differentiation and former knowledge. Organizational measurements concentrating on circumstances and meanings are also included in the analysis (Aaker, 2002, p. 197). The analysis can also elucidate several results for the assessment of brand portfolio, which pulls through conducting decisions with respect to altering or removing current products or launching new products (Cravens and Piercy, 2009, p. 298). Thus, selfanalysis might provide modifications on existing brand strategies and forming new brands.

4. DESCRIPTION OF DESTINATION BRAND For current consumer-travelers, preference for holiday destination is a major point, which is associated with hardly finding time for vacation and allocating earned money (Morgan, Pritchard and Pride, 2004, p. 4). This holiday destination can be country, city or region. As cultural, political, commercial and social operations now exist in a single global market, all destinations have to compete in order to get concerning shares of those (Anholt, 2009, p. 6). This observation is supported by The World Tourism Organization since the development of tourism destinations will be the same as fashion products in 21st century (Morgan, Pritchard and Pride, 2004, p. 4). “How interesting the destination is considered to be” is crucial aspect for attractiveness of any place and such a strong brand for destination contribute to marketing efforts in tourism (Moilanen and Rainisto, 2009, p. 11). Buhalis (2000, p. 97) states that destinations, which have set of suppliers and services, are now recognized as sort of brands by tourists. Public administrations now consider branding destinations as an essential phase (Hankinson, 2009, p. 97) since repositioning the destination in competition entails large investment and great amount of time (Pike, 2009, p. 864). Thereby, destination branding is comprised of supplementary marketing activities. Blain, Levy and Ritchie (2005, p. 337) define destination branding as a group of these activities by dividing into four components: • “Supporting formation of a name, logo, symbol or word mark for suitable identification of destination and its differentiation • Expressing the expectation based on tourist experience with exclusive associations of the destination • Consolidating and reinforcing the relationship among the destination and travelers within suitable servings • Concentrating on decreasing perceived risk and search costs of travelers.” Pike (2009, p. 857) accordingly clarifies these marketing activities as destination branding’s involvement in both demand and supplier side perspectives. It is absolutely concerned with different products (supplier side) and sights (demand side) for creating a cohering source for destination (Ooi, 2004, p. 110). This source includes jointly pulling the destination, providing cooperation among several organizations and motivating tourists and tourism agencies (Ooi, 2004). In that case, destination cannot be considered as a single product. It is different from other products due to having set of several components, serving touristic attractions and entertainments, consisting of constant cultural values and natural environment (Morgan, Pritchard and Piggott, 2002, p. 337). Buhalis (2000, p. 98) also points out that the mixture of tourism products puts marketing and management of destinations in difficult position during production and development processes since a destination brand reflects local people’s interests in that area instead of belonging to visitors. Uniqueness is therefore distinctive element for a destination brand compared to corporate brand.

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5. MARKETING ALBANIA AS A DESTINATION BRAND IDENTITY Even though Albania has gained its independency in 1912, researches have revealed that this country has passed through different ancient civilizations and the antecedents going back to the middle and late Palaeolithic period (100000-10000 BC), Illyrian, Roman, Byzantine and Ottoman periods (Pollo and Puto, 1981, p. 1-4). Albania was announced as an independent state with the end of the Balkan war in 1912 and its formal borders were acknowledged during â&#x20AC;&#x153;London and Peace Conferenceâ&#x20AC;? in 1913 and 1921 (Draper, 1997, p. 126-128). In several time intervals, the country had surpassed different regimes from a short life monarchy to being a republic under Italian ruling (Pula, 2008, p. 574-574). The country turned into Socialist Peopleâ&#x20AC;&#x2122;s Republic of Albania in 1945 and this regime was lasted until 1991 (Schwartz, 2009, p. 5152), when Albania was part of the subgroup that communism was more strict in elsewhere of Eastern Europe (Griffith, 1963. p. 146). Transition from centrally planned economy, which is focused on heavy industry, to liberal market economy cannot prevent political and socio-economic instability at all. Unfavorable competitive position of heavy industry infrastructure led to development of Albanian service sector, including tourism industry that was untouched before (Ivy and Copp, 1999, p. 425). Accordingly, exploiting tourism industry by focusing on its potential covering historical and cultural heritage will assist in creating both a niche market (Hall, 2000, p, 42) and reconstructing the fragile economy of a country, such as Albania.

5.1. Methodology The case study is considered as the most appropriate for this study since Eisenhardt and Graebner (2007, p. 30) clarifies that case study submits relevant research strategy in building a conceptual model and developing theory among these different approaches. The nature of this research brought on selecting qualitative single case study by gathering primary data to conduct the exploration in the field of destination brand identity. In addition to obtained knowledge from the literature, documentation and practical sources; the empirical research pursued the framework of qualitative methods. The interview was established in the form of six open-ended questions and each question had a sub-question depending on the answers. The participants were free to respond in any preferred way since the depth-interview technique was applied. Nargundkar (2008, p. 39) clarifies that the open-ended questions in depth interview provide rich data due to depending on the face-to-face and semi-structured discussion with minimized restrictions. In this research, ten semistructured depth interviews were conducted. As the main purpose of the research is to develop a new theory (Eisenhardt and Graebner, 2007, p. 27), the theoretical sampling was seen reasonable by the authors. Accordingly, the respondents in the study were chosen according to their role in constructing and developing a destination brand identity in the case of Albania. Two of the representatives were from government organization, three of them were from non-governmental organization, three from private tourism agencies, whereas two of them were from academic environment related with economic, marketing and tourism of Albania.

5.2. Results and Analysis The respondents elucidated several important strategic factors for developing Albanian brand identity. Accordingly, country differentiating strengths and comparison of market perception can be used as driving sources for attracting more and various tourists. Consequently, new segmentation based on historical heritage, geographical position and natural beauties will contribute to Albania in terms of reputation, financial gains and international connections. Transferring the identity with respect and protection into current time can provide unique identity elements for the destination. The usage of various communication channels in tourism market should be considered to reach more tourists. Longterm strategies with action plans are needed. Accordingly, repressive laws are required for the raise of environmentalist movements in order to protect the natural resources such as lakes and rivers. Direct governmental supports for sustainable development of tourism are crucial since many private business enterprises act different based on concerning interests in the market and it damages the national tourism. As regional projects with neighbor countries will raise the market share, more practical implications of the projects should be fulfilled by government. The infrastructure should be improved by the investments of national and regional governments. Superior education of tourism might present professional integration of the youth with the tradition and culture. Desired quality in services should be considered as an initial tourism effort of the destination and the government should encourage private entrepreneurs to invest in tourism.

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Strategic Brand Analysis in Destination Identity Context Conceptual Model Empirical data was analyzed with theoretical data and specific attributes of destination were detected. Internal Analysis of Stakeholders is suggested through four main aspects with combining aspects. Accordingly, the order of analysis refers to “local people”, “local enterprises”, “regulators” and lastly “existing brand image”. Internal analysis is correspondingly expected to bring central elements to core identity that was discussed by Aaker (2002). Local people and values are combined together on account of the role of values in the construction of destination identity. Following analysis of local enterprises has two combining aspect consisting of environmental concerns and values in relation with their capabilities of saving and presenting them. Analyzing the regulators, on the other side, consists of five combining aspects crucial for internal stakeholders: tourism strategies, tourism education, tourism infrastructure, environmental concerns and political stability/instability. Moreover, it mainly focuses on the role of internal analysis in macro level. Lastly, evaluating existing brand image outlines the importance of considering the aspects, geographical capabilities and historical heritage, while conducting internal analysis. External Analysis of Stakeholders is concentrated on three main aspects: “trends in tourism”, “communication and promotion” and “destination image versus satisfaction”. In addition, analyzing the trends in tourism can be conducted by focusing on both needs and segmentation. As the sequence of analysis depends on transmission of identity to image, it contributes to the enlargement of identity which can also be said as extended identity (Aaker, 2002). All these three aspects are supposed to define the route of the owners of destination brand in order to attract more tourists. The main aspects of Tourism Competition Analysis, are “brand identity” and “brand image”. Brand identity’s major combining aspect is tourism management that comes from the analysis of three other sub-aspects: “investments”, “capabilities” and “natural resources”. Brand image formed as a result of this analysis is integration and interaction of both “tourism gap” and “competitors’ strategies”. Accordingly, tourism competition analysis will result in deeper evaluation and understanding of successful competitor destinations in tourism market. While this model, “Strategic Brand Analysis in Destination Identity Context”, is suggested as an initial step for constructing or developing destination identity, it is believed that the results are applicable for the analysis of destinations identity in global tourism market.

6. CONCLUSION This study results that establishment of strategic brand analysis by considering destination identity context is propitious for theoretical contribution to the literature. While the analysis is useful to provide initial results for identity development of destination brands, suggested processes and aspects are assumed to be useful and beneficial in terms of marketing destinations in tourism industry. Hence, the paper is systemized in that the way of what and how the owners of destination brand should perform in order to position the destination as a strong brand in tourism market. The destination identity was strategically analyzed as a brand in tourism market and the findings presented initial elements for identity construction of Albania. As the country can complete first step to reach to a well-developed identity by considering these results, sustainable tourism development and better positioning in tourism market can be fulfilled by partly support of study findings. The aim of this research study was to develop a new conceptual model in destination identity formation as the first generation step. Therefore, the need for more respondents from each representative group is obvious in order to consolidate the model more. Accordingly, a need to cover more countries is essential. Based on this, there is a necessity to apply the presented model in global context to understand the generalizability. In this way, the suggested model can be discarded, revised or accepted. There is also a need of more explanation to define the difference between identity and image relating to the existing confusion between these two concepts. Moreover, the suggested model is understood as the initial phase of identity development and therefore, studies related with the second phase of it can be conducted.

LITERATURE 1. 2. 3. 4. 5.

Aaker, D.A. (2002). Building Strong Brands. London: Simon & Schuster. Aaker, D.A., & Joachimsthaler, R. (2000). Brand Leadership. New York: Free Press. Alsem, K.J., & Kostelijk, E. (2008). Identity Based Marketing: a new balanced marketing paradigm. European Journal of Marketing, 42 (9/10), 907-914. Anholt, S. (2009). Why National Image Matters. In T. Buncle, ed. Handbook on Tourism Destinations Branding. Madrid: World Tourism Organization. pp. 6-7. Buhalis, D. (2000). Marketing the Competitive Destination of the Future. Tourism Management, 21 (1), 97-116.

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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.

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Blain, C., Levy, S.E., & Ritchie, J.R.B. (2005). Destination Branding: insights and practices from destination management organizations. Journal of Travel Research, 43 (4), 328-338. Crockett, S., & Wood, L. (2004). Western Australia: building a state brand. In N. Morgan, A. Pritchard, & R. Pride, ed. Destination Branding: creating the unique destination proposition. 2nd edition. Burlington: Elsevier Ltd. pp. 186-207. Chernatony, L. De, & Riley, F.D. (1998). Defining A Brand: beyond the literature with experts” interpretations. Journal of Marketing Management, 14 (4/5), 417-443 Cravens D.W., & Piercy, N.F. (2009). Strategic Marketing. 9th edition. New York: McGraw- Hill. Draper, S. (1997). The Conceptualization of an Albanian Nation. Ethnic and Racial Studies, 20 (1), 123 - 144. Eisenhardt, M.K., & Grabner, E.M. (2007). Theory Building from Cases: opportunities and challenges. Academy of Management Journal, 50 (1), 25-32. Go, F., & Konecnik, M. (2008). Tourism Destination Brand Identity: The case of Slovenia. Brand Management, 15 (3), 177-189. Griffith., W. (1963). European Communism and the Sino-Soviet Schism. The Annals of the American Academy of Political and Social Science, 349 (1), 143-152. Ghodeswar, B.M. (2008). Building Brand Identity in Competitive Markets: a conceptual model. Journal of Product and Brand Management, 17 (1), 4-12. Hankinson, G. (2009). Managing Destination Brands: establishing a theoretical foundation. Journal of Marketing Management, 25 (1), 97-115. Hall, D.R. (2000). Tourism as sustainable development? The Albanian Experience of “transition”. International Journal of Tourism Research, 2 (1), 31-46. Ivy, L.R., & Copp, B.C. (1999). Tourism Patterns and Problems in East Central Europe. Tourism Geographies, 1 (4), 425-442. Jafari, J. (1974). Creation of the Intergovernmental World Tourism Organization. Annals of Tourism Research, 2 (5), 237–245. Kotler, P., Jatusripitak, S., & Maesincee, S. (1997). The Marketing of Nations. New York: Free Press.Kapferer, J.N. (1998). Strategic Brand Management: creating and sustaining brand equity long term. 2nd edition. London: Kogan Page. Morgan, N., Pritchard A., & Pride, R. (2004). Destination Branding: creating the unique destination proposition. 2nd edition. Burlington: Elsevier Ltd. Moilanen, T., & Rainisto, S. (2009). How to Brand Nations, Cities and Destinations. Chippenham: Palgrave Macmillan. Morgan, N., Pritchard, A., & Piggott, R. (2002). New Zealand, 100% Pure. The Creation of a Powerful Niche Destination Brand. Brand Management, 9 (4-5), 335-354. Nargundkar, R. (2008). Marketing Research: text and cases. 3rd edition. New Delhi: Tata McGraw-Hill Publication. Nwokah, N.G. (2009). Customer-focus, Competitor-focus and Marketing Performance. Measuring Business Excellence, 13 (3), 20-28. Ooi, C.S. (2004). Poetics and Politics of Destination Branding: Denmark. Scandinavian Journal of Hospitality and Tourism, 4 (2), 107-128. Pike, S., & Ryan, C. (2004). Destination Positioning Analysis through a Comparison of Cognitive, Affective, and Conative Perceptions. Journal of Travel Research, 42 (4), 333-342. Pike, S. (2009). Destination Brand Positions of a Competitive Set of Near-home Destinations. Tourism Management, 30 (6), 857-866. Perry, A., & Wisnom, D. (2003). Before the Brand: creating the unique DNA of an enduring brand identity. New York: McGraw-Hill. Pollo, S., & Puto, A. (1981). The History of Albania: from its origins to the present day. Boston: Routledge & Kegan Paul. Pula, B. (2008). Becoming Citizens of Empire: Albanian Nationalism and Fascist Empire, 1939-1943. Theory and Society, 37 (6), 567-596. Schubert, S.F., Brida, J.G., & Risso, W.A. (2010). The Impacts of International Tourism Demand on Economic Growth of Small Economies Dependent on Tourism. Tourism Management, 32 (2), 377-385. Schwartz., S. (2009). “Enverists” and “Titoists” – Communism and Islam in Albania and Kosova, 1941–99: From the Partisan Movement of the Second World War to the Kosova Liberation War. Journal of Communist Studies and Transition Politics, 25 (1), 48-72. Solomon, M.R. (2002). Consumer Behavior: buying, having, and being. New Jersey: Prentice Hall.

34. Upshaw, L.B. (1995). Building Brand Identity: a strategy for success in a hostile marketplace. Canada: John Wiley & Sons.

DETAILS ABOUT AUTHORS: SAIMIR SUMA MSC. FACULTY OF ECONOMY EUROPEAN UNIVERSITY OF TIRANA saimirsuma@msn.com KRESHNIK BELLO DR. FACULTY OF ECONOMY EUROPEAN UNIVERSITY OF TIRANA nikbello@yahoo.com

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DETERMINANTS OF LOAN PRICING FOR CROATIAN BANKS IVAN ŠVERKO IVICA PRGA ZORAN MARTINOVSKI

ABSTRACT In recent years, there are many discussions about high interest rates for loans in Croatia. Most of these comments say that these rates are one of the burdens for potential GDP growth in the Republic of Croatia. In times of economic crisis usually different sectors and business segments expect from banks to provide more reliable (or cheaper) financing of their activities and projects with the aim of restarting the economic cycle (again). The same is true in Croatia. One of the very common questions of the public is - why Croatian banks currently do not offer lower interest rates for loan portfolio and in that sense help the recuperation of the national economy? There are few determinates of loan pricings in every country: (1) liabilities` pricing, (2) regulatory costs, (3) credit risk costs, (4) other risk costs, and (5) net interest margin. The aim of this work is to try to analyze determinants of loan pricing for the Croatian banks and to audit the reliability of these prices. This analysis will help us making conclusions on the persistence of the public expectations for lower interest rates. KEYWORDS: Croatian banks, loan pricing, obligatory reserve, net interest margin, credit risk

1. INTRODUCTION Pricing the loan initially requires determining the renegotiation outcomes as a function of the state of the borrower. This is complicated by the result that renegotiated interest rates are not monotonic in borrower type. A related complication is that the bank is not always successful in preventing the borrower from taking on additional risks. The bank allows some loans to continue even though the borrower chooses to add risk to the project. This makes pricing bank loans quite distinct from the standard view of pricing corporate securities.1 According to Hasan and Zazzara,2 an appropriate pricing formula for a credit exposure has to consider two main parts: • Counterparty credit characteristics - various risk factors, such as the counterparty’s Probability of Default, the Recovery Rate related to the granted facility (mortgage, loan and loan commitment, etc…), the maturity, the Exposure in the event of Default and the amount of Regulatory Capital requested by the supervisory authorities. • Bank internal factors - includes commissions, operational costs, and other subjectively allocated costs. Speaking on credit characteristics, one can distinguish expected and unexpected loss. According to Curcio and Gianfrancesco3, Expected loss (EL) depends on the borrower’s probability of default (PD) and the Loss given default (LGD). Assuming the independence between PD and LGD, the expected loss rate (ELR) for a single loan/borrower j is simply given by the following product: PDj×LGDj, whereas, for a whole credit portfolio, it is the sum of each loan’s ELR. Since they are expected, these losses must be hedged by adequate accounting loan-loss provisions and represent a physiological cost of bank lending activity. Unexpected loss (UL) is function of the PD variability and the correlation between the portfolio assets and must be covered by an appropriate amount of economic capital. Ex post, UL equals the difference between the actual loss and EL. Ex ante, the unexpected loss can be measured through a portfolio model based on a Value-at-Risk (VaR) methodology. Within the new regulatory framework, banks have to set aside an amount of regulatory capital to face the risk of unexpected losses, deviating these resources from their lending activity and suffering from the consequent opportunity cost.

Gary Gorton, James Kahn: THE DESIGN OF BANK LAN CONTRACTS, COLLATERAL, AND RENEGOTIATION, NBER Working Paper Series, February 1993, pg. 4. 2 Itekhar Hasan, Cristiano Zazzara: PRICING RISKY BANK LOANS IN THE NEW BASEL II ENVIRONMENT, Bank of Finland Research, Discussion Papers, 3-2006, pg. 8. 3 Domenico Curcio, Igor Gianfrancesco: BANK LOAN PRICING AND BASEL II: A MULTI-PERIOD RISK-ADJUSTED METHODOLOGY UNDER THE NEW REGULATORY CONSTRAINT, Banks and Bank System, Issue 4, 2009, pg. 66. 1

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Figure 1. Expected and unexpected loss

Source: Author

A consistent pricing methodology avoids numerous questionable practices in loan pricing by lenders. One questionable practice is demonstrated by lenders who typically do not include any costs associated with the risk of the loan in their pricing. This omission encourages bad credits to borrow at the same price that are being used to entice better credits. Another such practice is evident in lenders within the same organization who make a wide variety of assumptions about what it costs the bank to originate and maintain borrowers. Lenders typically don’t have good personal knowledge about what it costs to run the commercial banking organization. They may be estimating something, pulling a number out of the air, or using the rules of thumb used at a previous bank. A third questionable practice occurs when lenders associate too large an earnings credit with corresponding balances. They don’t take into account all factors associated with deposit profitability. They know less about deposit profitability than loan profitability.4

2. DETERMINANTS OF CROATIAN BANKS LOANS` PRICINGS As stated before, there are few determinates of loan pricings in every country. The most important and deterministic factors of loan pricing in the Republic of Croatia are as follows: (1) liabilities` pricing, (2) regulatory costs, (3) credit risk costs, and (4) net interest margin. a.d.1. Liabilities` pricing is one on the most important part in determining the loan prices. Speaking of Croatian banks` deposits one should mention high euroization of total banking system. This euroization is the specific of banking sectors in all ex Yugoslavia countries. The structure of Croatian banking sector liabilities is as follows: Figure 2. The structure of Croatian banking liabilities

Source: Financijska stabilnost, Croatian National Bank, January 2011, pg. 41.

Thomas A. Hannagan: LOAN AND RELATIONSHIP PRICING, RMA Journal, December 2004, pg. 19.

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As seen above roughly 45% of total banking liabilities consists of residents FX deposits (either in form of pure FX or foreign currency linked deposits). Speaking only on deposits the picture is a bit different: Figure 3. Currency structure of deposits

Source: web page of Croatian

â&#x20AC;ŠNational Bank www.hnb.hr As seen above, roughly 80% of Croatian banks deposits are nominated in foreign currencies.

Finally, one should consider the pricing habbits of Croatian banks (and to compare it with prices of other countries). In general, Croatian Banks overpay their deposits in comparison with other countries. This can be seen the following graph: Figure 4. Deposits` pricing levels of Croatian banks

â&#x20AC;Š

Source: web page of Croatian National Bank www.hnb.hr

It can be seen from the above graph that in last two to three years Croatian banks have been paying roughly 4% on FX time deposits. Current levels are around 3,5%. While, banks from EU countries pay around market prices (EURIBOR rates) Croatian banks currently overpay deposits by roughly 2,5%. This can be seen by comparing the above graph with the following one (showing the development of 3M EURIBOR).

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Figure 5. Development of 3M EURIBOR

Source: Bloomberg

There are many reasons of such overpayment of deposits. The most important ones are as follows: • The first one is the fact that the county default spread was always substainable factor in pricing foreign loans (as a alternative source of funding for banks). • Most of deposits (especially retail ones) are with the administrative interest rates.These are the changable interest rates which can be changed by banks. Before the new banking act (or before March 31st 2010) banks had an option to change interest rates without stating and proving reasons to their customers. However, with the above mentioned law banks are obliged to prove to their clients reasons of changing interest rates (these reasons can be for example changing of referential interest rates, changing of regulatory costs, etc.). The pricing pattern of administered deposits is different then the ones linked to referential interest rates (eg. EURIBOR) used in EU countries. All and all, Croatian banks (due to many reasons) in comparison with EU countries substantially overpay their deposits. Therefore, their input price is relatively higher than the one in EU countries. a.d.2. Furthermore, regulatory costs in Croatian banking system are very high. These costs mainly come from the fact that big parts of funds are imobilisated in some forms of reserves. Currently, Croatian banking system is under very developed and strict regulation. All of these measures resulted in regulation costs higher than in other accession countries. The banking system is regulated with the few acts. The most important one is Banking Law5. Banking Law has conducted in 2010. This Law regulates conditions for the establishment and operation of a bank, as well as for the supervision of bank operation. Banking Law was the first Banking Act covering risk management as a special topic. Besides the Banking Law, very important parts of banking regulation in Croatia are different decisions of the Croatian National Bank. The most important ones are as follows: • Decision on the capital adequacy of banks, • Decision on the classification of placements and contingent liabilities of banks, • Decision on reserve requirements, • Decision on the limitation of banks` exposure to foreign exchange risk, and • Decision on the minimum required short-term FX assets.

Official gazette 84/2002

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Out of the mentioned decisions the ones having the biggest impact on regulatory costs are as follows: • Decision on reserve requirements6 defines obligatory reserve of banks. It is currently at the level of 14%7, and is different for foreign exchange (FX) and for Kuna sources. For FX sources obligatory reserve is kept partially in kuna and partially in foreign exchange. For Kuna sources obligatory reserve is kept strictly in kuna. • Decision on the minimum required short-term FX assets8 regulates the ratio of short-term foreign exchange assets (up to three months) and total foreign exchange liabilities. It is currently setup at the level of 17%. As some other decisions it went through many changes in last few years. Up until 2006 it was valid only for pure foreign exchange items, but after the last change it is valid for foreign exchange and for currency clause items. Taking into account all above-mentioned measures and decisions one can assume that regulatory costs in Croatian banking system are very high. These costs mainly come from the fact that big parts of funds are imobilizated in some forms of reserves. This can be seen from the following example: Let’s assume that the bank takes a EUR 100 deposit from the domestic retail customer. The percentage of funds that can be used for placements is as follows: Table 1. Retail deposit as a source of funds Deposit amount

100

Obligatory reserve (13,5%)

13,5

Minimal required short-term FX assets (17%)

Left for placing to customers

Source: Author

As it can be seen in this example, only 83% of the funds from this deposit can be used for loan placements, while the residual 17% is kept in different forms of regulatory required assets. All together, above-mentioned reserves have substantial effects on total costs of borrowings. The company Arhivanalitika has been calculating the average regulatory costs of Croatian banks (for the Croatian Banking Association) for already few years9. This calculation shows that the total average regulatory cost for the whole Croatian banking system in 2010 was at the level of 0,98%. Moreover, the comparison of of emerging countries regulatory costs is shown on the following graph: Figure 6. Comparison of banking regulatory costs

Source: Financijska stabilnost, Croatian National Bank, July 2010, pg.48.

Official gazette 203/03, 145/04, 34/2005, 64/2005, 136/2005 and 146/2005 Here it should be mentioned that obligatory reserve in most of EU countries is at the level of 2%. In some countries is more conservative, but it is not higher than 5% in any of the respective countries. 8 Official gazette 104/2006 9 Troškovi banaka i njihova dobit – Stabilnost unatoč padu , HUB analize #28,Croatian Banking Association, Zagreb, December 2010, www.hub.hr/ Default.aspx?art=1978&sec=566&dm=2 6 7

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The above figure shows that Croatian banking sector has the highest regulatory burden compared to their peer group competitors. a.d.3. As in other countries, credit risk exposure is the most important and the most relevant risk exposure of the banking sector in the Republic of Croatia. This is especially true in the times of financial crises – which Croatian economy is now facing. The quality of the portfolio exposed to credit risk can be seen through different parameters. The most important one is the level of non-performing loans (NPL) in the total exposure. The development of B and C placements (or NPLs) can be seen on the following graph: Figure 7. The development of the NPL in the banking sector

Source: web page of Croatian National Bank www.hnb.hr

As one can see, the level of NPLs in the total credit risk exposed investments is currently  at the level of 8,3%. However, the development of this ratio is even more relevant. It can be seen that the ratio was constantly decreasing, while starting from 2008 it began to increase (mainly due to the effects of financial crises). Besides the NPL ratio, second main indicator of credit risk problems is definitely the coverage of problematic loan portfolio or coverage of the total loan portfolio. Croatian national bank calculates two different coverages. Their development is shown as follows: Figure 8. The development of provisions` coverage

Source: web page of Croatian National Bank www.hnb.hr

Coverage 1 shows the ratio between loan loss provisions and total placements and contingent liabilities. It is currently at the level of 4,3%. Its development line is very much similar to the line of NPLs. It was constantly decreasing, but it becomes increasing starting from 2008.

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Coverage 2 shows the ratio between loan loss provisions and B and C placements and contingent liabilities (or NPLs). The ratio is currently at the level of 41,3%. Its curve looks different than the one of NPLs or the one of coverage 1. It basically constantly decreases. Taking all above mentioned into account, one can conclude that a substantial part of portfolio (8,3%) is non-interest bearing (due to the excluded interest) and represents additional cost factor in the total loan pricing formula. a.d.4. Finally, required net interest margin is very important in every decision on loan pricing. Besides the public opinion of having very expensve products, one addtional myth about Croatian banking sector is that it is highly profitable. However, comparison of ROE (as one of the major profitability ratio) is as follows: Figure 9. Development of banking sectors ROE

Source: Aktivnosti i profitabilnost banaka – prvi znaci rasta, HUB analize # 32-33, Croatian Banking Association, September 2011., pg. 31.

As one can notice, Croatian banking sector is not more profitable than the other peer group sectors. The truth is even different – one can notice many other countries with more profitable banking sectors (compared to Croatian one). Net interest income is definitely the most important part of every bank`s profit. Therefore, net interest margin has very big influence on banks` ROEs. Taking into account the average ROE of Croatian banking sector, one can notice that Croatian banks have “average” net interest margin.

3. INSTEAD OF THE CONCLUSION As stated at the beginning, in recent years, there are many discussions on high interest rates for loans in Croatia. Most of these comments say that these rates are one of the burdens for potential GDP growth in the Republic of Croatia. Therefore, there is more and more pressure on Croatian banks to revise these rates. However, this analysis shows that higher loans` interest rates in Croatia are quite reasonable phenomena. The major reason is definitely high deposits rates Croatian banks pay. Furthermore, high regulatory costs are additional burden resulting in higher loans` interest rates. When one add additionally costs of credit risks as well as required net interest income the total (relatively high) loans` interest rates are quite reasonable and expected. Second question raised is – can we expect lowering of loans interest rates? The answer lies in the analyzed costs structure. If it will be positive one it should definitely be accompanied with lower interest rates on liability side and definitely with lower regulatory costs.

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LITERATURE 1.

Domenico Curcio, Igor Gianfrancesco (2009): BANK LOAN PRICING AND BASEL II: A MULTI-PERIOD RISK-ADJUSTED METHODOLOGY UNDER THE NEW REGULATORY CONSTRAINT, Banks and Bank System, Issue 4, 2009

Gary Gorton, James Kahn (1993): THE DESIGN OF BANK LAN CONTRACTS, COLLATERAL, AND RENEGOTIATION, NBER Working Paper Series, February 1993

Itekhar Hasan, Cristiano Zazzara (2006): PRICING RISKY BANK LOANS IN THE NEW BASEL II ENVIRONMENT, Bank of Finland Research, Discussion Papers, 3-2006

Thomas A. Hannagan (2004): LOAN AND RELATIONSHIP PRICING, RMA Journal, December 2004

Troškovi banaka i njihova dobit – Stabilnost unatoč padu (2010) , HUB analize #28, Croatian Banking Association, Zagreb, December 2010, www. hub.hr/Default.aspx?art=1978&sec=566&dm=2

Aktivnost i profitabilnost banaka – prvi znaci rasta (2011), HUB analize # 32-33, Croatian Banking Association, September 2011, pg. 31.

Financijska stabilnost (2010), #5, Croatian National Bank, July 2010

Financijska stabilnost (2011), #6, Croatian National Bank, January 2011

Bloomberg

10. Web page of Croatian National Bank

DETAILS OF AUTHORS: IVAN ŠVERKO, PH.D. HYPO-ALPE-ADRIA BANK D.D. ZAGREB CROATIA ivan.sverko@hypo-alpe-adria.hr IVICA PRGA, PH.D. GRADUATE SCHOOL OF ECONOMICS & BUSINESS ZAGREB UNIVERSITY OF ZAGREB, CROATIA ivica.prga@hibo.hr ZORAN MARTINOVSKI; MBA INTERNATIONAL FINANCE CORPORATION SKOPJE, MACEDONIA zmartinovski@ifc.org

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DETERMINANTS OF CROATIAN MONEY SUPPLY TONĆI SVILOKOS

ABSTRACT In this paper author applies money multiplier method to assess the determinants of Croatian money supply. The research shows that with the introduction of recession in Croatia, two components of Friedman – Schwartz equations which are influenced by the behaviour of commercial banks and non-bank public has changed significantly. Because of that, money multiplier falls below 1. Furthermore, the study shows that because of selected exchange rate regime, the high euroisation of the Croatian economy and because of reduced inflow of foreign exchange, monetary authority has difficulties in controlling the monetary base. In order to achieve its main objectives - price stability and stable exchange rate, the Croatian National Bank (CNB) combines intervention in the foreign exchange market with the sterilization measures such as the minimum required foreign currency claims and open market operations and changes in the reserve requirement rate. Recently, because of economic crises in Croatia, monetary policy has substantially changed from the relatively restrictive to an expansionary. However, due to problems in the transmission channels, this change did not boost the production and employment. KEYWORDS: Money multiplier, monetary aggregates, money supply, exchange rate regime, economic crises

1. INTRODUCTION Economists, investors and policymakers are interested in issues related to the money supply because it affects interest rates, exchange rates, inflation and the production of goods and services. As a result, monetary authorities - in Europe it is European Central Bank (ECB), in the United States it is Fed, and in Croatia it is Croatian National Bank (CNB) - are trying to manage the money supply. To understand how central banks can influence money supply, we need to know what factors determine money supply and how a central bank can increase or decrease the amount of money in circulation. When asked whether the money supply is exogenous or endogenous variable, or, is it determined by market forces or controlled by the monetary authority, economists have no unique answer. Traditionally it was thought that the money supply is completely under control of monetary authorities, and even can and should be used to control nominal GDP and inflation. This classic view assumes that the money supply is a product of monetary base (reserve money, highpowered money) and money multiplier. The central bank is able to control the monetary base and monetary multiplier is considered to be stable. According to the above, the money supply curve is a vertical to the abscissa. Articles of Milton Friedman (1956) and John Hicks (1937) are classic articles utilizing this approach, which is adopted in many other papers of that time. Many participants in the debates of whether the money is essential (does money matter) during the 1940s, 1950s and 1960s rely on the assumption that the money supply is exogenously determined. On the other hand, supporters of the post-Keynesian theory (PK) stand that money suppy is an endogenous variable that is primarily influenced by external factors. Kaldor (1970, 1982) and Moore (1988) were the biggest proponents of the theory of money endogeneity. Their ideas are the most discussed in scientific papers in the 1980s. Both, Kaldor and Moore believed that the supply curve of money or loans is completely flat¸ presenting the view that the supply of monetary base and money should be considered as endogenous and determined by demand for loans. They believed that Central banks cannot directly control the money supply and have not absolute control over the bank reserves. This view in the theory is known as “horizontalism”. During the 1990s, many scholars (Davidson, 1989, Isaac, 1991, Pollin, 1991) questioned this theory and from these criticisms emerged a slightly different stance known as “structuralism”. The structuralists claimed that horizontalists over-simplified the money supply process, and came to a conclusion that the money supply curve should be upward-sloping. The elements that drive the money supply are: (1) Asset and liability management decisions of the commercial banks, (2) the portfolio decisions of the non-bank public and (3) the demand for bank loans (Palley, 1994). PK approach focuses on key interest rate set by the central bank (eg. discount rate - in Croatia it is an interest rate for deposit facility, lombard loans and intraday loans, through which the CNB sets the lowest and the highest interest rates at the money market). Banks meet credit demand, offering loans by adding a markup over the key interest rate. After that, deposits are created by having these loans deposited in bank accounts. The repayment of loans destroys money and what is left in the system is the result of preference for holding cash. In accordance with the PK theory, there are three factors that should be considered as direct determinants of money supply: a) high-powered money, b) reserves-to-deposit ratio, and c) cash-to-deposit ratio.

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The goal of this study is to examine the extent to which these factors affect the money supply in Croatia and to draw conclusions about the level of influence that CNB has on money supply. The paper is organised as follows. An introductory section provides a brief theoretical review of different stances about the exogeneity of money supply. Second part deals with the calculation and analysis of the monetary multiplier in Croatia. The exchange rate regime chosen by monetary authority is crucial for managing the level of monetary base. So, the key subject in the third section is exchange rate regime in Croatia and monetary sovereignty. The fourth section contains a brief analysis of measures that monetary authority took prior to and during the recession in order to provide the assessment of ability of monetary authority to influence the money supply in Croatia. Section five contains concluding remarks.

2. OPERATIONAL RISK MANAGEMENT The money supply, in the narrow sense (M1) is determined by the monetary base and monetary multiplier as follows: M1 = B×m

(1),

Where are: M1 – money supply, B – monetary base, m - multiplier In a nutshell, equation (1) is the backbone and starting point of this research. Monetary base (reserve money) makes currency in circulation (money outside the banks) (G) and reserves of the banking system (R): B = G + R

(2)

The reserves of banking system are comprised of: Bank’s cash in vaults, Banks’s deposits and reserves with the CNB, other banking institutions’ deposits and other domestic sectors’ deposits with the CNB.1 The money supply, in the narrow sense (M1) is comprised of: currency in circulation (G) + demand deposits (D): M1 = G + D (3) Demand deposits includes: Government deposits with CNB, households and enterprises deposits with commercial banks. Beside this M1 monetary aggregate, that is applied in this paper as a measure of money supply, there are two broader monetary aggregates calculated in Croatia: Monetary aggregate M1a and monetary aggregate M4. Monetary aggregate M1a comprises M1 plus government deposits with commercial banks, while the monetary aggregate M4 (also called total liquid assets) makes M1a, plus time and saving deposits, plus foreign currency deposits (non-banking public with banks), plus money market instruments. The presented structure of the monetary aggregates in Croatia is not and should not be permanent. It changes with change of the money characteristics. The foundation for the creation of money supply and for calculation of the money multiplier is in the central bank balance sheets. Table No. 1 shows the balance sheet of the CNB.

CNB Bulletin No. 181

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Table 1: Monetary Authorities Accounts (end of period, million HRK)

Source: www.hnb.hr

Since the declaration of independence and the introduction of Croatian Kuna, the most important asset in the CNB balance sheet have been demand deposits with foreign banks and securities in foreign currency, which actually have been representing the majority of foreign exchange reserves. Monetary base (reserve money) in liabilities is based on foreign exchange reserves in assets. The ratio of these components is determined by the chosen exchange rate regime, and this choice affects the ability of monetary authority to implement an independent monetary policy. We can see from CNBâ&#x20AC;&#x2122;s balance sheet in Table 1 that the monetary base is made primarily of currency of outside banks and bank deposits with the CNB, and those are bank reserves. The majority of bank reserves are made of banksâ&#x20AC;&#x2122; settlement accounts, statutory reserves and overnight deposits. When we subtract bank reserves and statutory reserves we get excess reserves. One of the most important instruments of monetary policy is the reserve requirement rate. Up to June 2005 CNB paid 1.25% interest rate on statutory reserves and in early 2011 that interest rate decreased to 0.25%, and at the beginning of March 2011 CNB completely abolished it.

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CNB increases or decreases monetary base by changing the levels of its assets primarily based upon foreign assets and claims on banks.2 CNB uses open market operations and foreign exchange interventions. When monetary authorities buy securities, the consequence is higher monetary base, and vice versa. The role of non-banking public (households and firms) is that they make a decision how much currency it wishes to hold relative to deposits. However, the public’s preference for currency relative to deposits does not affect the monetary base, because, if the cash in circulation increase at the same time the banks’ reserves with the CNB will decrease and M0 will remain unaffected. (Hubbard, 2012, pp 417). Although open market operations and discount loans both change the monetary base, the CNB has greater control over open market operations than over discount loans. The CNB completely controls the volume of open market operations because it initiates purchases or sales of securities. On the other hand, when banks borrow from the central bank (using standing facilities), they decide whether to borrow funds under these conditions or not. Of course the central bank sets interest rates for their loans and thereby encourages or discourages banks to borrow. Figure 1: Bank reserves and currency outside banks

Source: Author’s calculations based on data from www.hnb.hr

Figure 1 shows the share of currency outside banks and bank reserves (which includes banks cash vaults, settlement accounts, overnight deposits and statutory reserves) in monetary base. Since 2005 to 2008 and beginning of escalation of financial crisis, currency in circulation increased, and then it started to stagnate. Furthermore, bank reserves rose in the entire analyzed period, and because of that its share of base money increased to 73%. Figure 2: The structure of reserve money in March 2012

Source: Author’s calculations based on data from www.hnb.hr

Fed has the ability through open market purchases of Treasury securities to increase bank reserves and, thereby, the monetary base. Recently Fed began to purchase hundreds of billions of dollars worth of mortgage-backed securities and other financial assets, and it was inevitable that the monetary base would increase substantially. Now, the key question is the exit strategy that fed will use in such situation. See more in: Galvin, W., T., “More Money: Understanding Recent Changes in the Monetary Base,” Federal Reserve Bank of St. Louis Review, Vol. 91, No. 2, March/April 2009, pp. 49–59. 2

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Beside monetary base, the factor that determines the money supply is the monetary multiplier. Our analysis has three steps to show that the size of the monetary multiplier is determined by the actions of three parties in the economy: the Central Bank, non-banking public and the banks. The first step shows how the money supply can be increased or decreased through a process called multiple deposit expansion. In this part of the analysis the simple deposit multiplier is determined. The second step shows how the actions of non-bank public affect the money multiplier, and the third step incorporates the actions of banks. We can wonder what happens to the money supply when the central bank buys securities from commercial banks. That increases the credit potential of banks and banks have an incentive to loan out or invest these funds. When a commercial bank grants the loan (based on these resources) to non-bank public, the M1 money supply increases (M1 = G + D). Furthermore, loans are usually used to meet the obligations of the borrower, and because of that, the money eventually end up back to banks in a form of bank deposits, which again increases the credit potential of banks. This means that through a process of deposit and credit multiplication (based on the rate of required reserves and the rate of unused credit potential) the primary initial impulse is multiplied. Looking at the process of deposit and credit multiplication it seems that commercial banks actually create the majority of money. However, the bank can lend an amount equal to its excess reserves. The new deposit is created when the borrower spends the money that was borrowed from the bank, and when that money comes back into the banking system. Here we can notice that the central bank can expand the volume of deposits in the banking system by increasing reserves, and can also contract the volume of deposits by reducing the reserves. Central Bank reduces reserves by selling securities in an open market sale. This action has a ripple effect that is similar to deposit expansion in the banking system, but in the opposite direction. Banks influence the multiplicative effects if they hold more reserves than prescribed by the central bank (if they have excess reserves). Non-banking public affects the multiplication if it holds more cash and have a lower demand for loans. Money multiplier links the monetary base to the money supply. If it is not stable, monetary authority will not be able to influence the money supply by changing monetary base. Let us start from equation (1) that tells us that the money multiplier is equal to the ratio of money supply and monetary base: m = M1/B.

(4)

Table 2: Simple monetary multiplier in Croatian banking system Monetary base

Money

Broadest money

Multipl. 1

Multipl. 1a

Multipl. 4

Year

M1a

m=M1/B

m=M1a/B

m=M4/B

2005

35 328.3

36 445.0

37 241.2

145 582.2

1.032

1.054

4.121

2006

40 943.8

42 432.0

43 245.9

166 462.2

1.036

1.056

4.066

2007

47 756.0

50 775.5

51 482.2

196 341.7

1.063

1.078

4.111

2008

50 663.4

53 362.2

54 048.5

217 716.9

1.053

1.067

4.297

2009

54 479.8

46 930.2

47 453.3

221 215.0

0.861

0.871

4.060

2010

55 584.8

49 425.5

50 074.8

227 256.7

0.889

0.901

4.088

2011

59 351.4

51 290.9

52 174.9

235 688.2

0.864

0.879

3.971

03/2012.

60 821.7

47 389.5

48 087.2

235 530.1

0.779

0.791

3.872

Source: Authorâ&#x20AC;&#x2122;s calculations based on data from www.hnb.hr

Table 2 shows that there is no significant difference between M1 and M1a money supply, so the multiplier 1 and multiplier 1a are similar. However, the multiplier 4 is significantly higher. Furthermore, it is evident that the simple money multiplier 1 was stable at an average of 1.046 until 2009 when recession in Croatia started, and then it suddenly drop 3

Multiplier 1a was 1.064 on average for the period 2005-2008.

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to an average of 0.860 for the period 2009-03/2012. This is a decrease of 17.78%. The decrease of the multiplier 4 is somewhat milder and it has fallen from an average of 4.149 for the pre recession period, to the average of 3.998 in the recession period (a decrease of 3.6%). In order to detect the reasons for this decline in the multiplier, which is now below 1 it is necessary to make further analysis. Recall that the money supply (M1) is the sum of currency in circulation (G) and deposits (D), while the monetary base (B) is the sum of currency in circulation (G) and bank reserves (R). Reserves can be separated into two components: required reserves (RR) and excess reserves (ER). Introducing this into (4), it is obtained: m = (G+D)/(G+RR+ER)

(5)

As we obtained earlier, for multiplication the incentive of non-banking public to hold currency relative to deposits is important, as well as the tendency of banks to hold excess reserves relative to deposits. In order to capture these behaviours in the expression for the money multiplier we introduce two indicators: currency-to-deposit ratio (G/D), which measures the nonbank public’s holdings of currency relative to its holdings of deposits, and the excess reservesto-deposit ratio (ER/D), which measure banks’ holdings of excess reserves relative to their deposits. To include these ratios in the expression for the money multiplier (5), we can divide numerator and denominator by D and we will get the expression (6): m = ((G/D)+1)/(G/D+RR/D+ER/D)

(6)

Term (6) is Friedman - Schwartz equation which contains three components. RR/D is a part of the multiplier that monetary authorities have control on through the reserve requirement mechanism, but the other two components (G/D and ER/D) are not under its direct control. Table 3: Multiplier components Currency outside Deposits banks

Requiered reserves

Excess reserves

Currency/

Multipl. 1a

Multipl. 4

Deposit

Exc. res./Deposit

Req. Res/ Deposit

M1a

m=M1/B

m=M1a/B

m=M4/B

Year

G/D

ER/D

RR/D

2005

11 812.0

24 633.0

15 961.3

7 710.0

0.47952

0.31299

0.64796

2006

13 431.9

29 000.1

18 685.7

8 832.0

0.46317

0.30455

0.64433

2007

15 356.3

35 419.2

21 648.4

10 539.6

0.43356

0.29757

0.61120

2008

16 444.4

36 917.8

22 593.3

11 343.2

0.44543

0.30726

0.61199

2009

16 226.0

30 704.2

23 698.5

15 176.0

0.52846

0.49426

0.77183

2010

15 544.6

33 880.9

22 353.8

17 680.0

0.45880

0.52183

0.65978

2011

16 280.8

35 010.1

23 942.4

19 128.0

0.46503

0.54636

0.68387

03/2012

16 171.8

31 217.7

27 636.7

17 015.0

0.51803

0.54504

0.88529

Source: Author’s calculations based on data from www.hnb.hr

From equation (4) can be observed following:

• Currency-to-deposit ratio (G/D) is the part that is under the control of households and businesses. An increase in • •

the G/D causes the value of the money multiplier to decline and, if the monetary base is unchanged, the value of the money supply will decline. That is because, if households and firms hold more currency relative to the deposits, banks will have less money to lend which will reduce the multiplication of deposits. An increase in required reserve ratio (RR/D) also causes the value of the multiplier to decline because banks will have less money to lend because it will have to use it in order to maintain higher required reserves. An increase in the excess reserves-to-deposit ratio (ER/D) causes the value of the money multiplier to decline, because, if banks hold relatively more excess reserves, that means that they are not using these funds to make loans as part of the process of multiple deposit creation. Banks make the decision about ER/D ratio.

When all this is taken into a consideration it is obvious that central bank does not have full control on money supply. The behaviour of non-bank public and banks can also significantly affect the money supply, and that was a case in Croatia during the crisis since 2008- up to this day.

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In Croatia, with the appearance of the economic crisis, the monetary multiplier started to decrease, and it has dropped below 1 (see data in Table 2). The reason for this is shown in Table 3 that contains the calculation of currency-to-deposit (G/D) and excess reserves-to-deposit (ER/D) ratios. G/D in 2009 increased as a result of the fall of deposits. ER/D significantly increased as banks reduced lending and they became more cautious in granting new loans. At the same time, the household demand for loans was reduced significantly. Higher bank lending interest rates (as a result of increased country risk and default risk) surely influenced the reduction in bank lending activity. The result of all these things is a movement of ER/D ratio as shown in Figure 3 Figure 3: Movement of G/D and ER/D ratios

Source: Author’s calculations

Despite a significant increase in monetary base in 2009, money supply declined. In 2010 and 2011 CNB managed to increase the amount of monetary base upon the foreign exchange reserves, but money supply still stagnated.

Figure 4: Movement of monetary base and money supply (end of period, million HRK) Monetary base

Money supply

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3. MONETARY BASE AND MONETARY SOVEREIGNTY OF REPUBLIC OF CROATIA The selection of the exchange rate regime defines the framework in which the monetary authority conducts its monetary policy. There is a wide range of foreign exchange rate regimes: from currency union, “dollarization”, currency board, up to a managed and free floating exchange rate regime. In “dollarization” domestic currency is completely substituted by the foreign currency. In that case the monetary authority cannot influence on money supply. In fixed exchange rate regime, monetary authority commits to fix the domestic currency for a foreign anchor currency. Domestic currency can be emitted only if it is fully covered by foreign reserves in central bank balance sheet. Because of this central bank would always be able to fulfil its obligation of exchanging domestic currency to foreign currency based on defined fixed rate. That significantly limits the monetary authority in the implementation of sovereign monetary policy. The advantage of this exchange rate regime is in its stabilization function of exchange rate movements, which encourages foreign trade and potentially leads to higher rates of economic growth. Lower interest rates that are result of stabilised exchange rate movement lead to higher investment and faster growth. Criticisms of using a fixed exchange rate regime are based on fact that the national government, by choosing this regime gives up two important instruments: interest rates and exchange rates. Economy slowly responds to external shocks, and the risk of an outbreak of currency crises is higher. Expectations of devaluation of national currencies in the system of fixed exchange rates result in higher interest rates, and that makes business more difficulty and create additional pressure on national governments to maintain the stability of the system. On the other hand, supporters of the floating exchange rate regime in which the exchange rate is determined solely on the basis of market supply and demand without the intervention of monetary authorities claim that this regime should be used because it provides an independent monetary policy. The exchange rate works as an automatic stabilizer that restores the balance of the economic system. This solves the problem of “fundamental imbalances” that are common in the fixed exchange regime which is susceptible to speculative attacks. Developed national financial sector is a necessity for the operation of floating exchange rate regime since its implementation implies the ability to adapt to market trends, and national institutions should have a higher level of credibility. Given that most emerging markets has shallow and underdeveloped financial system, their institutions, which are still developing their credibility, could have a lot of difficulties in managing and maintaining a flexible exchange rate regime, so they should choose less demanding exchange rate regime. In previous analysis, we examined how the behaviour of three actors: the central bank, non-banking public and banks affects the monetary multiplier. However, the choice of exchange rate regime, the level of international openness and the behaviour of participants at the foreign exchange market also have an important role in creation of money supply. If there is a high degree of international openness, capital inflow from abroad can create appreciation pressures. Depending on the exchange rate regime, the central bank will, in order to maintain exchange rate stability, intervene at foreign exchange market by purchasing foreign currency. The purchase of foreign currency results in the increase of international reserves, but also in the increase of money supply, which can build up inflationary pressures, thus being in opposition to central bank’s key objective and that is price stability. During the nineties with the adoption of stabilization program that strived to stop hyperinflation and to help the country to pull out of the economic crisis, Croatian opted for an open economy with a floating exchange rate regime with defined range of floating. The exchange rate is determined by the market force of supply and demand, but its fluctuation is bounded because the central monetary authority intervenes in order to maintain the previously specified boundaries. If the bounds of exchange rate movements are set closely, the system behaves much like a fixed exchange rate regime, and if they are set wide, the system is more like a free floating exchange rate regime. The exact boundaries of Croatian kuna exchange rate are not explicitly stated, and monetary authority intervene after significant change in exchange rates in a short term. Described exchange rate regime is called “Dirty flow”. After successful completion of first phase of the Stabilization program during the nineties, Croatia has created preconditions for the intensification of foreign capital inflow. There were the expansion of domestic consumption, strong development of the banking sector, the rapid growth of bank loans, foreign debt and the deficit on current account. Factors that contributed to the growth of capital inflows to Croatia are privatization, financial deregulation, improvement of macroeconomic stability, favourable macroeconomic outlook, stable exchange rate, and higher interest rates compared to those in developed countries (Ötker-Robe et al., 2007). Foreign capital was coming to Croatia through direct foreign investments and through loans from foreign creditors. The structure of foreign direct investments was dominated by inflows to the financial sector, while Greenfield investments in the real sector (mostly into the retail sector) accounted for only a small share. In addition, the inflow of equity capital into the banking system gained strength over the last

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few years, relating primarily to recapitalisations of foreign-owned domestic banks due to the central bank’s prudential measures. In addition to the described capital inflows, Croatia also saw a strong inflow of foreign exchange in the form of tourism revenues. (Ljubaj, I. et. al., 2010). Figure 5: Direct foreign investments (million EUR)

Source: Author’s calculations based on data from www.hnb.hr

In Figure 5 we can see the strong growth of foreign direct investments in Croatia that lasts until the occurrence of financial crises, when a strong contraction takes place, which lasts until early 2009 when a slight recovery follows. However, the international direct investments have not yet reached the level from 2007. With the high level of euroisation of the domestic monetary system and the interdependence between inflationary expectations and change in exchange rate movements, the described capital inflows were one of the key factors that determined the way of implementation and application of monetary policy instruments. The CNB achieved low and stable inflation primarily through the stabilisation of the domestic currency. There the foreign exchange interventions had the key role. With the purchase of foreign currency (creating HRK) the CNB prevented appreciation due to the large capital inflows from abroad. Purchase of foreign exchange dominated in foreign exchange transactions with commercial banks and the government, and this contributed to the central bank’s accumulation of foreign exchange reserves. Figure 6: Exchange rate and foreign exchange interventions (million HRK)

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In order to regulate the growth of money supply that occurred because of rapid growth of monetary base due to foreign exchange interventions, the CNB has undertaken the measures that influenced the monetary multiplier. Those measures are reserve requirement, marginal reserve requirement, the minimum required amount of foreign currency claims, mandatory purchase of CNB bills and open market operations. CNB carried out the sterilization policy in order to keep a low inflation.4 Figure 6 shows that, since the end of 2010, CNB is facing the serious depreciation pressures on Croatian Kuna, on which it responded by a series of foreign exchange intervention in order to stabilize exchange rates. One source of depreciation pressures is significant reduce of foreign investments and loans from abroad (because of external shocks such as the debt crisis, the oil price, etc.) and because of that, Croatia experiences the reduced inflow and even a net outflow of foreign exchange. For instance, Figure 5 shows that by the end of the fourth quarter of 2007 foreign direct investment grew at an average annual rate of 10.27%, and after 2008 we have a negative average growth rate of foreign direct investment of -1.37%. This shows that the high degree of euroisation of the domestic banking system and policy of stable exchange rate largely limits the scope of monetary policy.

4. CNB MONETARY POLICY DURING THE ECONOMIC CRISIS IN CROATIA Before the crisis, monetary policy was directed to discourage foreign borrowing intentions of Croatian bank subsidiaries in their parent banks abroad and placing the obtained funds in domestic loans. Such relatively restrictive monetary policy CNB has chosen because of rapid growth of current account deficit and foreign debt, and because of the creation of bubbles at stock markets and real estate, and the illusion of a permanent increase of consumption and standards based on relatively affordable and readily available foreign loans. This policy led to the formation of foreign exchange reserves by which was retained the general stability and liquidity in external payments and avoided credit crunch, in the conditions of general crisis. In the second half of 2008 the monetary authority noted that Croatia has gradually been entering a phase of recession, and as a result found themselves called on to make an adequate response to the new financial circumstances, both internal and external. In order to ensure the stability and liquidity of the banking system, monetary policy became expansive, and CNB made a series of Decisions among which outstands the following: The first Decision was taken in October 2008. That was Decision to reverse the Decision of the marginal reserve requirement5 in order to increase the foreign currency liquidity of banks. Then, in November of the same year, the reserve requirement rate was reduced from 17% to 14% which released 8.4 billion Kuna into liquidity. In February 2010 this rate was further reduced to 13%, which freed up a further 2.9 billion Kuna for financing the government and HBOR programs for encouraging bank credit activity. In January, and then again in February 2009 the CNB decided to reduce the rate of minimum coverage of foreign currency liabilities by foreign currency claims, first from 28.5% to 25% (in January) and then from 25% to 20% (in February), which gave the banking system access to a total of 18.25 billion Kuna. In March 2011 the Governor of the CNB decided on an additional easing of the rates of minimum coverage of foreign currency liabilities by foreign currency claims from 20% to 17%, which meant for bankers 6.3 billion Kuna of newly available funds. In addition, one of the measures in 2011 which reduced the lending interest rate was the Decision of the CNB to reduce the discount rate from 9% to 7% which also reduced the default interest rate in business relations to 15%, and in relations between the companies and individuals to 12%. With this Decision the highest contractual interest rate in transactions between legal persons can be 22.5%, and between legal and natural persons 12%. Increased liquidity in the system is primarily used in order to maintain the countryâ&#x20AC;&#x2122;s external liquidity in circumstances when repayment of principal and interest on foreign debt became larger than the use of new loans, and also to encourage bankâ&#x20AC;&#x2122;s credit activity. However, such growth of monetary aggregates, unfortunately, had no significant impact on production. Reasons for this can be found in the behaviour of government, non-bank public and banks. Specifically, in times of crisis and uncertainty, banks see governments as more desirable client in relation to enterprises and households. In the period 2000 to 2011 It is very important to decide to what extent to do sterilization. Namely, sterilization curbs the money supply and that can result in higher interest rates, which can attract new capital inflows from abroad. Additional inflows lead to new appreciation pressures and to the need for new interventions, which can make the money supply management difficult and jeopardize the autonomy of the central bank. More about the sterilization policy of the CNB see in Ljubaj, I., et al., (2010). 5 The National Bank in 2006 introduced a marginal reserve requirement on the increase of foreign liabilities. At the end of that year the CNB made a decision about the mandatory purchase of CNB bills (which was canceled in November 2009). 4

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the large portion of bank loans (37%) were placed in budget deficit and that was a typical crowding-out effect. In addition, because of rising unemployment and fear of job loss, households demand for loans stagnated. As regards the investments in the enterprises, grew during 2011 at a rate of 7.1%. However, that relatively good growth was not sufficient to substitute the lack of inflow of foreign capital. CNB was trying to foster the growth of these loans by reducing interest rates through programs A, B and C, but the results were still only relatively modest.6 Because of banks and their customers risk aversion and because of a lack of good production programs that could be financed by such loans has resulted in monetary multiplier to be under 1, as shown in the second part of this paper. This indicates that the essence of the problem lies in the channels of transmission of expansionary monetary policy toward the real sector. Today (2012), Croatia is still in recession, and monetary policy faces a numerous difficulties such as recession in the EU, problems in the European banking system because of insufficient level of capitalisation, reduced investment activity in the country, further stagnation in foreign capital inflow, high external financing needs of government and corporations. Due to the above, forecasts for Croatian GDP and unemployment are negative (decline of GDP for about 1-2% and a further rise of unemployment). Unfortunately, because of high euroisation of the Croatian economy, a radical change in monetary policy is not possible.

5. THE INTERNATIONAL INDEBTEDNESS PROBLEM, DEBT CRISIS AND SUSTAINABILITY OF FOREIGN DEBT Three actors are involved in the process of making money. Those are: Central Bank which is responsible for controlling the money supply and supervising the banking system, banking system which creates the deposits that are the most important component of the M1 measure of the money supply, and non-bank public, which refers to all households, firms and government. The nonbank public decides the form in which they wish to hold money (for instance, as currency or as account balances), whether to take a loan or to save money, etc. The calculated components of the monetary multiplier for Croatia have shown that the multiplier dropped below 1 mostly because of a credit crunch in Croatia, which led to the growth of ER/D ratio. The banks propensity to bear the risk was reduced, and banks risk assessment was changed. Household tendency to take a loan was reduced as well because of fear of job loss. Furthermore, the majority of monetary base CNB creates by purchasing foreign currency at foreign exchange market, while it uses open market operations primarily for short-term liquidity management. Because the monetary policy transmission mechanism through the interest rate channel in Croatia is relatively weak, the central bank influences on monetary developments through the use of reserve requirements or other administrative measures. Since the end of 2010 CNB is facing with severe depreciation pressures on Croatian Kuna, on which was answered by a series of foreign exchange interventions in order to stabilize exchange rates. One of the source of depreciation pressures is significant reduce of foreign investments and loans from abroad. The high degree of euroisation of the domestic banking system and the implementation of monetary policy based on a stable exchange rate largely limit the scope of monetary policy. With the appearance of the economic crisis in Croatia, monetary policy has substantially changed from relatively restrictive to an expansionary, however due to problems in the transmission channels of monetary policy on the real sector this change did not have a significant impact on production and employment.

LITERATURE 1.

Berg, A., Borenztein, E., (2000) The choice of exchange rate regime and monetary target in highly dollarized economies, Journal of Applied Economics, vol. III, No. 2, Universidad del CEMA, pp. 285-324 2. Bilten HNB-a 181 (2012), Hrvatska narodna banka, 3. Davidson, P. (1989), On the endogeneity of money once more, Journal of Post Keynesian Economics, 11(3), pp. 488–90. 4. Friedman, M., (1956), The Quantity Theory of Money: A Restatement, Studies in the Quantity Theory of Money, University of Chicago, Chicago 5. Galvin, W., T., More Money: Understanding Recent Changes in the Monetary Base, Federal Reserve Bank of St. Louis Review, Vol. 91, No. 2, March/April 2009 6. Hicks, J., (1937), Mr. Keynes and the Classics: A suggested Interpretation, Econometrica 5, 144-159 7. Hubbard, R. G., O’Brien, A., P., (2012), Money, Banking and Financial System, Prentice Hall, pp. 412-422 8. Isaac,A.G. (1991), Economic stabilization and money supply endogeneity in a conﬂicting-claims environment, Journal of Post Keynesian Economics, 14(1), pp. 93–110. 9. Kaldor, N., (1970), The New Monetarism, Lloyds Bank Review, pp. 1-17 10. Kaldor, N., (1982), The Scourge of Monetarism, Oxford: Oxford University Press More about results of these programs see in: Svilokos, T., Bank Credit Activity and Economic Growth in The Republic of Croatia, Journal of International Scientific Publications: Economy & Business, Vol. 5, part 2, Info Invest, Bulgaria, 2011, pp. 460.-474., ISSN: 1313-2555 6

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11. Ljubaj, I., Martinis, A., Mrkalj, M., (2010), Priljev kapitala i učinkovitost sterilizacije – ocjena koeficijenta sterilizacije i ofset koeficijenta, Istraživanja, Hrvatska narodna banka, pp. 3-7 12. Moore, B.J. (1988), Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge: Cambridge University Press 13. Nikić, G. (2000), Kontroverze tečajne politike, Ekonomski pregled, 51 (9-10) pp. 1102-1122 14. Ötker-Robe, I., Polański, Z., Topf, B. i Vávra, D. (2007.): Coping with Capital Inflows: Experiences of Selected European Countries, MMF, paper br. wp/07/190 15. Palley, T. I., (1991), Competing views of the money supply: theory and evidence. Metroeconomica, 45. pp.67–88. 16. Palley, T. I., (1994), The endogenous money supply: consensus and disagreement, Journal of Post Keynesian Economics, Vol. 13, No. 3 pp. 397–403. 17. Pollin, R. (1991), Two theories of money supply endogeneity: some empirical evidence, Journal of Post Keynesian Economics, 13, pp. 366–96.

DETAILS ABOUT AUTHOR: TONĆI SVILOKOS ASSISTANT UNIVERSITY OF DUBROVNIK, DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS DUBROVNIK, CROATIA tonci.svilokos@unidu.hr

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THE STORY OF THE HUNGARIAN FITNESS SECTOR – FAIRY TALE OR NIGTHMARE? ÁGNES SZABÓ

ABSTRACT In the business sphere, fitness centres respond to the consumer demand with adequate quantity and quality of supply in Hungary. Still, their operations are not problem-free. The 31 qualitative interviews and the questionnaire research reveal not only the bright side but also the problems of fitness centres (for example the lack of professionalism, sponsors, market research, club-system, ect). The interviewees estimate that only a third of fitness centres are profitable. This problem was in the questionnaire responses as well. Why? What are the reasons for that? I try to give the answer. Still as a conclusion, several hundreds of thousands of people exercise at fitness centres and it is possible to learn from them, for example the service quality. KEYWORDS: fitness sector, fitness centre

1. INTRODUCTION While Western Europe’s leisure sport industry has a history going back 50-60 years, in Hungary, it only came into being with the end of state socialism in 1989 – that is, barely 20 years ago. Fitness centres first came on the scene after state socialism ended. The first fitness centres opened in 1988-89. In Hungary, the following periods were important in the fitness center world, in chronological order: “Zero Hour”: The 1970s and 1980s • No fitness centers, just “body centers” and “iron-pumping” rooms in basements, usually in a bad state of disrepair • Absolutely no service • Absolutely no supplementary services Phase 1: From the end of state socialism in 1989 to 1999 • Smaller gyms capable of handling 150-300 members • Only basic services were available: aerobics, weightlifting, but no specialized machines • Solariums and saunas were supplementary services • Investors could get a return on their money within 2-3 years, hence it was worthwhile to enter the fitness industry • Local clientele • When a new center opened, it attracted new clients, not the old clubs’ members • OTSH offered tenders from which 130 clubs were built during this period. Phase 2: The beginning of the 2000s: • The appearance of quality clubs that were financially strong, in good locations, not just attractive for locals, but for a larger geographic region • Bigger areas, from 1,000 square meters • More comprehensive services (e.g. beauty treatments, food and drink) • Additional sports in addition to fitness, e.g. squash • Additional services, e.g. personal trainers, nutritionists • The quality of service became increasingly important thanks to strong competition • Price competition: Smaller gyms found it difficult to compete against the bigger gyms based on the price-value ratio • Big clubs began to siphon away clients from the smaller clubs, which may have driven 10-15 small clubs into bankruptcy. From the middle of the 2000s, the number of fitness centers did not grow, or grew only marginally Third phase: From the mid-2000s • Appearance of 3,000-5,000-8,000 square meter fitness centers • In most cases, the clubs are not just units, but networks • Typically financed by financial investors (real-estate developers). Examples include Oxygén Wellness and Sport Max • Holmes Place is the only strategic professional investor in Hungary (There was Gold’s Gym, but it went out of business because the “club system” it employed failed to take on in Hungary.) • Countless machines, services and service packages • High service quality

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One of my interviewees opened his gym, which was the fourth or fifth fitness centre in Budapest, in 1994. At that time, it was easy to open a gym from every viewpoint, and you could get a return on your investment in 1-2 years. Nowadays the situation is not the same. What is it now? The aim of my research was to examine the fitness industry in Hungary with qualitative and quantitative methodology, and to reveal the real problems of it. I will seek the answer to the research questions: “What are the characteristics of the fitness sector in Hungary and what areas need to be developed? Perhaps it could be useful not only for Hungary but also in other countries.

2. THE HUNGARIAN FITNESS-INDUSTRY 2.1 Methods I did 31 qualitative in-depth interviews during 2011. When selecting my interviewees, I employed the criterion, opportunistic and snowball methods (Miles and Huberman [1994], cited by Bokor [2000]). It was important to speak with representatives from the state, civil-society and corporate spheres. I also considered it important to get opinions from university experts; these served as a “control” and to ensure the reliability of the information. I used Nvivo software to analyse my 31 interviews. My online questionnaire could be filled out between November 3, 2011 and February 10, 2012. I sent the questionnaire to 800 fitness companies with a covering letter, asking the leader of the organization to fill my questionnaire. I got back 18 fulfilled questionnaires from for-profit fitness clubs. In my opinion this answer-rate also has a meaning. I analysed the data using the SPSS 15 program.

2.2. Results of the interviews When we discussed the question of which leisure sports work well as businesses and can sustain themselves from consumers, fitness received the most votes. Tennis, skiing and fighting sports were in a dead heat for second place, while cycling, running and swimming received honourable mentions. Also-rans included squash, small-field football, extreme sports, horseback riding, golf, boating/rowing, dance and yoga. One of the key advantages of fitness is the constant appearance of new styles and trends. The big sports-equipment sellers said people spend the most on products for fitness, hiking and winter sports as well as retail cycling. The fitness sector has been dominant. IHRSA (International Health, Racquet & Sports club Association) collected the most important data in 2011 about the fitness sector in the EU27 countries. Despite of the global crisis, the fitness sector has been increasing. Table 1: The fitness sector in the EU27 2008

2011

Estimation about Hungary in 2011

Members

40 million people

44 million people

300 000 people

Employees

390 000

450 000

Fitness clubs

36 900

48 000

600 – 800 (with the small clubs)

Annual revenues

20 billion euros

28 20 billion euros

144 million euros

Source: IHRSA 2011 Report, cited by Zopcsák [2012], additional Hungarian estimations based on the interviews

My interviewees who work in the fitness sector estimated that there are 600-800 fitness centres in Hungary. The palette is very broad, from small gyms that do not offer a complete service package (just the occasional aerobics class) to big centres that have everything from wellness services to all kind of sports. (There are 20-30 such centres, and these serve the majority of people who go into fitness centres). While the number of small- to medium-sized gyms is much greater, most customers frequent the bigger complexes. The gyms try to poach clients from each other. The big centres offer better value for money than the medium-sized ones and the medium-sized gyms are superior to the small ones.

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Consequently, the small gyms find themselves in an increasingly unpalatable situation. Just a quarter to a third of all centres are able to prosper. There are a number of reasons for this: 80-90 percent of fitness centres rent their premises instead of owning them, and the “club system” has not taken root in Hungary. An estimated 300,000-400,000 people frequent fitness centres, or 3-4 percent of the entire population. (According to a 2010 Eurobarométer survey, 2 percent of Hungarians exercise at fitness centres and 4 percent at other sports centres, compared to an EU average of 11 percent who go to fitness centres and 8 percent at other sports facilities. Some 15.6 percent of people in the United States, 14.6 percent of Canadians and 11.3 percent of Britons belong to fitness clubs (Oakley – Rhys [2008]). According to the IHRSA in Holland and in Spain 15 percent of the population belong to fitness clubs, in Hungary only 2.5 percent.) My interviewees were not able to offer exact numbers, just estimates. One representative of the corporate sector said there were 300 clubs in Budapest that had Internet addresses. The question came up several times as to how big fitness centres can operate profitably. Many respondents say they are not profitable; they exist to serve other facets of business, such as black-market employment and money laundering. Proving this would be impossible, and it is not my area of expertise. For myriad reasons, financial investors often establish fitness centres as a kind of “playground” for their family members, wives, or friends. The people who run these centres do not understand the business, and consequently, they do not prosper very well. A lack of economic and management experience is one of the defining factors in this field. Just because somebody is a good aerobics instructor does not mean she will be a good gym manager. Typically, fitness centres have no adequate business plans or realistic business expectations. Fluctuation is fairly high at the bigger gyms; renters come and go, principally because they had no business plans. Many times, they not only fail to hire a sports manager, they do not even ask for business advice. There are also very few consultants in Hungary who can offer all the necessary experience and knowledge (operational experience, sports and training experience, economic qualifications, market knowledge, knowledge of foreign and domestic trends). A battle for clients is raging and certain clubs try to poach each other’s customers. The intense competition is a major reason for the lack of cooperation between industry players. The prices demonstrate just how competition is: A monthly pass costs about half the 30,000-40,000 HUF (100-135 euro) that it should cost. Hungarian consumers typically buy single-day tickets. The average customer works out twice a week; at the biggest gyms the average is 2.2 times a week. The average spending is 40 euro per month (12 000 HUF). There is a major need for software to keep records on the clients. Such software would greatly facilitate the clubs’ marketing activities and help them gather market data. A lot of fitness clubs rent their premises (80-90 percent) and very few own them. Rents are high (albeit lower since the financial crisis struck). There is no point in renting space for more than 5-7 euros/square meter per month; anything higher would make it impossible to achieve profit through regular fitness-centre operations. People who own their premises may find it worthwhile to open a gym. The centers constantly need to purchase new machines, partly due to amortization and partly due to ever-changing trends. The interviewee who works as a fitness machine distributor offered an interesting fact: When an owner first opens his gym, he furnishes it with used machines nine out of 10 times, because pre-owned machines cost half as much as new ones. Just one fifth or one sixth of fitness centers can afford premium-category machines (Techno Gym, Life Fitness). Banks that financed new gyms used to ask the fitness-machine distributors for a 100 percent buy-back guarantee, but this did not work. This is why the market for used machines and machine-repair services is thriving right now. Several people said fitness centres might spend hundreds of millions of forints on a marketing campaign without performing any market research. They do not adequately assess the competition, the market and the opportunities. From every point of view, the field is extremely under-researched. We do not even know how many gyms are operating or the size of the consumer base. We also do not know enough about the consumers’ demands. Service providers have made strides with respect to marketing in recent years. Just a couple of years ago, only the big service providers did any marketing. Generally speaking, the majority of gyms and service providers – especially the smaller ones – completely lacked any marketing strategy, any relationship with customers, and any means of communicating messages to the consumers. Nowadays, they take advantage of online media or Facebook. There is much room for development in marketing, especially in the field of communications. They will need to spend money on this – but at present, most gyms try to solve all problems through barter deals. There is also a lack of sponsors. Single-entry tickets are the dominant source of revenue. In Hungary, the “club system,” where clients pay an annual membership fee, does not work, even though it is a natural fact of life in Western Europe. While Western European fitness centres survive from membership fees, their Hungarian counterparts live off of single-entry tickets. Many gym owners say the club system is the future. Some of them attribute the failure of multinational fitness giant Gold’s Gym in

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Hungary to the fact that its business model was based on the club system. At present, most gym owners do not dare to introduce such a model out of fear that they will lose their customers. However, some new clubs are trying it out. The other difference between Western Europe and Hungary is that clubs with a highly specialized target group have been operating in Western Europe for years. In Hungary, the only example of specialization is that some clubs are for women only.. An estimated third of fitness centres can operate profitably. Of the establishments listed on the government’s http://ebeszamolo.kim.gov.hu website, 40 percent of Budapest fitness centres were profitable and 60 percent are loss making in 2010. The interviewee who is familiar with the sector estimated that the rate of profitable gyms is more like 25-30 percent, especially if we include the gyms outside of Budapest. The reasons for this can be summarized as follows:

• A lack of market research • A lack of strategic professional investors, and financial investors often do not employ staff with adequate expertise • • • • • • • •

– there is a lack of business and economic knowledge A low number of gyms that own their premises A low number of credible, professional advisors and managers A lack of realistic business planning A lack of record keeping and planning – smaller clubs cannot afford the expensive software The “club system” does not work The sponsorship market does not work for fitness centres (earlier progress in this area has been rolled back by the financial crisis) Profit is not a goal because fitness centre owners “cross-finance” their operations through other activities In addition to these facts, the lack of quality standards (because of the lack of the state’s regulation) and the lack of cooperation and advocacy (because of the weakness of the civil organizations) are also big setbacks. The fitness sector field needs research because we need exact numbers and data instead of estimations.

The service quality is OK in the case of bigger fitness centres, but not in the case of smaller ones. The expectations are different: people want more from a big Oxygen Wellness and from a small fitness room. Budapest and the countryside: two different dimensions. Some clubs in big cities in the countryside have begun competing with the big fitness centres in Budapest, but they can only charge about half as much as their Budapest-based counterparts for single-entry tickets or monthly passes. There are also differences in the quality of service. There are huge developments considering the dimension of time: the services and the service quality of the big fitness centres are excellent, the services are comprehensive and there are lots of supplementary services also. One defining factor is the location of the service provider. In general, clients do not want to travel more than 20 minutes from their homes or workplaces. According to the in-depth interviews, the following items play a decisive role in service quality (in order of importance): Decent staff (behavior, politeness, knowledge), the state of the facility (uncrowded, airy, adequate light), design, cleanliness, modern machines, and supplementary services. Consumers have a hard time assessing the quality of a fitness program and its potential to bring results, so this does not figure in to their decision to choose a fitness center (or leave it). A suitable record-keeping system for clients and the related software are also important, as is the role of the gym’s website, which must be constantly maintained and updated and must be able to serve the clients interactively (a client should be able to sign up for a class, cancel his attendance, ask questions, and provide feedback on his satisfaction or dissatisfaction). All interviewees stressed the importance of personal relationships – for example, a receptionist who can greet the clients by name. In their view – contrary to the findings of both academic literature and my questionnaires – the physical environment is not the biggest factor that shapes the consumer’s first impression upon entering the gym; rather, it is the personal touch, the human factor. At the same time, overcrowding during peak hours and a lack of space can generate a negative feeling. The situation of fitness-service providers that offer a decent quality and supply of services could improve (according to the interviewees) if there were more strategic professional investors; if they employed credible advisors and managers; if they drew up realistic business plans; if more gym owners owned their premises; if they did more market research or hired others to do it for them (this would also improve the quality of service and the opportunity for segmentation); if they used software to keep records on their clients; if they could implement the club system; and if they could sign more contracts with sponsors. Decent service quality combined with good marketing would spur demand, which would boost supply. In addition, the growing number of active sports consumers is a decisive factor in creating value for owners and profitability.

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2.3. Results of the questionnaire-research I asked the stakeholders to assess the importance of the tasks they need to fulfill on a seven-point scale, and to assess the degree to which these tasks are being fulfilled in practice, also on a seven-point scale. These scales demonstrate the difference between the theoretical importance of the tasks and the practical fulfillment thereof. I also asked for basic data (name, postal code, type of organization, branch of sports, year of establishment, number of employees, number of members, revenues, expenditures), the quality of services they provide, the demand for their services, the competitive environment, economic-financial information and their material circumstances. Table 2: Revenue sources for fitness centres Revenue From consumers

75%

From sponsors

1.67%

From tenders

From the state or local governments

From events

20%

From partners

1.67%

Others

1.67%

Source: Table created by the author

Some 75% of the revenues of the fitness centers come from the customers, from daily tickets or season tickets. They do not have any sponsors (less than 2% the revenues from sponsors). Some 20% of the revenues come from different events they organize. Considering the costs, more than 90% of them are the maintenance and wages. Altogether 33.3 percent of the clubs described their own services as “high quality,” just 16.7 percent said they were “excellent.” Some 16.7 percent said the quality of the services they provide was “low” and none of them described it as “very low.” One third of the fitness centers said they thought their quality of service was adequate or average. Also one third said it was “high” and 16.7 percent said it was “very high,” while 16.7 percent described demand as “average,” 33.3 percent said it was “low,” and none of them said it was “very low.” Altogether 16.7 percent of the fitness centers said they had a significant advantage over their competitors. Some 33.3 percent described their competitive situation as average and 33.3 felt they were being squeezed out of the market. None said that they had become unable to compete. All fitness centers said at least one of their managers had some kind of qualification in economics. 16.7 percent had a manager who had completed a course; 16.7 percent had a manager with a mid-level degree; and 66.7 percent had a manager with a high-level degree. The most important tasks for fitness centers in theory and in practice are: • efficiency, • developing the quality of service, and • long-term planning/strategy development. For fitness centers, the biggest differences between theory and practice crop up in the following cases: • obtaining sponsors, • marketing activity, • achieving profit, • development, innovation, • facility development, • growth, • cooperation, partnerships, and forming strategic alliances with profit-oriented enterprises. With the exceptions of marketing activity and cooperation, all the above-mentioned factors have a strong positive correlation with the quality of service as well as the service provider’s financial situation. There is also a strong positive correlation between cooperation and financial situation. A paired-sample t-test showed that there are a total of eight factors that present no difference between theoretical importance and practical fulfillment at the fitness centers. Among these, defining target markets, long-term planning, community building, and financial planning are important for the fitness centers in both theory and in practice. The

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other four factors are important in neither theory nor practice. The theoretical and practical importance of quality of service and long-term strategy is beneficial for all business enterprises. Based on the interviews, fitness centers usually have no sponsors, even though they consider sponsorship important. The interviewees also stated that many gyms do not have the money or the energy for marketing activity and do not conduct market research. According to their estimates, only a third of all gyms are profitable; this problem arose in the questionnaires as well. If there is no profit, there is no growth, no money to develop facilities and no money for innovation (e.g. to implement a “club system” or to purchase software to keep client records). The questionnaires also reflected the interviewees’ assertions that there is no cooperation between players in the corporate sphere, even though they consider cooperation important in theory.

3. CONCLUSION In the business sphere, fitness centers respond to the consumer demand with adequate quantity and quality of supply. Still, their operations are not problem-free. The interviews and the questionnaires reveal that fitness centers generally do not have sponsors and cannot find any, even though they consider sponsorship important. Many fitness centers do not have enough money or energy for marketing activities and do not carry out market research. Many smaller fitness centers do not even have software to keep records on clients. The interviewees estimate that only a third of fitness centers are profitable. This problem was in the questionnaire responses as well. Stakeholders in the corporate sphere do not cooperate with one another, even though they theoretically consider cooperation to be important, according to the questionnaires and interviews. The corporate sphere has only four tasks that present no difference between theoretical importance and practical fulfillment – defining target markets, long-term planning, community building and financial planning. Still, several hundreds of thousands of people exercise at fitness centers and it is possible to learn from them.

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

Bokor A. [2000]: Szervezeti kultúra és tudásintegráció: A termékfejlesztés problémája. Doktori (PhD) értekezés, BKÁE, Budapest Eurobarometer 2009, 2010 IHRSA 2011 Report Oakley, B. – Rhys, M. [2008]: The Sport and Fitness Sector. Routledge, New York Zopcsák L. [2012]: A fitnesz szektor Magyarországon és Európában. „A sport mindenkié”, „A részvétel már győzelem”, „Többen – Aktívabban – Gyakrabban” című szabadidősport konferencia, 2012. március 22. Budapest http://e-beszamolo.kim.gov.hu

DETAILS ABOUT AUTHOR: ÁGNES SZABÓ PHD.-STUDENT BUDAPEST CORVINUS UNIVERSITY BUDAPEST, HUNGARY agnes.szabo2@uni-corvinus.hu

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COMMUNICATIONS MODEL OF A SOCIALLY RESPONSIBLE CORPORATION MAJDA TAFRA-VLAHOVIĆ

ABSTRACT The body of knowledge of corporate social responsibility (CSR), recently more often called sustainability and increasingly included in education and research programmes as a valuable multidisciplinary academic area that presents itself as a challenge to representatives of various academic fields, is multidisciplinary by definition. Its multidisciplinary quality is materialised in the real life as a request for the embedment of its principles into overall strategic and operational levels across all functions of an organisation, and on the academic level as a research interest and education content in various areas of various disciplines: economy, marketing, communication, ethics, management, sociology, and that by no means completes the list. The multidisciplinary area of public relations or corporate communication seems increasingly complex as well. Again, not only in real life where corporate communications have managed to penetrate all areas of corporate life, again across functions and raise to the level of substantially contributing to the highest decision making process since they guard the most valuable intangible assets, but also in research and education, corporate communications or public relations are an area accessed and studied in the fields of various disciplines: communication science, sociology, ethics, marketing, management, crisis management, psychology, and that does not complete the list either. The research question of this desk research aiming to draft a conceptual framework for a model of communication used by socially responsible company, would, therefore be: Which theoretical concepts from various disciplines would this framework consist of, under the hypothesis that such a model could be constructed and later be empirically researched? As a result the framework consists of Grunig`s theory of excellence, situational theory of publics (also Grunig), the concept of boundary spanning, the stakeholder theory, the theory of competitive philanthropy and the concept of corporate social opportunity. These six concepts could be considered to partly map the conceptual framework for a communication model of a sustainable corporation engaged in a process of implementing CSR principles across various functions and at all levels of strategy and operations. In empirical part, the research aims to study the public relations of a company which implements a policy of social responsibility in order to discover how different, if at all, is a model of public relations of a socially responsible company from a model of a company which does not implement such a policy. The paper presents empirical research in the area of public relations in the case of Coca-Cola Beverages Hrvatska. On the basis of research questions seven hypotheses were set up, out of which the empirical research confirmed five and rejected two. The result of the empirical research was a creative synthesis in the form of a model of public relations of a socially responsible company using the example of Coca-Cola Beverages Hrvatska. The application of the model on a micro-local level confirmed it as a self-sustainable model of community relations which showed that it had a strong connection with the local culture and that it had the potential of being replicated in similar cultural contexts.Originality lies in the result of a parallel actions whereby the author had the opportunity to create and repeatedly test and develop such a model without any previous models to look to and to conduct a research of it at the same time. KEYWORDS: corporate social responsibility, sustainability, corporate communications, public relations,

1. INTRODUCTION Corporate social responsibility (CSR) is defined in different ways. According to one of the definitions, corporate social responsibility refers to “achieving commercial success in ways that honour ethical values and respect people, communities, and the natural environment” (Business for Social Responsibility). Bagic, Skrabalo, Narancic (2004) offer a descriptive definition of corporate social responsibility – it is about “a company assuming responsibility for its activities that go beyond commercial considerations. For some it is looked at as the source of competitive advantage; for others it is an important response to the increasing demands of key stakeholders, such as employees, investors, consumers and environmentalists”. We are witnessing extremely fast and dynamic development in this area. Thousands of books on CSR have been

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published over the last five years. Its growth is almost exponential and quite fascinating. To be a socially responsible company has become a business imperative. In such a context, this paper discusses the topic of the public relations of a socially responsible company, as opposed to a company that does not implement a social responsibility policy, i.e. a company that is not socially responsible. Therefore, this paper focuses primarily on the field of public relations in the context of corporate social responsibility. Coca-Cola Beverages Hrvatska, d.d. produces, bottles and sells Coca-Cola drinks in Croatia. The company has been recognized as the leader in the context of corporate social responsibility in Croatia. In 2002. it published an Environment Protection Report, followed by Social Reports in 2003 and 2005, thereby becoming the leading Croatian company in terms of transparent operation. The reports and data are made available on the company web site, which has opened another important channel of communication with consumers and other stakeholders. The publication of social or sustainability reports is a trend among socially responsible companies around the world which aims at transparency and the encouragement of dialogue with stakeholder groups with the purpose of making a quality contribution to the public welfare of society. The company has positioned its social report as a landmark in the long-term process of a cultural change towards success in triple bottom line achievements. The basic hypothesis arising from the creation and evaluation of the public relations practices of Coca-Cola Beverages Hrvatska is that, in the course of the gradual implementation of the company’s social responsibility policy, its public relations function has started operating on the basis of structures and processes that make up an innovative model of public relations. The scope of communication with decision makers before the introduction of social responsibility policy was largely limited to the national level whereas, on the micro-local level, the company did not communicate directly, but usually via national government bodies and other institutions. Practice shows that one-way communication is increasingly giving way to multiple dialogue-based two-way communication, creating opportunities for dialogues and relations foreign to linear communication. The process of transition from the one-way communication model based on publicity and principles of public information to the new model based on multiple dialogues and two-way communication lasted several years.

2. THE FRAMEWORK: DESK RESEARCH Scientific studies focus on understanding stakeholders, defining the types of the corporate social responsibility that could be applied and the ways to bring corporate social responsibility and some established business priorities together. Such definitions prove that CSR activities take place in a controlled programme of activities within permanent relations (which are not a matter of choice for a business) with a diverse group of stakeholders, which includes the government, non-profit organizations, buyers/clients, employees, and others. Furthermore, the necessity of multistakeholder dialogue, when partners in that relation negotiate a mutually acceptable solution of an unpleasant issue together, is considered the best precaution, Payne and Calton claim (2002). The term stakeholder is thought to have been coined as an intentional play on the word stockholder. The most famous definition is the one by R. Edward Freeman (1984), still often used today, which defines stakeholders as “any identifiable group or individual who can affect or is affected by the achievement of an organization’s objectives”. He was the first to clarify the concept of stakeholders to the public in his book Strategic Management: A Stakeholder Approach. The development of stakeholder theories is linked to the increasing opening of communication channels, the idea of leadership in the total organization, concern for sustainable development, concern for the public trust and the maintenance of the licence to operate. The most widely used model of determining stakeholders in an organization is considered to be the so called Bernstein wheel, named after Bernstein (1984) who proposed nine different types of recipients of organization’s messages which are separate but can also overlap. Messages can target whole groups, subgroups or individuals. Receivers include the media, finance, buyers, general public, internal, local influential groups, trade, organization’s suppliers and service providers and the government. The list of the existing and possible stakeholders of an organization is not exhausted by these nine groupings – these are merely the principal stakeholders that can be found as the objects of interest of the discipline called stakeholder management or a more recent discipline called stakeholder relationship management. Explaining the reasons for engagement of all social stakeholders, Freeman says that groups establish official or unofficial relations, coalitions on certain issues or strategic alliances, and that people belong to several stakeholder groupings – shareholders can be buyers, employees or members of the local community. This approach conforms with Grunig and Hunt’s excellence model of public relations which includes the two-way symmetrical ethical dialogue with the aim of establishing winning relations with stakeholders.

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Johnson and Scholes (2002) claim in their work Exploring Corporate Strategy that the stakeholder mapping helps determine the key constraints or opportunities of a strategy and the relevant responses; will certain stakeholders swap places and thus reduce their influence, or will they try to find new champions of a certain strategy, and the proportion to which the interest (or power) would be kept or changed. They take into account two important issues: the level of stakeholders’ interest in having their expectations embodied into the company and whether they have the power (means) to do it. In this way the stakeholders are classified in terms of their capacity and probable interest in supporting or opposing certain actions and the organization can thus determine a suitable mode of communication with every group. Furthermore, organizations can consider the extent to which the level of interest or/and the capacity of stakeholders would increase or reduce under certain conditions, i.e. as a result of the proposed strategies. Stakeholder theories does not necessarily assume that all groups (or individuals) are equal, and in result, there are different modes of comparing the awarding of priority to stakeholders. Freeman and Reed (1983) have distinguished between a narrow definition of stakeholders, which includes those groups who are vital to the survival and success of an organization, and a wide definition, which includes any groups who can affect or be affected by an organization. They believe that the stakeholders covered by the narrow definition should be treated equally, based on the doctrine of fair contract. One of the arguments in favour of the stakeholder theory is that individuals or groups have the power to convince, induce or force others to accept their points of view which can be in opposition to the strategy of the organization. Judging from the wide use of similar techniques, especially in problem and risk management, many doubts and questions arise, ranging from pragmatic issues (how to conduct the most useful stakeholder analysis), ethical (who will assume the position of a stakeholder, in what context and based on what criteria) and theoretical (determining of conceptual framework). Most of these issues are under constant scrutiny, especially in the context of corporate social responsibility and overall management practice in companies. The most prominent recent work on the topic argues that the stakeholder theory is developing in several directions. Andriof and Waddock (2002) identify two principal areas – analytical and wide narrative. Incidentally, we should point out that the foreword to their book Unfolding Stakeholder Thinking was written by Edward Freeman. The book delivers the majority of more important conceptual discussions of the recent theoretical thinking on stakeholders. In the foreword, Freeman calls for the rewriting of management theory and practice so that the idea of stakeholders is put into the centre and he sees business activity as a moral activity. Four editors collected an assortment of texts, most of which pertain to convince the reader into the inevitability of the new position of stakeholders. The book provides a solid vision of the global social practices that have rapidly become a business imperative. The essay Unfolding Stakeholder Engagement by Andriof and Waddok outlines the development of the ideas of the corporate (social) responsibility and corporate social performance – which helps explain the terminology in the collection Unfolding Stakeholder Thinking . The authors present the development of the corporate social responsibility: from the section on the business’s social contract, via the concept of maximizing returns to shareholders to the modern meaning of social responsibility on the conceptual and strategic basis until today when it has become a part of the business practices. Opponents of the stakeholder theories hold the opinion that there is a certain contradiction found in its very foundation. Thus, McEwan quotes Sternberg (1994) who identifies different ethical responsibilities of the management that should advance the interests of shareholders (with the aim of increasing the long term value of operation) and the need to have understanding for the expectations of other stakeholders. An argument against the stakeholder theory is that the business is made impossible, if it is taken seriously, because the aim of the stakeholders (balanced profit for all stakeholders) a priori excludes the profit of certain groups. She says that the business is automatically excluded, as an activity that maximizes long-term ownership value as well as different objectives of maximization of profit for users and advancement of benefits for employees. According to her opinion, this separates the corporate responsibility from the “basic commitments” that we all have towards each other. Managers have the moral obligation to act within the accepted limits of decency (which excludes fraud, theft, violence and forcing stakeholders to act against their own interests) and distributional justice. Stakeholder theory is the theoretical foundation of the theory of a socially responsible company because it defines the important principles of responsible business activity which also extend to other groups apart from stakeholders. All other theories of corporate social responsibility, based primarily on the stakeholder theory, do not differ much in their answers to the question how a company can conduct responsible business (what is more, we have noticed increasingly more systemized and organized management processes which are dramatically different from the search

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for the identity of corporate social responsibility in early 1990s) but, in a way, they return to the beginning and answer the question why (operate responsibly), only to derive the answer to the question how from it. Engagement of Michael Porter, one of the gurus of the contemporary economic science, into the discussion in 2003 provoked a strong reaction of the business world. His engagement could be interpreted as a certain call (it is difficult to find anyone engaged in the contemporary academic field of corporate social responsibility whose scientific contribution is not at the same time also socially engaged) for business people not to be defensive and to find profit in philanthropy. This is also the name of the first article published by Harvard University in 2003 which brought eight crucial texts on corporate responsibility under the simple title Harvard Business Review on Corporate Responsibility. The publication contains a series of texts that explain the major theoretical directions of the new interdisciplinary field. Apart from the text by Michael Porter (who will be discussed in more detail, as the new theoretical derivative of corporate social responsibility called corporate social opportunity is based on his thesis on competitive advantage of philanthropy) the volume consists of seven other excellent texts, among which special attention should be given to Charls Handy’s What’s a Business For? Charles Handy (2003) is an eminent expert in business in society but above all he is a humanist whose works focus on the contemporary world and the doubts that accompany the development of modern capitalism. He claims that the language and standards of business have to be turned around. In knowledge-based economy, good business is a community with a purpose, and not a piece of property. If the company thinks that the community creates riches that consist of members with certain rights, as is the case in many European companies, it is more likely that the members of the community will treat each other as equally valuable partners and assume responsibility for revealing the truth. Such community can also improve the reputation of a company, insisting that its purpose is not only to make profit, but to make profit in order to make something better. What is a business for, then, according to Charles Handy? His answer is: to use the profit to make something better, and thus more useful, for the mankind. If one had to simplify the contemporary theory of socially responsible company to the fullest, than it would be based on the stakeholder theory, stretching on the continuum between the theory of Michael Porter (Do good in order to make profit) and the theory of Charles Handy (Make profit in order to do good) with all other theories placed somewhere between those two extremes. Furthermore, one could discus the extent to which all other theories conform or do not conform to the compromise that could be Make profit within the limits of good. Porter stresses the growing importance of competitiveness. Competitive context has always been an important part of strategy and it has become even more important when the overpowering productivity replaced the cheap resources as the foundation of competitiveness. Porter draws the conclusion that corporate philanthropy gives competitive advantage, determining that there is no inherent conflict between the economic and social goals, but long-term synergy. Michael Porter suggests three strategic steps for corporations to develop their strategy of corporate philanthropy. The first step is to review the existing grants, which includes categorizing donations into three major categories of giving (Are the contributions aligned with the priorities of the company?; Are decision-making, controlling and reporting criteria clear?; Is maximum value being created in communal obligation and relationship building grants?). According to Porter, a typical portfolio of corporative philanthropy consist of three types of giving motivated by different objectives. The first type is communal obligation or corporate citizenship, which means that one supports the community as a good corporate citizen and responds to the needs of the community. The second type is relationship building, i.e. maintaining the company’s licence to operate by building goodwill with key stakeholders (e.g. other business partners, the government). The third category is context focus – improve the company’s ability to operate and grow by investing in a social issue that is also a business constraint. Stakeholder expectations may necessitate that the company makes grants in all three categories, but companies should migrate funding as much as possible toward context focused giving and seek opportunities to create greater value in other two categories. The second step is to identify the key constraints in the competitive context. The key questions are what external factors limit the growth, productivity and innovations of the company and its cluster, and which elements of the competitive context are particularly important to the company versus its competitors? The third step is to identify the programs or interventions where leveraged company assets, expertize and partnerships could have a measurable impact on one or more constraints. Context-based approach, Porter claims, will increase the social and economic value of corporate philanthropy. Thereby Porter completed its concept of corporate philanthropy, which simultaneously offers competitive advantage, and

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promoted clusters of such companies and successful social segments. Even though he uses a number of examples of successful clusters that turned corporate philanthropy into their competitive advantage to support his thesis, Porter does not enter all four roughly divided sectors of corporate social responsibility (market, human rights, environment, community). However, he thinks that the corporate social responsibility is basically an issue of competitiveness, investment and profit. This is a weakness of Porter’s corporate social responsibility theory which includes the active shareholder partnership component (not giving but partnership), but it is also its great advantage because it makes the theory more easily acceptable for the business sector, being the foundation of management strategies from the same context (context of profit, investment and benefit). Based on the same need for alignment with business challenges, the theory of corporate social opportunity, which has gained extremely strong footing in the UK, was created in keeping with this theory. The advantage of this theory compared to Michael Porter’s theory is that it tends to be all-encompassing and it is not exclusive. The latest theoretical framework of this concept combined with the guidelines for managers and simulation of real life cases was published late in 2004 by Adrian Hodges and David Grayson, the leaders of two most renowned NGOs engaged in corporate social responsibility at a time – 2004 (Business in the Community and the International Business Leaders Forum). It is extremely important that the authors have introduced a new term: corporate social opportunity, (which is also the title of the book) instead of the already traditional term social responsibility. The semantic shift is of key importance here because it echoes the principal message of the book which proposes that corporate social responsibility should be seen as a business opportunity – which corporate social responsibility actually is. The book is structured on the seven-step analytical process in order to enable managers to comprehend all implications that corporate social responsibility has on their overall business strategy. These seven steps are repeated twice in two parts of the book, and the second time they are supplemented by practical tools and forms that were allegedly completed by the management of a hypothetical company from food industry. Grayson and Hodges (2004) propose that corporate social responsibility be integrated into the business strategy and not into operations. Mission, vision and values of a company are connected and created together, as well as the division of ownership and participation. Company management needs to show that it believes in values and mission. Mission, vision and values are constantly underlined by the organization (and outside) and they are implemented in: corporate culture, processes and awards, and they include employment, appointments, management and staff, education, performance objectives, evaluation, reward and acknowledgement structure, advancement, procurement criteria and processes and deep analyses for evaluating business partners. Seven steps for including corporate social responsibility at the strategic level, advocated by this theory, include: identify the drives, monitor relevant issues, create a business plan, act determinedly, integrate and gather staff, include stakeholders, measure and report. Public relations and corporate social responsibility are two fields whose relevant theories come from a number of common sources and have many points of contact. The theoretical framework for studying public relations in the context of corporate social responsibility within public relations field is determined by Grunig and Hunt’s excellence theories: situation theory of the public and the concept of boundary spanning and system theory. With the purpose of laying down a relevant theoretical framework for empirical research of public relations of a socially responsible company, some of the crucial theories in both fields were discussed . In their publication Public relations Management, Grunig and Hunt (1984) claim that each of the four models of public relations could be effective, depending on the structure of the organization and the environment in which it operates. The development of theory and research showed that organizations could apply different models in different situations, and this concept evolved to the so-called mixed motives model, which includes both symmetrical and asymmetrical communication (Murphy, 1991). Organisations are systems with interconnecting internal and external parts. PR is a filter and facilitator of information transfer (Aldrich & Herker, 1977). Systems within some organisations are open (connected, participative, empowered, equality, teamwork, shared decision making, proactive) others are closed (insular, authoritarian, controlled, directed, traditional, centralised decision making, reactive). This affects ability to recognise and respond to external changes. Systems theory assumes organisations are holistic, driven by objectives, have management systems in place and can respond to changing circumstances. Implications for PR include ability to practice 2-way communications, nature of organisational culture, leadership, openness to external audiences, etc. How does PR work with other functions?

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Companies have different linkages (Esman, 1972): • Enabling linkages – authority/resources provided by Government, stockholders, etc • Functional linkages – providing input and taking output: employees, unions, suppliers, consumers, buyers • Normative linkages – associations, societies, political groups with similar problems/values • Diffused linkages – experience consequences of actions: publics, public opinion, activists, communities PR’s boundary spanning role is supported by systems theory. This enables PR to have internal and external focus – mediating between organisation and stakeholders.Within organisations there are systems of influence (Mintzberg, 1983) controlling information, seeking to build empires, suppress knowledge, different cultures, etc.PR must have support of dominant coalition, autonomy, expertise, contribute to strategic decisions and interact with many, active stakeholders to be powerful in an organisation. One of the most important theoretical concepts of public relations is the function of boundary spanning the border of a system. The concept derives from the systemic theory that was used in the theory of organization for explaining the structure and activity of an organization as well as its interaction with its environment.

2. THE COMPANY: EMPIRICAL RESEARCH Investigation of overview studies brought about a list of variables and a set of hypotheses to be tested in an empirical research. The relevant studies were reviewed with the aim of critically examining the importance and position of corporate social responsibility in company policy, the relationship between company reputation and social responsibility, partnership with the local community, the nature of that relationship and communication inherent to such a relationship. The scope of selected studies includes the studies that focus on the theory and practice of corporate responsibility and relevant communication, as well as the studies that discuss relationships with audiences with special emphasis on relationships with the community. A result of the reviewing of the overview studies within the context determined by the said theories of corporate social responsibility and theories of public relations was a list of ten interactive and firmly connected variables for the study of public relations. Each of the ten variables was an indicator of the assessment of public relations in the specific context of social responsibility and it contains a number of related indicators for both social responsibility and public relations. Three areas of research interest containing seven research questions that determined the plan of research arose from the principal research question about the nature of public relations of a socially responsible company. The methodology used in the empirical research was primarily qualitative. However, in addition methodological triangulation is applied and quantitative methods are used. The researcher of the Coca-Cola Beverages Hrvatska case study had direct contact and was close to the situation, people and the phenomenon investigated. The researcher’s personal experience and insight were an important part of the research and necessary for understanding the phenomenon. The explored system of Coca-Cola Beverages Hrvatska was dynamic, which was the reason for the constant caution regarding the process itself and for the assumption that change is necessary. It is precisely this consideration of changes that is one of the key guidelines of this research, because the researcher, being both an observer and a participant, was herself a culprit and a witness of the dynamics of the system of Coca-Cola Beverages Hrvatska. The quantitative method used in this research was a questionnaire survey. Methodological triangulation, which includes comparison and integration of data collected in some type of qualitative and quantitative method, was also used. Purpose-based sampling was used. Homogenous and heterogeneous samples were used in different segments and there was also some overlapping of these two types of samples. The first such homogenous sample were journalists, the second were PR practitioners, the third were members of a study tour group, the fourth - the managers of Coca-Cola Beverages Hrvatska, and the fifth - the managers of Coca-Cola Hellenic Bottling Company. Furthermore, a convenient sample consisting of persons willing to participate depending on the circumstances was also used. In fact, many selected samples were convenient in order to meet the needs of the research. The samples used in the qualitative methods in this research were small (seven and eight to thirty), while those used in the quantitative methods were larger (up to 170), where possible. Coca-Cola Beverages Hrvatska is an exceptional example of a socially responsible company operating in Croatia and

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was therefore, selected as the topic of an in-depth research. For the purposes of deep understanding of the case in the basic sample, different groups were sampled for the in-depth study of this particular case from the groups of the public and company interest groups, internal and external. Variables determined by the preliminary review of the literature were to be tested as the initial variables in the research of individual stakeholders. The research context is specific. The author of the paper investigated the very phenomena that she herself encouraged, created and applied and because she expected to encourage, create and apply the knowledge acquired from the qualitative research. The strategic framework based on the qualitative method used for planning the research, acquisition of data and analysis was founded on the key principles of qualitative research. Drawing on the principal research question and based on the conclusions of the study of literature within the theoretical framework and of the review of overview studies of public relations and corporate social responsibility, seven hypotheses were formulated, correlating with the seven research questions arising from the principal research question and they were divided into three major areas of interest to be refuted or proved by the empirical research.

3. RESULTS OF THE EMPIRICAL RESEARCH The Public relations model that lies behind the communication and establishment of the relationship with the stakeholders of Coca-Cola Beverages Hrvatska as a socially responsible company (from 2001 on) includes direct communication of the company with interest groups and audiences on all three levels: local, national and global. Apart from direct communication, indirect communication is also established between the organization and stakeholders and the public on the national and global level and the lower level is brought in by the same stakeholder group. The model is normative and it presents the public relations of a socially responsible company on the example of CocaCola Beverages Hrvatska as they would be ideally suitable for a socially responsible company because they allow for overall communication and dialogue with all on all levels, which is the crucial precondition of the social responsibility of a company comprised in the demand for multi-stakeholder dialogue or multiple dialogue with different audiences. The public relations model of a socially responsible company is not static, but dynamic and flexible. In that model, a socially responsible organization establishes relationships with different groups and audiences, at different times, while those groups and audiences also establish relationships among themselves at different times. The company is thus entangled into a net of public relations and together with them it continually changes its initial structure in space and time, like a spider’s web. The spider’s web might be the most telling metaphor for the complexity of mutual connections of different factors in the net and for its flexibility, since the structure of the net changes with every new public or stakeholder group that becomes a part of it. The Public relations model of a socially responsible company on the example of Coca-Cola Beverages Hrvatska in the Dubrovnik project rests on the global values of corporate citizenship, but also acknowledges local cultural specifics. A company that is a member of a global corporation cannot communicate effectively with different interest groups and audiences in the national environment by practicing public relations unless it bases its strategy on the acknowledgment of local cultural and interest specifics. The local determination of Coca-Cola Beverages Hrvatska, is based on the microlocal and regional sociocultural determination of the local community. In Croatia, the “local” quality of the strategy of a company that is a part of a global corporation, as is the case with Coca-Cola Beverages Hrvatska, does not refer to its national focus, which is the only interpretation arising from the global-local opposition, but it refers to its subnational, regional and microlocal focus (Dalmatia, Dubrovnik, eastern Slavonia). The public relations model of a socially responsible company on the example of Coca-Cola Beverages Hrvatska has four key elements: a) Stakeholder approach. Stakeholder approach is the dominating strategic approach in company’s public relations. The overall power and influence of a stakeholder group are not determined by its commercial or political strength but also by its social relevance and the general benefit it provides for society. In company Public relations, a stakeholder approach is directly related to social responsibility because it assumes a practical application of the responsible relationship with all stakeholders and the application of the theory of social opportunity. The advantages of such a public relations strategy of a socially responsible company such as Coca-Cola Beverages Hrvatska are the quality of stakeholder relations, synergy and innovations in business models. b) Two-way symmetrical communication. A certain number of the elements mentioned in Grunig, Grunig and Dozier (1995) excellence study were proved by an empirical research of excellence in regards to social responsibility. Other elements were directly tied to the category of social responsibility and business ethics. Those are above all the following: preference of a two-way symmetrical communication or the so-called mixed model, management and strategic

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role of Public relations, transparency of operation and communication with audiences and stakeholders via different channels, estimate of the effect of social responsibility and socially responsible public relations. c) Public relations management as relationship nurturing based on reciprocity, responsibility, reporting and relationship nurturing. Communication as relationship nurturing is the third key characteristic of the public relations model of a socially responsible company applied by Coca-Cola Beverages Hrvatska. Practices based on the excellence model lead to relationship building. This model is not complete without stewardship. The relationship building model called ROPES (research, objectives, program, evaluation, stewardship), based on Hendrix’s (1998.) fund-raising model, is not complete without the concept of “friend acknowledgement” which encompasses 4 Rs: reciprocity, respect, reporting, relationship nurturing.( K. Kelly /Heath, 2001). d) Micro-local-national communication directions. Cultural specificity of microlocal identities does not determine only the unusual directions of communication (regular communication of national with local factors) but also the sustainability of socially useful activities. It is initiated already in the first stage of the partnership project between the local community, private sector and civil society organizations when the only source of project funding is the private sector. The funds are allocated in the form of seed money necessary for the project to earn such recognition of its benefit to the society that would make regional or national government willing to pick up the project and raise it to the level of a regional or national program, as was the case, for example with the tourist culture project supported by Coca-Cola Beverages Hrvatska in the County of Split and Dalmatia. The image presents the various directions of communication inherent to this model which allows for stakeholder dialogue of all with all. As it is obvious from the Public relations model of a socially responsible company on the example of Coca-Cola Beverages Hrvatska, Public relations are significantly enriched by the partnership and various communication channels in the context of social responsibility applied by the company. The greatest gain for the Public relations and the company itself was the introduction of the microlocal level as a special level of partnership that mediates the central – national level and chiefly on the level of specific microlocal cultural content. This mediation of the local within the national communication is a specific of this model. The same mediation is conducted also on the global level where the company communicates directly, but also indirectly, with organizations. In fact, the direct relationships with certain groups on one level (microlocal, national, global) are mediated also by indirect relationships via the other two levels, which allows for total dialogue of everybody with everybody in a democratic atmosphere of open communication which is, thus, above all, a type of communication that is responsible to all audiences. The public relations model of a socially responsible company on the example of Coca-Cola Beverages Hrvatska is normative primarily in the Croatian context due to the specifics of the local-micro-national environment, but it is also normative in the global context as cross-sector partnership is one of its characteristics. The public relations model of Coca-Cola Beverages Hrvatska assumes a three-fold cross-sector partnership with varied key success factors and they are divided into factors related to the social environment, mutual respect of partnership groups, processes and structures, common objectives and access to resources. The local community public relations model is dominated by different success factors such as the service function (an example is the service provided by a business to the city of Dubrovnik or the University), the innovative role (using the same example, that would be the local launch of a cause-related marketing campaign), the role of chiefly advocating the estimated effect of the project as its value (effect on society, and not only on profit) and the joint work on the building of the community and democratization.

5. CONCLUSIONS AND RECOMMENDATIONS The scope of communication before the introduction of the social responsibility policy was largely limited to the national level while the company did not communicate directly on the micro-local level, but usually indirectly via national government bodies and various institutions. Practice shows that one-way communication is increasingly giving in to multiple dialogue-based two-way communication, creating opportunities for multiple dialogues and relationships foreign to linear communication. The process of transfer from the one-way communication model based on publicity and public information principles to the new model based on multiple dialogue and two-way communication lasted several years. The fundamental starting hypothesis of this research was that the public relations of Coca-Cola Beverages Hrvatska as a socially responsible company include direct communication of the

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company with interest groups and audiences on all three levels: local, national and global, as well as indirect communication between the organization and stakeholders and the public on the national and global level, with the indirect communication mediated by the same stakeholder group to the lower level; and that the model is normative and presents the public relations of the socially responsible company Coca-Cola Beverages Hrvatska, as they would be ideal for a socially responsible company. Communications and public relations are of key relevance for social responsibility. The point of corporate social responsibility lies in the overall relations with different social groups that might have an influence on a company or that could be influenced by a company. Business cannot be “changed” without communication – it is the essence of its interrelation with the society. The challenge rests in the numerous forms of communication between businesses and different audiences, some of them completely new and still undiscovered by some, in the framework of a social community, as coalesced, interdependent, interactive, mutually effective, stimulating and interfused segments. In short, public relations are a precondition and the essence of the transformation of business into responsible business. This paper offered a model of the Public relations of a socially responsible company on the example of Coca-Cola Beverages Hrvatska. This model is more complex than the model of the same company that existed before the introduction of corporate social responsibility. The relations are conducted on all three levels both directly and indirectly with the key audiences and they are dynamic. As the social responsibility of a company is a process and not a condition, so are the public relations in this model a dynamic flexible process that includes overall communication of all with all. The normative model of public relations of a socially responsible company, according to which communication is conducted among all audiences and simultaneously, indirectly and directly, between the organization and different audiences on all three levels: local, national and global, based on the example of Coca-Cola Beverages Hrvatska aims to make a contribution to the theory of public relations and corporate social responsibility. Future research should be directed towards generalization of the public relations model of a company in the European environment, in the context of social responsibility.

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.

Andriof, J.,Waddock, S.,Husted, B.,Sutherland Rahman S., (2002)’Unfolding Stakeholder Thinking’ , 1,2, Greenleaf Publishing Aldrich i Herker, (1977), Boundary spanning roles and organisational structures, Academy of Management Review, 2 Bagić, A., Skrabalo, M., Narancic, L., (2004), ‘Overview of corporate social responsibility in Croatia” AED, IBLF, Zagreb, Bernstein, D., Corporate Image & Reality: A critique of corporate communications, Cassell, 1984 Burke, E. (1999), ‘Corporate Community Relations’, Praeger Publishers, Clark., E. C. (2000), ‘Difference between public relations and corporate social responsibility: An analysis’, Public relations Review, Volume 26, Issue 3, Autumn 2000, Cutlip, S. M., Center, A. H. i Broom, G. M. (1994), ‘Effective public relations’, 7th edn., Prentice Hall, Englewood Cliffs, NJ Cutlip, S.M., Center, A.H. and Broom, G.M., Effective Public Relations, 8th edition, Prentice Hall, 2000 Freeman, R. E. (1984), ‘Strategic Management: A Stakeholder Approach’, Pitman, Boston, MA Freeman, R. E. (1994), ‘The Politics of Stakeholder Theory: Some Future Directions’, Business Ethics Quarterly 4: Freeman, R. E. i Reed, D., ’Stockholders and Stakeholders: A new perspective on corporate governance’, in ‘Corporate Governance: A Definitive Exploration of the Issues’, ed. C. Huizinga, UCLA Extension Press, 1983. Grayson, D.& Hodges A., (2004), ‘Corporate Social Opportunity’, Greenleaf Publishing Grunig, J.&Hunt T., ‘Managing Public relations’, Holt, Rinehart&Winston, 1984 Grunig, J. B. (1992), ‘Excellence in public relations and communication management’, Hillsdale, NJ, Erlbaum Grunig, J. E. E., i Huang, V. H. (2000), ‘From organizational effectiveness to relationship indicators: Antecedents of relationships, public relations strategies, and relationship outcomes’, in Ledingham, J. A. i Bruning, S. D. (Eds.), ‘Public relations as relationship management: A relational approach to the study and practice of public relations’, p.. 23-53 Hillsdale, NJ, Erlbaum Grunig, J. E. (1992), ‘Communication, public relations, and effective organizations: An overview of the book’, in Grunig, J. E. (ed.) ‘Excellence in public relations and communication manegement’, Lawerence Erlbaum Associates, Hillsdale, NJ, p.1-28 Grunig, J. E. i Grunig, L. A. (1992), ‘Models of public relations and communication’, in Grunig, J. E. (ed.) ‘Excellence in public relations and communication manegement’, Lawerence Erlbaum Associates, Hillsdale, NJ, p. 285-325 Grunig, L. A., Grunig, J. E. i Dozier, D.M. (2002), ‘Excellent Public relations and Effective Organizations: A Study of Communication Management in Three Countries’, Lawrence Erlbaum Associates, Mahway, NJ Handy, C. (2003), ‘What`s a Business For?’, in Harvard Business Review on Corporate Responsibility, Harvard Buisness Press, p.65-83 Heath, I. (ed.), ’Handbook of Public realtions’, Thousand Oaks, Sage, p. 659-663 Heath, R. L. (1997), ‘Strategic Issues Management: Organizations and Public Policy Challenges’, Sage Publications, Thousand Oaks, CA Johnson, G I Scholes, K. (2002), ‘Exploring Corporate Strategy’, Pearson Education Ltd, 2002, p. 207-209, 213 Kelly, K. S. (2001), ‘Stewardship, The Fifth Step in the Public relations Process’, u Heath, R. L. ‘Handbook of Public relations’, p..279-289 Ledingham, J., i Bruning, S. (2000) (Eds.) ‘Public relations as relationship management: A relational approach to the study and practice of public relations’, Hillsdale, NJ, Erlbaum

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25. Porter M..(1999),’Philanthropy’s New Agenda’, Creating Value, Harvard Business Review, nOve,ner/December 1999 26. Porter, M., Kramer M. (2003), ‘The Competitive Advantage of Corporate Philanthropy’, Harvard Business Review on Corporate Social responsibility. 27. Waddock, S. (2001), ‘Integrity and Mindfulness, Foundations of Corporate Citizenship’, The Journal of Corporate Citizenship, Issue 1, p. 27-35 28. Waddock, S. (2002), ‘Leading Corporate Citizens: Vision, Values, Value Added’, McGraw-Hill, 2002, p. 195-196 29. Waddock, S. (2002), ‘From TQM to TRM: Total Responsibility Management Approaches’, The Journal of Corporate Citizenship, Issue 7, Autumn 2002, p. 113-126

DETAILS ABOUT AUTHOR: MAJDA TAFRA-VLAHOVIĆ PROFESSOR UNIVERSITY OF DUBROVNIK DEPARTMENT OF COMMUNICATION SCIENCE DUBROVNIK CROATIA mtvlahov@unidu.hr

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CONCEPT OF BRAND IN MONTENEGRIN SERVICE INDUSTRY LUKA B. USKOKOVIĆ

ABSTRACT Service industry, being an inevitable segment of every economic flow at local, regional, national or international level, shows ever-increasing formative power in GDP of Montenegro as well. Montenegrin economy, being still under the influence of global, but also domestic economic crisis, as small and open, directly depends on the external sources of financing. In addition it is affected by radical market liberalism and drop of industrial production. Therefore, in the near future, it has to direct its sources, both human and material, to the service industry with clear focus on service marketing and creation of so-called service brand at all organizational levels. Brand, like service, almost identically explains the concept of tangibility (while in principle both are intangible), ensures added value to tangible product, makes tangible product available and, in the contemporary economic conditions, pay great attention to the satisfaction of clients. Accordingly, brand concept in the service industry of Montenegro i.e. planning, application, everlasting improvement, evaluation and control of the values of brand concept are the key factors for development of service rendering entities in Montenegro and consequently dominant Montenegrin service-rendering branches such as tourism, hospitality, trade and traffic, banking, finance and insurance. KEYWORDS: Brand Management, Service Brand Name, Service Industry, Montenegrin Service Branches.

1. INTRODUCTION Service industries, being an inevitable segment of every economic flow at local, regional, national or international level, shows ever-increasing formative power in GDP (over 60% of GDP in the global economy). Along with the increase in investment income, the growth of services in the current account balance is one of the main factors of development of the international economic relations during the past twenty years. As a consequence of complexity of the service sector and its influence on the economic process, the classic division of national economy into three main sectors (primary, secondary and tertiary, which aggregates all service industry) is no longer objective. The fact is that the service sector is necessarily divided and classified by depth into the following categories: 1. tertiary (tourism and hospitality), 2. quaternary (transport and trade, finance and insurance, administration and communications, ICT) and 3. quinary (health services, education and recreation and similar sectors of service industry). Due to the expansion of the above mentioned service sectors and the fact that in developed countries these service sectors dominate in the economic structure, almost all national economies are being categorized as service economies. Actuality of research of service industry quality management in terms of constant change, development of new and improvement of traditional services in tertiary and quaternary service sector, should start from the market segmentation towards service industry, representing a frame on which is based one of three Porter generic strategy of differentiation. Ensuring favorable strategic position by differentiating service sectors and service companies as well is very limited because these services are intangible and therefore brand becomes the main factor of differentiating a service from its competition. Brand, like service, almost identically explains the concept of tangibility (while in principle both are intangible), ensures added value to tangible product, makes tangible product available and, in the contemporary economic conditions pay great attention to the satisfaction of clients/consumers. New rules in the service industry have levied introduction of a new business concept, which is primarily reflected in the powerful means of retaining existing customers and attracting new ones, i.e. brand as an income instrument which determines business success and profitability, but also as a market term which comprehends value, recognition and guarantee in the consumers’ expectations. For services, as well as for products, is necessary to add a new value and by doing so to reduce the time spent on making the initial reaction and then to direct an interactive marketing function towards the functional quality of service and in that way build a long-term relationship with consumers. The success of “adding” new, recognizable value to services, i.e. making of successful service brand needs to be a result of managerial effort and capability to make a long-term and sustainable competitive advantage. In the past two decades numerous books, studies and research papers of the leading brand management theorists Aaker, Keller, Kotler, Davis and Kapferer, were devoted to development of strategy and brand management. First books referring to the importance of brand management as market concept which strengthens competitive position were Aaker’s Managing Brand Equity (1991), Building Strong Brand (1996) and (with Joachimstahler) Brand Leadership (2000). Having established the foundations of the brand theory at the beginning of the 21st century and having analyzed the relationship between a brand and a financial performance of a company, trying together with the Interbrand (the largest global network for creating a brand value) to measure the brand equity, the first models of the brand value were developed

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(BAV, Aaker, BRANDZ, Model Resonance). This American approach follows the Keller’s book Strategic Brand Management (2003), while Kapferer’s book The New Strategic Brand Management: Creating and Sustaining Brand Equity Long Term (2004) represents the leading European theoretical and practical concept of the new rules of brand management. Therefore new rules of management theory now include strategic approach of branding, i.e. making decisions on the nature of new and existing brand elements which will be applied to the new or existing products or services. Presented in that way strategic brand management framework includes designing of a program which will contain a plan of marketing activities for development of a brand and its management over a certain time period, and based upon information which will be received by constant monitoring and measuring the value of a brand success considering company’s own strategic objectives. Theoretical concept of a brand management lead by a motive that being a relatively new area of marketing management it needs standardization and “completion”, proceeds from a general fact that “almost everything can be branded”, often generalizing areas of branding and equally considering all areas in which a consumer has a choice. So physical product, service, shop, person, place, state, organization or idea are analyzed as areas of brand management (without clear distinction of every separate area) in making, measuring and maintaining brand value. Contemporary economic conditions which generate marketing concept from mass to individual, expansion of marketing canals on several levels as precondition of business functioning, growth as well as decline in social welfare, changed lifestyles, exponential growth and development of ICT sector which enabled the emergence of new services, constant increase of competitiveness enhanced by influence and activities of the service sector and everlasting aspiration of companies to add/brand new elements within the scope of the service components, are all the facts that additionally actualize research and enhance conception of brand management development strategy in the service industry of Montenegro.

2. THE IMPORTANCE OF APPLICATION OF BRAND MANAGEMENT IN THE MONTENGRIN ECONOMY The Montenegrin economy, being still under the influence of both global and domestic economic crisis, as small and open, directly dependent on external sources of funding, hit by radical market liberalism and decline in industrial production, in near future must direct with more determination material and human capacities towards service industry, or service organizations with clear focus on service marketing and creation of the service brand, at all organizational levels. The above mentioned challenges that Montenegrin economy faces with a special reference to the service industry and the orientation to adequate and rational reaction on the events in the region, i.e. development of the strategic framework aimed at creating a brand as an important instrument of long-term competitiveness both the service industry and the service organizations, are very interesting research topics. Integral application of brand management instruments in the service industry of Montenegro is in its initial stage. Service organizations in Montenegro realize that managing basic determinants of service quality is no longer sufficient to provide reliability in consumers’ expectations. Services as well as products need to improve by adding a new value and by it is also necessary to put emphasis on the time dimension, i.e. the time spent on creating the initial reaction. In terms of domestic economy marketing experts, realizing the creation and maintenance of a brand value of a service organization as an imperative of corporative competitiveness, now have an opportunity to revitalize interactive marketing function aimed at functional quality of service and making of an organizational brand, building in that way long-term connections with the consumers. Service industry of Montenegro, although facing huge and often cruel market requests, has a chance in development of small service organizations which would be predominantly market oriented at a local level. Thanks to this direct connection with market, decisions made at a local level will be firmer and interactive marketing performance even more developed. Based on the fact that Montenegro still has not got developed methodology and application of quantitative analysis of measuring brand value, the problem of the brand conception in the service industry is additionally actualized for the broader region. In 2012 activities on promotion of business environment and regulatory reform will represent permanent process of necessary partnership between state administration and the economy. Although in post-crisis period, Montenegrin economy still searches for the efficient measures and instruments for strengthening competitiveness. Burdened by the numerous causes which deepened the crisis, the Montenegrin economy is still in a phase of external funding impasse and with weakly developed financial structure. It is an economy which is characterized by decline in export due to the decrease in activities of export partners. The end of 2011 marked decline of total scope of all production activities, while in contrast, during the economic crisis as well as in the post-crisis turbulent business environment, the service industry

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marked growth, making over 50% of GDP. So, by analyzing the condition of Montenegrin service industry and by perceiving contemporary strategy of a brand management, branding models and the results of the revitalization on this field, one can come to a conclusion that present condition of the service sector of Montenegro can be improved and it can even grow and develop up to a very considerable level of service offer with all direct positive economic, but also indirect geo-demographic and socio-cultural side effects of such development. Starting from the experiences of other service economies it is clear that application of marketing and brand concept as basic generators of contemporary business and direct influence on effectiveness and efficiency of a company has to be applied at the domestic field as well, and therefore directly increase the competitiveness of our service companies and comprehensive economic activity.

3. SERVICE INDUSTRIES AS THE SUBJECT OF BRANDING Establishment of the concept and strategy of brand management with a clear focus on service industry and planning, application and permanent improvement, evaluation and value control of a brand concept as a key factor of improvement of competitive advantage of service organizations on the example of Montenegro contains perception and completion of the theoretical framework of brand management on the one side, and analysis of the existing condition and directions for development of service sectors of the Montenegrin economy, on the other side. The example of dominant service industries of Montenegro (tourism and hospitality, trade and transport, banking, finance and insurance) which contribute with over 50% to Montenegrin GDP shows that possible solutions from the aspect of creating unique strategy and brand management application need to be offered. The objective must be, not only theoretical elaboration of a model of brand value (brand value is based on the consumer and financial brand value), but also application in the business of Montenegrin service industry with a final goal to prove that funds invested in a brand have influence on creating market value and competitive advantage of a service company. Due to the fact that a specificity of a service brand is reflected in its non-material component, predominantly qualitative character, by application of basic models and methods of valuating Montenegrin service brands and by adequate concept and brand management strategy it is possible to create, position on a market and constantly maintaining the value and recognition of domestic service brands, and by doing so also improve the competitive advantage and the strength of service sectors and the economy as a whole. Starting from the leading role of the service sector in the GDP growth, classification and characteristics of services and the possibility of creating new economic environment, regarding both global and domestic economy, the necessity of application of marketing and brand concept or development of a specific marketing strategy in business of service organizations becomes the necessary and intrinsic framework of adequate service management, focusing the â&#x20AC;&#x153;broadenâ&#x20AC;? marketing mix i.e. all necessary marketing instruments in function of managing service quality. Brand concept, which not only represents a valuable market term, but also is an integrator of quality and characteristics of services, image and reputation and overall behavior of the service organization, reviews the aspect of managing adequate marketing program with a goal to establish and improve its value. Within the scope of service brand management process, possible active and passive variables of brand environment need to be analyzed. The subject of analysis should also be the manner of profiling and market positioning of a brand with a goal to plan identity and value of a service brand, and with comprehensive strategic planning, qualitative and quantitative goals of a brand. Strategic control which should provide an answer to the question regarding market status and brand vitality has to include the entire set of measures for permanent monitoring and eventual revitalization of a brand. Finally, the establishment of interactive and direct market communication as well as provision of quality brand service is inevitable. That will be achieved by focusing the service brand communication and by completely integrating strategic approach.

3.1 Banking and financial market of Montenegro and the concept of brand management Changes in consumersâ&#x20AC;&#x2122; behavior, burdened by the socio-economic indicators, drastically changed the banking and financial market of Montenegro in post-crisis period, but also influenced the necessity of development of a new brand management concept for this, along with tourism, the leading service industry of Montenegro. It seems that in terms of expectations, instruments of service marketing and brand management as possible directions for solution during crisis this market is the most developed. Although it is the most sensitive market of pro-cyclic activity, in the economy directly dependent on the foreign funding sources, whether in a process of growth or decline, strict application and control of the instruments of service marketing and continuity of brand management process as well has to be provided. Focus of

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brand management has to be on the development of integrated, planned and long-term brand activities which would guarantee adequate management of relations among consumers and their total satisfaction. Precisely the development of adequate strategy of brand management in this industry can be the key to the maintenance of value and stability in the bank-client relationship, and therefore the factor of improvement still not sufficiently developed domestic financial structure. Brand management in this market has to promote and emphasize the importance of socially/emotional brand component of both Montenegrin banking and insurance industry. The global economic crisis and its influence on Montenegro only confirmed that problem of lack of investments or investment spending in the economy cannot be solved without establishment of its own, mature and well organized financial market. Banking market of Montenegro has to create future vision on a fact that the period of easily accessible money and funding sources is over, so it needs to remain the main initiator and funding source of Montenegrin companies, but with previous internal reorganization and “removal of diseased tissue”. The Central Bank needs to restore its full authority with favorable interest rates, stable liquidity and constant restoring customer’s confidence; the financial sector needs to be back on the road of supporting economy with permanently controlled brand management activity whose full promotion was almost blocked by the crisis and post-crisis period. Concept of branding services in banking sector should form a clear, recognizable image of financial company which provides it, with positive associations and expectations. Due to the globalization and development of new technologies, financial services1 overtake dominant role at the market. They start to brand and promote, except for the fact that the same manners which apply for the product cannot be applied. Employees i.e. those who represent organization for consumers and clients are a brand, and based upon them the organization is developed and positioned. Branding services is an excellent instrument for communication with the buyers, which can transmit the message, e.g. various service packages are offered depending on the wishes and needs of the buyers (each service package has its own name and is recognizable). The examples of successful service branding in the Montenegrin banking and insurance are numerous, and the most important are the following: Crnogorska Komercijalna Banka AD Podgorica-CKB, American Express credit cards, Uniqa and Sava Insurance.

3.2 Case Study – Elements of brand of the Crnogorska Komercijalna Banka Brand management in banking of contemporary style and intensity which can be seen in developed economies is of the recent date. In the late 1950’s in original form it appeared in the USA, and in Montenegro it appeared in the past ten years. Nowadays, contemporary marketing management has available a powerful instrument – brand, by which it emphasizes conscience, reputation, positioning and value of business, company, institution or product. Crnogorska Komercijalna Banka AD Podgorica, the leader in the Montenegrin market for more than a decade, creates unique market recognition of its products, services, team, concept and contemporary model of business. CKB brand, one of the most powerful brands in Montenegro, in the visual and verbal domain, has all distinctive features – brand elements: (1) CKB Brand Name – name of a brand is the most important element of complexity of creation of a brand, crucially important choice, because it often covers the central spot in associations that a brand awakes. A brand name represents the part of a brand which is possible to pronounce and to write by letters. The name “CKB” works in seconds, and is connected with all associations of the brand and is part of the every day’s life for the citizens of Montenegro. Apart from the use of full company name, Crnogorska Komercijalna Banka equally uses its acronym – CKB. An important strategic decision represents is the choice of the manner on which company will structure and name brands in its profile. Brand architecture (branding strategy) which bank uses is corporative marking of products/services i.e. name of a product is used together with the corporate name and therefore creates an “umbrella brand” (CKB credits, CKB savings, CKB child savings, CKB cards, CKB e-banking, CKB Call Center, CKB Business terminals etc.). This strategy is very suitable because the bank has an already created image, market recognition and is very present in Montenegro. (2) CKB Logo is the second important element of corporate and/or brand identity. In short, that is the “brand logo” i.e. the part of a brand which cannot be pronounced, visual symbol of the organization and brand which identifies that organization and differentiates it from others. Logo of the Crnogorska Komercijalna Banka is constituted of textual and appropriate graphic solution i.e. three binding letters – CKB, acronym of a full company name (Crnogorska Komercijalna Banka), but also emphasizes the name of the strategic partner – “member of the otp group”. Apart from the acronym it contains a symbol (drawing) which creates certain associations (safety, roof, rise) for the clients.

Formative force of the service economy in GDP in the late 90’s makes the following shares: the USA 75%, Belgium 73%, France 70%, the Netherlands 74%, and Great Britain 74%. The average of the developed countries is 71%, and less developed in terms of “service economy are the following countries: Bulgaria 62%, Poland 65%, Romania 53%, China 33%, Egypt 51%, India 46%, Mexico 67% etc. 1

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(3) CKB Brand Color – apart from the topography and shape it is extremely important to make the right choice of colors. Properly chosen colors define the brand logo. Mark Gobe emphasizes that importance of color in branding is not only about the beauty or aesthetic experience, but that color also serves for communicating the most important information to a client. Crnogorska Komercijalna Banka uses two colors – green and white, with which it creates unique brand identity, completely different from the competition. Looking at an associative and symbolic importance of the color, it is considered that green reminds of nature, calmness, safety, good health, while white reminds of purity, perfection and festivity. Cultural treatment of the combination of green and white in the bank logo is aligned with valid aesthetic understanding of a culture of clients within the area on which CKB operates. In order to quickly reach their market share, competition does not pay much attention and bravely play around with corporate colors. In the wide spectrum of colors, in order to reach client as quickly as possible, the variations of red which reminds of passion, power and domination are most often used. On the other side, playing around with appealing and luxurious shades of yellow and purple is easily noticeable, but is short-lived. (4) CKB Brand Messages – the next important element in branding banking services is definitely a slogan or message of a brand, component which can be often changed which is in contrast to the other identity elements. A brand message can be defined through a slogan, short phrase that defines a brand. Crnogorska Komercijalna Banka in creating its business slogan uses unlimited number of ideas, however it always takes care about the reaction it will cause within clients. Therefore it is the best accepted among the present and future clients. A certain call is always used in the message: (a) rational, which refers to the interest of clients – e.g. “0% of provision for all traders on turnover that goes through CKB Business terminal”, “CKB child savings, for our children” (b) emotional, which awakes all positive emotions – e.g. “Crnogorska Komercijalna Banka in every household”, “Bank for all times”, “World is too small for you” and (c) moral, aimed at conscience, i.e. what is right and proper for the audience – e.g. “Make safe savings”, “Make savings, that is the key to your independence” etc. Not understanding the specificity of the domestic market the competitors make many mistakes in this field. They either only copy the slogans of their mother banks, or in a cooperation with a foreign marketing agency they make mistakes by launching messages which are not typical for our region and country. The fourth element of branding is packaging and marking, but considering the intangibility of banking services, the emphasis is on development of corporate brand. B. Rakita, having in mind that service is invisible and unrepeatable product emphasizes the role of corporate branding which has a task to create client confidence by making the quality of service and the way they experience it predictable and imaginable. Corporate brand of Crnogorska Komercijalna Banka includes a wide range of associations at the banking market and in public. CKB actively participates in culture, science and sports of Montenegro. These promotions of bank brand are long remembered and are developed in the fully completed concept of social responsibility. CKB brand represents what the bank works and what it actually is, it is an important part of the capital of Crnogorska Komercijalna Banka which provides it a leader position. Nowadays in Montenegro, over 300,000 natural and legal persons, recognizes CKB brand and has certain amount of knowledge about it. Finally, CKB brand is not just a name or a logo. It is a promise to every client because it integrates quality and characteristics of products and services, image and reputation, overall behavior of the bank and positive client experiences.

3.3 Interest for brand in tourism Considering the level of achieved development of tourism and hospitality in the world and promising prospects of its rise in the future long-term period, there is an unambiguous necessity for strict application of marketing postulates and brand management in this increasingly influential sector of service industry. Montenegrin tourism is already in the stage when it is necessary to provide facilitated conduction of the exchange process for this industry, through adequate market research and organization of comprehensive marketing activities with crucial role of brand. Research of concept of marketing management in Montenegrin tourism (with precisely defined stages) i.e. framework for marketing management of a tourist destination and defining in which stage of a life cycle is Montenegro tourist destination. Research area and application of brand concept of tourist destination has to comprehend analysis of active and passive variables of Montenegrin tourist brand, development of brand-service matrix, choice and implementation of appropriate positioning strategies with constant control of market status, acceptance and manners of maintaining the vitality of domestic tourist brand. The necessity for a brand and traditional recommendations for creating and choice of a brand are also valid for a tourist product. As an expression of guarantee of appropriate characteristics of an offer, tour operators more and more insist on a brand. In the literature the key reasons for interest for brand in tourism are mentioned2: • The growing and strongly expressive attitude on value of a brand as part of assets, • The change of communication line with buyers in order to increase marketing expenses, • Rise of the retail influence and importance of its own brand at the market, • Information on the influence of global competition3 etc.

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There are certain advantages of brand in tourism which marketing managers should have in mind. These advantages are the following: (1) brand reduces the consumers’ risk, (2) it helps in easier identification and the choice of market segments, (3) it enables integration of different participants (employees, shareholders etc.) at the tourist destination, and (4) it represents strategic weapon for long-term planning in tourism. Professor Mihajlovic emphasizes that in tourism there is also an open dilemma between choosing a familiar (corporate) or an individual brand. Trend of choosing corporate brand (common brand, “umbrella brand”) is very present, as well as its advantages over individual brand. The former most powerful brand in charter aviation in Germany Kondor was substituted by Lufthansa which invested millions in order to create strong brand at the charter aviation market. However, now that brand is substituted by Thomas Cook which united the brands such as Kreutzer and Terramar under its “umbrella”. TQ united former powerful brands TUI First and Hapag-Loyd. The similar situation is with other corporate brands such as: Nekerman, Club Mediterane, Accor etc. Corporate brand strategy assumes merge of the total company supply under a single name. This strategy can be especially significant and interesting for tourist destination which is not unique, and therefore creating a brand for it as a whole is difficult. Strategy of familiar brand usually refers to the choice of a brand for a group of products (e.g. an ecologic and extremely famous place such as Toscana, French Riviera, Dalmatia etc.). However, the brand evolution happened during the certain time period, so apart from the familiar, an individual brand was used. In the case of management decision for an individual brand, then each service has its own brand. Creation of multiple brands is necessary approach towards market segmentation and product differentiation. The establishment of a brand at the tourist market is much more complicated in manufacturing stage, due to the characteristics of service. When referring to the policy of brand development in tourism of Montenegro, we can state that it is just at the beginning, in the stage of brand development and brand launching, i.e. at the very beginning of the brand life cycle.

3.4 Product and image of tourism of Montenegro Although in the recent years thanks to the nautical and tourist brand, luxurious marina and estate Porto Montenegro, Montenegro as a destination has become more important, it still does not have such famous name and it does not offer a demanding product. That is why concept of “the new beginning” in the process of making brand has become necessary. The activity needs to be directed from the first stage of the brand life cycle, i.e. brand development and launching; and product development needs to be directed towards strategic goals: quality destination and product segmentation. Basically, orientation of product segmentation should be: discover, experience, enjoy! Different directions of product branding should be developed analog to the basic topics – market segmentation and segmentation of the target groups, partly along with them, and partly in mutual order. Within the scope of these manufacturing lines certain offers are being specialized further, are being introduced for the necessities of the target groups and build a set of sub-brands. Market approach and advertisements have to gradually follow the development of a product and at the same time they have to: (1) follow the basic themes of the production line, (2) fascinate, i.e. cause interest and desire for travelling, (3) emphasize USP (Unique Selling Proposition) i.e. point out attractive specificity, (4) be fair, i.e. be in accordance with the facts. In order to achieve a specific demand which existing supply can qualitatively satisfy, and in order to create the essence of a brand which nowadays is followed by an adequate service, and in the near future is to be developed into an image of high value which will permanently define Montenegro as a specific goal, brand (image) strategy should take the name of country “Crna Gora” as a general symbol. With this general symbol it should create the image of holiday as follows: (a) uniquely beautiful and still untouched area, (b) diversity, exotica and authenticity of nature, culture and service itself, (c) Adriatic beaches and sunny climate, and (d) high quality and possibility of choice in all areas of service4. Finally, when it comes to Montenegro, then it is already obvious that a tourist product where sun, sea and sand are dominant factors, i.e. simple services and inferior (substandard) elements need to be upgraded with elements such as: promotion of our eco-environment, lots of sport, entertainment, cultural and educational programs, excitement, flexibility and all that what modern tourist requests, and which would result in high level of tourists’ satisfaction and only then brand of our destination would become positive and recognizable. Mihailović Božo, Marketing u turizmu – Principi za menadžment, Faculty for tourism and Hospitality – Kotor, Press Obod AD, CPI – Podgorica, Cetinje, 2005, page 282. 3 International tourist market is already a global market. Globalization in the context of tourism is inevitably related to the international tourism (although domestic tourism is far greater by the number of travels)/ The sole existance and growth of the international travels (in 2004 there were over 760 million of international travels, 37% more than ten years before, while the share of tourism at the Middle east and in Asia has grown on the account of Europe and America), represents one of the most obvious manifestation of the globalization. 4 Marketing concept for Montenegro, Absatz-Communications, Werbeagentur 2

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Focusing the development of a brand strategy for rural tourism as a new product of domestic service industry it is possible to provide availability and permanent use of tourist potential which is to be ensured and attractiveness of total supply together with its international competitive advantages and therefore creation of a strategy for brand development in hospitality of Montenegro is necessary quality factor of our tourist product.

3.5 The importance of hotel industry During the first 6 months of 2012 Montenegro reached 140 M EUR of revenue in tourism sector of services employing around 8 K residential people. Until 2012-end total revenue of tourism will reach 700 M EUR keeping the same level as previous year. Even in spite of financial crisis, from year to year, tourism is a growing sector showing positive trends in operating revenues of the Montenegrin hotel industry as well. Total number of hotels in Montenegro is 310. Montenegro is turning increasingly to the elite tourism. With 5 stars there are 4 hotels. It is very important to notice that hotels 5 * have the longest operations during the period â&#x20AC;&#x201C; around 11 months and very important fact that 36% of full utilization. In contrast, the lowest category hotels have the shortest period operations â&#x20AC;&#x201C; about 8 months and 22% of full utilization. The operating revenue of hotels with 4 and 5 star has increased twice in 2011 compared to 2006, while the same indicator for hotels in the lowest category (2*) stayed on the same level. Based on some predictions in near future 4 and 5 star hotels will moderate growth of room rates. Table which follows shows the business of the hotel industry of Montenegro in three regions. Having compared total income of this industry in specific regions the analysis showed that hospitality makes about 25% of total income in tourism of Montenegro, where hotels in the north make 1.84%, those in the central part 1.82% while 20.69% of income from hospitality is generated in the southern region. The estimate is that hotel industry will contribute to total income of the Montenegrin tourism with over 150 million euros at the end of 2012. Table 1. Hotel Industry in Montenegro (North, South and Central Region)

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The most developed hotel industry is at South Region where 226 hotels and other touristic units accommodated 640 K visitors with more than 4 M overnights in 2011. There is the biggest number of luxury hotel brands such as Splendid, Avala, Queen of Montenegro, Ibero Star etc. Avala Resort & Villas is a unique 5-star resort located directly on the beach and provides for a first-class vacation experience. The Montenegro Stars Hotel Group is a hotel management company that owns and operates three hotels in Montenegro, on the Budva Riviera: Splendid Conference and SPA Resort 5* the most well-known hotel, Montenegro Beach Resort 4* and Blue Star Hotel 4* designed for businessmen and short-stay travellers. Hotel Splendid has been a member of Great Hotels of the World since 2008. Bar has 48 touristic units accommodating 150 K visitors and 1.2 M overnights, Herceg Novi 38 with 250 K visitors reaching 2 M overnights during 2011. In the period 20062010 the operating revenue of hotels in Seaside area has been increased for 22% on the average of 14 K EUR per room. Starting from the influence brand management had in the change of accommodation facilities in Montenegro and segmentation of hotel industry in the world and in Montenegro, and from the standpoint of creating the adequate strategy of hospitality brand management it is necessary to focus on the relation between franchising and merchandising and on the problem of service standardization. Also, importance and influence of creating a brand for tourist business from the standpoint of multiple connected vertically and horizontally integrated service industries will provide completed framework of strategy for development of brand management and of national brand.

3.6 Transport and inevitability of managing brand instruments Specificities of application of brand management as a factor and initiator of development of transport and trade industry of Montenegro are becoming an important and intrinsic factor of development. Starting from the situation analysis and characteristics of transport infrastructure, limitations and possibilities of brand value in terms of traffic and transport services, necessary process of market (re)positioning of a brand of these service industries becomes an imperative. Strategic presumptions for development of efficient system of distribution should enable adequate implementation of brand elements in a trade industry trough process of merchandising and franchising, as a manner of creating additional value, and by improvement of electronic trade which modern business requests. Montenegro is predominantly mountainous country and has a very good geo-strategic position. However, due to the hilly landscape i.e. natural environment, transport remains the industry with slow development. Although services it generates have a great share in GDP, direct foreign investments as well as the building of the highway Bar-Boljare are still missing. Despite the fact that main advantage represents access to the Adriatic Sea, which is the main Montenegrin road to the world, there are only few partly developed brands in this area. Two airports are operating: Podgorica Airport and Tivat Airport. Montenegrin airports are used by numerous global brands of aero industry, and the most important are the following: Turkish Airlines, Austrian Airlines, Adria Airways, Emirates, JAT, Croatia Airlines etc. Railway network in Montenegro, which is 155 miles long, connects the Bar Port with the rest of the country and with important export-import partners. Railway traffic is not competitive, especially considering the fact that investments on annual level are 5-7 million euros, and approximations are that necessary funds for maintenance of rails is over 20 million euros a year. Extremely expensive infrastructure completely repressed any activities of brand management in this branch. Montenegrin Post Office has approximately 900 employees and is one of the companies with the best infrastructure in Montenegro and is also a subject of interest for many investors who are willing to with additional investments broaden the national brand by opening Postal savings. Two large international companies and one from the region are the most important factors in the area of telecommunications in Montenegro. These are the following: T-Mobile, Telenor and m:tel. At the end of June 2012 the number of mobile telephone users in Montenegro was 1,021,572 which is the rise of 164.76%5. In 2005 Montenegrin Telecom became the ownership of Hungarian Matav, and later of the Deutsche Telecom. Within the territory of Montenegro it provides all telecommunication services â&#x20AC;&#x201C; landline phone services, broadcast, mobile phone services, data transmission, Internet and international communication. Montenegrin Telecom is the first and at the same time the biggest provider of Internet services in Montenegro and it is the biggest Montenegrin service â&#x20AC;&#x153;umbrellaâ&#x20AC;? brand.

Agencies for Electronic Communications and Postal Services

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4. CONCLUSION The importance of brand management for making marketing decisions in service organizations needs to have a special utility value in order to develop and improve key principles of brand management development strategy in the service industry of Montenegro. After using special models for and processes of brand research on the examples of the most important service industries brands at the domestic banking and tourist market, transport and trade, but also researches in art and culture and leading service organizations that operate in Montenegro, it is possible to show the clear causality of research, with permanent brand control and display it as a function of marketing decision making. Certainly, the contemporary buyer looks for a specific additional value, which will increase his pleasure. Brand making in service industries of Montenegro is one way of adding and achieving special values – brand does not represent only the subject of sale, but also how company operates and what that company is actually. It is important part of the company’s capital which provides power at the market and has a significant economic contribution. In contemporary economic conditions powerful brands are the result of market leadership which is not guaranteed to anyone. Service organizations with powerful brand survive and progress more easily because people want to work with organizations which associate them to success. In that context, brand is the result of one’s effort, creation, more or less success in relation with market and consumers. Simply, that is the goal of strategic brand management. Positioning and maintaining the brand we express through process of brand management, which as a final goal has establishment of its real value, as contemporary source of competitiveness. Brand management includes strategic and tactical activities by which the concrete brand and the organization are differentiated from others and by which both organization and buyers achieve benefits. Brand management process includes making key decisions such as: which strategy to apply, decisions relating revitalization and repositioning of a brand when necessary, decisions on broadening the brand, decisions relating a global brand etc. Strategic brand management is a systemic approach that positions the brand in the mind of buyers distinct compared to the competition. Along with the development of economy and society, activity structure changes significantly, i.e. formative force of some sectors in economy. The rise of tertiary sector (“service industry”) represents a phenomenon which characterises the contemporary economic conditions. This circumstance emphasized the necessity that theoretical and practical achievements clearly applied in the domain of development of goods exchange, apply as well to the other sectors of economy, therefore also to the service sector. Considering the level of achieved development of service sector in Montenegro and promising prospects of its rise in the future long-term period, there is an unambiguous necessity for strict application of postulates which must ensure facilitated conduction of exchange process through adequate market research. It is possible to provide long-term profitability of domestic economy by focusing on the brand management development strategy of the leading service industries. The basic approach is defining strategic brand management framework of Montenegrin banking, tourism and hospitality, transport and trade as well as the other service industries in the economy.

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

Aaker, A., D. & Jacobson, R. (1994) The Financial Information Content of Perceived Quality, Journal of Marketing Research, Number 31, str. 191-201 Aaker, D., & Joachimsthaler, H. (2002) Brand Leadership, Free Press Abratt, R. & Bick, G., (2001) Valuing Brands and Brand Equity: Methods and Processes, New York Bakić, O., Ljubojević, C. & Bakić, M. (2002) Marketing strategija turističkih usluga, Beograd, Zavod za udžbenike i nastavna sredstva Berc, B. & Radišić, B. (2005) Promocija u hotelijerstvu, Opatija, Fakultet za turistički i hotelski menadžment Bialdyga, D. & Britzelmair, B. (2011) A literature review on perceived brand parity, Centre for International Research in Consumers, Locations and their Environments, Dubrovnik, CIRCE, International Journal of Management Cases, str. 56 Bowie, D. & Buttle, F. (2004) Hospitality Marketing: An Introduction, Oxford, Elsevier Butterworth Heinemann Brierley, S. (2006) The Advertising Handbook, London, New York, Routledge Taylor & Francis Group Categora, P. & Graham, J., (2002) International Marketing, 11th edition, New York, McGraw-Hill Frlić, A. (1974) Tehnika i organizacija ugostiteljskog poslovanja, Zagreb, Školska knjiga Gobe, M. (2006) Emocionalno brendiranje – nova paradigma povezivanja brendova sa ljudima, Beograd, Mass Media Intertaional Gregory, R., J., & Wiechemann, G., J. (2001) Branding – Across Borders, McGraw-Hill Hoffman, D., K. (2005) Strategic and Marketing Planning, Marketing Principles and Best Practices, 3e, Thomson, South-Western, str. 36-65 Hoffman, D., K. (2005) Services Marketing, Marketing Principles and Best Practices, 3e, Thomson, South-Western, str. 312-350 Horvath consulting (2005-2011) Poslovanje hotelijerstva u Crnoj Gori Hutt, D., M. (2005) Business-To-Business Marketing, Marketing Principles and Best Practices, 3e, Thomson, South-Western, str. 204-234 Istman, S., T., & Ferguson, K., R. (2004) Promocija elektronskih medija, Clio

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18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34.

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Keller, K., L. (2003) Strategic Brand Management – Building, Measuring and Managing Brand Equity, New York, PH Kobašić, A. (1972) Turističko ugostiteljstvo - izvozno značenje, uvjeti i tendencije razvoja, Dubrovnik, Turističko društvo Dubrovnik Kotler, F., Bowen, J. T. & Makens, J. C. (2004) Marketing for Hospitality and Tourism, New Jersey, Pearson Prentice Hall Ljubojević, Lj., Č. (1996) Marketing usluga, Beograd, Institut za tržišna istraživanja McLunah, M. (2002) Gli sturmenti del comunirace – Mas media e societá moderna, Nuove edizioni tascabili Mihailović, B. (2005) Marketing u turizmu – principi za menadžment, Fakultet za turizam i hotelijerstvo, Kotor, Štamparija OBOD AD, Cetinje, CPI Podgorica Noe, A., R., Hollenbeck, G., J, & Wright M., P., (2006) Menadžment ljudskih potencijala, Zagreb, Zagrebačka škola ekonomije i menadžmenta, Mate Peter, P., J. & Olson C., J. (2005) Consumer Behaviour & Marketing Strategy, McGraw-Hill Rakita, B. & Mitić, S. (2009) Efekti transferisanja imidža brenda kroz strategije kobrendiranja i ekstenzije brenda, Marketing, Beograd Sartain, L. & Schumann, M. (2006) Brand from the inside, Jossey-Bass Schroeder, E., J. & Morling-Salzer, M. (2006) Brand Culture, London, New York, Routledge Taylor & Francis Group Sinha, I. & Batra, R., (1999) The effect of consumer price consciousness on private label purchase, International Journal of research Marketinf, Volume 16, Number 3, str. 237-251 Uskoković, B. (2000) Marketing-menadžment u turizmu Crne Gore, Podgorica, Ekonomski fakultet Podgorica Uskoković, B., L. (2011) Strategic Brand Management of Montenegrin Tourism, Centre for International Research in Consumers, Locations and their Environments, Dubrovnik, CIRCE, International Journal of Management Cases, 154 Vaidyanathan, R. & Aggarwal, P. (2000) Strategic brand alliances: implications of ingredient branding for national and private label brands, The Journal of Product & Brand Management, Volume 9, Number 4, str. 214-228 Vranešević, T. (2007) Upravljanje markama (Brand Management), Zagreb, Accent World Travel & Tourism Council (2004-2011) Crna Gora – uticaj putovanja i turizma na zaposlenost i privredu, London

DETAILS ABOUT AUTHOR: LUKA B. USKOKOVIC TEACHING ASSISTANT FACULTY FOR MANAGEMENT HERCEG NOVI HEAD OF MARKETING AND SALES REPORTING CRNOGORSKA KOMERCIJALNA BANKA AD PODGORICA PODGORICA, MONTENEGRO luka@uskokovic.me

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SPORTS AND RECREATION ACTIVITIES AND TOURISM ZLATKO VERUNICA MAJA VIZJAK

ABSTRACT Sports and recreation activities in tourism form an integral part of what a destination has to offer. Given that such activities differ greatly, they should be organized and executed by fully qualified and educated staff, ensuring the quality and, more importantly, safety of the programs. One should bear in mind that sports and recreation activities often attract users that have had little or no previous experience in sports and that their bodies will be unaccustomed to increased physical effort. For this reason, sports and recreation activities should be conceived, organized and implemented by educated animators. They should produce a suitable recreational program for each user. The program should be fun to use and be mindful of the users’ physical abilities. Animators that implement the recreational activities should have an educational background in sports. This type of education is offered at higher education institutions, but additionally through specialized courses or seminars run by companies that target this line of work and prepare specific profiles of personnel for its needs. The role of these personnel is not only to be familiar with the current sports and recreation trends, but also be trained in activities related to communication and guest management. KEYWORDS: tourism, sports, recreation, needs, benefits

1. INTRODUCTION The area of sports and recreation in tourism is an important economic issue and a particularly realistic facet that forms an integral part of the tourism market that focuses on the realization of free time in the place of residence, but also outside of it. This phenomenon is strongly intertwined and associated with a host of tiny threads, mostly through the development of specific forms and types of tourism that are jointly referred to as sports and recreational tourism. These factors, as well as sport, recreation and tourism, all belong to the row of secondary human needs, but also to various activities carried out within the specified actions. They all together depend heavily on developments and changes in society. One of these changes is closely related to the individualization of human needs, thereby potentially affecting the importance of creating trained expert personnel that should operate within the realm of sport, recreation, and tourism. These personnel should know the qualities, needs and wishes of tourist users within the area of their operation. Depending on their knowledge and practices, they should particularly excel at creating and implementing a variety of sports and recreational programs to fully adapt to the needs of their users customers. Regarding tourism in Croatia, this is not only a country of tourism but also sports. This culture is very developed and adopted within the whole country and in all areas of sports, and especially developed activities among the youth and young people. The top competitive or recreational sport and recreation, too, according to some surveys actively gathers a large number of users. A large part of these sports and recreational activities take place in tourism. Connection between sport, recreation and tourism is a historic and well established socio-economic phenomenon, strongly interrelated. The actual association of these factors are strongly reflected by factors of tourism, sports and recreation, functions that support the development of tourism and sports, and their impact on the economic effects. Sport, recreation and tourism appear in various forms and generate a strong influence on contemporary tourism with the dominant message: “Sport for All”, which laid the foundation of tourist recreation. Sports and recreation developed over time into a numerous activities and forms that are substantially transformed into the powerful leverage of active tourism holidays for manifold users. Constantly new development tendencies of sport and recreation help the overall development of tourism and show that established changes in travel trends are increasingly replacing traditional motifs and trends in the use of recuperation and under the operation of active holidays within tourism. Sports and recreational activities, which are used within a particular form of tourism, significantly affect the quality of a destination’s content and activity holidays. Day-to-day work should suggest new directions of development and the possibility of improving the quality of the new sports and recreation forms in the tourism industry.

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2. THE CONNECTION OF SPORT, RECREATION AND TOURISM Sport, recreation and tourism are interdependent social and economic phenomena in terms of the constituent parts that develop them, and the action that restores them in action, but also in terms of the economic impact that binds them and sorts them.1 Without going into minor details, factors, functions and effects that restore these two phenomena, it should be noted that a number of objective and likewise subjective factors that determine the joint nature of their being and development. Some of the subjective factors are certainly fashion, imitation, habit, prestige, etc., and one other phenomenon depends on the activities which the users deal with in their free time as well as in the time available to them after they have fulfilled their work responsibilities and their life commitments, but still in time of liberty when you can relax into enjoyment, but also the need to participate in social, sporting, recreational and cultural life, as in one particular category of quality of life.2 From a different perspective, you can set up the claim that the activities that happen in sport and recreation and tourism can be accommodated in the secondary needs of human beings, and that they can meet after meeting their primary needs, which are treated as housing, food, clothing, shoes and the like. Therefore, it is clear that these activities are a separate economic category, because it depends on the amount of free time that one has, but also the level of available financial resources at one’s disposal. Using one’s free time is actually categorized consumption and individual free time is used for private purposes.3 Individuals or tourists who use tourism for sporting and recreational purposes, but also meet some of their sporting and recreational needs in their own time, also use a variety of other activities that are completely individualized and customized for them precisely because they are chosen according to their own needs and wishes. Hence the claim: Leisure as consumption is strongly associated with the individualization and implementation of individual needs, rights and choices.4

3. TOURISM AND PARTICIPANTS IN SPORT AND RECREATION In order to better analyze the impact of sport and recreation on tourism and the users themselves - the tourists and their free time, we will analyze the statistical data on the number of users of sports and recreational activities in some of European countries. Analyses of this sort are carried out in Europe every few years, and one of the last such surveys was conducted in 2004 on a sample of 24,791 respondents. The resulting analysis shows the following:

• 38 percent of respondents engaged in sports at least once a week-most Finland 76 percent, Sweden 72 percent, Denmark 60 percent,

• 21 percent of them twice a week - the Netherlands 35 percent, Sweden 32 percent, Denmark 32 per cent, Finland 31 per cent,

• Three or more times a week - Finland 45 percent, Sweden 40 percent, Denmark 28 percent, • 11 percent one to three times a month, • 53 percent rarely or never - Portugal 73 percent, Greece 68 percent, Italy 67 percent.5 Reasons cited for abstinence from sports are:

• • • •

34 percent of respondents cited lack of time, 25 percent do not like sports, for 4 percent it is too expensive, for 3 percent there is no adequate sports infrastructure in their environment.6

Bartoluci,M,: (2003.)Ekonomika i menadžment sporta, Zagreb, Informator, p.23. Bartoluci, M,Žugić,Z.:(2004.) Slobodno vrijeme i sport, Zagreb; kineziološki fakultet, p.59. 3 Arai,S, Pedlar,A, : (2003.) Moving beyond individualism in leasure theory, a critical analysis of concepts of community and social engagement, Leisure Studies, New York, p.190. 4 Arai,S, Pedlar,A, : (2003.) Moving.. p. 188. 5 Batroluci, M,;(2004.) Edukacija stručnjaka za sportsku animaciju, Zagreb, Kineziološki fakultet, p.290. 6 Ibid 1 2

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The question of where they do sports was answered in the following way:

• • • • •

51 percent elsewhere, 16 percent of the club, The fitness center 15 percent In sports centers 11 percent In an educational institution 6 percent.7

„Elsewhere” was mostly cited in Malta, Slovenia and Poland. Sport clubs are preferred in the Netherlands, Denmark and Germany, fitness centers used in the southern part of Europe - Greece, Italy and Portugal. It is especially important to note the expression elsewhere, which implies places outside of living environment, and that is on a trip or in tourism, which is important for the analysis of the offer in tourist destinations. When questioned what are the benefits of using sports and recreation, the following responses were begot: Table 1. What are the benefits from the use of sports and recreation ANSWERS

Health improvement – physical and mental

78 %

Developing physical abilities

46 %

Relaxation

43 %

Fun

39 %

Spending time with friends

31 %

Source: Europea Commission, 2004

Among the responses, the impact of sports and recreation on health got the most hits. This is evidence of the success of previously performed studies on the effects of sport and recreation on the human body. If the above data were compared with those obtained from a similar study conducted in Croatia, and presented in the Statistical Yearbook for 2006, in Croatia there are registered:

• • • • •

4,470 sports associations, 308,680 active members, 82 member organizations of the Croatian Association for sporting recreation, 18,000 registered members, 708,000 members from a population of students and pupils.

By analysis of these data, we can claim that the various forms of sport and recreation affects about 15 percent of the Croatian population. Compared with other European countries, comparative data are moving to the detriment of Croatian, and the reasons can be defined as: a low standard of living, lack of sports facilities, equipment, sports centers, and what is particularly worrisome - insufficient financing system for sports and recreational activities.

4. SPORTING AND RECREATIONAL TOURISM Sports and recreation in tourism function as a specific form and the type of tourism that is defined and practiced in various forms and ways. The very concept of sport and recreation in tourism is explained by various authors in various ways. For example, a top Croatian expert in this area, Bartoluci, explains sport and recreation in tourism: tourism in which sport and recreation are the main motivation for travel to a specific tourist destination and stay in it is known as sports tourism. To clarify this research paper we should explain the forms, and modes of development and operation. In doing so, special attention should be paid to the competitive part of sports and recreational tourism, as well as summer and winter sports and recreational activities in the tourism industry. Competitive sports and recreational tourism in itself encompasses all travel in order to participate in certain sports events, be it domestic or international.8 Participation in these sporting and recreational events can be active or passive, that is, whether the participant participates in recreational sports events actively or just as an observer. On the other hand, participants in both winter and 7 8

Ibid Bartoluci,M,:( 2004.) Sport u turizmu; Zagreb, Grafa, p.21.

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summer sports and recreational events in the tourism industry are usually amateurs who wish to engage in certain sports and recreational activities, or actively participate in those activities such as skiing, skating, hiking, etc.9 Since sports and recreational tourism, in addition to participating in sporting events in the form of watching the respective sports and recreational events, includes opportunity to play sports or recreation, as well as active involvement, it is clear that the tourism market there is in need of this type of professional sports and recreation staff . The further development of sports and recreational tourism in the future will certainly affect various trends in the sports, recreation and tourism market. Some of these trends are already rapidly evolving, as it strongly increases the number of individual tourists of various individual sports versus team sports. The model of participation in the sport gets dispersed, as tourists tend to try other kinds and forms of sport and recreation. These segments lead to exaggerated division of sporting disciplines, adapting various sports activities, limiting urban life, with the development of adventure in a natural environment.10 On the other hand, the trend of development of individual sports coincides with social changes and mentality oriented toward neo-liberalism and personal development of the individual. Participants can collaborate with other individuals who share their love of a particular sport, but this is likely to happen outside the traditional sports organizations. The need and demand for individuality within sport and recreation will certainly be reflected in their touristic activity. It is particularly important to track the type of sport and recreation professional staff that should be trained for the tourist market, but also what changes should be applied to educational institutions specializing in sport. This can be achieved through two of several possible forms, but their actions should be consistent with other tourism organizations, or they should act as independent sport businesses associated with the tourism market.11 If one considers the effect of individual companies, one should think about a variety of sports and recreational organizations such as clubs from the domain of various sports, sports and recreation centers which provide a variety of sports such as tennis, bowling and more. Although these sports organizations should have their actions and business activities realized in the sports market, primarily through sports activities for people in their place of residence, one part of their activities could be carried out very successfully in the tourist market providing sport and recreation services for various interested tourists, especially during the organization of sports and recreational events, which are organized under the tourism market, and become a part of competitive sports activities. This type of sports organizations should have in their staff structure particular sport and recreation managers, and professionals such as various leaders and a variety of sports instructors, coaches, managers, sports facilities and the like. Further to this, we should mention that many tourist facilities already possess their sports departments that offer visitors a variety of sports and recreational tourist treatments. Such sports and recreation departments in practice act as independent profit centers run by various sports managers, and coordinate their activities with business tourism enterprises within which they operate. Such entrepreneurial sports and recreation departments are led by sports managers who know the ropes of their trade and become familiar with the specifics of working in the sports and recreational activities. These sports and recreation departments also employ other professional staff such as heads of various sports, entertainers, professionals in recreation, as well as various experts in various therapies, rehabilitation and more. Table 2. Sport Tourism Demand smf Content Demands

Visitor demand and necessary content

Top sport

Efficiency is the main goal. For these customers the priority is access to competitions and appropriate conditions and facilities for training. In meeting the needs of this group of tourists, tour operators and managers of tourist destinations attention should be given accommodation and food, as well as doctors, content for rehabilitation and other services.

Mass sport

Preservation of health and fitness is the primary goal of this group. Targeted results are determined individually. Key requirements of this market segment are accessible region for relaxation and quality of sports facilities.

Occasional sportsmen

Compensation and prestige play a greater role than with serious pro athletes. This segment prefers less demanding sports such as recreational skiing and bowling. Sports activities have a higher priority than cultural attractions and other interests within these market groups.

Passsive No participation in individual sports. The focus of this group is the mega sporting events and other sports tour- sports sites. Includes coaches and other escort elite athletes, as well as media representatives. Requires ists a large infrastructure that will meet the needs of a large number of spectators in sporting events. Source: Higham,T,: (2004.) Sport tourism development, Channel ViewPublications, p.35. Bartolucu,M,: (2004.) Sport u turizmu, Zagreb, Grafa, p,23. Hinch, T,Higham,J.:(2004.) Sport tourism development, Clevedon, Channel View Publications, London, p. 192. 11 Bartoluci, M,Škorić,S,: (2009.) Menadžment sportskog i nautičkog turizma, Veleučilište u Karlovcu,Karlovac, p.120. 9

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Their numbers and activities in Croatia are relatively low, according to their economic confines. For example, in Croatia, there are around 600 active hospitality properties during the season in which there are about 100 professionals for various sports. The need for new sport professional employees stems from the need to create a new professional sports and recreational programs and implement them, but also from the need for these personnel to best detect and satisfy the needs of users on their vacation. On the other hand, knowledge and satisfaction of the most important qualities of sports and recreational market is increasingly becoming a necessity, not only in the management of sports tourism, but also for the entire tourist destination, especially if a specific tourist destination made efforts and investments to develop sports and recreational tourism as its development strategy.12 The needs and characteristics of these tourists depend for their requirements when they come into a particular tourist destination on their vacation and stay. Some requirements of tourist athletes are displayed in Table 1. Active and professional qualities required in tourist and recreational sports groups should best be known by experts and animators who work with them, and they can offer them the best ways to meet their needs. On this account, indicating the need for close cooperation between the sports and recreation professionals, tourism and sport and recreational users of facilities. This cooperation needs to be built up from the beginning of planning, program of action for sports and recreation, to the overall development of tourism in a region, and the operation and status of sports professionals should be equated with other employees in the tourism industry. Both of these business branches should better connect with each other and coordinate their action. This would help us to achieve better business in the tourism and sports entities and achieve better economic results. This especially applies to the trained professional personnel in the domain of sport and recreation, without which the development of education and further development of sports and recreational tourism would not be possible.

5. THE IMPORTANCE OF PROFESSIONAL PERSONNEL IN SPORT AND RECREATION According to the previous postulation in connection with the professional staff of sports and recreation activities, it can be concluded these staff should, within their education, acquire some knowledge of the field of tourism to be able to efficiently and above all competently act, and thus further develop tourism together with tourism officials for mutual benefit. That kind of highly educated professional sports and recreation workers have been successfully formed in several higher education institutions in Croatia. In this way there are Kinesiology Faculties in Zagreb and Split. In Zagreb, furthermore, there is a college and a coaches’ clinic. In Split there is a college for sports management. In Čakovec they are soon expecting to open a college for Tourism and Sports Management. University of Split, School of Kinesiology has a university course Sports Tourism, as part of the elective courses in the field, and in the third semester of graduate study, while at the College of sports management in the fifth semester of college there is a class named Sport and Recreation Management in Tourism.13, 14 Faculty of Kinesiology in Zagreb has several ways to make students acquainted with the tourism industry and its significance for the economic development of the country. Students discuss and study the effect of kinesiology and recreation at undergraduate level and the graduate level, where they listen to a variety of classes related to tourism. Also, students who are studying sports management study their subjects related to tourism and tourist activities. In addition, the study at college level also teaches recreation in tourism where students receive all the necessary information on tourism and its inner workings. In every way, the area of sports recreation in tourism is especially closely related to tourism development and tourism on a whole, and education of personnel needed is crucial to tourism activities. In this way, trained personnel, should design and implement a variety of sports and recreational programs for tourism and its participants - tourist athletes. Since the concept and the various operations and activities within the sport, recreation and tourism are very broad and demanding, much more attention should be paid towards connections between tourism and sporting activities, especially those competitive types and forms.

Bartoluci, M,Škorić,S,: (2009.) Menadžment . p.119. KIFST- Kineziološki fakultet Split, Izvedbeni plan nastave Diplomskog studija kineziologije za 2009./2010. 14 ASPIRA (2010.) Program stručnog studija Sportskog menadžmenta, http/www. Aspira,hr.content/sport, man/kolegij.asph. 12 13

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6. SPORT AND RECREATION IN CROATIAN TOURISM Sport and recreation in Croatian tourism presents a strong factor in the present and future tourism demand and supply. The tourism industry is increasingly used for active recreation, which in recent decades has become recognized as a biological necessity, but also a substitute for a lack of physical movement and the accelerated pace of life of modern men and tourists. Various sports and recreational programs are designed to allow tourists to exercise their fundamental need for quality physical activity and an active holiday a category of sea tourism. Various activities, which enhance the ability of an organism, are transformational programs, and tourism is an ideal place to implement them in their natural environment with the use of all necessary activities, such as walking, running, hiking, swimming, boating and more. All these activities strongly affect the body, especially the heart and the vascular system. An important part of sport and recreational programs is associated with relaxation exercises and relaxation, designed to eliminate or reduce stress. The second part of sports and recreational activities is closely related to the socialization performed through group sports and sports games, such as tennis, basketball, volleyball and so on, while the other part is connected with the forms of adventure tourism and other activities such as white-water rafting, scuba diving and similar. Various games and activities complement sporting program and strongly connect people through fun, leisure and comfort. Conducted research into various needs of tourists shows that there are many benefits of designed sports and recreational tourism. Some of these offers were made to answer and increased need for active participation of tourists in various recreational sports and activities. Thus, there is data that the average age of tourists in Croatia is about 40 years, and they all expressed a growing interest in organized forms of sport and recreation. This confirms the importance of planned access to sport facilities, which should be overseen by professional persons with a certain education. Further development of sport and recreation in tourism is organize can be developed in three different forms:

• Competitive sports tourism; • Winter sports and competitive tourism; • Summer sports and recreational tourism.15 When talking about competitive sports and recreational tourism, its development and its effectiveness depends on the overall developments of competitive sport on a global level. Such forms and types of sports and recreational sport usually develop in larger centers, and less so in smaller cities. The known international sports events abroad, as Tour de France, Italy and the like, or in Croatia such as sailing regattas in Poreč, Split, Dubrovnik and the like. On the other hand, in Croatia there are various forms of winter sports and recreational tourism, mostly in different mountains or spas. In Croatian mountains there are natural conditions for development, as well as all necessary infrastructure for mountain tourism, skiing and other winter sports and recreation. These are the natural areas in the massif of Velebit and Gorski Kotar, Lika and others. In these geographic areas, there are some accommodations that may be developed by construction of better roads and with little financial investment to enable the reception of large tourist groups and their activities. Development of ski tourism in particular was favored by the success of the Kostelić family in the FIS World Cup. Domestic tourists can be attracted by organizing various sporting events and this could attract many foreign guests to Croatian winter sports centers. Along with these winter sports and recreational activities, one could successfully develop also summer sports and recreational activities at the sea and in a variety of spas. The most important prerequisite for these activities is the existence of a variety of sports and recreational programs and sports facilities, as well as a variety of sports and recreational facilities in a tourist destination. According to the analyses, on Croatian coast there are more than 1,000 tennis courts, but only a few tennis halls where you can play tennis indoors and hold various tournaments or play tennis year round. Construction of more tennis halls would help take advantage of tourism facilities in the preseason and in the postseason. On the other hand, specific sport and recreation programs at spas could be very successfully synchronized with programs related to health tourism, as players recover from injuries, various recreational programs for disabled persons and so on. In particular, the question of developing wellness tourism is growing on a global scale. For example, in Croatia, the largest realistic possibilities for development of sport and recreation lie in summer recreational tourism, mostly of the sea, rivers, lakes or mountains. The truth is that Croatia achieves the highest tourist traffic in the summer holiday period, while the future sports and recreational tourism offer should be geared towards the actual future plans and tourism development. Current sports and recreation facilities and centers, which were built for the former forms of mass tourism, should rapidly adapt to the new forms of tourism in which providers act with more discretion and individuality to their customers, and with a strong individual personality.

Bartoluci,M, : (2003.) Ekonomika i menadžment sporta, Zagreb, Informator, p. 73.

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7. CONCLUSION Important and integral parts of the tourist offer are manifested through the development of sports and recreational offer defined through various programs in tourism. Because they are diversified and characterized by a certain uniqueness, they should be created and implemented by specially educated and trained personnel who are able to efficiently plan, organize and carry out these programs. In doing so, one should emphasize the importance of sports animators as leaders of these programs. Experience from other countries, which have a long tradition of sports and recreational tourism, indicates that the education of such personnel should be performed before starting their sports and recreational activities in a recreation facility, and educational activities should be carried out at two levels. The first level of education should be carried out at high schools and colleges, and the second level at various courses and seminars within tourism companies that use the services of such personnel. The role of such personnel is not just to work inside the sports and recreational activities, but can also be transferred to other activities such as communication with visitors, and meeting various requirements that brought before them. All of animators and sports professionals, in addition to the knowledge and skills acquired in the educational cycle, should also possess special physical or psychological characteristics, talent and love for their work and a sense of collaboration with the tourists. Education of sports professionals for the preparation and implementation of sports and recreational activities in the tourism industry becomes more and more a critical need for further development of tourism. This work previously included various high schools and universities in Croatia that recognized the importance of tourism and its relationship to sports and recreation. On the other hand, further development of tourism should be a strategic move in the direction of increasing cooperation with sports and recreation. Cooperation between tourism, sport and recreation should take place in all areas where it can achieve a competitive advantage. In addition to these activities, special attention should be given to education and training for the job of professional and qualified staff. Further development of these specific types and forms of tourism is increasingly opening the need for educated personnel from various sports and recreational domains. In particular, it is necessary to satisfy the trend of increased demand for recreational tourists’ individualization tourism and sport needs. Various programs for sport and recreation within the tourism industry are increasingly looking to the tourist market and acquiring more customers. On the other hand, trained kinesiologists use their knowledge and skills to increasingly meet the needs of sports and recreational tourism.

LITERATURE 1.

Arai, S., Pedlar, A. (2003.) Moving beyond individualism in leasure theory, a critical analysis of concepts of community and social engagement, Leisure Studies, New York. 2. Bartoluci, M., Žugić,Z.(2004.) Slobodno vrijeme i sport, Zagreb; Kineziološki fakultet. 3. Bartoluci, M.( 2004.) Sport u turizmu; Zagreb, Grafa. 4. Bartoluci, M.(2003.)Ekonomika i menadžment sporta, Informator, Zagreb. 5. Bartoluci, M., Škorić, S. (2009.) Menadžment sportskog i nautičkog turizma, Veleučilište u Karlovcu, Karlovac. 6. Bartoluci, M., Maršanić, H. (2004.) Edukacija stručnjaka za sportsku animaciju, Menadžment u sportu i turizmu, Kineziološki fakultet u Zagrebu. 7. Hinch, T., Higham, J.(2004.) Sport tourism development, Clevedon, Channel View Publications, London. 8. Thwaites, D., (1999.) Closing the gaps service quality in sport tourism, Journal of service Marketing, London. 9. Udrescu, M., (2008.) The diagnosis in managem,ent system, Annals of the University of Oradea, Economic Setence Series, New York. 10. Vukonić, B., Čavlek, N. (2001.) Rječnik turizma, Zagreb, Masmedia. Other sources: 1. KIFST- Kineziološki fakultet Split, Izvedbeni plan nastave Diplomskog studija kineziologije za 2009./2010. 2. ASPIRA (2010.) Program stručnog studija Sportskog menadžmenta, http/www.Aspira,hr.content/sport, man/kolegij.asph.

DETAILS ABOUT AUTHORS: ZLATKO VERUNICA, PROF. PROFESSOR FACULTY OF TOURISM AND HOSPITALITY MANAGEMENT OPATIJA, CROATIA MAJA VIZJAK, MSC. STUDENT FACULTY OF TOURISM AND HOSPITALITY MANAGEMENT OPATIJA, CROATIA

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BENCHMARKING EFFECTS IN TOURISM BUSINESS ANA VIZJAK MAJA VIZJAK JASNA LASINGER

ABSTRACT The term benchmarking appeared relatively recently in international economies, especially in the economies of the most developed countries, and it has proven very successful in business activities of tourist entities. It is a contemporary economic term which denotes stimulating effectiveness in business activities of a company, in this case a tourist company, with the purpose to increase its competitiveness. This is achieved by co-operation of managers with colleagues from similar companies, or other business entities, through mutual visits, short-term activities in another company, or other forms of co-operation, with the goal to learn about the production process or other forms of activities of another, usually competitive company. This is, in fact, a sort of an education for top managers, with the objective to train them to improve effectiveness in their business entities, and to improve competitiveness of their business entities, companies, etc. This kind of education became very popular in Japan during the 1980’s, and led to significant improvements in business activities of companies which had used these models of analytical activities. Through the application of this model, managers learned about business activities of competitive companies, and tried to apply knowledge acquired in other companies to their own, which led to improved efficiency of their companies’ business activities. The objective of applying benchmarking is discovering internal weaknesses of one’s own company and learning about competitive advantages of stronger competition. The efficiency level of the competition is obtained through data analysis. KEYWORDS: benchmarking in a tourist entity, origin, application, efficiency

1. INTRODUCTION The term benchmarking1 is a relatively new economic term which appeared recently in the most developed countries. Although it dates back to the 1980’s, when the Japanese greatly used its advantages, its use in corporate world did not start until the end of the last century. This is a contemporary economic term which denotes stimulating company performance in business activities, regardless whether on lower or higher levels, with the objective to increase its competitiveness. Stimulation of successful business activities of a business entity is conducted through co-operation of managers with colleagues from other, similar business entities, through mutual visits, short-term activities in another company, or other forms of co-operation, with the goal to learn about the activities of another company and to transfer the obtained insights on one’s own business entity, in this case a tourist business entity. This is one of the most effective contemporary forms of education for top managers, with the objective to train them to improve effectiveness in their business entities, and to improve competitiveness of their business entities, companies, etc. This kind of education became very popular in Japan during the 1980’s, and led to significant improvements in business activities of companies which had used these models of analytical activities. Through the application of this model, managers learned about business activities of competitive companies, and tried to apply knowledge acquired in other companies to their own companies, which led to improved efficiency of their companies’ business activities. The objective of applying benchmarking is discovering internal weaknesses of one’s own company and learning about competitive advantages of stronger competition. Therefore, it is no accident that Japan grew, from a relatively underdeveloped country at the beginning of the century, to one of the leading world economic countries at the end of the century.2 Therefore, benchmarking is a strong stimulation for improvement of a company’s business activities and improvement of operations of its lower management, and it is increasingly used throughout the world.

The term benchmarking is derived from the term benchmark, which denotes a geodetic device for determining important elevation points on an analysed land. 2 For more information, see: Fong, W.,S., Cheng, E.,W., L., Ho, D.,C.,K., (1998) Benchmarking: a General Reading for Management Practioners, Management Decision. MCB University Press. 1

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Benchmarking, which is applied in tourism, becomes an increasingly important factor in the lower organisational scheme of a tourist company, i.e. in directing an individual tourist business entity towards achieving the most efficient operating process, which will ultimately offer the best service to service users. Benchmarking activities may be used very efficiently in any significant economic sector, whether national or international, and they are frequently used in business activities of tourist business entities.

2. DEFINITION AND EFFECTS OF BENCHMARKING As mentioned above, the term “benchmarking” originates from the term “benchmark”, which denotes a geodetic device for determining important elevation points on an analysed land. Since there is no adequate synonym in the Croatian language for this economic term, this term will be used hereinafter. In fact, benchmarking activities have kept pace with the human race from their very beginning. The use of benchmarking as an economic term started after the Second World War, because stronger production had to be developed on international level.3 In international terms, the most effective initial results were achieved in the company called Xerox, in which Robert Camp, the manager, presented successful benchmarking results to the world in a book.4 The advantages in question were scientifically presented world-wide by E. Finch and K. Massheder in 1998. These scientists pointed out the necessity to recognise internal weaknesses in companies’ business activities, and the necessity to change them in accordance with advantages of successful competitors.5 In a contemporary international economic environment, there are several types of benchmarking, from the type on the lowest level of management production, which operates within an individual business entity, to the one on a higher, or external, management level. Selection of adequate benchmarking greatly depends on success of the competing company and the ability to quickly and efficiently adapt to competitive abilities of the competition. It is therefore important to choose a partner for co-operation from the ranks of the most successful business entity, so that one’s own company could accept and develop more successful organisational or production schemes, which will ultimately reflect on the quality and price of a final product or a service, which is especially significant in business operations of tourist entities. Bencmarking is especially used in the field of total quality management, marketing, processing industry, and in some of the service sectors, such as tourism. Implementation of benchmarking should refer to improvement of internal or external business activities of a company or another business entity, and to improvement of the production processes or company management by the management of the respective, in this case, a tourist company. In this process, a tourist company’s management should establish the best agent in the competing industry and discover the reason behind competitors’ success. In the course of activities in the benchmarking system, numerous definitions were created which should provide an answer to the question: What is benchmarking? Some of the more important definitions and their authors are presented below: • an external view on internal activities, functions, or operations with the goal to achieve continuous improvement,6 • a process by which entrepreneurs identify the leaders in their branch, compare their products, services, practice, and apply the processes by which they improve their characteristics, in order to become similar or better than the competition,7 • continuous, systematic development of products, services, or business activities of a company which is the agent of the best production- or organisational practice,8 • the art of establishing how and why some individuals or companies run better businesses than others,9 • continuous search for more efficient procedures which lead to more successful competitive features, and their successful implementation,10 • systematic procedure of comparative measurement with the goal to achieve continuous improvement11; it is comprised of two components that are equally important for success, specific standards or measures, the purpose of which is to establish differences in the performance of the process whose goal is to improve knowledge and estabRenowned advocates of benchmarking in Croatia are Renko, N., Delić, N., Škrtić, M., in their scientific paper (1999) Benchmarking u strategiji marketinga, Zagreb, MATE d.o.o., and Ferišak: (1998) Benchmarking u nabavi, RRF, Zagreb RIFIN No. 3. 4 The book is entitled: Camp, R. C.:(1989) The Search for Industry Best Practices that Lead to Superior Performance, ASQC Quality Press, Milwaukee 5 Camp, R. C.:(1989) The Search …. p. 126. 6 Ahmed, P.& Rafiq, M.: (1998), Integrated Benchmarking: a Holistic Examination of Select Technics for Benchmarking Analysis. Benchmarking for Quality Management and Technology, Vol. 5(3), p. 1-10. 7 Jafari, J.: (2000) Encyclopedia of Tourism, London: Routledge. 8 Spendolini, M.,J.:(1992) The Benchmarking Book, New York, Amacon. 9 Kotler, P.: (1994) Marketing Management, Analysis, Planing, Implementation and Control, New Jersey: Prentice Hall. 10 Ahmed, P.& Rafiq, M.: (1998), Integrated … p. 228. 11 Wöber, K.,W.: (2002) Benchmarking in Tourism and Hospitality Industry: CAB International, p. 156. 3

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lish a better practice,12 a technique or a tool for improving performance and for establishing a quality process oriented towards the best,13 more than a mere analysis of the collected data, and establishing good company performance in comparison with the others,14 an efficient tool in planning and application of changes in the business process which leads to an improvement of the organisation, where knowledge is turned into an action plan for improvement of competitive advantages,15 measuring of one’s results in comparison with the others and learning from others, most often direct competitors.16

Table 1. Efficiency and the Benchmarking Process Benchmarking Selection of standards and setting up of operational goals Process and changes Improvement of products, services, operating processes Improved performance, improved competitiveness and greater satisfaction of consumers Review and communication Source: Štoković,I.,(2004), Benchmarking u turizmu, Ekonomski pregled, Zagreb, No.1-2, p.69.

The presented data lead to the conclusion that new operational goals may be set up by using benchmarking; new programmes and operational policy of a business entity may be defined, in this case a tourist business entity, with the goal to achieve better business results than the competing tourist business entities. In this way, realistic positions of a tourist business entity are discovered and compared within national or international economic sector with other similar tourist business entities. Benchmarking is a systematic process of comparison with a selected model with the goal to achieve permanent improvements. Furthermore, through benchmarking, a segment, or a specific business unit, is systematically selected, either a production-, process- or service business unit, with the goal to improve their effectiveness, with the clear task to gain better positions on a specific market. Selection of a specific benchmarking should provide an answer to two important questions. The first question is: “Who is better on the market?” The second question is: “Why are they better?” Adequate measures, which could improve one’s own operational factors with an impact on business activities, should be selected immediately after coming to this conclusion. It should be pointed out that implementation of benchmarking is a permanent process which starts its operating cycle after the results had been achieved, because the competition operates in the same way, and functions the same. When a bechmarking cycle ends, a new cycle begins.17 The benchmarking system should not only be used in case of unfavourable business of a tourist entity. It should rather be used systematically, so that a certain tourist business entity could be timely oriented in the desired business direction. Why should the benchmarking system be used in everyday business activities of a tourist entity? Constant monitoring of activities in various organisation parts in a tourist business entity, and more comparison of activities with a competing tourist business entity will greatly assist in the organisation of a more successful internal structure of one’s own business entity, reveal the weak spots of the organisational system in a business system, and point out the necessity to change the activities of the established weak spots. Benchmarking can be used very successfully in a specific tourist business entity for fulfilment of the requirements of service buyers of the respective tourist business entity, its effective development goals, improved competitiveness, and an efficient business process.18 Benchmarking has a great impact on satisfaction of consumers or users of a tourist service, successful discovery of innovations, discovering one’s own good or bad sides. It also had an important impact on the creation of a permanent process which stimulates successful business activities in a tourist business entity.19

Camp, R.,C.:(1989) The Search …p. 85 Fong, W.S.,Cheng, E.W.L., Ho, D.C.K.,(1998) Benchmarking: … p.153. 14 Elmuti, D. (1998), The Perceived Impact of the Benchmarking Process on Organisational Effectiveness. Production and Inventory Management Journal, No. 39, Vol. 3. p. 87. 15 Voss, C., Ahlstrom, P., Blackmon, K.,:(1997), Benchmarking and Operational Performance: Some Empirical Results, International Journal of Operations and Production Management, No. 17, Vol. 10. 16 Ferišak,V.:(1998), Benchmarking u nabavi, RRF, Zagreb RIFIN No. 3, p. 24. 17 Munro-Faure, L. I. M.: (1992), Implementing Total Quality Management, London: Pitman Publising. 18 Camp, R. C.:(1989) The Search …p. 98. 19 Kozak, M., Rimington, M. (1998), Benchmarking: Destination Attractiveness and Small Hospitaly Business Performance, International Journal of Contemporary Hospitaly Management, No. 10, Vol. 5. 12 13

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3. TYPES OF BENCHMARKING IN THE PRACTICE OF A TOURIST BUSINESS ENTITY Benchmarking differs according to its way of use, depending on whether it is used in a tourist business entity or a company. Internal benchmarking may be used; external benchmarking is used when it is used among several tourist entities or companies. Types of benchmarking which are implemented in the operating and analytical practice are presented in the following Table 2. Internal benchmarking is accepted as a stimulating factor, in the process of discovering good or bad sides within oneâ&#x20AC;&#x2122;s own organisation in a tourist business entity, and it is called SWOT analysis. In this analysis, a tourist company or a business entity chooses internal benchmarking; it is especially used in large tourist companies which have their subsidiaries in other towns or even countries, in order to gain an insight in operating and business activities of each operating tourist unit. This is conducted because of the necessity to reveal management failures or business inefficiency, but also to single out the best organisational units in a tourist business entity, which should serve as examples to others. Reasons for their success are revealed through discovering the most successful organisational units in a tourist business system, and analysis of their activities, and their operational scheme, is gradually transferred to other organisational units which do not achieve satisfactory results. Table 2. The Most Important Types of Benchmarking Type

Directed to

Objectives

Strengths

Weaknesses

Internal

Functions, departments, projects, jobs in the same company or a group on the same or a different location

Improving competitiveness, stimulation of continuous improvements, improving economic efficiency.

The same language, culture, mechanisms and systems, simple access to data, communication, fast results

Possible lack of external view of the problem, highlighted weaknesses of the company itself, possibility of inadequate feedback because of low improvement level

Best practice

Any organisation in the sector or area.

Identification of the best management practice.

Possibility of progress, better corporation prospects, stimulation of changes, lowered sensitivity towards political environment.

Relatively hard access to data, high degree of change, great interest of the public.

Competing

Competition

Identification of performance, objectives, strategies, programmes, competitors, identification of the best management practice.

Similar structure and limitation, relatively facilitated access to data, relatively low degree of treatment, assistance in overcoming complexes and arrogance.

Sector model may hinder creativity, legal, ethnic, political views.

Sector

Specific or the same sector or branch.

Identification of sector Easier access to indusstrategies and programmes, trial trends, relatively distribution of the best easy access to data. information and practices, defining training programmes.

External

Difficulties in obtaining specific recommendations, results are also available to the competition.

Source: Spendolini, M., J.: (1992) The Benchmarking Book, New York, Amacon, p. 67.

This way of benchmarking implementation is relatively easy, because all information on the most successful agents are available to everyone, participants in the analysis are well-informed on all the relevant and necessary data, co-operation between the participants is adequate, the cost of adjustment procedure is relatively low. Such internal benchmarking performance, conducted in a tourist business entity, as well as performance results measured on the level of this particular tourist business entity, is relatively weak. A successfully conducted external benchmarking should achieve a high performance level because, in comparison with the competition, it tries to apply everything from a competitive tourist entity in the same economic group which a tourist competitor had realised as advantage. This is called realisation of competitive benchmarking. Through competitive

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benchmarking, a respective tourist business entity directly confronts its tourist competitor. Confrontation may occur through providing tourist services, or other industry-related types of services. In case of comparison with another, noncompetitive business entity from its branch, or a business entity from another economic group, it is called transindustrial benchmarking. If comparison is based on various data collected on the sectoral economic level, the activity is called sector benchmarking. Sector benchmarking may apply through comparison with a leading company in the national industrial branch, but such a leading company does not necessarily have to be a direct competitor on the market. In most cases, such activity is conducted through data collected for the entire national economic sector. Such activity is called generic benchmarking. Subject of analysis may be a part of the production or business activities. Benchmarking called “the best practice” attempts to conduct a transfer to other companies in the national economic sector with the objective to achieve better performance of the entire analysed national sector. Subjects of comparison are synonymous business processes in different parts of the national economic system. In the analysis, organisational features of companies achieving adequate results in the analysed activities, are studied in detail. Some authors present global benchmarking, through which comparison is based on organisational activities of a particularly successful company, regardless of its geographical position and economic sector.20 In case benchmarking is viewed with the goal to improve the analysed process, or when subject of analysis are the final results, the result is process benchmarking or result benchmarking. Process benchmarking is presented by qualitative data in terms of results. Result benchmarking may be realised through the obtained results which can be successfully measured, thus obtaining quantitative data. According to Table 3, stages in the operational practice refer to the following: Table 3. Operational Stages of Benchmarking Planning Selection of areas, identification of potential associates, definition of processes and establishment of sources of the necessary data or methods. Activity Collection of data, selection of associates, determining the differences in relation to a benchmarking associate. Causes of the analysed, or future desired features. Actions Communication with the management, adaptation of objectives, design of plans and their implementation. Monitoring Permanent control with adequate monitoring of the processes. Source: Štoković, I. (2004), Benchmarking u turizmu, Ekonomski pregled, Zagreb, No.1-2, p.69.

In the attempt to achieve better competitive advantages of a microtourist business entity, analytical activities are necessary in both of the above-mentioned directions. Scientists Fong, Cheng, and Ho established benchmarking activities according to direction, function or characteristics, in the process of which analysis is transferred to the operational system, to one or more business function or to output features of a business entity, which is especially significant in development of the tourist offer of a tourist business entity.21 Benchmarking is conducted in stages in the practice of a tourist business entity, while the number of stages is left to individual authors of the project.

4. BENCHMARKING PROCESS FACTORS IN A TOURIST BUSINESS ENTITY Selection of an adequate tourist business entity for implementation of the benchmarking process is essential for a functional analysis of comparison with another business entity. In its core, benchmarking is a system of comparison of one business entity, which realises better business results in practice, with another, which realises poorer business results, and comparison is often conducted among several business entities.

20 21

Fong, W.S., Cheng, E.W.L., Ho, D.C.K.(1998) Benchmarking: … p.184. Fong, W.S., Cheng, E.W.L., Ho, D.C.K.(1998) Benchmarking: … p.123.

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Comparison and analysis of business indicators of a certain tourist business entity analysed on the microlevel may be analysed from quantitative or qualitative point of view, established in greater detail by quantitative or qualitative indicators. Some of the quantitative indicators are physical and financial, usually used in specific analyses. Qualitative indicators usually refer to defined indicators. Financial indicators of a tourist business entity show several important business factors: total income, total profit, investments, efficiency, profitability, return on capital, revenue per employee, stocks, and turnover. Non-financial indicators of a tourist business entity refer to the quality of services, satisfaction of consumers, and other comparable indicators through which answers may be provided to many questions referring to activities, structure and effectiveness of the respective tourist business entity.

5. BENCHMARKING AND ACTIVITIES FOR ACHIEVING COMPETITIVENESS OF A TOURIST BUSINESS ENTITY When benchmarking use is analysed, its successful results are often connected in practice only with competitiveness realised by an individual tourist business entity. Such a point of view is only partially correct in the final analysis. In its core, benchmarking is a process of constant improvement of business activities of a tourist business entity with the goal to achieve competitive abilities achieved by the best tourist companies of that rank on the market. On the other hand, any tourist business entity may achieve competitiveness on a market which can sell its product or service before other synonymous offer providers, when the market is not saturated, and when there is lack of competition. In this case, a tourist business entity realises adequate financial effect on the sold offer or service on the market, because it beats the competition. In finding the answers to the question which company has a better starting position on the market, a tourist business entity should make a comparative analysis of its offer on the market and its business activities, and compare them with the competition. In any case, acceptance of a benchmarking process by a tourist business entity means considering a higher degree of business, and refers to reasons why there are differences in the features of business operations of the respective business entity in comparison with the competition. Identification, various qualitative and quantitative measurements, as well as comparison of business properties of a tourist business entity with competing business entities are the first level of benchmarking activities. Furthermore, a conducted competitiveness analysis in relation to other business entities of the same rank points to current realised effects of the respective tourist business entity, but also its position on the market in relation to other business entities of the same rank. Benchmarking analysis should result in corresponding data on the manner of achievement of satisfactory results on the tourist market, which a certain tourist business entity realises, or should realise. Differences between implementation of benchmarking and achieved competitiveness are presented in Table 4. Table 4. Connection Between Benchmarking and Competitiveness Competitiveness analysis

Benchmarking

Orientation to results

Orientation to the process and final results

Testing of final results

Testing of processes and results

Comparison with the industry

Possibility of comparison with other industries

Research without sharing, analysing the whole

Sharing of research for mutual goals

Focusing on the objective, how to become competitive

It is possible to focus only on improvement, but it is not of key importance to be competitive

Secrecy of information

Sharing of information

Separation, isolation of the entity

Partnership between entities

Independence

Co-operation and interdependence

Testing of oneâ&#x20AC;&#x2122;s own competitiveness is applied

Applied for achieving better results

The objective is industrial knowledge

The objective is knowledge about processes

Focusing on the needs of the microentity

Focusing on the needs of consumers.

Source: Smith, G., Ritter, D., Tuggle,V.: (2003): Benchmarking: The Fundamental Questions, Marketing Management, p. 46

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6. MEASURING OF SOME OPERATIONAL EFFECTS OF A TOURIST BUSINESS ENTITY Measuring of some active business properties of a specific tourist business entity was conducted by numerous authors of scientific studies related to benchmarking. For example, a scientist Jones analysed in one of his papers the topic of productivity in a specific company, and classified the obtained data on input and intermediate output. After the classification, he compared the factors as an interrelation between intermediate output and real output. After he had obtained specific data, he classified them as a relationship between the desired and real output.22 Research activities of benchmarking in the tourist business sector, related to business activities of a certain tourist business entity, may be conducted in several ways. According to the usual principles, benchmarking may be conducted: • within tourist business entities oriented on profit, • within tourist business entities which are not oriented on profit, • in the framework of other business activities related to towns, regions or countries. The definition of productivity or providing a tourist service is essentially the relationship between outputs and inputs of a tourist business entity, in case when it realises only one input or output. On the other hand, a tourist business entity may realise several inputs or outputs. In case when only one input or output is taken into consideration, or analysed, the subject of analysis is usually its productivity, profitability, etc. Multiplication productivity of services of a tourist business entity is also taken into consideration, but the productivity factor may also be analysed through the unit of one of the inputs. Referring to such a relationship between data obtained from benchmarking analyses, the scientist Kotler advocated an interdependent model of measuring important factors in which he included inputs, processes, outputs, markets, and significant properties of near or far environment on which business activities of individual business entities depend.23 In some cases, data obtained within a specific tourist business entity are compared with data obtained from another tourist business entity, the comparison model used by Wöber in his analyses may be used very successfully, and is characterised by the following:24 • comparison of the realised budget of a tourist business entity according to real input and output data, • comparison of realised input and output data of a tourist business entity in a longer period of time, • comparison of inputs and outputs of a tourist business entity with important competitors on the market. In the benchmarking data analysis, the first two factors function on the basis of their own tourist business entity data, while, for the third factor, data have to be obtained from a competitive tourist business entity. The budget of a certain tourist business entity actually represents a business plan of this tourist business entity, planned and realised by managers within this business entity. The budget of a tourist business entity is realised in a specific given period of time, and almost all business properties of a tourist business entity are reflected in it. In addition to the planned income and expenditure, budget also represents non-financial factors, such as the percentage of booked tourist facilities, costs of selling tourist services, promotion, etc. According to budget factors, an insight is gained in the future income level of a tourist business entity, if some important business factors change, such as change of the tourist offer price on the market, costs of business activities of the business entity, costs of employees, etc. In the access benchmarking analysis, the number of inputs analysed in the given process has to be exactly determined, as well as expected outputs in the final analysis. Among the analysed inputs, it should be determined on which inputs management of a specific tourist business entity may have a direct impact, and on which it may not. In addition to this, it should be pointed out that, in a specific targeted output, it is possible to analyse future income of a tourist business entity. Along with the stated financial indicators, attention should be also devoted to some physical indicators, such as market share of the offered service on a national or international market, structure of the users of the analysed service, etc. Analysis of financial indicators provides various useful information which refer to the income of a tourist business entity. The income of a tourist business entity may be analysed according to the realised revenue per employee, revenue from a specific service, solvency of the business entity, etc. Each of the above-mentioned indicators obtained from a tourist business entity may be analysed separately, or in specific groups, but all data may also be analysed collectively. The above-mentioned indicators may be presented through weighted calculation average, provided that they can be analysed according to the level of significance determined by a tourist business entity. Fong, Jones, P.: (1998), Quality, Capacity and Productivity in Service Industries. International Journal of Hospitality Managing, 7(2), p.104 -112. Kotler, P.: (1994) Marketing Management, Analysis, Planing, Implementation and Control, New Jersey: Prentice Hall, p. 57. 24 Wöber, K.,W. (2002) Benchmarking … p. 145. 22 23

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In order to obtain a more complete, but also more quality benchmarking analysis for a specific tourist business entity, along with the stated factors, it is desirable to analyse: • expenditure structure of a tourist business entity, • gross or net investments in certain tourist facilities, • structure of users of tourist services, • market share of a specific tourist service on a national or international market, • analysis of the obtained data should be conducted in the longest possible time period.

7. CONCLUSION Benchmarking has managed to impose itself in a relatively short period of time as a successful business and developmental model, accepted and developed by an increasing number of tourist business entities in the most developed tourist countries. Since the very beginning of its application in the business policy of tourist business entities, positive effects are visible after practical application of its research and analyses in the business policy of tourist business entities. It is to be pointed out that this method was developed and is used mostly by economically most developed countries. It should be pointed out that the role of benchmarking in international economics, especially in tourism, is getting stronger. Using this method in business activities of tourist business entities, especially in large multinational business entities, has led to strong developmental incentives, price reduction of final products and services, and perfecting of various production processes, as well as greater offer of different kinds of tourist services, and other tourist offer. However, when highly professional employees were sent to competitive tourist companies, there was a certain alienation of intellectual property, patents or others’ production processes, but the guest professionals also left their knowledge in the host tourist companies. This led to interpenetration of production and other type of knowledge between different tourist companies, which stimulated international market, production and service economy, creation of a new type of international management, but also connected many international business entities on the market, especially in the field of tourism and tourist business. In this respect, it should be pointed out that effective benchmarking systems are processes of the future, which will play an important part in the future development of the tourist offer, marketing, but also in activities of the entire tourist management.

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

Ahmed, P. & Rafiq, M.: (1998), Integrated Benchmarking: a Holistic Examination of Select Technics for Benchmarking Analysis. Benchmarking for Quality Management and Technology, Vol. 5(3), Camp, R. C.:(1989), The Search for Industry Best Practices that Lead to Superior Performance, ASQC Quality Press, Milwaukee. Fong, W. S., Cheng, E.W.L., Ho, D. C. K. (1998) Benchmarking: a General Reading for Management Practioners, Management Decision. MCB Univestity Press. Elmuti, D. (1998), The Perceived Impact of the Benchmarking Process on Organisational Effectiveness. Production and Inventory Management Journal, No. 39, Vol. 3. Ferišak: (1998) Benchmarking u nabavi, RRF, Zagreb RIFIN No. 3. Jones, P.: (1998), Quality, Capacity and Productivity in Service Industries. International Journal of Hospitality Managing, 7(2). Jafari, J.: (2000) Encyclopedia of Tourism, London: Routledge. Kozak, M., Rimington, M. (1998), Benchmarking: Destination Attractiveness and Small Hospitaly Business Performance, International Journal of Contemporary Hospitaly Management, No.10. Vol. 5. Kotler, P.: (1994) Marketing Management, Analysis, Planing, Implementation and Control, New Jersey: Prentice Hall. Munro-Faure, L. I. M. (1992), Implementing Total Quality Management, London: Pitman Publishing. Renko, N., Delić, N., Škrtić, M.:(1999), Benchmarking u strategiji marketinga, Zagreb, MATE Spendolini, M. J.,:(1992) The Benchmarking Book, New York, Amacon. Štoković, I. (2004), Benchmarking u turizmu, Ekonomski pregled, Zagreb, No. 1-2. Voss, C., Ahlstrom, P., Blackmon, K.:(1997), Benchmarking and Operational Performance: Some Empirical Results, International Journal of Operations and Production Management, No. 17, Vol. 10. Wöber, K. W. (2002): Benchmarking in Tourism and Hospitality Industry: CAB International.

DETAILS ABOUT AUTHORS: ANA VIZJAK PROFESSOR FACULTY FOR TOURISM AND HOSPITALITY MANAGEMENT OPATIJA,CROATIA anav@fthm.hr

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MAJA VIZJAK PHD. STUDENT FACULTY FOR TOURISM AND HOSPITALITY MANAGEMENT OPATIJA,CROATIA majav@fthm.hr

JASNA LASINGER ASSISTANT FACULTY FOR TOURISM AND HOSPITALITY MANAGEMENT OPATIJA,CROATIA jasnal@fthm.hr

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YOUTH UNEMPLOYMENT IN THE CRISIS: THE CASE OF CROATIA PERICA VOJINIĆ NEBOJŠA STOJČIĆ MARIJA BEČIĆ*

ABSTRACT The global crisis increased unemployment, one of the most pressing economic and social problems, in almost all European countries. Especially hit by the crisis was the young population with youth unemployment rates growing faster than adult ones: from 2008 to 2011 in some EU countries youth unemployment increased even by twenty percentage points. Croatia experienced similar labour market situation with almost one-third of young people unemployed in 2010 and 2011. Young people find it difficult to find a job due to the lack of specific human capital components stemming from the lack of experience. Consequently, likelihood of subsequent unemployment and transition to long term unemployment rises. High share of unemployed young people indicates underutilisation of the national workforce which can trigger a vicious circle of poverty and social exclusion. On the basis of the Labour Force Survey data, the aim of this paper is to explore the incidence and determinants of Croatian youth unemployment in the crisis using binary logit model. Several variables representing characteristics of unemployed will be included in the analysis such as gender, marital status, level and area of education, level of urbanisation and number of persons in household. The results of regression suggest that there is a higher probability of being unemployed for women and unmarried individuals with lower level of education. KEYWORDS: Youth unemployment, education, binary logistic model

1. INTRODUCTION Unemployment is one of the most pressing economic problems. The reason lies in the fact that it is costly, both to individuals who experience it and to society as a whole. Firstly, unemployment imposes costs upon society: labour is perishable and if it isn’t fully utilised causes a permanent output loss. Secondly, it imposes suffering upon individuals associated with low self esteem and subsequently behavioural and physical problems. In addition to personal problems, unemployed individuals experience pecuniary costs, i.e. income loss as a result of not-working. This income loss is possible to offset partly by unemployment benefits and partly by increased leisure time but it is very likely that costs of unemployment rise with the unemployment duration as unemployment benefits and satisfaction decrease. Recent global crisis heightened concerns over unemployment, particularly over the youth unemployment. More and more young people experience periods of unemployment when entering into the labour market and in the times of global economic crisis youth1 unemployment rose dramatically (ILO, 2011; Arpaia and Curci, 2010). There is evidence that the youth labour market is especially volatile during crisis. Demidova and Signorelli (2010) find that the consequences of crises in the 1990s were more severe for the youth than for the general unemployment. Bell i Blanchflower (2011) explain the fact of rapidly rising youth unemployment rates in crisis as a consequence of a last-in first-out rule application in firing decisions by the firms. This affects new entrants as young workers are usually the ones hired the last and, if there are dismissals, first to be fired. Generally, there are numerous theories of unemployment which can still be divided into classical and Keynesian approach. Neoclassical economists see unemployment as reflecting high NAIRU2, itself largely the consequence of institutional interference with market mechanism where unemployment is predominantly voluntary (Layard, Nickell and Jackman, 1991). Keynesians, on the other hand, see unemployment as a consequence of the inherent weakness of adjustment mechanism in the labour market, with economical shocks causing long-term, perhaps even permanent deviations from the NAIRU (Adnett, 1998).

*Corresponding author According to the standard United Nations definition, “youth” comprises young people aged from 15 to 24 years inclusive (United Nations, 1998). In practice, the operational definition of youth or young people varies widely from country to country, depending on cultural, institutional and political factors. 2 NAIRU – non-accelerating inflation rate of unemployment is the level of unemployment consistent with unchanging inflation (Layard, Nickell and Jackman, 1991) 1

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The literature on youth unemployment can be classified into those analysing the nature, causes and consequences followed by macroeconomic perspective (Blanchflower and Freeman, 1999; Oâ&#x20AC;&#x2122;Higgins, 2001; Rees, 1986) where changes in youth employment are related to changes in aggregate demand. Other points of view are those analysing the schoolto-work transition from microeconomic point of view (Ryan, 2001; Kogan and Schubert, 2003; Quintini. and Manfredi, 2009). There can be several explanations of youth unemployment (Jousten et al, 2010), among which the most often are the lack of professional training and mismatching. According to the human capital theory (Schultz, 1961; Becker, 1964; Mincer 1974), young people could find difficult to find a job due to the lack of specific human capital components stemming from the lack of experience and job specific knowledge. Consequently, likelihood of subsequent unemployment and transition to long term unemployment rises. The longer the unemployment spell lasts, the more individual productivity will be affected and the lower the level of initial qualification, the longer the effects are likely to last (OECD, 2012). Another possible explanation of youth unemployment is mismatching between educational system and existing market in a combination with the lack of geographical mobility. This paper analyses youth unemployment from microeconomic point of view, addressing the issue of individual characteristics and the probability of being unemployed. The aim of the paper is to provide econometric results on the determinants of youth unemployment. The paper is organised as follows: next section provides some stylised facts on youth unemployment in European countries with emphasis on Croatia. In section three data and methodology used in this paper are presented followed by results and discussion. Finally, the last section of the paper includes concluding remarks.

2. SOME STYLISED FACTS OF YOUTH UNEMPLOYMENT Global crisis deepened the problem of unemployment in almost all European countries increasing unemployment rates by several percentage points. The average unemployment rate in EU27 rose from 7.1% in 2008 to 9.7% in 2010. However, some groups of workers experienced larger impact than others. From the table 1 it can be seen that the crisis had the impact particularly on the young population whose unemployment rates increased much faster than overall unemployment rates. Croatia has one of the largest shares of unemployed workers among European countries and only Greece, Spain and Slovakia have larger unemployment rates considering both general as well as youth unemployment rate. In 2008 overall unemployment rate was 8.6% and encouraged by the crisis, in 2010 it increased by four percentage points to 12.7%. Moreover, youth unemployment increased by half making, in average, almost one third of young active population, aged 15 to 29, unemployed.

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Table 1. Youth and general unemployment rates in selected countries in 2008 and 2010 (%) Age group Country

15 - 19

20 - 24

25 - 29

15 - 64

2008

2010

2008

2010

2008

2010

2008

2010

European Union (27 countries)

20.3

26.1

13.9

19.2

8.6

12.6

7.1

9.7

Belgium

25.5

35.1

16.7

20.4

9.0

11.6

7.0

8.4

Bulgaria

25.3

48.3

10.8

19.8

6.4

12.7

5.7

10.3

Czech Republic

24.4

39.2

8.0

15.9

4.1

9.4

4.4

7.4

Denmark

9.4

16.4

6.8

12.0

3.4

10.6

3.5

7.6

Germany

11.1

10.9

10.3

9.5

8.4

7.6

7.2

Ireland

17.6

36.2

11.3

25.7

6.8

17.1

6.1

13.9

Greece

26.1

39.0

21.4

32.0

13.1

19.8

7.8

12.7

Spain

39.4

61.4

20.4

37.0

13.6

25.2

11.4

20.2

France

23.8

29.6

17.2

21.2

9.2

12.3

7.4

9.4

Italy

34.7

45.5

18.4

24.7

11.0

14.7

6.8

8.6

Hungary

38.2

45.7

18.2

25.1

9.1

14.3

7.9

11.2

Netherlands

7.1

11.1

3.8

6.9

2.2

4.4

2.7

4.5

Austria

10.8

10.5

6.4

7.9

4.8

5.9

3.9

4.5

Poland

20.1

30.5

16.9

22.8

8.2

7.2

9.7

Portugal

24.2

34.2

14.8

20.0

10.8

14.5

8.1

11.4

Romania

29.6

27.0

15.8

21.2

6.7

9.9

6.1

7.6

Slovenia

9.9

15.3

10.6

14.5

6.5

4.5

7.4

Slovakia

42.2

61.6

16.2

30.5

10.5

16.7

9.5

14.4

Finland

26.6

31.6

11.7

17.0

6.7

9.2

6.4

8.5

Sweden

31.9

36.1

13.9

20.2

6.7

9.9

6.3

8.6

United Kingdom

21.5

28.8

11.4

15.0

5.7

8.2

5.7

7.9

Norway

11.9

12.2

4.4

7.6

3.5

5.3

2.6

3.6

Croatia

39.3

57.0

17.8

27.3

10.0

17.6

8.6

12.1

Source: EUROSTAT

Young people, especially educated ones, represent an important component of human capital in every economy, while youth unemployment is large permanent waste with negative long term economic and social consequences. As it can be seen, youth unemployment is a growing concern in all European countries and Croatia is no exception. Figure 1. Youth and overall unemployment rates in Croatia in the period 2002 â&#x20AC;&#x201C; 2011 (%)

â&#x20AC;ŠSource: EUROSTAT

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Figure 1 shows the trends in youth and general unemployment rates in the period from 2002 to 2011. It can be seen that youth unemployment rates are continuously and significantly (up to three, four times) higher than the general unemployment rate. All rates had decreasing trend until the beginning of 2009 when the crisis showed first effects and all unemployment rates have been increasing since. The rise in the youth unemployment rate is the highest and the rate for the youngest category reached almost 60% in 2011. Therefore, this issue of unemployment, particularly youth unemployment is of a high interest for policy and decision makers.

3. DATA AND METHODOLOGY The analysis of this paper is based on data coming from Labour Force Survey (LFS) undertaken by Croatian Bureau of Statistics for 2010. Dataset consists of 25 812 observations. For this purpose the data for employed and unemployed examinees between 15 and 29 years old are used. In total there are 918 observations for unemployed young persons and 2 638 observations for employed young persons. Figure 2. Youth in activity by gender

â&#x20AC;Š

As shown in Figure 2, the sample consists of 2105 males and 1451 females examinees, from which approximately the same proportion are unemployed (26%). Table 2 presents the characteristics of youth in analysed sample. Table 2. Characteristics of youth in analysed sample

The level of urbanization

Urban settlement

38%

Semi - urban settlement

Rural settlement

54%

House outside of settlement

Average number of persons in household Marital status

Education

Vocation

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4 Married

14%

Unmarried

86%

Elementary school and less

High school

75%

College

University and higher education

12%

General programmes

11%

Teacher training and education science

Humanities, languages and arts

Social sciences, business and law

21%

Science, mathematics and computing

Engineering, manufacturing and construction

35%

Agriculture and veterinary

Health and welfare

Services

17%

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Source: LFS, 2010

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More than 50 percent of youth in analysed sample live in household located in rural settlement. Average household in analysed sample counts four persons, 86% of examinees are not married, and the greatest proportion of them (75%) attained secondary level of education. If the sample is analysed by vocation, it is evident that the engineering, manufacturing and construction is the main field of the highest share of examinees (35%), followed by social sciences, business and law (21%) and services (17%). The lowest proportion of youth in analysed sample are in field of humanities, languages and arts (2%), teacher training and education science (3%) and science, mathematics and computing (3%). Theoretical models and empirical evidence suggest that unemployment and youth unemployment may be determined by set of factors, such as: gender, marital status, education, vocation etc. In order to explore which factors determine youth unemployment in Croatia, binary logistic regression should be performed. Binary logistic regression is similar to linear regression except that it is used when the dependent variable is nominal and dichotomous. Binary logistic regression assumes that the dependent (or outcome) variable is dichotomous and, like most other statistics, that the outcomes are independent and mutually exclusive; that is, a single case can only be represented once and must be in one group or the other (Tabachnick and Fidell, 2007). Our model can be expressed as follows:

P(E) is the predicted probability of the event which is coded with 1 (in this case employed youth) rather than with 0, 1-P(E) is the predicted probability of the other decision (in this case it represent the probability of being unemployed), and predictor variables are level of urbanisation, number of persons in household, gender, marital status, education and vocation (categories of these variables are given in Table 2). The binary logistic model is performed with the support of computer program SPSS 20.0.

4. RESULTS AND DISCUSSION The model diagnostics and the results of model testing by Binary Logistic Regression analysis are presented in Table 3 and Table 4. First part of the table shows the model diagnostics and the second part shows the coefficients and odds ratios of the regression equation. The Classification Table summarises the overall number and percentages of predicted variable data points for the two categories of the predicted variable. The overall percentage shows the percent of cases for which the dependent variables was correctly predicted given the model. In the Classification Table of this analysis, the overall percentage of 58.2% shows that in 58.2% of the cases youth status (employed/unemployed) is correctly predicted by the model. Sensitivity and specificity of the test show that 59.3% of occurrences are correctly predicted as well as 55.2% non-occurrences. The Hosmer-Lemeshow tests the null hypothesis that the data fit the model well, i.e. that there is a linear relationship between the predictor variables and the log odds of the criterion variable. Comparing the observed frequencies with those expected under the linear model a chi-square statistic is computed. A nonsignificant chi-square indicates that null hypothesis is accepted and the data fit the model well. In this case data fit the model well since the significance of Hosmer and Lemeshow test is larger than 0,05. Table 3. Model diagnostics Classification table results Overall percentage correct

58.2%

Sensitivity

59.3%

Specificity

55.2% The cut value is 0.730

Hosmer and Lemeshow test Chi-Square

9.811

Sig.

0.279

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Table 4. Results of estimation Coefficient β Odds Ratio Level of Urbanisation Urban settlement

-0.007

0.993

Semi - urban settlement

0.141

1.152

Rural settlement

0.038

1.039

House outside of settlement (RC) Number of persons in household

-0.087***

0.917

Gender

-0.277***

0.758

Marital status

-0.989***

0.372

Education Elementary school and less

-0.894***

0.409

-0.127

0.881

0.012

1.012

0.078

1.081

Teacher training and education science

1.012***

2.752

Humanities, languages and arts

-0,616**

0.540

-0.023

0.977

Science, mathematics and computing

0.313

1.368

Engineering, manufacturing and construction

-0.075

0.927

-0.538***

0.584

0.739***

2.094

3.805***

44.941

High school College University and higher education (RC) Vocation General programmes

Social sciences, business and law

Agriculture and veterinary Health and welfare Services (RC) Constant

Source: Research findings Notes: a) RC – Reference category ** and *** denote statistical significance at 5% an 1% respectively

Predictors that meet the conventional 0.05 standard for statistical significance (Table 3), are going to be interpreted:

• 0.917 odds ratio for Number of persons in household means that for every one unit of increase in number of persons in household, the odds of being employed decreases;

• 0.758 odds ratio for Gender means that there is a higher probability for younger women to be unemployed compared to men;

• 0.372 odds ratio for Marital status means that there is higher probability for unmarried young people to be unemployed compared to those who are married;

• Odds ratios for all the categories of Education show that there is higher probability for youth to be unemployed with lower levels of education (not all coefficients are statistically significant);

• Significant parameters of Vocation are for the following categories: Teacher training and education science; Humanities, languages and arts; Agriculture and veterinary and Health and welfare. This means that there is a higher probability for the youth in the field of Teacher training and education science and Health and welfare to be employed compared to those in the field of services. On the other hand, there is a lower probability for the youth in the field of Humanities, languages and arts and in the field of Agriculture and veterinary to be employed comparing to those in the field of services.

Findings of this analysis are in accordance with present researches and expectation. As it was expected, there is a higher probability for younger women to be unemployed compared to men. This is in accordance with unemployment literature which suggests the existence of higher unemployment rates for women generally, not just for the youth. The finding can be explained by the fact that woman’s position in the labour market is more complex than man’s. The reasons for that are numerous such as carrier interruption (maternity leaves), work at home or possible inequality in the labour market.

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The level of education seems to be important for the young population when entering the labour market. There is higher probability for youth to be unemployed with lower levels of education which is in accordance with study of Barić and Obadić (2004) who analysed the influence of education system in reducing the youth unemployment in Croatia. Their findings also suggest that levels of education are important as those with low levels of educational attainment usually have higher rates of unemployment. The similar finding have Mlatsheni and Rospabe (2002) whose findings support the thesis that education plays a major role in probability of finding a job. It is greater probability for young people to be unemployed with higher number of persons in household. This can be explained by the fact that many of Croatian young people live with their family what allows them to be unemployed until they find the job adequate to their education and preferences. This is in accordance with the finding that there is higher probability for unmarried young people to be unemployed compared to those who are married. Married people are usually have to consider many more elements in making the decision whether to accept the job or not compared to unmarried. Some fields of education (vocation) are significant in determining the status of activity in the labour market. There is a lower probability for the youth in the field of Teacher training and education science and Health and welfare to be unemployed compared to those in the field of services. On the other hand, there is a higher probability for the youth in the field of Humanities, languages and arts and in the field of Agriculture and veterinary to be unemployed compared to those in the field of services. In addition, the level of urbanisation does not appear as significant variable in the analysis suggesting that the problem of unemployment is equally spread in all types of settlement.

5. CONCLUDING REMARKS Recently, there has been a growing concern over unemployment since the global crisis deepened all economic problems including unemployment. Especial concern is given to youth unemployment due to the fact that more and more young people experience periods of unemployment when entering into the labour market and in the times of global economic crisis youth unemployment rose dramatically. Youth unemployment imposes costs upon society and it is a large permanent waste of human capital with negative long term economic and social consequences. In this paper youth unemployment from microeconomic point of view was analysed, addressing the issue of individual characteristics and the probability of being unemployed. The aim of the paper was to provide econometric results on the determinants of youth unemployment in Croatia in 2010. Binary logistic regression was performed using the LFS data by Croatian Bureau of Statistics. The results of regression suggest that there is a higher probability of being unemployed for women and unmarried individuals with low level of education. Findings of this paper suggest that policy makers should provide incentives for employing young women as well as incentives for education of young people.

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

Adnett, N. (1996), European Labour Markets: analysis and policy, Pearson Education Limited, United Kingdom Arpaia, A. and Curci, N. (2010), The EU labour market behaviour during the Great Recession, European Commission Economic Paper No. 205 Barić. V. and Obadić, A. (2004), The Role of education in reducing youth unemployment in the globalized world and Croatia, 2nd International Conference: “An Enterprise Odyssey: Building Competitive Advantage”, Zagreb Becker, G.S. (1964), Human Capital: A Theoretical and Empirical Analysis ith Special Reference to Education, The University of Chicago Press, Chicago, US Bell, D.N.F. and Blanchflower, D.G. (2011) Youth Unemployment in Europe and the United States, IZA Discussion Paper No. 5673 Blanchflower, D.G. and Freeman, R.B. (2000), The Declining Economic Status of Young Workers in OECD Countries, in Blanchflower, D.G. and Freeman, R.B. (Editors): Youth Employment and Joblessness in Advanced Countries, NBER, University of Chicago Press, Chicago, pp. 19-56 CBS; Labour Force Survey 2010, Croatian Bureau of Statistics, Zagreb Demidova, and Signorelli (2010), The Impact of Crisis on Youth Unemployment of Russian Regions: An Empirical Analysis, Quaderni del Dipartimento di Economia, Finanza e Statistica No. 78/2010. ILO (2011), Global Employment Trends 2011, International Labour Organization, Geneva Jousten, A., Lefèbvre, M., Perelman, S. and Pestieau, P. (2010), The Effects of Early Retirement on Youth Unemployment: The Case of Belgium in Gruber, J. and Wise, D.A. (editors): Social Security Programs and Retirement around the World: The Relationship to Youth Employment, NBER Books Kogan, I. and Schubert, F. (2003), Youth Transition from Education to Working Life in Europe: A General Overview in Kogan, I. and Muller, W. (Editors), School-to-Work Transition in Europe: Analysis of the EU LFS 2000 Ad Hoc Module, MZES, Mannheim, pp. 5-26 Layard, R., Nickell, S. and Jackman, R. (1991), Unemployment: Macroeconomic Performance and the Labour Market, Oxford University Press, Oxford Mincer, A. (1974), Schooling, experience and earnings, NBER Press, NewYork Mlatsheni, C. and Rospabe, S. (2002), Why is Youth Unemployment so High and Unequally Spread in South Africa, Development Policy Research Unit, Working Paper No.02/65

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15. OECD (2012), Equity and Quality in Education: Supporting Disadvantaged Students and Schools, OECD Publishing 16. O’Higgins, N. (2001), Youth unemployment and employment policy: a global perspective, International Labour Office, Geneva 17. Quintini, G. and T. Manfredi (2009), Going Separate Ways? School-to-Work Transitions in the United States and Europe, OECD Social, Employment and Migration Working Papers, No. 90, OECD Publishing 18. Rees A. (1986), An essay on youth joblessness, Journal of Economic Literature, 34, pp. 613-628. 19. Ryan, P. (2001), The school-to-work transition: a cross-national perspective, Journal of Economic Literature, 39 (1), pp. 34-92. 20. Schultz, T.W. (1961), Investment in human capital, American Economic Review, 51(1), pp.1-17 21. Tabachnick, B. and Fidell, L., (2007) Using Multivariate Statistics. Boston: Pearson 22. United Nations (1998), Statistical charts and indicators on the situation of youth, 1980-1995 (New York).

DETAILS ABOUT AUTHORS: PERICA VOJINIĆ, PHD SENIOR ASSISTANT UNIVERSITY OF DUBROVNIK, DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS DUBROVNIK, CROATIA perica.vojinic@unidu.hr NEBOJŠA STOJČIĆ,PHD SENIOR ASSISTANT UNIVERSITY OF DUBROVNIK, DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS DUBROVNIK, CROATIA nebojsa.stojcic@unidu.hr MARIJA BEČIĆ, MA ASSISTANT UNIVERSITY OF DUBROVNIK, DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS DUBROVNIK, CROATIA marija.becic@unidu.hr

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APPLICATION OF MUNDELL-FLEMMING MODEL IN CONDITIONS OF EUROZONE COUNTRIES FROM FISCAL PERSPECTIVE1 MARIA VOJTKOVA RICHARD ĎURECH

ABSTRACT The main goal of this paper is to test applicability of the Mundell-Flemming model on one of the newest members of common currency union in Europe, the Slovak republic. Basic structure of IS-LM-BP model is adjusted for specific conditions of the Eurozone, especially presence of fixed exchange rate due to common currency euro. Additionally, we model fiscal sector in more detailed way due to the fact that in case of common currency union the fiscal policy is able to positively or negatively affect final output of the economy. Contrary to the standard model, we use short-term interest rate as a tool of monetary policy while we distinguish between exogenous part of money stock - domestic credit, and an endogenous part represented by a foreign credit. KEYWORDS: Mundell-Flemming model, fiscal policy, monetary policy, Eurozone.

1. INTRODUCTION In the recent years the new open economy macro models (NOEM) have spread in the economic literature and have been widely used not only by academic researchers but also by policy makers. The traditional Mundell-Flemming model (referred as the MF model) has been used mostly in the economic theory for teaching purposes. Yet, as argued in Huang (2010): “up to now, the main conclusions obtained from NOEM shows no radical difference from those of the MundellFlemming model or Dornubsch model.” Furthermore, so far it has been considered to be a traditional approach to apply basic MF model on conditions of the Slovak economy (Luptáčik et al., 2005; Luptáčik et al., 2006; Ivaničová, 2006). We would like to contribute to this branch of economic literature by taking the standard model used in Luptáčik et al. (2005) and Huang (2010) and adjust it for conditions of a common monetary union. As the Slovakia has become a member of the Eurozone in 2009 the process of upgrading the traditional models on specific conditions of the common monetary union is a necessary step to be taken by economic researches. Our new version of the MF model resembles some features of the model proposed and tested by Páleník et al. (2011) but we decided to go deeper into problems of fiscal and monetary policy as done before. In particular, the main focus of this paper is to assess the empirical predictions of MF model in explaining economic development of new member countries of the Eurozone, in our case the Slovakia.

2. THEORETICAL BACKGROUND The MF model is an extension of the basic IS-LM model suitable for small open economies with inclusion of international financial capital flows accounted in the balance of payment statistics. The model used in this paper is designed for the analysis of macroeconomic policy, in particular fiscal and monetary policy, in a small open economy that is a price taker in import markets and in specific cases as well as in export prices. Contrary to the standard model we assume that the domestic price is a tool that enables economy to achieve its equilibrium, not the short-term interest rate. Thus we place ourselves into the environment of fully flexible domestic prices.2 The short-term interest rate is fully under control of the monetary authority as well as the domestic credit. Transmission mechanism between short-term interest rate and the long-term interest rate that affects investment decisions in the IS curve is modelled as a single equation.

This work was supported by the project VEGA 1/0613/12 “The intensity of the relationship between financial sector and real economy as a source of economic growth in Slovakia in the post-crisis period” (50 %) and the project of PMVP 2315026 “Theoretical and practical aspects of modeling foreign debt and economic imbalance in DSGE models.” 2 This assumption results from the reasoning related to the theory of the optimal currency area. In the environment of fixed nominal exchange rate adjustment processes in the external sector depends on the relative prices of tradable goods between domestic and foreign economy. From this reason we would like to analyze the impact of changes in monetary and fiscal policy on the required change of the domestic price level. Clearly, the slow price adjustment process creates imbalances in this environment. 1

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2.1. Extended Mundell-Fleming model The basic setup of the MF model used in our analysis is described by a system of three following equations: IS curve:

0 = C(Y,T) + I(IRS, IRL*, P, Y) + G(Y, T) + X (Y*, P, P*) − M (Y, P, P*) − Y

[1]

LM curve:

0 = MD(Y,IRS) − m(DC + FC)

[2]

BP curve:

0 = X(Y*,P, P*) − M (Y, P, P*) + CFA IRD(IRS, IRS*)

[3]

where C(Y,T) stands for consumption, I(IRS, IRL*, P, Y) for investments, G(Y, T) for government expenditures, X (Y*, P, P*) for domestic export, M (Y, P, P*) for domestic import, Y for domestic output, MD(Y,IR) for domestic demand for real money balances, m(DC + FC) for domestic money supply, CFA IRD(IRS, IRS*) for capital and financial account of the domestic balance of payments. The IS curve represents set of equilibriums in the market for goods and services depending on different combinations of interest rate and output. The LM curve represents set of equilibriums in the money market depending again on different combinations of interest rate and output. The standard IS-LM model for closed economy is extended by BP curve that represents set of equilibriums in the foreign trade and capital markets and is modeled by basic domestic balance of payments equation. Contrary to the standard model that takes government spending as an exogenous variable we would like to take a closer look on the impact of the changes in fiscal policy on different economic variables. Therefore we model government expenditure as a function of taxes, exogenous government expenditure and total domestic product. We assume that there is a positive relationship between taxes and total domestic product, thus in case of higher product the total amount of taxes collected from the economic agents should rise. Additionally, the level of taxes should have an influence on the level of private consumption, thus the total domestic consumption depends negatively on the taxes and positively on the level of domestic product. The higher domestic tax rate decreases real income of domestic households, thus the total consumption goes down. Based on the reasoning above, the concrete form of the equations included into the IS-LM-BP model is described as follows: IS curve:

LM curve:

C = c0 + c0Y + c2T

MD = md0 + φY + λIR

I = i0 + i1IRS + i2Y

MS = MD

C = g0 + g1T + g2Y Q = q0 + q1Y + q2P* + q3P

BP curve: S

MS = m(DC + FC)

X = x0 + x1Y* + x2P* + x3P

Q = q0 + q1Y + q2P* + q3P X = x0 + x1Y* + x2P* + x3P

[

]

[4]

CFA = cf0 + cf1 IRS − IRS*

IRD

where c0 stands for autonomous consumption, Y for domestic product, T for taxes, g0 for autonomous government expenditure, i0 for autonomous investments, IRS for short-term nominal interest rate, Q for import, X for export, P for price level, md0 for autonomous real money demand, CFA for capital and financial account of the balance of payments, RP for risk premium. Asterisks indicate foreign variables. The coefficients associated with the variables included into the model may be interpreted as elasticity of those economic variables with respect to the change in the other specific variables. For example, the coefficients c1 and c2 thus represent elasticity of consumption with respect to the domestic product or taxes, respectively. All of the coefficients may turn out to be of positive or negative values. However, according to the economic theory we generally assume the following:

c1 > 0,c2 < 0,g1 < 0,g2 > 0,i1 < 0,i2 > 0,q1 > 0,q2 < 0,q3 > 0, x1 > 0,x2 > 0,x3 < 0,φ > 0,λ < 0,m > 0,cf > 01

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In accordance with the standard economic theory we should use long-term interest rate as a variable that influences investment decisions of the companies. Yet, we would like to analyze impact of changes in the monetary policy not only from the perspective of changes in money supply (as done in the standard models) but also from the perspective of changes in the nominal interest rate as it currently serves as the main monetary tool in the environment of inflation targeting. From this reason the use of the short-term nominal interest rate in the LM curve seems to us to be more appropriate. At this point we explicitly assume that there exists a strong link between the short-term and long-term interest rate that may be formulated as in equation for long-term interest rate.3 Moreover we assume that the international capital flows are mostly determined by interest rate differential in the short-term, thus the short-term domestic and world interest rate enters the balance of payments equation. The LM curve in our model has its specific characteristics. As we would like to examine the impact of changes in monetary policy on the domestic economy in the open economy environment we model domestic money supply as a product of domestic and foreign credit. While the total amount of the domestic credit may be influenced by the monetary policy decisions the amount of the foreign credit is determined by the interaction of the domestic economic agents with foreign environment. From this reason the domestic credit will serve as a tool for monetary policy in case of the monetarist transmission mechanism. For the specification of the real exchange rate we use standard purchasing power parity theory that states the following:

P* RER = ER â&#x2C6;&#x2019; P

[6]

where ER stands for nominal exchange rate which is defined as amount of units of domestic currency in exchange for one unit of foreign currency. In case of countries that are not members of the common currency area the Eurozone the real exchange rate will be computed as stated in [6]. Yet, since the accession of the domestic country to the Eurozone the evolution of the common currency euro will not affect the evolution of the foreign trade or international capital flows in the full scale. For our purposes we assume that by adoption of the euro the domestic country does not face exchange rate risk and the nominal exchange rate, thus ER is fixed to unity for all time periods.4 The evolution of the external trade is therefore affected by the changes in relative prices of the tradable goods. The influence of domestic and foreign price level on the export and import is modeled separately without loss of generality. The flows of capital recorded in the capital and financial account are not any more under the influence of the changes in nominal exchange rate. Moreover we assume that the relative prices of domestic and foreign goods do not influence the evolution of the capital and financial account. Only the interest rate differentials in short term interest rates may have an influence on the capital flows between domestic and foreign country. In the system of equations described in [1], [2] and [3] we work with the set of dependent, independent and policy variables. As there are three basic equations that describe the full system of linear equations in order to achieve full identification of the system we specify three dependent variables: Y as the domestic output, P as the price of domestic tradable goods and FC as the foreign credit. In addition to this we have set of policy variables that serve as an economic tool of fiscal or monetary policy: T as the taxes, DC as the domestic credit and IRS as the short-term interest rate. All other variables represent independent variables and are exogenously specified. In the theoretical part of this paper we briefly discuss implications of IS-LM-BP model. For this part the basic concepts of the derivation of the implicit function are used.

Based on the data on international bilateral trade published by the Eurostat, the majority of export and import of goods from or to Slovakia, Slovenia and Estonia flows comes from the member states of the Eurozone. As the bilateral data on capital and financial account are not available we are not able to confirm or reject the hypothesis that the majority of international capital flows for countries such as Slovakia, Slovenia or Estonia also comes from the member states of the Eurozone. For our purposes we will assume that this is the case. rate, foreign long-term interest rate, changes in government deficit and inflation rate. The equation for the long-term interest rate is used instead of the LM curve. According to the authors: â&#x20AC;&#x153;The standard Mundell-Fleming model contains an LM-curve which is replaced by a long-term interest rate equation in our model, since during the 1980s the major monetary policy pursued in the various countries was an interest rate policy.â&#x20AC;? As in our model we would like to investigate the effect of using the monetary transmission mechanism as well as interest rate policy we do keep LM curve in the model and we do not use the link between short term and long term interest rate described in the model of Douven and Plasmans (1996). The one possible extension of the model would be to consider long-term interest rate in the IS curve which is specified by the equation used in Douven and Plasmans (1996). 4

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2.2. Implicit function theorem Let us assume that there is vector of dependent variables y and vector of independent variables x where y = y1, y2,... ym and x = x1, x2,... xn. If is an implicit function of many variables then may be written in the following form:

g(x1, x2,... xn, y) = 0

[7]

Let us first examine the case when there is only one dependent variable y and n independent variables x = x1, x2,... xn. In this case we may write differential form of the implicit function in the form of g(x1, x2,... xn, y) = 0 as following: ∂g ∂g ∂g ∂g —dx + —dx + ... + —dxn + —dy = 0 ∂x1 1 ∂x2 2 ∂xn ∂y

[8]

∂g dy ∂g ——= −— ∂y dxi ∂xi

[9]

In case we would like to examine change in y for specific xi , where i = 1,2,...,n we set dxj = 0 for j = 1,2,...,n where i ≠ j . Thus the partial derivative with respect to the xi is expressed as following:

dy ∂g/∂xi —=−— dxi ∂g/∂y

Let us now proceed to the case when there are m dependent variables y = y1, y2,... ym and n independent variables x = x1, x2,... xn. In order to be able to solve for a unique solution for dependent variables y = y1, y2,... ym it will take m equations to describe system of y variables:

g1 (x1, x2,... xn, y1, y2,... ym) = 0 g2 (x1, x2,... xn, y1, y2,... ym) = 0 ... gm (x1, x2,... xn, y1, y2,... ym) = 0

[10]

If we write this system of m equations in differential form in matrix notation, we get that:

Dx g(x, y)m×n dxn×1 + [ Dy g(x, y) ] m×n dym×1 = 0

[11]

The system of m equations in matrix form may be further elaborated as following:

[ Dy g(x, y) ] m×m dym×1 = Dx g(x, y)m×n dxn×1

[12]

dym×1 = − [ Dy g(x, y) ]−1m×m Dx g(x, y)m×n dxn×1

Let us assume that we would like to investigate effect of changes in x on y, thus finding the partial derivatives of x with respect to y. To find this out, we reformulate [] as following: −1

=−

[13]

In order to be able to solve for a unique solution of the system of m equations the matrix of first derivatives Dy g(x, y) must be invertible.5 Matrix filled with derivations of first order as in [] is called Jacobian, thus Dy g(x, y) = J . We may rewrite the solution to the system as described in [] in the following way:

dy dxi

=− J m 1

−1

m m

dg ( x, y ) dxi

for i 1, 2,..., n .

[14]

m 1

As the data for the money market rate were not available for France we used data on short-term government bond yields published by International Monetary Fund. 5 There are two basic conditions that must be satisfied in order to Dy g(x, y) to be invertible: (1) matrix Dy g(x, y) is a square matrix and (2) det Dy g(x, y) ≠ 0 . The first condition in always satisfied in a case when there are exactly m equations for m dependent variables. For the second condition to be satisfied we need to check the value of the determinant analytically. 4

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In order to find inverse of the Jacobian matrix we may proceed in different ways. Based on the basic mathematical algebra the inverse of the Jacobian matrix may be expressed in following way: −1

where

[15]

In order to be able to compute adjugate matrix in general form we firstly compute matrix Cij called cofactor Cij = (−1)i+j Mij , where Mij = det(M)(n−1)×(−1) while M is created from J by deleting i − th row and j = th column. Then adj(A) = CT <==> adj(A)ij = Cji . As we will mostly deal with a system of m = 3 equations we describe algorithm for computing adjugate matrix 3 × 3 Jacobian matrix. −

−

A = (ek − fh)

where B = (fg − dk)

C = (dh − eg)

D = (ch − bk)

[16]

G = (bf − ce)

E = (ak − cg)

H = (cd − af)

F = (gb − ah)

[17]

K = (ac − bd)

The final solution to the system of implicit functions for dependent variables is presented in the following form:

−

=−

[18]

2.3. Application of the implicit function theorem on the Mundell-Fleming model In order to be able to analyze impact of changes in policy variables on endogenous variables in our model we use concept of derivation of the implicit function as described in the previous section. The first step is to compute determinant of the matrix of the first derivation or of, more precisely, Jacobian matrix. The system of equation as described in the [1], [2] and [3] may be rewritten in the following form by using the concept of total derivation. −

−

( ) + + − − − ( ) −

−

Determinant of the Jacobian that is used later on in the [] is of the following form:

(

)

(

−

[19]

)

DJ = m XP − MP MY − −m XP − MP CY + IY + GY − MY −1 = mY XP − MP CY + IY + GY −1 < 0 −

−

[20]

Finally, the adjugate matrix to the Jacobian matrix is of the following form:

m XP − MP adj(J) = mMY MDY XP − MP

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In the following section we would like to analyze impact of changes in policy variables on the endogenous variables in domestic economy, such as domestic product, price level or foreign credit.

2.3.1. Change in taxes as a fiscal policy tool In order to describe how the changes in fiscal policy affect endogenous variables in our model we will proceed as described in the previous section. Firstly, we use relationship between Jacobian matrix as in [15] and adjugate matrix to Jacobian matrix as in [16] in order to specify signs of the vector v described in [18]. In the following theoretical analysis while we do not compute exact values of the elements of the vector v we are interested in the direction of the change, thus in the signs of the elements of the vector v. For our purposes the subscript of the vector v represent exogenous variable which is subject to the derivation. Thus, vector vt consists of the elements that describe the impact of changes in taxes on our endogenous variables. ∂Y ∂T ∂P −1 = ∂T ∂FC m XP − MP CY + IY + GY −1 ∂T + + + −

(

)

∂Y ∂T ∂P −1 = ∂T ∂FC m (XP − MP) CY + IY + GY −1 ∂T + + + −

(

)

m XP − MP mMY

MDY (XP − MP)

0 − (XP − MP )(CY + IY + GY −1)

(CT + GT )m (XP − MP ) (CT + GT )mMY

− m XP − MP

(CT + GT )MDY (XP − MP )

−m(CY + IY + GY − MY −1) − (XP − MP )MDY

(CT + GT) 0

[22]

− (CT + GT )/[(CY + IY + GY −1)]

− (CT + GT )MY /[(XP − MP ) (CY + IY + GY −1)] (−(CT + GT )MDY)/ m [(CY + IY + GY −1)]

We analyze impact of changes in taxes on exogenous variable separately in each case. As a first case we consider change in domestic product due to the changes in tax policy. Ad case 1 (∂Y/∂T): As there are many variables that may have a significant influence on the final result we need to distinguish between four different cases. Which one is able to describe what will happen in real economy depends on the empirical estimations of each single economy.

|C | > |G | T

|C | < |G | T

CY + IY + GY −1 > 0

/dT > 0 dY /dT < 0 dY

CY + IY + GY −1 < 0

/dT < 0 dY /dT > 0 dY

In case that the elasticity of consumption with respect to the taxes is higher than the elasticity of government spending, increase in taxes should decrease total product if we assume that total multiplicative effect of increase in product is lower than one (standard case). In other cases the change in fiscal policy may have even positive effect on the total product if specific conditions are satisfied.

Ad case 2 (∂P/∂T): As there are many variables that may have a significant influence on the final result we need to distinguish between four different cases. Which one is able to describe what will happen in real economy depends on the empirical estimations of each single economy.

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CY + IY + GY −1 < 0

/dT < 0 dP /dT > 0

|C | < |G | T

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CY + IY + GY −1 > 0

|C | > |G | T

for

In the case that the elasticity of consumption with respect to taxes is higher than the elasticity of government spending, increase in taxes should lead to decrease of relative price levels due to increasing domestic prices (we do not distinguish between different types of taxes). In other words, increase in taxes causes relative loss of competitiveness in international environment, thus decrease in real exchange rate (standard case). Ad case 3 (∂FC/∂T): As there are many variables that may have a significant influence on the final result we need to distinguish between four different cases. Which one is able to describe what will happen in real economy depends on the empirical estimations of each single economy.

CY + IY + GY −1 > 0

/dT > 0 dFC /dT < 0

|C | > |G | T

/dT < 0 dFC /dT > 0

dFC

|C | < |G | T

CY + IY + GY −1 < 0

dFC

In the case that the elasticity of consumption with respect to taxes is higher than the elasticity of government spending, increase in taxes should decrease foreign credit – more money are needed to be spent home not abroad (standard case).

2.3.2. Change in domestic credit as a monetary policy tool Again as in the previous section while we do not compute exact values of the elements of the vector we are interested in the direction of the change, thus in the signs of the elements of the vector v. Thus, vector vDC consists of the elements that describe the impact of changes in domestic credit (money expansion or contraction) on our endogenous variables. ∂Y ∂DC ∂P −1 = ∂DC ∂FC m XP − MP CY + IY + GY −1 ∂DC + + + −

(

)

∂Y ∂DC ∂P −1 = ∂DC ∂FC m (XP − MP) CY + IY + GY −1 ∂DC + + + −

(

)

m XP − MP mMY

MDY (XP − MP)

0 − (XP − MP )(CY + IY + GY −1)

0 0

m (XP − MP )(CY + IY + GY −1)

− m XP − MP

−m(CY + IY + GY − MY −1) − (XP − MP )MDY

−m

[23]

0 0

−1

There is no impact of changes in domestic monetary policy through increase in domestic credit (monetary transmission mechanism) except on foreign demand. This is a direct consequence of the model setup when there is one to one relationship between domestic and foreign credit in order to achieve equilibrium. This feature of the model may be considered as a problematic due to ineffectiveness of the monetary transmission mechanism and should be further analyzed when using the model in the field of monetary policy. Contrary to the standard IS-LM-BP model where the interest rate is not used as a policy variable, in our model the role of the money supply as a monetary used is replaced by the short-term interest rate. Thus, the money supply in this model is almost fully neutral.

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2.3.2. Change in short-term interest rate as a monetary policy tool Again as in the previous section while we do not compute exact values of the elements of the vector we are interested in the direction of the change, thus in the signs of the elements of the vector . Thus, vector consists of the elements that describe the impact of changes in domestic interest rate (monetary expansion or contraction) on our endogenous variables. ∂Y ∂IR ∂P −1 = ∂IR ∂FC m XP − MP CY + IY + GY −1 ∂IR + + + −

(

)

∂Y ∂IR ∂P −1 = ∂IR ∂FC m (XP − MP) CY + IY + GY −1 ∂IR + + + −

(

)

m XP − MP

mMY

MDY (XP − MP)

− m XP − MP

− (XP − MP )(CY + IY + GY −1)

−m(CY + IY + GY − MY −1) − (XP − MP )MDY

m (XP − MP) (IIRs − cf1CFAIRs)

m(MY IIRs − cf1CFAIRs (CY + IY + GY − MY −1))

(XP − MP) (MDY IIRs − MDIRs (CY + IY + GY −1) − cf1 MDY CFAIRs)

− (cf1CFAIRs + IIRs )/(CY + IY + GY −1)

− (MY IIRs − cf1CFAIRs (CY + IY + GY − MY −1))/ (XP − MP) (CY + IY + GY −1)

−(MDY IIRs − MDIRs (CY + IY + GY −1) − cf1 MDY CFAIRs)/ m (CY + IY + GY −1)

IIRs

MDIRs

cf1CFAIRs

[24]

(cf1CFAIRs + IIRs )/(CY + IY + GY −1)

(/(XP − MP))[cf1CFAIRs]+(MY( IIRs +cf1CFAIRs)/(CY+IY+GY−1) −1/m[(MDY ( IIRs +cf1CFAIRs)/ (CY + IY + GY −1))−MDIRs]

We analyze impact of changes in domestic interest rate on exogenous variable separately in each case. As the first case we consider change in domestic product due to the changes in interest rate. Ad case 1 (∂Y/∂IR): As there are many variables that may have a significant influence on the final result we need to distinguish between two different cases. Which one is able to describe what will happen in real economy depends on the empirical estimations of each single economy.

CY + IY + GY −1 > 0 cf1CFAIRs − IIRs > 0

CY + IY + GY −1 < 0

/dIR > 0

/dIR < 0

The impact of increase of interest rate depends on the value of total multiplicative effect in the economy. If there is total multiplicative effect lower than one the increase of interest rate leads to decrease of total domestic product (which is in line with the basic macroeconomic theory). Yet, in case of higher multiplicative effect increase in interest rate may lead to increase of total product due to inflow of capital through financial account. Ad case 2 (∂P/∂IR): Direct effect of the change in nominal interest rate is ambiguous. We need to distinguish among many possible combinations of values of total multiplicative effect in economy in relationship to other variables. Hence, there are following eight combinations possible:

MY IIRs + cf1CFAIRs CY + IY + GY −1

> cf1CFAIRs < cf1CFAIRs

|I |I |I |I

IRs IRs IRs IRs

| > |cf CFA | < |cf CFA | > |cf CFA | < |cf CFA 1

IRs

| | | |

CY + IY + GY −1 > 0 dP <0 dIR dP >0 dIR dP >0 dIR dP >0 dIR

/ / / /

CY + IY + GY −1 < 0 dP >0 dIR dP <0 dIR dP >0 dIR dP >0 dIR

/ / / /

In most of the cases increase in interest rate should be compensated with higher domestic price level in order the domestic economy to achieve equilibrium. Increase in domestic interest rate is transmitted into higher domestic price level

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and loss of competitiveness. However, there are specific cases where increase in interest rate should be accompanied with lowering domestic prices (with increasing real exchange rate, respectively). Unfortunately, there is no simple rule available when first or second case can be applied. Once again, the result of change in short-term interest rate not only strongly depends on the value of total multiplicative effect, the relationship between elasticity of capital flows to the interest rates and elasticity of investments to interest rates is equally important. According to this analysis, the openness of the economy measured by the elasticity of capital and financial flows with respect to changes in short-term interest rate may be a key factor thanks to which the economy will converge to the equilibrium. Ad case 3 (∂FC/∂IR): As in the previous case the direct effect of the change in nominal interest rate is ambiguous. We need to distinguish among many possible combinations of values of total multiplicative effect in economy in relationship to other variables. Hence, there are following four combinations possible:

CY + IY + GY −1 > 0 MDY IIRs − cf1CFAIRs CY + IY + GY −1

MDY IIRs − cf1CFAIRs CY + IY + GY −1

/dIR < 0

> MDIRs

dFC

< MDIRs

dFC

/dIR < 0

CY + IY + GY −1 < 0

/dIR > 0

dFC

/dIR < 0

dFC

In most of the cases increase in interest rate should be compensated with lower level of foreign credit in order to economy stay in equilibrium. However, in one specific case when total multiplicative effect in domestic economic is higher than one and high income elasticity in money demand along with high interest rate elasticity in CFA and investments makes total impact of change in interest rate on foreign credit positive. The economic logic behind the analytical analysis of the model is not so straightforward. Increase in domestic interest rate should trigger increase in capital flow which will be apparent in positive change of capital and financial account. As the domestic assets become more attractive and bought by foreign investors, net foreign stock should decrease due to increase of foreign liabilities.

3. DATA DESCRIPTION AND METHODOLOGY For the econometric estimation of parameters entering the system of equations described in [2], [3] and [4] we use a three stage least square method (later 3SLS). As the instrumental variables entering the estimation procedure we use all exogenous variables as defined in the section 2 of this paper (T, IRS, Y*, DC, P*, IRS*). Three endogenous variables (Y, P, FC ) are later used in the process of estimation. The 3SLS appears to be more efficient to use than the 2SLS if the correlations between residuals of single equations are high. In this case the estimation results provided by 3SLS are asymptotically efficient in the entire system of equations not only in the single equation as in the 2SLS (Cipra, 2008, p. 218). We decided to use 3SLS as some of the correlations in the correlation table appears to be high, thus the 3SLS should provide us with asymptotically efficient results (Table 1). The residuals were computed by using OLS method on each of the eight equations as in [4] separately. Table 1 Correlation table of residuals from single equations estimated by the OLS

There were various sources used for collecting the necessary data. All data were calculated on a quarterly basis and used in nominal terms if not stated otherwise. Data for nominal GDP and its components and balance of financial and capital

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account were expressed in nominal terms, in millions of EUR and not seasonally adjusted. Those data were taken from the Eurostat database. Data for M3 money supply were taken from the database of the National Bank of Slovakia, expressed in nominal terms and in millions of EUR. As a proxy variable for the domestic price level of tradable goods the consumer price index was used with year 2005 as a base year available in the Eurostat database. Data related to tax income were downloaded from the official database of the Ministry of Finance of Slovak republic and were expressed in mil. of EUR in nominal terms. Short-term interest rates were downloaded from the OECD database for Slovak republic as well as main foreign trade partners of the Slovakia. World short-term interest rate was computed as a weighted average of short-term interest rates of ten main foreign trade partners and their respective weights on total foreign import and export. The data for the structure of export and import on bilateral basis for the Slovakia were available up to year 2009, thus the data for the year 2009 were used for all other consecutive years. The same principle as in case of world short-term interest rate was used for the calculation of the foreign demand Y* of the Slovakia. We used data on total import of top 10 trade partners of Slovakia and weighted them by share of export and import of each single trade partner on total export and import from and to Slovakia. Data on total import of each trade partner were taken from the GDP statistics available in the Eurostat database. In case of the USA the data on total import of goods and services available in balance of payments statistics in the Eurostat database were taken. As in the previous case, the index of foreign prices was computed as a weighted average of consumer price indices of top 10 trade partners of Slovakia and their weights on total export and import of those trade partners. Data on domestic credit and foreign credit were taken from the balance sheet of the National Bank of Slovakia.

4. ESTIMATION AND RESULTS All the results from the 3SLS estimation of the model as described in [4] are provided in the Appendix II. Let us discuss results for the Slovak economy. Firstly we would like to test statistical significance of the results for the coefficients in each single equation. We consider variable to be statistically significant if the p-value associated with it is higher than 0.05, or 0.10 in specific cases. Contrary to our assumption we observe that the taxes do not affect domestic consumption, only the government expenditures are affected. According to our results, increase in taxes in times of the current crisis should have a negative influence on the consumption, thus the direction of change is correct but the statistical significance is not present in the data. The increase in taxes does go along with increase of government expenditure, thus, positive change in taxes does not bring negative change in government expenditure, however, the statistical significance is again a little questionable. As the possible explanation of this phenomenon we consider two factors: (1) burst of the current crisis in the 2008, (2) reign of the left-wing party during the period of 2006-2010. While the tax income has been decreasing since the last quarter of the 2008, the government expenditures have risen up to their peak in the second quarter of the 2010. Thus the increasing government expenditures had been accompanied by the decreasing tax income during the some specific time that has been included into our observations. Second interesting observation may be attributed to the fact that the role of prices, either domestic or foreign, contradicts our economic assumptions. Both of the variables are statistically significant, yet the results suggest that increase (decrease) in domestic prices and decrease (increase) of foreign prices triggers increase (decrease) in total value of import (export). Our results may suggest that the role of the nominal exchange rate was likely to be more influential during the analyzed period. The contradictory behavior of import and export with respect to foreign and domestic prices could be neutralized by a opposite behavior of the nominal exchange rates. From this perspective our model should be applied on the conditions of the Slovak economy since its adoption of euro, thus for the period of 2009-2012. Unfortunately, the lack of data does not make this kind of analysis possible. On top of that, the use of consumer price indices as a proxy variable for the price of tradable goods in domestic and foreign economy is likely not to be sufficient. Interestingly, world interest rates as well as the domestic short-term interest rates do not play a significant role in determining the capital flows in or out of the Slovak economy. Again, this result may point out to the important role of nominal exchange rate in financial flows which was not accounted for in our model. Other plausible explanation would point out to the structure of the capital and financial account. The more the capital flows

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are of a long-term character with a strong focus on the direct foreign investments the less likely are those investment decisions affected by the short-term interest rate that has been used in our case. Let us now analyze possible effects of fiscal and monetary policy on our three endogenous variables as stated in [4].

4.1. Fiscal policy The coefficients in the Appendix I provide us with exact values of the partial derivations with respect to taxes and total product needed to estimate direct effect of change in taxes on the domestic product, domestic price level and foreign credit. We used them to estimate full effect of changes in fiscal and monetary policy on endogenous variables. Numbers in equations are adjusted for statistically non-significant variables.

/ [ C + I + G −1 ] = −12.3571 (−25.2112 ) ∂P = − C + G M [ X − M C + I + G −1 ] = −0.0095 (−0.0194 ) — / ∂T ∂— FC = − C + G MD m [ C + I + G −1 ] = −2.6694 (−5.4462 ) / ∂T ∂Y = − C + G — T T ∂T T

According to estimations for the Slovak republic, positive change in taxes goes hand with hand with decrease in domestic product, domestic price level and foreign credit. When we eliminate coefficients that are not statistically significant we see that the impact of positive changes in tax income on domestic product is still negative. Thus, even though the domestic consumption seems not to be affected by the change in taxes the total domestic product will be affected negatively. The impact of changes in taxes on domestic price level is very ambiguous. Before adjustment for the non-significant coefficients increase in taxes should be accompanied with decreasing domestic price level. After the reduction we observe that the domestic price level should again decrease due to higher tax income. However, from economic perspective, the change in taxes does not represent an important factor that influences behavior of prices, based on the results of our analysis. Lastly, the increasing tax income causes negative change in foreign credit. As more money is spend in domestic economy covering the increase in tax income the foreign credit declines.

4.2. Monetary policy Empirical results for the effect of monetary policy are mostly in line with our assumptions. Increase in short-term interest rate triggers decrease in domestic product. However, as apparent from the Appendix I, there is strong positive relationship between domestic investments and short term interest rate in Slovakia which may be seen as a contradiction to the standard economic theory.

∂Y = cf CFA − I C + I + G −1 = −14055.62 (−20793.17*) — 1 IRs IRs Y Y Y ∂T

∂P = −1 X − M [ cf CFA + M (I + cf CFA ) C + I + G −1 ] ~ −0.0000 (−0.0000*) — P P 1 IRs Y IRs 1 IRs Y Y Y ∂T ∂FC — = −1 m [ MDY IIRs − cf1CFAIRs (CY + IY + GY −1) − MDIRs] = −3036.31 (−4491.76*) ∂T

Yet, looking at the evolution of investments and short-term interest rates in Slovakia we see strong co-movement in both series. Again, this causes of this phenomenon links back to the current economic crisis. With burst of the economic crisis in third quarter of the 2008 we observe decline in both investments and short-term interest rate as the latter one has been used as a tool for fighting against the crisis. After the second quarter of 2010 the very slow recovery of domestic economy in terms of increase in investment stock has been and has been accompanied by increasing short-term interest rates. Thus, our model correctly predicts that increase in short-term interest rates should lead to rise in investment stocks.

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Secondly, restrictive monetary policy in terms of increasing short-term interest rate does only have a minor influence over the domestic prices. From this perspective, the monetary policy is neutral with respect to the domestic price level. Finally and not surprisingly, increase in short-term interest rate should be mirrored in decreasing level of foreign assets. As the domestic financial assets become more attractive the investors change their preferences and switch from foreign to domestic assets.

5. CONCLUSION This paper proposes a new extension of the traditional Mundell-Flemming model for conditions of the common monetary union. Contrary to the standard MF model we use short-term interest rate as main policy tool for expansionary or restrictive monetary policy. Secondly, we incorporate taxes as a main tool for the fiscal policy that may have an influence on the total domestic product. The new version of the MF model is analyzed firstly analytically providing a general solution to the model. Afterwards, we test predictions of the MF model in economic conditions of the Slovak republic during the period of 2006-2011. With respect to the structure of our model we show that in the presence of the inflation targeting where short-term interest rate serves as a tool of monetary policy the monetary transmission mechanism is ineffective. Secondly, the change in short-term interest rate leads to decreasing total domestic product, increasing price level and decreasing foreign credit. The restrictive fiscal policy resulting in increasing tax income leads to decreasing total domestic product, increasing domestic prices and decreasing foreign credit. Empirical results for Slovak republic suggest that increase in tax revenues goes hand in hand with decrease of total domestic product. According to the model, the monetary policy as well as the fiscal policy should both leave the domestic price level unchanged. Finally, the effect of the changes in short-term interest rate on the total domestic product is in line with a standard economic theory, where increase in domestic interest rates should lead to decrease in total product. As the model is calibrated on the data that incorporates birth of the current crisis and its slow vanishing the results only resembles this fact. Furthermore, as a suggestion for a future research we would recommend testing the model on the countries that have been involved in the common monetary union for a longer time than a Slovakia has been.

LITERATURE 1. 2.

Cipra, T. 2008. Finanční ekonometrie (Financial Econometrics), Praha: Ekopress, 2008, ISBN 978-80-86929-43-9 Douven, R. C. – Plasmans, J. E. J. 1996. SLIM, a small linear interdependent model of eight EU-member states, the USA and Japan, Economic Modelling 13 (1996), 185 – 233. 3. Huang, L. 2010. A Logical Inference and Extension of the Mundell-Flemming Model. School of Economics at Peking University, Working Paper No. E-2010-06-005. 4. Huh, H.-S. 1999. How well does the Mundell-Fleming model fit Australian data since the collapse of Bretton Woods? Applied Economics, 1999, 31, 397407. 5. Ivaničová, Z. 2006. Mundell-Fleming Model in Fixed and Freely Exchange Rate Regimes – View over Slovak Crown Development, Journal of Economics (Ekonomický časopis), issue 01/2006, 36-51. 6. Kempa, B. – Nelles, M. 1998. On the Viability of Exchange Rate Target Zones in a Mundell-Fleming Model with Stochastic Output Shocks, Journal of Policy Modeling, 1998, 20(5), 603-219. 7. Luptáčik, et al. 2005. Formal Model of Economy in Transition – the Case of Slovakia, Journal of Economics (Ekonomický časopis), issue 01/2005, 33-49. 8. Luptáčik, et al. 2006. Formalizovaný model tranzitívnej ekonomiky – prípad SR (Formal Model of Economy in Transition – the Case of Slovakia), Politická ekonomie, 2, 2006, s. 227-246. 9. Páleník et al. 2011. Možnosti modelovania zmien ekonomiky Slovenskej republiky so zreteľom na fungovanie v Európskej menovej únii. (Possible Ways of Modelling the Changes in Slovar Republic with respect to its Membership in the European Monetary Union). Bratislava: Ekonóm, 2011, ISBN 798-807144-192-2. 10. Visser, H. 2004. A Guide to International Monetary Economics: Exchange Rate Theories, Systems and Policies, 2nd edition. Edwar Elgar Publishing Limited, UK. DETAILS ABOUT AUTHORS3: VOJTKOVA, MARIA PHD STUDENT, UNIVERSITY OF ECONOMICS IN BRATISLAVA; FACULTY OF NATIONAL ECONOMY, BRATISLAVA, SLOVAK REPUBLIC maria.vojtkova.nhf@euba.sk Durech, Richard PHD STUDENT, UNIVERSITY OF ECONOMICS IN BRATISLAVA; FACULTY OF NATIONAL ECONOMY, BRATISLAVA, THE SLOVAK REPUBLIC richard.durech@gmail.com

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Appendix I

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INTERTEMPORAL APPROACH TO THE BALANCE OF PAYMENT: CASE OF SLOVAK REPUBLIC AND SLOVENIA1 MARIA VOJTKOVA

ABSTRACT In this paper we use intertemporal model of balance of payments proposed by Bergin and Sheffrin (2000) with timedependent interest rate. Using this model we test its appropriateness for forming predictions regarding development of balance of payment for selected countries of the Eurozone. Strong attention is paid to the situation of the newer members of the Eurozone such as Slovenia or Slovak Republic. Our results suggest that the model in its standard form is able to provide correct predictions, however only in such a case when very specific conditions are met. KEYWORDS: current account, intertemporal model, balance of payment.

1. INTRODUCTION So far the intertemporal model of the current account has not delivered satisfactory results especially for the case of a small open economy. The first generation of the intertemporal model with a constant world interest rate was proposed in Sheffrin and Wo (1990). Since then many studies tried to use the model to predict evolution of the current account but with ambiguous results (Otto, 1992; Ghosh, 1995; McDermott, 1999; Suarez Para, 1998; Arena and Tuest, 1999). Second generation of the model based on a time-varying world interest rate was firstly introduced in Bergin and Sheffrin (2000). Even though the new version of the model is clearly dominant to the first-generation model it still lacks a strong predictive power that would be required by this type of models. As argued in Nason and Rogers (2006) the proponents of the intertemporal model fail to say which parts of the intertemporal model are most responsible for the poor empirical performance of the present value models of the current account. This paper aims to test the standard intertemporal model of the current account on two small open economies, Slovak republic and Slovenia. Although those countries are comparable in size and structure of the economy, both belong to the countries with Soviet legacy and have successfully passed transition to modern economy and finally have become involved in common monetary union2 the results of our analysis point out on significant differences with respect to the explanation of underlying factor influencing development of their current account. Thus, our results suggest that the intertemporal model fails to explain an evolution of the current account due to its low complexity in terms of structure of the economy. We employ the standard model proposed by Bergin and Sheffrin (2000) but differ in computation of the world real interest rate. Firstly, we compute world interest rate as a weighted average of real interest rates of the G7 countries, in the second sample the exogenous real interest rate is computed as weighted average of main foreign trade partners of the domestic economy, Slovak republic or Slovenia. Moreover, we test accuracy of the intertemporal model on the de-trended and demeaned data and thus test cyclical part of the evolution of the current account. In the next section we briefly describe main feature of the standard intertemporal model with time-varying interest rate as proposed by Bergin and Sheffrin (2000). Section 3 presents description of the data and model calibration. Main findings and conclusions are discussed in Section 4 and 5.

2. THEORETICAL BACKGROUND The intertemporal model of the current account of the balance of payment is based on forward-looking approach. We work with representative households that maximize their utility over time in order to smooth their consumption while their optimal consumption path is based on investment-saving decision. Moreover we work with representative agents (households) that have perfect foresight, complete information about their economic environment and live for infinitely long period. The households have an access to international capital market so they can borrow or lend in order to smooth their consumption. Model does not necessary require complete international markets in state contingent claims. We assume that capital is internationally mobile while labor is internationally immobile. This work was supported by the project VEGA 1/0613/12 “The intensity of the relationship between financial sector and real economy as a source of economic growth in Slovakia in the post-crisis period” (50 %) and the project of PMVP 2315026 “Theoretical and practical aspects of modeling foreign debt and economic imbalance in DSGE models.” 2 Slovenia joined the Eurozone in 2007 and Slovak republic in 2009. 1

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In case the representative agents expect temporary fall/increase in net output in order to smooth the consumption they will borrow/lend savings in world capital markets and therefore country would run a current account surplus/deficit. The foreign shocks are transferred to the domestic economy by introducing time-varying world interest rate and the real exchange rate as a proxy for a price of non-tradable sector to tradable sector. This adjustment was firstly introduced in the paper of Bergin and Sheffrin (2000).

2.1. Basic structure of the model In this paper we follow the model described in Bergin and Sheffrin (2000). The solution of the model is calculated for social planner.

2.1.1 Consumer utility specification We solve optimization problem for representative household in economy that maximizes present value of expected utility in order to smooth its consumption.

max ∑ βt (Et[U(C*t )] We assume that optimal consumption may be reinterpreted as composite index of the representative individual’s consumption of tradable and non-tradable goods. Therefore we may describe consumption in terms of Cobb-Douglas form as following:

C*t = CTtα CNt1−α where coefficient α represents intratemporal elasticity of substitution between tradable and non-tradable sector, CTt represents consumption of tradable goods and CNt consumption of non-tradable goods. Additionally, utility function is presented in its standard form of CES function as following:

1 (C α C 1−α)1−σ U(C*t ) = − 1−σ Tt Nt

where σ represents coefficient of relative risk aversion which is defined as −u"(c)c/ u'(c) .

The coefficient γ = 1 σ then represents the intertemporal elasticity of substitution between consumption at two different points in time which is assumed to be constant.

2.1.2. Budget constraint As we apply optimal household problem on entire economy the budget constraint will take following form:

Yt = (CTt + PtCNt) + It + Gt + (Bt - Bt−1 − rtBt−1)

[4]

Previous equation states that total output Yt produced in the economy must be equal to total consumption expressed by a sum of non-tradable and tradable goods, investments It, government spending Gt and net foreign stock which represents balance of current account. As the representative household may consume tradable and non-tradable goods we need to distinguish between those groups of goods also in the budget constraint equation. The relative price of non-tradable and tradable goods is denoted as Pt , so all variables in the equation are measured in terms of tradable goods. In order to derive budget constraint equation we use following identity for national product that links net foreign asset accumulation (balance of current account) with saving-investment balance of national economy:

CAt = Bt - Bt−1 = Yt - Ct - It - Gt + rtBt−1 = NOt - Ct + rtBt−1

[5]

The identity in [5] states that the level of saving in the economy computed as a sum of domestic savings plus return from net foreign claims (assets) from previous period in terms of interest payment equals to the difference of economy’s stock of net foreign claims between two periods. The level of Bt is endogenously determined once a household has chosen the

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consumption path. The NOt represents net output calculated as the difference between total domestic product, investments and government spending. The variable rt is a real world interest rate in terms of traded goods which may vary over time. Importantly, the representative households take value of world interest rate as given and can not influence it by their decisions. The transversality condition for the optimization problem as described in [1] and [5] is following:

lim Et Rt,i Bt+1+i = 0

[6]

Summing (5) over all periods for infinite horizon and imposing the transversality condition the intertemporal budget constraint may be written as follows:

∑ E0 (Rt Ct) = B0 +∑ E0 (Rt NOt)

[7]

where NOt represents net output calculated as a difference between output, investment and government spending and Rt is defined as market discount factor in following form: [8] The budget constraint as described in the [9] needs to be log-linearized following the procedure in Bergin and Sheffrin (2000):

Δct 1 − ∑ βt Δnot −—−(1−—)r Ω Ω t t=1

[9]

where Δnot is calculated as Δnot = log(NOt ) − log(NOt−1) , Δct is calculated as

/ ∑R C

Δct = log(Ct ) − log(Ct−1) and ΔΩ = −B̅

where B̅ is the steady state value of net foreign assets.

2.2. Solving the problem of a representative agent A representative agent maximizes its utility in [1] with respect to budget constraint [5] using first order condition approach and with respect to transversality condition. The optimal consumption profile takes following form:

[10] where γ represents intertemporal elasticity of substitution in consumption as described above. The consumption profile as stated in [10] may be log-linearized assuming constant variances and covariances among variables. The equation [10] might be therefore rewritten as following:

1−γ EtΔct+1 = γEt {rt+1 + [(—(1 − α)]Δpt+1 + const} γ

[11]

where γ = 1 σ is the intertemporal elasticity of substitution; Δpt = log(Pt ) − log(Pt−1) is the appreciation for the real exchange rate; log(1 + rt ) ≈ rt . The expression on the right side of the equation [11] represents so called consumption-based interest rate rt* . Log-linearized budget constraint expressed in [9] together with log-linearized Euler equation in [11] will lead to final equation for the balance of current account3: 3

[12]

Detailed derivation of the equation [12] can be found in the Bergin and Sheffrin (2000).

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[12] Derived from [12], expected change in consumption in period t+1 depends on the level of intertemporal elasticity of substitution (which is assumed to be constant over time) and expected value of consumption-based interest rate in the future. If the interest rate is expected to rise in time t+1, the costs of borrowing in international financial markets will be expected to rise which will trigger substitution to future consumption by raising the cost of current consumption. The second variable to consider in this model is change in relative price of non-traded goods captured by the variable Δpt+1 . If the price of traded goods is expected to rise the consumption-based interest rate is expected to rise above the conventional level which will lower current consumption already today by the intertemporal elasticity of substitution.

2.3. Description of the VAR model Following the procedure in Bergin and Sheffrin (2000) we would like to test restriction that the current account depends on expected future values of net output and interest rate. As the current account itself incorporates all information regarding future evolution of net output and interest rate that households possess we estimate VAR model that represents consumer forecast. We use basic VAR model with one lag incorporated in the Eviews software. Δno a11 a12 a13 Δno u1 * CA = a21 a21 a21 CA* + u2 r* t a31 a21 a21 r* t−1 u3 t

[13]

The above standard VAR model can be rewritten in more compact form: zt = Azt-1 + ut . The expected value of the E(zt+i ) is given by the following equation: E(zt+i ) = Ai zt + ut . Thus, the restriction on the evolution of the current account is given by the following equation:

hzt = ∑ βi (gi − γg2) Ai zt

[14]

where g1 = [1 0 0], g2 = [0 0 1] and h = [0 0 1]. For a given z, the right-hand side of equation [14] can be expressed as:

CA*t,e = kzt

[15]

where

k = −(gi'− γg2') βA(I − βA)-1

[16]

If the restrictions of the theory were consistent with the data, such that CA*t,estimation = CA*t then the vector k should equal [0 1 0] . This implies that the model may then be tested statistically by using the delta method to calculate a ∂k ∂k' -1 ͂ χ2 statistic for the hypothesis that k = [0 1 0] . Then k͂ '(—V—) k will be distributed chi-squared with three ∂A

∂A

∂k degrees of freedom, where V is the variance-covariance matrix of the underlying parameters in the VAR, and − is the ∂A

matrix of derivatives of the k vector with respect to these underlying parameters, which can be computed numerically (Bergin and Sheffrin, 2000). In our case we will test VAR with only one lag on data for Slovak republic and Slovenia. The strength of the model will be ˆ = [0 1 0] . The vector k will be computed numerically based on the equation [16] tested under the assumption that k where A is the matrix of coefficients estimated by VAR procedure stated in [13].

As the data for the money market rate were not available for France we used data on short-term government bond yields published by International Monetary Fund. 4

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3. DATA SET AND CALIBRATION Seasonally adjusted data for the period of 1996 â&#x20AC;&#x201C; 2012 on quarterly basis have been used for Slovak Republic and Slovenia. Description of the data used for each variable included in the model follows. Data for consumer price index and nominal GDP of the Slovak republic and Slovenia were taken from the Eurostat database and seasonally adjusted when applicable. Money market rate were used as a proxy for short-term interest rate and were taken from the International Financial Statistics database collected by International Monetary Fund.4 Data for nominal GDP and consumer price indices of the G7 countries and main trade partners were taken from the International Financial Statistics database collected by International Monetary Fund. Real effective exchange rate in broad terms is calculated and published by the Bank for International Settlements on quarterly basis. Data on working age population were taken from the World Databank administrated by the World Bank. As argued in the Bergin and Sheffrin (2000) in order to get rid of the constant term in the [11] it is necessary to use demeaned data for calculation of the VAR. In our paper we de-trend data by Hoddrick-Prescott filter and use cyclical part of the CAt* , Î&#x201D;not and rt* time series. Thus, our analysis focuses explicitly on the explanation of the cyclical behavior of the balance of payment and not the description of the long-term trend in the evolution of the current account. The cyclical part of the time series created by HP filter is demeaned, by definition.

3.1. Data adjusted for per capita values The model assumes to be applied for representative agents therefore the data used for testing need to be computed as values per capita. Working age population (in age 15-64 years) was used for transforming the aggregated data for percapita data as we assume that mostly working-age population may have influence on economy production.

3.2. World real interest rate rt* There were two different dataset used for computation of the real interest rate. Firstly, in order to make our results comparable with results described in Bergin and Sheffrin (2000), we use data for G7 countries as a proxy of the world interest rate. Secondly, we use real interest rates of the major 10 trade partners in foreign trade according to the Eurostat data of the Slovak republic and Slovenia. The world interest rate rt* is then computed as a weighted average of individual real interest rates weighted by the shares of 10 top trade partners on the total value of import and export with those trade partners, or on total product of the G7 countries. We collect short-term nominal interest rates from the Eurostat database for selected countries5 as we would like to take into account inflation expectations as described in Bergin and Sheffrin (2000). Inflation in each country is measured using domestic consumer price indices; expected inflation is calculated by a two-quarter auto-regression equation.6 The expected real interest rate is calculated as a nominal interest rated adjusted for the expected rate of inflation for each trade partner. According to the equation [11] we need to estimate an expected change in relative prices of domestic tradable and nontradable goods Pt. We follow Rogoff (1992) and using as a proxy for Pt a measure of the real effective exchange rate in broad sense calculated by Bank for International Settlement and publicly available in their database. The expected real effective exchange rate appreciation is calculated by a two-quarter auto-regression equation.7

3.3. Variables in the model expressed in terms of price of tradable goods The model assumes that all variables are expressed in terms of price of tradable goods thus in real terms. As a proxy for price of tradable goods a consumer price index was used, thus all variables are expressed in real terms.. As the data for the money market rate were not available for France we used data on short-term government bond yields published by International Monetary Fund. 5 Countries within G7 group in first case or the top 10 foreign trade partners of Slovakia and Slovenia in the second dataset. 6 Due to the lack of data we do not use rolling regression. Instead, the estimation of the coefficient in the auto-regression take into account entire set for years 1996-2012. We assume that the autoregressive process is stable over time therefore the calculated coefficients are accurate and can be used for inflation forecast. 7 Again, we assume that the autoregressive process is stable over time therefore the calculated coefficients are accurate and can be used for forecast of the real effective exchange rate. 4

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3.4. Net output and balance of current account The net output series, NOt , are constructed for each of the two countries by subtracting government expenditures Gt and private investments It from GDPt , all in real terms adjusted for changes in consumer prices index with base year 2005 and expressed in per capita terms. As the model uses log-normalized form of economic variables, the NOt values are differenced and expressed in log form. The data for CAt* variable are computed for each country by subtracting the log of consumption adjusted for population and the inflation measured by change in consumer price index, from the log of net output NOt .8

3.5. Calibration The discount factor β is calculated for steady-state conditions with help of world real interest as states the following equation: β=1 1+¯r *. In our analysis we simulate evolution of the values of elements in vector k based on different values of β. However, only results for β higher than 0.9 are considered valid furthermore in the economic interpretation of the model.9

As discussed in Bergin and Sheffrin (2000) the specification of the coefficient α, share of tradable and nontradable goods in domestic economy, does not significantly alter final results of simulations. Therefore we use standard value of and for further computation. The coefficient of intertemporal elasticity of substitution γ is the most problematic one to estimate.10 Because of the wide range of possible values used in empirical literature following values are considered in our econometrical analysis: 0.1, 0.5, 0.9.

4. ESTIMATION AND RESULTS In our paper we test appropriateness of the intertemporal model as stated in Bergin and Sheffrin (2000) on conditions of small open economy, such as the Slovenia and Slovak republic are. As in Bergin and Sheffrin (2000), change in alpha does not alter results significantly. The highest impact visible is on real interest rate evolution but only scale impact while direction remains unchanged (model 1a vs. 2a or 1b vs. 2b). Secondly, we test hypothesis that the measurement of real exchange rate is an important factor that may significantly alter prediction power of the model. The results of our analysis suggest that the selection of the calculation of the real interest rate is strongly dependent on the set of parameters used in simulation. In case of the model 1, the G7 real interest rate strongly dominates real interest rate based on main trade partner calculation. In the model 2 for Slovak republic the main trade partners provide better results (due to the RIR behavior), yet in case of Slovenia the G7 real interest rate seems to provide better results. In the model 3 the results have been reversed; for Slovakia the G7 real interest rate measurement is better, yet for Slovenia main trade partners approach seems to be more accurate. The results of the model 4 for case of Slovakia are rather inconclusive, for Slovenia model with main trade partners provide better results without any doubts. Thirdly, the intertemporal model for Slovenian economy does not hold a significant explanatory power especially due to k2 ≠ 1 in most of the cases (maximum value reached by k2 is 0.6 instead of one, thus hypothesis that k2 = 1 is not satisfied). As stated above, the difference in statistical power between G7 based real interest rate and trade partners based real interest rate highly depends on the parameter calibration of the model. Unfortunately, it is not possible to expressed data for the current account of the balance of payment in log terms as the balance on the current account may run into negative numbers. From this reason we follow procedure used by Bergin and Sheffring (2000): NOt = Yt − It − Gt = Ct + NXt 8

( ) (

) ( )

NO Ct + NXt NX NX CA*t = ln(NOt ) − ln(Ct ) = ln —t = ln — = ln 1+—t ≈—t Ct Ct Ct Ct By subtracting consumption from the net output in log terms we express balance on the current account as the share of net export in real terms on the real consumption. Unfortunately, as the net output is expressed in logarithmic form we need to check whether the logarithmic transformation is allowed. In the case of Slovak republic and Slovenia the net output is always in positive numbers, thus the logarithmic transformation is possible. At this point it is necessary to point out that this logarithmic transformation creates time series of current account in relative and not in absolute terms as used in the theoretical part of the model. Hence, before trying to interpret results of our econometric estimation and using them for forecasting we firstly need to address this issue. 9 The values of the β coefficient higher than 0.9 implicate interest rate to be higher or equal to approximately 11 percent. The average real world interest rate is approximately 0.7 percent while the average real world interest rate calculated for main foreign trade partners varies from 0.3 for Slovak republic to 0.5 percent for Slovenia. The consumption based real interest rate ranges from 0.4 up to 5.6 percent for Slovak republic and from 0.5 up to 1.1 for Slovenia. Thus the possible range of values subject to analysis will be from 0.9 up to 1 for the β coefficient. 10 The coefficient of the elasticity of substitution serves two purposes in the theoretical models. Firstly, it is assumed that it measures how strong the link between consumption and the changes in real interest rate is. Secondly, it may be viewed as a measurement of the household attitude toward risk, thus the coefficient of relative risk aversion. We will test both of the concepts by varying possible values of the coefficient γ.

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Finally we may conclude that it is possible to find an optimal parameter calibration for the Slovak republic (model 3a or 3b) that satisfies condition k = [0, 1, 0]. However, the model is not appropriate for the case of the Slovenian economy. Even such similar countries in terms of economy structure and economic power provide different results from simulations. The main problem seems to lie in influence of the real interest rate on the cyclical element of the balance of payments. The results of the simulations are also strongly affected by the share of non-tradable goods to the tradable goods expressed by the parameter γ. While the most appropriate value of the γ parameter for the Slovak republic is 0.5 in the case of Slovenia the value of 0.1 seems to deliver better results.

5. CONCLUSION This paper aims to test predictive power of the intertemporal model as proposed by Bergin and Sheffrin (2000) for two countries that have recently become members of the common currency area, the Eurozone. According to our analysis, we do not observe significant differences between simulation results for the G7 based real interest rate and real interest rate computed as a weighed average of real interest rates of the main foreign trade partners. The reliability of the model in Bergin and Sheffrin (2000) in case of the Slovak republic and Slovenia strongly depends on the value of the coefficient γ, thus the relative share of non-tradable and tradable goods in the economy. While in the case of the Slovak republic the model proposed by Bergin and Sheffrin (2000) is able to deliver satisfactory results, in case of Slovenia the model fails to satisfy hypothesis that k = [0, 1, 0] in most of the cases. Thus, we may only partially confirm findings in Bergin and Sheffrin (2000) that their model is able to better predict changes in the cyclical part of the balance of payment behavior. Apparently, our work on the satisfactory model of the balance of payment behavior of small economies such the Slovakia and Slovenia are does not end here. According to our view, the key factor that needs to be analyzed and further to be focused on in the model is behavior of the real interest rate. This is in line with Nason and Rogers (2006) who state that: “the internalized risk premium and exogenous world real interest rate shocks are two of the leading factors that we identify. Thus, future research should look for additional underlying macroeconomic factors that drive the current account.” One possible direction of future research work thus may lie in incorporation of the time-dependent risk premium into the computation of the real interest rate. The risk premium modeled as a function of the level of net foreign assets in the previous period would change a simple difference equation of the first order in [5] to more complex non homogenous non linear equation which is, however, mathematically very hard to handle. As we have seen during the recent crisis although the small and open economies are considered a price taker in case of the world interest rate we should consider implication of the government debt on the risk premium incorporated in the real interest rate. The more complex model that with government sector included could increase reliability of the model especially in case of small open economies where the role of the government is considered to be more influential.

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

Bergin, P. R. – Sheffrin, S. M.: Interest Rates, Exchange Rates and Present Value Models of the Current Account. Economic Journal 10, 2000, pp. 535-558. Cambell, J. Y. – Mankiw, G. N.: Consumption, Inccome, and Interest Rates: Reinterpreting the Time Series Evidence, NBER Macroeconomics Annual 1989, Volume 4”, Cambridge: MIT Press. Ghosh, A. R.: International Capital Mobility Amongst the Major Industrialised Countries: Too Little or Too Much? The Economic Journal, Vol. 105, No. 428, January 1995, pp. 107-128. Huang, CH. – Lin, K. S.: Deficits, government expenditures, and tax smoothing in the United States: 1929-1988. Journal of Monetary Economics, Vol. 31, 1993, pp. 317-339. Nason, M. J. – Rogers, J. H.: „The Present-Value Model of the Current Account Has Been Rejected: Round Up the Usual Suspects“. Federal Reserve Bank of Atlanta Working Paper, WP 2003-7a, October 2003. Sheffrin, S. M. – Woo, W. T. (1990): „Testing an optimizing model of the current account via the consumption function“. Journal of International Money and Finance 9 (1990), pp. 220-233. Otto, G.: Testing a present-value model of the current account: Evidence from US and Canadian time series. Journal of International Money and Finance 11, 1992, pp. 414-430.

DETAILS ABOUT AUTHOR: VOJTKOVA, MARIA PHD STUDENT, UNIVERSITY OF ECONOMICS IN BRATISLAVA; FACULTY OF NATIONAL ECONOMY, DOLNOZEMSKA CESTA 1, 852 35 BRATISLAVA, SLOVAK REPUBLIC maria.vojtkova.nhf@euba.sk

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Appendix I Model 1a, alpha=2/3, gamma=0.1, r_star=G7 countries

Model 1b, alpha = 2/3, gamma=0.1, r_star=main trade partners

Model 2a, alpha = 0.5, gamma=0.1, r_star=G7 countries

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Model 2b, alpha = 0.5, gamma=0.1, r_star=main trade partners

Model 3a, alpha = 0.5, gamma=0.5, r_star=G7

Model 3b, alpha = 0.5, gamma=0.5, r_star=main trade partners

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Model 4a, alpha = 0.5, gamma=0.9, r_star=G7

Model 4b, alpha = 0.5, gamma=0.9, r_star=trade partners

Summary, SK vs. SL r_star=G7

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Summary, SK vs. SL r_star=trade partners â&#x20AC;Š

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ATTITUDES OF BUSINESS STUDENTS TOWARDS LEADERSHIP STYLES: CASE OF UNIVERSITY OF DUBROVNIK-CROATIA IVONA VRDOLJAK RAGUZ MATEA MATIC BOZENA MILJANIC

ABSTRACT An analysis of leadership styles of business students is very important because it suggests their future leadership styles in organization. Recognition of the specific components of students’ attitudes toward leadership styles offers sizable diagnostic power for the future business behaviour. Therefore, it is necessary to identify students’ attitudes towards leadership styles in order to assume their future leadership style in organization. The purpose of this paper is to identify attitudes towards leadership styles of business students from the University of Dubrovnik, Croatia. The empirical research is conducted in March and April 2012, on students at the University of Dubrovnik, Department of Economics and Business Economics. The research instrument was T-P Leadership Questionnaire. The analysis of survey research is based on univariate statistical analysis which shows that students prefer shared leadership styles. KEYWORDS: university students, leadership styles, attitudes towards leadership styles, T-P leadership questionnaire

1. INTRODUCTION The last 30 years of the 20th century are characterized by numerous changes in leadership style – both in developed countries and countries in transition. The changes are rapid, constant and unexpected, so today’s business world is more like “organized chaos”. Leadership in such conditions has become increasingly complex mainly due to the continuous restructuring which many companies frequently use to improve their business, then because of the growing global competition, demographic changes regarding employees and accelerated technology development. Therefore, within the framework of the theory of management, leadership and business performance measurement in the last twenty years a number of concepts and models has been developed which promise achieving an adequate level of flexibility required by companies to survive in the new business environment (Vrdoljak Raguž, 2009, pp. 1-2). In the late 20th century the overall paradigm in the approach to studying the phenomenon of successful leadership has changed significantly. Olsen (2006) show that the leadership characterized by a vertical structure of power in successful corporations trying to replace with leadership that indicates horizontal structure of power, at the same time facing followers. Economic disbalance in balance of payment can be deprived from different factors: broken relations between the production and expenditures, negative external shocks, poor macroeconomic policy, the need for accelerated economic growth, development and so on. This change also reflects the currently dominant perception of the nature of contemporary organizations as open, dynamic and complex systems. Exploring styles of leadership, researchers found the two extremes – democratic and autocratic leadership style – which are the main features of all leadership models. Despite that, every leadership style combines different factors that influence the management of a company such as concerning for people, concerning for the production, task structure, the relationship between subordinates and superiors, and positions of power in the company.

2. LEADERSHIP STYLES AND ANALYSIS OF INSTRUMENTS FOR LEADERSHIP STYLES IDENTIFICATION The leadership style can be defined as a specific form of managerial behavior in the work process which affects the working results of a particular organization. There are many theories about leadership styles, but all of them can be resumed to the way of using the authority, so they move between the two extreme cases: democratic and autocratic style. It is impossible to define which leadership style is the best because in practice there is always a combination of several leadership styles. There are three basic leadership styles developed in the theory: autocratic, democratic and laissezfaire (Hybels, Weaver, 2001, pp. 326). Autocratic leadership style is based on the centralization of power and authority concentrated in the hands of one person. Autocratic leader has unlimited authority and power in decision making, he controls his subordinates and is responsible for all decisions, orders both to groups and individuals and manages by applying penalties and rewards. Since there is a strict hierarchy existing, the communication takes place from the top to the bottom. Employees do not like this

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leadership style, primarily because it awakens fear within them. Although this leadership style does not sound desirable, there are situations where it works perfectly. For example, when there is only one person within a group which is an expert in a field significant to the company or at the beginning of business activity, but considering transformation into a democratic leadership style in the further existence. Autocratic style can be effective in smaller companies, but in the case of larger ones with many employees, the marginalization of middle management can jeopardize the success of the entire business activity (Brajdić, 1998., pp.95). The problem of autocratic leadership style dominance in decision making within Croatian companies can be solved by delegation of authority and responsibility in decision making at lower levels of management in the companies. This would not only democratize the process of decision making in the company, but it would also qualitatively improve it, taking into account that top management would deal only with decision-making on major issues, whereas all other matters would be left to lower levels of management (Sikavica, 1999., pp.33.). The democratic leadership style involves the participation of subordinates in decision making, which means that the leader delegates authority to all levels of management within the company, but retains ultimate responsibility. Communication is bilateral and it stimulates both groups and individuals. Democratic leader consults colleagues before making final decision and employees are allowed to express their own ideas which encourage creativity and innovation. Basically, the democratic leadership style implies fine organizational climate and relations between employees so that term ‘cooperative leader’ is often used for a democratic leader. Laissez-faire leader is also called “the leader of the free hand”. This type of leader usually avoids responsibility and uses power slightly or not at all, allowing subordinates to set goals. That way he only helps them in achieving these goals by gathering information from the external environment. Over the last ten years in the world, both in scientific circles and in practice, two basic leadership styles have been most mentioned: a modern leadership style, for which the common term is “feminine” leadership style and traditional, socalled “masculine” leadership style. These leadership styles are named by the behavior that is considered to be typically male or typically female, but that does not mean that the “female” style is characteristic for women, nor “male” only for men. “Female” leadership style is the popular term for the modern leadership style which is worldwide called the “emotional”, friendly, collegial, transformational or interactive, and also a democratic or participative leadership style. It is also characterized by “soft” approach to managing and motivating people (Pološki, 2003., pp.40.). On the other hand, “male” leadership style is also called the autocratic or transactional and it is absolute contrariety to the “feminine” one (Bahtijarević-Šiber, Sikavica, 2003., pp.184.). Manager who manages in the “men” leadership style could be described by words such as: determined, bold, aggressive, powerful, confident in his abilities and authoritarian-leaning. Each employee represents him as a potential competitor who aspires to his position and all power derives from a formal position in the organization focusing on winning and executing the task, so the interpersonal relationships within the company has been put into the background. As a true autocrat he motivates employees by punishing them because criticism represents his main mean of communication. He could sometimes boast his subordinate, but such situations are extremely rare. There are two key questions regarding leadership styles: which of the leadership styles would be ideal to implement in the exact company and, secondly, the way of choosing the optimal one. The answer should be sought in a way that the choice of the optimal leadership style may be made for each specific situation and circumstances. For this purpose it is necessary to analyze which leadership style to apply and to determine the criteria for success. The first step that a manager should take when choosing the optimal leadership style is to explore a style that is currently applied in the management of the company. This research can be carried out by different methods and techniques. The most commonly used method of research is a survey method using questionnaires adapted to subordinates or employees in the company who are required to help in determination of the leadership style by answering the questions. Research on leadership styles can be conducted using the criterion of efficiency: the data about impacts (quality, quantity), measures of behavior and attitudes of followers, fluctuation, absenteeism at work, appeals, the degree of dissatisfaction in the work and the criteria of effectiveness which can be expressed by the degree of realization of the goal, the production of products seeking a market, etc (Dujanić, 1993., pp.259.). The general model which could be applicable for any particular situation is simply impossible to set because each situation seeks a leadership style that is most effective exactly for itself. The same leadership style would not be equally effective in different industries nor in various business sectors. Practice has proved that the democratic leadership style is more effective in solving long-term and creative tasks, while the use of an autocratic leadership style is more successful in dealing with some everyday, routine tasks. Employees prefer the democratic leadership style which provides them more freedom and satisfaction, but they are also aware that in some situations only the command can contribute to the realization of the objective.

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Finally, it is important to emphasize that the leadership style is manager’s personal decision, although most managers try to adapt their leadership style to their own behavior and characteristics both of the industry and the company they run, but corresponding to the company employees. There are numerous instruments applied in previous studies to identify the leadership both in the theoretical analysis and in application to a large number of companies around the world. The best examples include: Theory X Theory Y Leadership Style Self-Test, TP Leadership Questionnaire, Leader Behavior Leadership Analysis Test (LBAII) Followership Style Test and Multifactor Leadership Questionnaire (MLQ), of which fundamental characteristics, uses, advantages and disadvantages are stressed in the paper, although there is only TP Leadership Questionnaire applied in the empirical part of it.

2.1. Theory X Theory Y Leadership Style Self-Test In 1960 McGregor formulated the autocratic-democratic leadership model based on the X and Y theory along with the thesis that the leadership style must be subordinated to the characteristics of subordinates. The questionnaire which determines the theory X and theory Y consists of 30 claims. 15 statements are used to identify the leadership style which fits the style of X or Y style, while the remaining 15 claims represent the response of subordinates on their leadership preference to style X or Y. The claims are assessed in grades 0-5, with 0 representing never, 1 rarely, 2 from time to time, 3 often, 4 mostly and 5 always. The sum of all 15 claims gives the final result and defines the leadership style. For the first 15 questions, the sum of 0-15 represents a solid application of theory X, 16-44 general theory X, 45-59 general theory Y and, finally, 60-75 a firm application of the theory Y. The same classification remains for the other 15 questions, but they express a preference to particular leadership theory. Explanation of the questionnaire analysis can be found in the fundamental features of the theory X and theory Y. Theory X represents the traditional approach to management which indicates human antipathy towards work, natural laziness, avoidance of the work, so that people should be forced to work, also controlled and threatened with penalties. People want security and they enjoy being led, because that way they avoid responsibility while, according to the theory Y, people will work well when in the right conditions for it and they will seek greater accountability and incentive to work.

2.2. T-P Leadership Questionnaire There is another survey questionnaire intended to describe a leader’s behavior and often applied when conducting tests on the basis of behavioral approach to leadership, and which aims to identify its own leadership style within groups, trends of commitment to tasks and people, and to establish a model in terms of three possible styles. The questionnaire is designed in a way that the respondent completes the statement in the way he would most likely react when in role of a workgroup leader. Proposed responses to the statements are: always, often, occasionally, rarely, never. The questionnaire offers 35 statements. After the respondent has completed a questionnaire, profile of a group leadership style is determined on the basis of valuation prescribed in advance. The questionnaire identifies three leadership styles: autocratic leadership (high productivity), democratic leadership (high morale and productivity) and laissez-faire leadership (high morale). Number of points obtained after the evaluation shall be entered on the T-line which represents caring for the execution of tasks and P-line which indicates concern for people. These two resulting points shall be connected by a line and the point where they intersect on the third line, which indicates democratic leadership, represents leadership style of the respondent. This tool is quite effective in practice, especially when one wants to identify the extent to which the leader is focused on tasks and, on the other hand, employees in the organization, so it is often used to identify the leadership style in companies around the world. Clear identification of the concern for individuals and tasks stands out as a major advantage, while the major disadvantage could be subjectivity of the respondents who value certain claims on the basis of their own judgment on themselves.

2.3. Leader Behavior Analysis Test (LBAII) Leadership Behavior Analysis (LBAII) is an instrument for determining a leader’s behavior flexibility and effectiveness which is widely used in companies. It represents a basic measure of current leadership approaches and recommendations for improving the leadership style in terms of becoming more effective as leaders. It is formed by Hersey and colleagues on the basis of Hersey and Blanchard theory. Styles that appear in their model are marked with labels S1, S2, S3 and S4. The aim of the questionnaire is to examine and interpret leader’s style and also to determine which style is dominant. Their model is based primarily on the leader’s behavior and presence of four leadership styles – between

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which choice depends on the subordinates and willingness of individuals to perform a certain task – is assumed within. This means that the style chosen has to coincide with the situation given. According to this theory, leadership styles are: ordering style (telling subordinates what to do) - S1, selling style (selling ideas to subordinates) - S2, participatory style (participating with subordinates) - S3, and delegation (delegating to subordinates) - S4. The Leader Behavior Analysis Test (LBAII) is based on these leadership styles, so that it determines the behavior of followers and leaders in certain situations. There are four leadership styles, derived from the LBAII survey, which have shown that this model maintains a positive direction because it supports situational variables which may be of equal or greater importance as the economic crisis, time pressures, or some unique characteristic of the nature of work, while a large number of models excludes the importance of situation in the leadership style of the individual.

2.4. Followership Style Test A leader together with leadership as a process has to have followers who follow him on a basis of a mutual interest and without whom no person could be a leader. As the main feature of followers there can be specified the growth and development of leaders, and vice versa. Over time, apart from establishing a dominant leadership style of a leader, there is an instrument developed for determining the dominant style of followers which is often cited in the literature, but also used in modern business practice. The questionnaire consists of 20 statements which are rated by grades from 0-6, with 0 indicating rare usage, 3 often, and 6 almost always. After completing the questionnaire followers add points for independent thinking and active participation. The style of followers is determined on the basis of these two categories and it is presented by a graph where the vertical axis represents the independent thinking and horizontal one active participation. After determining the scores for each category, there is a line to be drawn, which connects them and determines the style of followers. Kovar (2005) has clearly pointed out the advantages and disadvantages of all types of followers (pragmatic ones, separators, conformists, passive followers and executive ones). This questionnaire is often used in combination with some of the others which define the leadership style in order to clearly establish the differences between leadership styles and style of the followers and to examine the opinion of the followers about the leader and their way of running a business, all with the aim to set a balance between the dominant leadership and dominant followers styles.

2.5. MultiFactor Leadership Questionnaire (MLQ) The questionnaire which determines transformational leadership, so-called Multifactor Leadership Questionnaire (MLQ), was developed on the basis of a study which was conducted among 70 senior African leaders and also on the basis of literature with special attention to the processes of influence, charisma and dynamics of social exchange. 142 particles, defined through these sources, were given to the sample of 11 postgraduate students at Management and Business Academy and students of Social Sciences as part of their education in the field of leadership. Each student should put each statement in the category of “transformational, transactional, or do not know” with a prior acquaintance with the definitions of transformational and transactional leadership. They were also asked to write down their own definitions of terms: charisma, evaluation, and power. Some studies indicate the existence of auditors’ errors and influence of some factors on evaluators in the assessment of the leaders. Thus, the results of the study conducted by Ojode, Walumbwa and Kuchinke (1992, according to Bass, 1994) showed that there are certain correlations between the assessment of leadership style and some characteristics of the evaluators, while the study conducted by Rice, Instone and Adams (1984) gave the conclusion that the impact of gender, both leaders’ and assessors’, plays an important role in the assessment of the leader’s success and in the processes and methods of leadership. Since 1985 questionnaire has undergone numerous revisions which identified some additional scales. The final version of the questionnaire obtained nine scales of leadership behaviors which are measured by the questionnaire named Multifactor Leadership Questionnaire 5x (MLQ 5X). These scales are: behavioral charisma, attributed charisma, inspirational motivation, intellectual stimulation, individualized care, situational reward, active deviations management, passive deviations management and liberal style. The first five scales form the transformational leadership style, while the other three scales mentioned refer to transactional leadership style. Advantages of MLQ questionnaire could be the simplicity and understandability of the model to the general public, also the “Assessment through 360 degrees” which allows the employees’ perception at all levels, the effectiveness of team leaders, supervisors, managers and all other employees at all three levels of management, then the width of the questionnaire application in all enterprises regardless their activity and, finally, emphasis on the development of leaders personally and intellectually as well as their impact on followers. MLQ questionnaire disadvantage is mainly in its basis on the managers’ self-assessment whose objectivity may be challenged. This is why the so-called “Circular assessment” was formulated – in order to avoid the subjectivity of managers when completing a questionnaire.

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3. METHODOLOGY: RESEARCH DESIGN AND RESEARCH OBJECTIVES To examine the students’ attitudes toward leadership styles, T-P Leadership Questionnaire was used. This questionnaire is part of the empirical research served as the main instrument for collecting primary data. The empirical research is conducted in March and April 2012, on a sample of 111 students of economics and business economics course. The research instrument was consistent of 35 questions. In part of the research results only the statements with number 2, 6, 21, 25 that were statistical significant with variable gender, were analyzed. Other statements were not statistical significant and therefore they were excluded from further analysis. For the personal characteristics of students the demographic characteristics gender was selected: Surveys were completed anonymously during regular class time, with a response rate of 100 percent. Collected data were statistically analyzed using computer software packages for processing qualitative and quantitative data of social research-SPSS (Statistical Package for the Social Sciences). In this paper descriptive and inferential statistical analysis were used. Within the inferential statistical analysis, Spearman’s correlation coefficient used to measure the association between qualitative variables. Our primary objective was to better understand the students’ attitudes toward leadership style probably due they are the future leaders. However, they are students; we cannot be certain that their attitudes are durable and clear. Also, findings of this research cannot be generalized to non-student populations.

4. RESEARCH RESULTS Prior to the inferential statistical analysis of collected data it is important to present the descriptive statistics of selected statements. Further analysis of data in the following table shows cross-tabulation of five chosen statements encouraging overtime work against variable gender. The further processing of data is approached by using the descriptive statistic, cross-tabs. Table 1. Cross-Tab of gender against encouraging overtime work Gender

I would encourage overtime work Always

Frequently

Occasionally

Seldom

Never

Total

Male

10,7%

7,1%

57,1%

17,9%

7,1%

100%

Female

3,6%

7,2%

32,5%

37,3%

19,3%

100%

Source: Research findings (N=111)

The table 1 shows cross tabulation of the level of agreement with statement, “I would encourage overtime work“ by variable gender. It can be seen that the majority of the male students will occasionally encourage overtime work while women will seldom or never encourage overwork. Therefore, small share of overall analyzed students would provide incentives for extra hours work. The further processing of data is approached by using the Spearman’s correlation coefficient. Table 2 shows the results of correlation matrix between gender and encouraging overtime work by using Spearman’s correlation coefficient. Table 2. Correlation matrix between gender and “encourage overtime work” Spearman's rho

Gender

I would encourage overtime work ,247(**) ,001

** Correlation is significant at 0,01 * Correlation is significant at 0,05 Source: Research findings (N=111)

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Statistical analysis of data displayed in table 2 found statistically significant, moderately weak but positive relation between variable gender and “encourage overtime work”. It is interesting to emphasize that generally students are not willing to do overtime and especially female students. The reasons for such situation lie in social and economic environment which showed, on the example of their parents, that working overtime frequently is not adequately paid and appreciated. The following table shows cross tabulation of the level of agreement with statement, “I would assign group members to particular tasks“ by variable gender. Table 3. Cross-Tab of gender against assigning group members to particular tasks Gender

I would assign group members to particular tasks Always

Frequently

Occasionally

Seldom

Never

Total

Male

35,7%

31,4%

14,3%

100%

Female

13,3%

27,7%

18,1%

28,9%

12,0%

100%

Source: Research findings (N=111)

The cross-table analysis shows that majority student especially male students will always or frequently give particular tasks to their workers. In addition, it should be noted that answers of female students are equally distributed. Precisely, 41% females will be for assigning tasks to individuals as well as for not assigning tasks individually. The next table shows the correlation matrix among gender and assigning group members to particular tasks. Table 4 Correlation matrix between gender and “assign group members to particular tasks” Spearman's rho

Gender

I would assign group members to particular tasks ,169(*) ,013

** Correlation is significant at 0,01 * Correlation is significant at 0,05 Source: Research findings (N=111)

Values of Spearman’s correlation coefficient show statistically significant, weak but positive relation between gender and “assign group members to particular tasks”. The data from the table 4 suggest that students are willing to specify the tasks for their employee, especially male, for the purpose of better organization and efficiency of their enterprise and therefore creating them a better leader. The following table shows cross tabulation of the level of agreement with statement, “I would push for increased production“ by variable gender. Table 5. Cross-Tab of gender against increasing production Gender

I would push for increased production Always

Frequently

Occasionally

Seldom

Never

Total

Male

39,3%

35,7%

Female

22,9%

41,0%

25,0%

,0%

100%

27,7%

8,4%

,0%

100%

Source: Research findings (N=111)

The cross tabs indicated that majority of male (75%) and female (63.9%) will stimulate the workers to increase their production. Only 8,4% students (all females) will rarely encourage their workers to increase their production and consequently production of their company. Further analysis shows correlation matrix between gender and push for increased production. Table 6. Correlation matrix between gender and “push for increased production” Spearman's rho

Gender

I would push for increased production ,153(*) ,022

** Correlation is significant at 0,01 * Correlation is significant at 0,05 Source: Research findings (N=111)

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Statistical analysis presented in the table 6, show low but statistically significant, positive relationship between gender and “push for increased production”. From the data shown in table 6 it can be seen that overall students regardless of gender will strive to increase production. The possible explanation of that such situation can be the awareness that only increased production and therefore increased profit can lead to successful leader. The next table shows cross tabulation of the level of agreement with statement, “I would stress being ahead of competing groups push“ by variable gender. Table 7. Cross-Tab of gender against being ahead of competing groups Gender

I would stress being ahead of competing groups Always

Frequently

Occasionally

Seldom

Never

Total

Male

17,9%

25,0%

50,0%

7,1%

,0%

100%

Female

7,2%

38,6%

47,0%

6,0%

1,2%

100%

Source: Research findings (N=111)

From the data shown in table 7 it can be seen that a majority of students regardless of gender will occasionally be representative of their group or enterprise. However, 46% female students and 43% of male students will always or frequently be ahead of competing groups. Equal proportion of students regardless of gender will seldom or never represent their work group or company. The next table shows the correlation matrix between gender and “stress being ahead of competing groups”. Table 8. Correlation matrix between gender and “stress being ahead of competing groups” Spearman's rho

Gender

I would stress being ahead of competing groups ,208(**) ,003

** Correlation is significant at 0,01 * Correlation is significant at 0,05 Source: Research findings (N=111)

Values of Spearman’s correlation coefficient show a positive, statistically significant but moderately weak relation between gender and “stress being ahead of competing group”. The data from table shows that there is a relation between this two variable regardless of students gender. This situation suggests that students will occasionally, if necessary be representative of their works group. It can be observed that they are aware that good team work can lead to success and becoming a better leader.

5. CONCLUDING COMMENTS Aim of this paper is to identify possible students’ leadership style in relation to gender. Also, the purpose of this paper is to determine the way students’ would most likely react as a leader of workgroup. The obtained results show gender impact on five selected statements in T-P leadership questionnaire but the influence is very low. The reasons for such lower relation can be found in the deeper economic and social analysis that could explain including the other model of leadership styles through further research. Finally, it can be concluded that male students generally are concerned for tasks therefore they have stronger tendencies for autocratic leadership styles compared to female students. On the other hand, it is important to emphasize that the leadership style is personal decision, although most leader try to adapt their leadership style to their behavior and characteristics. Therefore, determining the students’ attitudes toward leadership we can only assume leadership future leaders. Results from this paper can be very useful for further research especially comparison research between different Universities, different countries and different cultures.

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

Bahtijarević-Šiber, F., Sikavica P. (2003.) Neki aspekti položaja i načina rukovođenja žena managera u hrvatskim poduzećima-empirijska analiza, Slobodno poduzetništvo, Teb Zagreb Brajdić, I. (1998.) Stilovi odlučivanja menadžmenta i razvoj turističke destinacije“, Hotelska kuća ‘98, Fakultet za turistički i hotelski menadžment, Opatija Dujanić, M. (1993.) Vođenje (leadership) u funkciji managementa“, Zbornik radova Ekonomskog fakulteta Rijeka, Rijeka, 11. Hybels, S., Weaver II, R. L., Communicating Effectively, sixth edition, McGraw Hill, Boston, Burr Ridge, Illinois, 2001. Kovar, K. L. (2005.) Leaders and Their Followers“, The Value of Exemplary Followers, Statmats Olsen, R.. K. (2006.) A change from leadership (vertical power structure) to leadingship (horizontal powerstructure) at work“, The theory and practice Pološki, N. (2003.) Ženski stil vođenja-empirijsko istraživanje primarnih nositelja u hrvatskim poduzećima“, Ekonomski pregled, 54 (1-2) Sikavica, P. (et.al.). (199.) Poslovno odlučivanje, Informator, Zagreb Vrdoljak Raguž, I (2009.) Međuovisnost stilova vodstva i uspješnosti poslovanja velikih hrvatskih poduzeća, doktorska disertacija, Ekonomski fakultet Split, Split

APPENDIX T-P Leadership Questionnaire Directions: The following items describe aspects of leadership behavior. Respond to each item according to the way you would most likely act if you were the leader of a work group. Circle whether you would most likely behave in the describe way: Always = A, Frequently = F, Occasionally = O, Seldom = S, or Never = N A F O S N 1. I would most likely act as the spokesperson of the group. A F O S N 2. I would encourage overtime work. A F O S N 3. I would allow members complete freedom in their work. A F O S N 4. I would encourage the use of uniform procedures. A F O S N 5. I would permit the members to use their own judgment in solving problems. A F O S N 6. I would stress being ahead of competing groups. A F O S N 7. I would speak as a representative of the group. A F O S N 8. I would needle members for greater effort. A F O S N 9. I would try out my ideas in the group. A F O S N 10. I would let the members do their work the way they think best. A F O S N 11. I would be working hard for a promotion. A F O S N 12. I would tolerate postponement and uncertainty. A F O S N 13. I would speak for the group if there were visitors present. A F O S N 14. I would keep the work moving at a rapid pace. A F O S N 15. I would turn the members loose on a job and let them go to it. A F O S N 16. I would settle conflicts when they occur in the group. A F O S N 17. I would get swamped by details. A F O S N 18. I would represent the group at outside meetings. A F O S N 19. I would be reluctant to allow the members any freedom of action. A F O S N 20. I would decide what should be done and how it should be done. A F O S N 21. I would push for increased production. A F O S N 22. I would let some members have authority, which I could keep. A F O S N 23. Things would usually turn out as I predicted. Always = A, Frequently = F, Occasionally = O, Seldom = S, or Never = N A F O S N 24. I would allow the group a high degree of initiative. A F O S N 25. I would assign group members to particular tasks. A F O S N 26. I would be willing to make changes. A F O S N 27. I would ask the members to work harder. A F O S N 28. I would trust the group members to exercise good judgment. A F O S N 29. I would schedule the work to be done. A F O S N 30. I would refuse to explain my actions. A F O S N 31. I would persuade others that my ideas are to their advantage. A F O S N 32. I would permit the group to set its own pace. A F O S N 33. I would urge the group to beat its previous record.

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A F O S N 34. I would act without consulting the group. A F O S N 35. I would ask that group members follow the standard rules and regulations. T _________________ P__________________

Directions for Scoring 1. Circle the numbers 8, 12, 17, 18, 19, 30, 34, and 35. 2. Write the number (1) in front of the circled number IF you responded Seldom or Never. 3. Also write a number (1) in front of item numbers that are NOT CIRCLED if you responded Always or Frequently for the uncircled numbers. 4. Circle the number (1’s) which you have written in front of the following questions: 3, 5, 8, 10, 15, 18, 19, 22, 24, 26, 28, 30, 32, 34, and 35. 5. Count the circled numbers (1’s). This is your score for “Concern for People.” Record the score (Total of #1’s) in the blank following the letter “P” at the end of the questionnaire. 6. Count the uncircled number (1’s). This is your score for “Task.” Record this number in the blank following the letter “T” at the end of the questionnaire

DETAILS ABOUT AUTHORS: OLIVERA BAIĆ IVONA VRDOLJAK RAGUZ, PH. D. ASSISTANT PROFESSOR UNIVERSITY OF DUBROVNIK, DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS DUBROVNIK, CROATIA ivona.vrdoljak@unidu.hr MATEA MATIC, PH. D. SENIOR ASSISTANT UNIVERSITY OF DUBROVNIK, DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS DUBROVNIK, CROATIA matea.matic@unidu.hr BOZENA MILJANIC STUDENT UNIVERSITY OF DUBROVNIK, DEPARTMENT OF ECONOMICS AND BUSINESS ECONOMICS DUBROVNIK, CROATIA bozena.miljanic@gmail.com

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