Page 1

2016 M-SPHERE Book of Papers


2016 M-SPHERE Book of Papers SELECTED PAPERS PRESENTED AT 5TH INTERNATIONAL M-SPHERE CONFERENCE FOR MULTIDISCIPLINARITY IN SCIENCE AND BUSINESS


2016 M-Sphere Book of Papers. All rights reserved. The authors are responsible for all of the content that has been published. Published in Croatia. No part of this journal 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. NOTE: 2016 M-Sphere Book of Papers present selected papers from 5th International M-Sphere Conference For Multidisciplinarity in Business and Science (Dubrovnik, 27th – 29th October 2016). Papers for publishing in 2016 M-Sphere Book of Papers are selected by Editors. 2016 M-Sphere Book of Papers is e-publication. Members of M-Sphere on request can freely download 2016 M-Sphere Book of Papers. 2016 M-Sphere Book of Papers is located at www.m-spere.com.hr

Editor in Chief: Tihomir Vranešević Editorial board: Vesna Babić Hodović, University of Sarajevo / Muris Čičić, University of Sarajevo / Felicite Fairer-Wessels, University of Pretoria / Rainer Hasenauer, Vienna University of Economics and Business / Dagmar Lesakova, University of Economics / Miroslav Mandić, University of Zagreb / A. Niyazi Özker, Balikesir University / Irena Pandža Bajs, University of Zagreb / Doris Peručić, University of Dubrovnik / Diana Plantić Tadić, Vern / Dušan Radonjič, University of Maribor / Claudia Seabra, Polytechnic Institute of Viseu / Otilija Sedlak, University of Novi Sad / Masaaki Takemura, Meiji University / Marija Tomašević Lišanin, University of Zagreb / Tihomir Vranešević, University of Zagreb Publisher: Accent Graphic design and layout: Trvrtko Zelić

M-SPHERE - ASSOCIATION FOR PROMOTION OF MULTIDISCIPLINARITY IN SCIENCE AND BUSINESS M-SFERA - UDRUGA ZA PROMICANJE MULTIDISCIPLINARNOSTI U ZNANOSTI I POSLOVANJU Makančeva 16 10000 ZAGREB, CROATIA OIB 92668726253 - MB: 2911566 IBAN HR69 2340 0091 1105 3947 4 Privredna banka Zagreb web: www.m-sphere.com.hr e-mail: info@m-sphere.com.hr

ISBN 978-953-7930-11-0


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

MISSION

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

OBJECTIVES

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

VISION

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

GUIDING PRINCIPLE

IDEAS WORTH TO SPREAD – RESULTS WORTH TO DISSEMENATE


TABLE OF CONTENTS BETTER UNDERSTANDING OF TOURIST BEHAVIOUR? KNOWLEDGE TRANSFERENCE FROM THE NATURAL SCIENCES ��9 ATİLA YÜKSEL TWO COUNTRIES – TWO APPROACHES: EXPLOITING CULTURAL HERITAGE RESOURCES FOR TOURISM. A COMPARATIVE ANALYSIS OF TOURISM PRODUCTS IN TURKEY AND AUSTRIA��������������������������������������������������������������������������13 IRFAN ARIKAN; GEORG CHRISTIAN STECKENBAUER TOURIST HEURISTICS AND BIASES�������������������������������������������������������������������������������������������������������������������������������������������23 EKREM TUFAN; BAHATTİN HAMARAT; NUR UNDEY; EROL DURAN OPERATIONAL RISK MANAGEMENT IN CREDIT INSTITUTIONS: AN OVERVIEW AND INSIGHT FROM PRACTICE. THE CASE OF CROATIA �������������������������������������������������������������������������������������������������������������������������������������������������������������30 IVANA DVORSKI LACKOVIĆ; VLADIMIR KOVŠCA; ZRINKA LACKOVIĆ VINCEK THE PRIORITIES OF TAX REFORMATION IN DEVELOPING COUNTRIES: TURKEY’S TAXATION MATTER THAT AIMED AT EU ���36 A. NIYAZI ÖZKER EQUILIBRIUM OF NATIONAL MORTGAGE SYSTEM - PROBLEMS AND OPPORTUNITIES FOR IMPROVEMENT AND MODELLING�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������43 JORDANKA JOVKOVA FINANCIAL MANAGEMENT IN THE CONTEXT OF FINANCIAL CONTROL AND AUDIT���������������������������������������������������������50 NORA ŠTANGOVÁ; AGNEŠA VÍGHOVÁ OPINION LEADERS - OPPORTUNITY OR THREAT FOR THE COMPANY?�������������������������������������������������������������������������������55 DRAŽEN MARIĆ; RUŽICA KOVAČ ŽNIDERŠIĆ; ALEKSANDAR GRUBOR APPLICATION OF MARKETING STRATEGY FOR CREATION OF COMPETITIVE OFFER FOR RIVER CRUISE�������������������������63 DRAGO RUŽIĆ; IRENA BOSNIĆ; MARIJA ZDUNIC BOROTA CUSTOMER PERCEPTION OF GUERILLA MARKETING �����������������������������������������������������������������������������������������������������������71 ANTONIJA MILAK; AMIR DOBRINIĆ TENSIONS IN CORPORATE CREATIVITY ����������������������������������������������������������������������������������������������������������������������������������79 CARSTEN DECKERT THE IMPACT OF EMOTIONAL BRANDING ON CONSUMERS IN CROATIAN NORTHERN REGION �������������������������������������87 KRISTIAN STANČIN; IVA GREGUREC ENTERPRISE RISK MANAGEMENT SOFTWARE – SUPPORT TO BUSINESS DECISION MAKING ���������������������������������������95 DRAŽENA GAŠPAR; IVICA ĆORIĆ ROUTING CHARACTER ENCODING FOR POSTAL SECTOR �������������������������������������������������������������������������������������������������105 JURAJ VACULÍK; ONDREJ MASLÁK IDENTITY AND BRANDING OF CITIES IN ASIA – INVESTIGATING ATTITUDES OF CROATIAN STUDENTS ���������������������111 LUKŠA LULIĆ; GORAN LUBURIĆ; FILIP SUBAŠIĆ FISCAL DECENTRALIZATION IN POLAND – LOCAL GOVERNMENT FINANCE IN THE PERIOD BETWEEN 1991 AND 2015 ���117 MARIA JASTRZĘBSKA THE FISCAL LIABILITIES AND THE QUANTITATIVE EFFECTS OF THE FINANCIAL VARIABLES IN OECD COUNTRIES �����125 A. NIYAZI ÖZKER


FISCAL RULES FOR SUB-NATIONAL GOVERNMENTS: THE POLISH EXPERIENCE���������������������������������������������������������������132 MARZANNA PONIATOWICZ CORRELATION BETWEEN THE TOOLS AND DEVELOPMENT PROCESS AND THE PRODUCTION PROCESS IN SMEs �����144 MATEJA KARNIČAR ŠENK; MATJAŽ ROBLEK CORRECTION OF PERCEPTION OF ECONOMIC GROWTH IN THE CONTEXT OF THE NEW ECONOMIC REALITY �����������152 DARIA ROZBORILOVÁ PUBLIC OPINION ON THE METHODS OF FINANCING ENVIRONMENTAL IMPACT STUDIES �������������������������������������������160 MERICA PLETIKOSIĆ PROGRAM „CROATIA 365“ IN A FUNCTION OF BETTER MARKET POSITIONING OF THE TOURIST DESTINATIONS DURING THE PRE-AND POST-SEASON ���������������������������������������������������������������������������������������������������������������������������������167 BILJANA LONČARIĆ #INSTAFOOD – A FIRST INVESTIGATION OF THE “SOCIAL EATER” ON INSTAGRAM �������������������������������������������������������176 CHRISTOPH WILLERS; SOPHIA SCHMIDT THE PERCEIVED BUSINESS VALUE OF SOCIAL MEDIA AT WORK ���������������������������������������������������������������������������������������185 LIANA RAZMERITA; KATHRIN KIRCHNER; PIA NIELSEN DETERMINANTS OF MOBILE INTERNET USAGE AND OPPORTUNITIES FOR M-MARKETING AMONG YOUTH IN THE REPUBLIC OF MACEDONIA ���������������������������������������������������������������������������������������������������������������������������������������194 KALINA TRENEVSKA BLAGOEVA; MARINA MIJOSKA CLOUD COMPUTING AND THE SPECIFICS OF CONCLUDING CLOUD CONTRACTS �����������������������������������������������������������202 ANNA ONDREJKOVÁ CONSUMER KNOWLEDGE ABOUT FOOD LABELLING IN SLOVAKIA ���������������������������������������������������������������������������������212 FERDINAND DAŇO; PAULÍNA KRNÁČOVÁ VALUE BASED MANAGEMENT WITH SOME PRACTICAL EXAMPLES IN SLOVENIAN INDUSTRIES ���������������������������������222 VLADIMIR BUKVIČ OPENNESS AND DESIGN PRACTICES IN ACADEMIC LIBRARIES ���������������������������������������������������������������������������������������234 ANDREA GASPARINI; ALMA LEORA CULÉN CROATIAN Y GENERATION WORKFORCE: BIG BUSINESS EXPECTATIONS �������������������������������������������������������������������������243 IVANA FOSIĆ; ANA TRUSIĆ; VEDRANA VDOVJAK UNDERSTANDING THE DEVELOPMENTAL PATH OF PERSONALIZED MEDICINE AS AN INSTITUTIONAL PHENOMENON ���251 MARIJA KAŠTELAN MRAK; NADA BODIROGA VUKOBRAT IDENTIFICATION AND USE OF INFORMATION AND COMMUNICATION TECHNOLOGY IN THE PROMOTION OF CROATIAN TOURISM �������������������������������������������������������������������������������������������������������������������������������������������������������������259 IVAN KELIĆ; ANTUN BILOŠ; MARIN PUCAR FACTS AND MYTHS IN CONNECTION WITH ADAM SMITH �����������������������������������������������������������������������������������������������266 RÓZSA BERTÓK; ZSÓFIA BÉCSI INDEX OF AUTHORS ���������������������������������������������������������������������������������������������������������������������������������������������������������������271


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

BETTER UNDERSTANDING OF TOURIST BEHAVIOUR? KNOWLEDGE TRANSFERENCE FROM THE NATURAL SCIENCES ATİLA YÜKSEL

ABSTRACT Social sciences constitute a broad field and the relevant concepts and theories that are being used in tourism studies, which are yet to be accepted as a branch of science, are largely being imported from such other disciplines as geography, philosophy, anthropology, sociology etc. Along with the collapse of positivism, social scientists, heavily committed to the verifiability criterion of meaning, thus far have created false expectations by claiming that clear answers and successful formulae may be produced at short notice. Eventually, this has resulted in a failure to recognize what really amounts to the intrinsic unpredictability of consumer behaviours as a field. Although elegant and powerful theories have yet to be developed to understand consumer behaviours better, merging foundations of natural sciences with social science is expected to result in achievement of a more explanatory power. If everything is biologically driven by chemistry, which in turn becomes physics, psychology could basically be the study of mental biology and the behavioural biology could be the driving forces behind it. Aimed at starting a discussion, this paper questions the obsession with mathematical precision prevalent in tourism studies inherited from other disciplines and discusses the possibility of making use of some laws in natural sciences to enhance understanding of tourist behaviours. The rising quest for certainty in tourism field has muddled progress, accrued in too much flawed and counterproductive knowledge. It is frequently put forth in natural sciences that fission and elements act contrary to the expectations and general beliefs; and it has been argued that an order exists within the disorder (abrupt deviation, different behaviour). While a growing criticism against the notion of “precision” and “predictability” exist in the natural sciences, running after for a rigid mathematical precision in social sciences sounds controversial. KEY WORDS: Social science, prediction, theory, measurement, tourist behaviour.

1. INTRODUCTION Certainty is doubtful. Whether human nature is determinist or not is still a question (issue) without a concrete answer. Thus, the paradigm coming from determinist approach is controversial. According to the classical logic of this paradigm, the hypothesis is to be accepted as true or false. However, confirming or disconfirming the hypothesis is not a sufficient result. A third answer adopted by very few investigators can be found (and once, this was stated by Plato long ago). That is, indeterminism (ambivalence). Disconformity or conformity of the hypothesis should not be regarded as sufficient, since, how accurate or inaccurate the result is also has to be understood. An imprecise accuracy can be: very little, little, quite or approximately accurate; on the other hand, an imprecise inaccuracy can be; very little, little, quite inaccurate or approximately inaccurate. In short, it is not true to claim of a precise 0 (precisely accurate) or an imprecise 1 (precisely inaccurate). In other words, there exists indeterminism as the third answer that has to be searched in each question or hypothesis. This indicates that a hypothesis can have multiple covert results. This result can even change in accordance with the interpreter, for instance 0.3 (output) can be interpreted as (1-0.3) 0.7. These sorts of assessments can stop readers from meeting studies of great value. The disconformity of a hypothesis does not mean its confirmation (or vice versa). This study attempts to shift the focus to natural sciences in an effort to better articulate the algorithm among many variables that drive human behaviour.

2. WHY BOTHER WITH PRECISION? In customer oriented studies similar mistakes are being pursued. That is, a mass of information is gathered from the individual, and estimates are made according to the averages gathered from this mass. It should be discussed how accurate it is. A large number of water molecules transform into frozen state when they encounter with 0 degree Celsius although two water molecules do not do the same. Thus, the obligation to deal with the whole in order to understand the behaviour of the individual emerges; since “wholeness” will redound individuals a feature that is absent in them when they are alone. If a human being acts differently when he is on his own than when he is in the society, then it is impossible to talk about a pervasive linear system in the studies of consumer behaviours. It should not be disregarded that the customer behaviours develop in the conditions out of balance (chaos), and there is the pusher against the puller, or the puller against the pusher. Such a “disregard” is the most significant obstacle against the improvement expected from the relevant branch of social sciences.

2016 - M SPHERE

B O O K O F PA P E R S

-

9


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2.1 Natural Sciences to Explain Human Behaviour It is controversial whether human behaviours are simpler than thought. Some fundamental rules in physics can also be valid for human behaviours too. Concentration of the new studies published in natural science journals tend to focus more on the explanation of human behaviours. The increasing number of natural scientist who are fed up with the atomic and electron behaviours, prove Lünberg right about his prediction that “the expected improvement in social sciences will be made by the scientists who have been educated on the areas out of the social sciences” (Lündberg, 1939). Before passing on the discussion, it is relevant to emphasize the methodological difference about improvement between natural sciences and social sciences. This is crucial and it represents the reason why the social scientists are on the process of just repeating. The scientists dealing with natural sciences generally study on the same question with or without the knowledge of one another (the subject that is investigated) (to exemplify, as Bohr and Einstein or as Plank and Rutherford who were interested in the atom and its particles and also were in touch (see also Roehner, 2007). The information gathered through similar/different reasoning (through experimentation/ observation) on the same very well-defined question in various parts of the world is a guide of the explanation of this field and of what the next step ought to be. On the other hand, in social sciences, the studies are made in a very broad field dispersedly. Expected progresses cannot be made as it is not known for sure whether the same results are deduced on the same subject even if the researchers are not aware of one another. What is generally concentrated on is a developed scale whether it can be applied or not. It embodies the same meaning and significance with the development of the same scale by people independent of each other in diverse places. Even unintentionally, a model developed independently of another, such as an applied behaviour model, can be regarded as “intentional failure to make use of the other studies” in the assessment phase and, the similarity (coincidence) in the reasoning and the results of the study are trivialised. Indeed, this is quite significant! Somebody may be telling in somewhere what you have thought (I do not mean plagiarism)... As for another difference is the process of explanation of the subject in natural sciences in which the studies begin with understanding (contemplating-reading-discussing over the subject in detail) and attempt to explain through the multiple trials of the comprehended subject and through its outputs. The trial of the hypothesis (assumption, theorem) during the comprehension phase of the subject through developing the hypothesis, not after the study ends and the results are seen! Just in the case of social sciences. As the follower of Comte and inspired by Plato, Lundeberg who is a social physicist aspiring to the application of deterministpositivist basis of the natural sciences on the social sciences, advocates the validity of the fundamental universal rules of physics in explaining and defining human being, the society he constitutes and his complex structure despite all his caprice and immediate responses.

2.2 Interaction Although the transformations of magnetic attraction, gas or liquid seem as independent subjects, they have indeed common grounds. Despite their different elements and combinations, the major rule of the behaviour of any combination (including human being) in nature is whether the system in which it exists has one or more dimensions or whether the elements in their systems are exposed to the effect of short or long term forces in their interaction. The factor that should not be ignored in terms of behaviour is “interaction”. That is to say, the interaction of the environmental factors (internal, external, temporal) with the individual. Just like atoms interacting under the influence of attraction and repulsive forces, there are similar forces of attraction and thrust among people (and with other factors). The attempt not to intrude into another’s personal area, driver’s following one another with a certain distance, our effort not to bump into the oncoming people while walking on the pavement can all be interpreted as the indications about the existence of a repulsive force among human beings. It may be possible to explain how people act in a crowded corridor with power of attraction. (Suggested by Mehrebian in environmental psychology, the highly used S(stimulus-O(organism)-R(response) is none other than this). If there is an obstacle on one side of a straight corridor, you can see that you walk by copying the walking route of the people ahead of you even if you do not see the obstacle and others following you also get round of the obstacle in the shape of an S under the influence of you even if they do not see the obstacle either. It is disputable whether the laws attributed to the particles of atoms of a matter can also be used even partially for the consumers or not. For instance, there is an overlapping aspect of the customer behaviours with the law of attraction which suggests that two substances in the universe attract each other in direct proportion, inversely proportional to the square of the distance between the centres of mass. If shopping centres, the consumers visiting these centres and their potential visitors are considered as substances, we see that the centre with many consumers are more preferred (curiosity) by the potential consumers than the centre with few consumers. This can be stemming from the herd mentality (of herding influence); however, as the mass grows (as the number of the existing visitors increase –not only the physical quantity of the centre but also the benefits it will provide should also be taken into consideration at that point), the force of attraction this mass uses on the other mass (potential customer) also grows. The distance inversely proportioned of attraction seems applicable if both physical and

10

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

unphysical concepts of distance are considered. As walking distance (transportation) increases, the attraction (attractiveness) will decrease or the attraction (attractiveness) will decrease in case of the increase of the monetary or non-monetary costs necessary to access to/be in the centre. Have you ever witnessed that any cash point line (except for the express cash points) lasts for a short time more than the others? Probably not. Here is the law of computational fluids: “if the density of fluids in two or more container combined to one another from the bottom parts are the same, the height of the fluids in the containers will be the same; if the densities of the fluids are different, then their heights will be different in inverse proportion of their densities”. It is possible to explain the different reactions of the consumers exposed to the message of marketing with the Hooke law which claims that “the shape, height or size of a substance can change against force”. Pascal principle which suggests that “the force applied to the any points on the unit surface of any liquid in a closed container, reaches with the same quantity to the each points on the inner surface of the container no matter how the shape of the container is” can be used to understand the behaviour of the word-of-mouth (bad news travels fast (to everywhere)). Toricelli Law, the Law of Conservation of Mass, the Multiple Proportion Law, Mendel Laws ...etc. can be used in behavioural sciences on condition of not looking for a mathematical certainty. The argument of the limitlessness of human needs should be handled again. According to the marginal utility theory, after drinking a glass of water, drinking the second glass of water with the same quantity will not provide the same benefit as the first one. After the second, third glass of water, gradually less amount of water will be drunk since the benefit need of the person has decreased while the functional and hedonic benefits remain the same (the product may not change but the person will have changed). Therefore, it is not true to define the customer addiction as merely a repetition (buying the same product over and over). Redeeming the same vacation for the second or the third time right after the vacation will not mean the maintenance of the functional and hedonic benefits provided by the first vacation. Since, the person at the end of the first vacation is not the same person with the one in the beginning of the first vacation (the conditions will not stay the same). There is cycle in the nature; however the cycle does not lead completely the same results. The result bears a resemblance to the previous one, yet still not the same (the bifurcation is one of the most prevailing laws in the nature; see also http://www. bilgikultur.net/index.php/doga-sistemindeki-karmasa/). Each repurchased (repeated) consumption will not avail the person after a while as long as it is not renewed, and if not treated properly, it will create “disloyalty” rather than customer loyalty. Thus, the entropy law as used in Psychics means that the same utility cannot be obtained by using the same energy without an additional energy (input). As the entropy of the consumption (experience) increases, the degree of one’s loyalty will decrease. Even if there exists enough time between the purchases, neither the customer is the same person nor the product bought is the same product in the second purchase. Nothing states the same under the sun or “ Panta rei, oudei menei” “everything flows and nothing abides” (Heraclitus). The law of inertia (inaction) in Physics states that “unless urged to change its state through the application of a force, every substance stays standstill and in steady motion... A substance that stays standstill or moves with a constant speed, preserves this stationary state and its constant speed unless applied another force”. Is the customer loyalty something different from the inertia (the inactive state) of the people? Changing frequently of different brands of the same product is indeed a product loyalty despite regarded as customer disloyalty; what is changed is not the product (consumption) but the firm offering the product. The customer may have product (consumption) loyalty, however, his/her loyalty to the firm is a highly controversial concept (probably it does not exist). There are a great number of people who do not want to attach to anything. Unless there is a much more attractive presentation, people will preserve their existing consumerist habits (in case the conditions do not change, those who often change brands will go on changing; on the other hand, those who use the same brand permanently will choose the same brand). How can the conditions change? And when? The answer can be found in the notions of the critical mass, the bifurcation or the simple evaporation. Critical mass determines the change in a substance. Just as in the substances, a behaviour may begin or transform when it reaches the critical mass (or the tension, a term favoured by the social sciences) (for instance, during a sports match, the level of the sound that a quiet person makes among a small number of spectators will be more different from the level of sound he will make if there exist much more spectators. The person whose neighbourhood starts to allow immigrants from the outside, will start to feel unrest after the number of the immigrants reaches to a certain level, and s/he will change his/her shopping places, walking trail or his/her residence)... As in the human behaviour, the change in the social behaviour can occur when it reached to the critical mass (such as the change of the hospitality that people at first show towards the incoming visitors in the areas when the number of the visitors reaches the critical mass... etc.). Interaction is a necessity for the change of the condition. Let us take the evaporation in nature. As for the evaporation occurred in the water and wet surfaces, the water vapour leaving the water surface changes according to the properties of the air (meteorological conditions), to the water and the environment (under the effect of diffusion, convection or the wind) on the unit area. The change in the water takes place as a result of the impact of an energy (539-597 calories of heat is required for the evaporation of 1 gram water). The diffusion event continues till the vapour pressure of air decreases below the saturated vapour pressure in parallel with the water temperature. The convection movement (vertical

2016 - M SPHERE

B O O K O F PA P E R S

-

11


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

motion) begins when water is warmer than the air. As for a simple metaphor, we can consider the water loss occurred on the water surface as the customer attrition. Whenever the presentations of the existing firms turn into less qualified/beneficial than the other firms and their products (or reach a certain level of saturation point), and when the positive opinions towards the other firm increase among the customers (when the water is warmer than the air), vertical transition will take place. This process can occur in the form of evaporation, transpiration or evapotranspiration. Temperature has a significant place in all natural events; temperature preparing for the interaction can be physical or social (see also ‘social temperature). As in the example of the imitation of a person by those who are passing by him/her on the street when s/he is staring up, the interaction (a type of feedback) is the initiator of behaviour, the complexity or the simplicity of the interaction will be able to define the behaviour. Feedback is not steady and it is a circle (you cannot see yourself as the same person in the mirror everyday)... There is the concept of iteration in Mathematics (it means recursion in Latin), and it is a special process. The output of the equation in each iteration process (your behaviour) will be the input of the same equation in the next iteration (http://members.tripod.com/MustafaCemal/Articles/KAOS/Kaos1.htm ). At that point, we are challenged by the notion of human free will claiming that human beings act in accordance with their free wills. Actually, free will is not as ‘free’ as it seems. The options of human being cannot be infinite; but limited (for instance: you cannot vote for your grandmother even if you want to) and the choice of any option will be affected by the attitudes and behaviours of the people nearby (positively or negatively). Even while ordering food, you may make choice considering what another eats. The tradition (positivist thinking) based on the claim that relations are linear, is far from predicting the outputs resulted from the nonlinear relations. The distance between the two closest points in a straight line is inclined. Understanding the behaviour with respect to mere a single cause is impossible, the presuppositions made are problematic.

CONCLUSION The notion that causes lead to results may be false. Cause can lead to another cause. Concerning the previous definition of feedback, causes are inputs and generate outputs. They do not bring finality unless the time stops. According to the butterfly theory (as its classical example), a butterfly fluttering its wings in China can cause a hurricane in America. However, this is not an end, but an “instant”. The hurricane in America and the following events as the new inputs (concerning the same example, the cause) can bring along the development of an exceptional flora (optimistic) or the extinction of the existing flora (pessimistic) in China. It is claimed that human being made from the mould of emotions is different from atom and elements as the subjects of science. On the contrary, it should not be disregarded that a human being can display behaviours similar to those of atom. (Even if it is controversial in our country), the drivers in the traffic define their behaviours under the effect of (the driver behaviours) the vehicle ahead, the oncoming, the vehicle or the vehicles behind and the other vehicles in the lanes. That is to say, the distance is measured and the reaction (behaviour) is shaped according to that (effect). But does atom act in a different way? Position, momentum, energy and time are the common grounds for human beings and other entities in nature, and what determines the behaviour can be these four elements. It is frequently put forth in natural sciences that fission and elements act contrary to the expectations and general beliefs; and argued that an order exists within the disorder (abrupt deviation, different behaviour). While discussing the reality of “precision” and “predictability” even in the natural sciences, it is problematic to search for mathematical precision in social sciences. Overreliance on the measurement and its result can cause investment failures. Measurement itself distorts the natural flow of the system. Since, it is an intervention, the results are artificial. The result obtained (output) is an instant output of the distorted system, but not a natural output of the system. It should be considered how a realistic measurement can be made. In order to search for the truth and live with it, the first task may be to understand the logic of fallacy. Simple rules can often be the basis of complex behaviours. Complexity is an undesirable state for human being. One chooses to simplify the complexities and linearize the twistedness when encountered.

LITERATURE 1. Roehner, B. M (2007) Driving Forces in Physical, Biological and Socioeconomic Phenomena: A Network Science Investigation of Social Bonds and Interactions) 2. Lündberg, G. (1939). Retrieved from http://physicsworld.com/cws/article/print/18278 ).

DETAILS ABOUT AUTHOR: ATILA YÜKSEL PROF. DR., DEAN FACULTY OF COMMUNICATION HEAD OF GASTRONOMY AND CULINARY ARTS PROGRAMME

12

-

B O O K O F PA P E R S

ADNAN MENDERES UNIVERSITY FACULTY OF COMMUNICATION, MERKEZ KAMPUS AYDIN. TURKEY atilayuksel@gmail.com

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

TWO COUNTRIES – TWO APPROACHES: EXPLOITING CULTURAL HERITAGE RESOURCES FOR TOURISM. A COMPARATIVE ANALYSIS OF TOURISM PRODUCTS IN TURKEY AND AUSTRIA IRFAN ARIKAN GEORG CHRISTIAN STECKENBAUER

ABSTRACT Turkey and Austria are examples for highly developed tourism destinations, where tourism providers use cultural heritage to develop modern tourism products in order to be successful on increasingly competitive international tourism markets. The use and exploitation of these resources follow on one hand international standards of tourism marketing (like “sustainability”); therefore, we find highly comparable internationalized products in these destinations (like hotel products, museums, spas etc.). On the other hand, development standards and processes strongly depend on local, regional and national cultures, which influence the way how people work, cooperate, think and create. Thus, cultural factors also influence the attitude towards cultural heritage and the way, how cultural heritage is used for the creation of tourism products. This leads to differences in the development of tourism products on several levels: 1. In the selection of cultural heritage for the product development process; 2. In the processes, how tourism products are created; 3. In the way, how providers and marketing organisations work with tourism products based on cultural heritage. The aim of this paper is to discover differences in these dimensions by analysing and comparing examples of tourism products in Turkey and Austria, both countries with a highly developed tourism industry and rich experience of stakeholders in tourism industry in the field of product development and marketing. The cases are analysed based on available secondary data (as several cases are scientifically described) and displayed in a comparative structure. Therefore the result will be a more precise picture about the influence of cultural differences on the use and exploitation of resources in the field of tourism that allows developing recommendations for the tourism industry that must be taken into consideration to assure cultural resources are treated in a sustainable and responsible way. KEY WORDS: Cultural Heritage, Tourism Products, Austria, Turkey.

1. INTRODUCTION Cultural tourism as that form of domestic and international tourism whose object is, among other aims, the discovery and enjoyment of historic monuments and sites focusing on the built (immovable and movable) cultural heritage, the cultural landscapes, of heritage tourist sites, to experience places and activities that represent the cultural history of the host communities (Europa Nostra Congress, 2006). Cultural tourism is one of the largest and fastest-growing global tourism markets. Culture and heritage are increasingly being used to promote destinations and enhance their competitiveness and attractiveness. Many destinations are now actively developing their tangible and intangible cultural heritage resources as a means of developing comparative advantages in an increasingly competitive tourism industry, and to create local distinctiveness in the face of globalization (OECD, 2010). According to the World Tourism Organization, cultural tourism is growing globally at a rate of 15 % per year, and at the same time 37 % of all trips nowadays contain a cultural component (WTO, 2009). In most cases of tourism development, the primary motivation is economic gain. The local communities can increase revenues from the tourism industry and with those to have the resources to safeguard their cultural and historical heritage more effectively. In the case of tangible heritage, this concern has been urgent, especially when the heritage sites are located in an area where their own state government lacks the resources to do so. The economic gains from tourism can also the benefit for the safeguarding of the intangible heritage, as well. Economic gain and outside interest from cultural heritage tourism may also help the people in the community to have a higher appreciation of their own culture (UNESCO EIIHCAP, 2007).

2016 - M SPHERE

B O O K O F PA P E R S

-

13


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

According to the Mexico declaration on International Cultural Tourism, the natural and cultural heritages constitute intellectual and material resources which can fully meet the needs of tourism development (ICOMOS, 1999). It is important to understand these resources as including not only cultural institutions, museums and historic monuments, but also all ancillary resources related with tourism services, such as historical and cultural monuments, historical and cultural centers, sites of important cultural events, temples, monasteries and other places of worship, prehistoric sites, etc. (Dolgorsüren, 2004). Turkey and Austria are examples for highly developed tourism destinations, where tourism providers use cultural heritage to develop modern tourism products in order to be successful on increasingly competitive international tourism markets. The use and exploitation of these resources follow on the one hand international standards of tourism marketing (like “sustainability”); therefore, we find highly comparable internationalized products in these destinations (like hotel products, museums, spas etc.). On the other hand, development standards and processes strongly depend on local, regional and national cultures, which influence the way how people work, cooperate, think and create. Thus, cultural factors also influence the attitude towards cultural heritage and the way, how cultural heritage is used for the creation of tourism products.

2. CULTURAL TOURISM AND CULTURAL HERITAGE According to Dolgorsüren cultural tourism has several competitive advantages in the world tourism market (Dolgorsüren, 2004): • Its ability to stimulate the interest of tourists in returning to the same destination, and to leave a profound impression, • The wide range of service resources offered to tourists and, • The possibility of serving tourists year-round. The cultural tourist is likely to stay relatively longer at his or her destination, and spend a greater amount of money there. Cultural tourism today has emerged as a leading growth sector in the tourism industry and these cultural tourists will inject more revenue per trip in the host community than other types of tourists. To maximize the revenue potential offered by the cultural tourism industry, it is necessary to give more technical attention to managerial guides on their components. It could be reached by better fit of tourism development or planning along with a better understanding of nature of culture and cultural tourism (Sung-chae, 2011). Well organized cultural tourism creates opportunities for creating a balance between tradition and innovation, supporting the protection, conservation and restoration of historical and cultural monuments, and finding a compromise between conservation and visitor needs: of course it is useless to think of cultural tourism where there is no national cultural heritage (Dolgorsüren, 2004). McKercher and Cros pointed out also that positive impacts by cultural tourism are (McKercher & Cros, 2002): • The revenue from tourists can be used to improve local infrastructure, • Reinvigoration of traditional culture can occur, • Cultural exchange with tourists can lead to a greater tolerance of cultural differences in multicultural society, • Opportunities can arise to enhance local economy, • The revenue from tourism can be reinvested in sustainable tourism planning. An over and uncoordinated development is especially likely to lead to deterioration of cultural heritage, tangible or intangible. Heritage tourism can be a vehicle for conservation and preservation of heritage; it can create interest and appreciation that may become a catalyst in its protection. Moreover, the interest of outsiders in heritage may also galvanize local residents to act to protect a place once they realize that the heritage has cultural or historical significance, or at least has proven it has economic value. The potential to reach wider audience with heritage information and to convey to them “messages” about heritage significance and conservation is another argument for heritage tourism (Douglas & Derrett, 2001). The standardization, globalization, destruction or prettification can be very difficult to reverse. Once high buildings or open spaces have been created, it proves very hard to revert to what was there before. To be healthy, a town must be welcoming for tourists but also for its inhabitants. If heritage is advertised and emphasized, one needs to be aware that it is the contents that animates it. It is urban life taken as a whole with its complexity, which makes the container live and evolve. Without this, heritage loses its meanings, residents leave and towns start losing their specific “feel” and tourists leave as well. On the other hand, when succeeded, there will be a more balanced and controlled tourism

14

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

development that is in harmony with natural and social environment. Tourism equinox encourages the development of cultural tourism to sustain local cultures, traditional lifestyles and industries, it seeks to utilize resources and the environment in a sustainable way, and it aims to generate the local economy by providing opportunities for employment and economic development. Also it demands an awareness of the needs of local people, respect and appreciation for culture and the environment and achieves a balance between development and conservation (Arikan & Ünsever, 2015). UNESCO, ICOMOS and ICOM have specifically framed instruments for heritage tourism. On one hand the tourism industry should look for the access to heritage resources to produce a tourist “product” and satisfy tourist customers. On the other hand, the objective of heritage management should be to protect and conserve the physical and intrinsic elements of heritage, to promote awareness and appreciation of heritage. Therefore, the objective of heritage management is to protect and conserve the physical and intrinsic elements of heritage, to promote awareness and appreciation of heritage, and to provide access to heritage for educational, aesthetic and cultural purposes (Douglas & Derrett, 2001). The focus of this paper is not on primary cultural heritage objects, but on resources which have a certain meaning for regional culture, regional history or regional heritage in Turkey and in Austria. As such resources, which are not primary ones, are normally not protected by legal regulations, some of them are conserved and used for tourism products, others not.

2.1 Cultural Heritage Resources for Tourism in Austria Examples for the use of cultural heritage for tourism products in Austria are manifold: cultural tourism is – besides winter and summer tourism in alpine regions - one of the “cornerstones” of Austria’s tourism landscape. Cultural and city tourism offers are therefore a core area of Austria’s official tourism strategy (Federal Ministry of Science, Research and Economy, 2015). In Austria nine places are defined as and protected under the guidelines of UNESCO World Heritage Sites (date of inscription in brackets) (UNESCO, 2015): • Historic Centre of the City of Salzburg (1996) • Palace and Gardens of Schönbrunn (1996) • Hallstatt-Dachstein / Salzkammergut Cultural Landscape (1997) • Semmering Railway (1998) • City of Graz – Historic Centre and Schloss Eggenberg (1999 and 2010) • Wachau Cultural Landscape (2000) • Historic Centre of Vienna (2001) • Fertö-Neusiedler See Cultural Landscape, jointly with Hungary (2001) • Prehistoric Pile Dwellings around the Alps (2011). Additionally, over 80 traditions are listed in the national inventory of intangible cultural heritage of the UNESCO. A complete list and explanation of these cultural practices can be found in the online database of the Austrian Commission for UNESCO (UNESCO 2015). The following – by no means exhaustive - examples should demonstrate the wide range of historical resources that can be used to establish cultural tourism in the case of Austria. HERITAGE RAILWAY: In 1893 the “SchafbergBahn”, steepest cog railway in Austria (26 % gradient), went into operation. Since then, six coal-fired steam locomotives have been in operation on the 5,85 km long route between the station at lake Wolfgang and the 1783 m high station at the summit of Schafberg – and still are (www.schafbergbahn.at). Remarkably, the SchafbergBahn had originally been built for touristic reasons: “Sommerfrische” (summer-resort) had become an import economic factor in the region in the last 19th century and in order to increase touristic traffic in the Wolfgangsee region, a solution was sought to bring visitors to the peak of Schafberg - with other means than inefficient sedan chairs. Fortunately, the historic value of the facilities was seen by the new operators, Salzburg AG (since 2006), and the SchafbergBahn has therefore been preserved as a main tourist attraction in the region. Although, the majority of trains is now operated by oil-fired steam and diesel locomotives, the six historic coal-fired steam locomotives are amongst the oldest ones that are still in operation (www.schafbergbahn.at). But also other railways with historical links are used to offer special experiences, like the “Majestic Imperator Train”, a rebuilt historical train that is a direct reference to the imperial train of the Austro-Hungarian Monarchy. This train, rebuilt on original plans (adapted with regards to modern security standards) refer to the 19th century, the “great age” of railroads, and could give visitors searching for traces of Austro-Hungarian Empire – and in particular Empress Elisabeth and Emperor Franz Josef I – an idea of luxurious travelling in these times. (www.majestic-train.com).

2016 - M SPHERE

B O O K O F PA P E R S

-

15


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

TRAUNSEESCHIFFFAHRT: Traunseeschifffahrt, founded in 1839, is the oldest commercial shipping line on inland waters in Austria. The founders John Andrews und Joseph John Ruston came from England. The Traunsee Region, located in Salzkammergut, in these days was an ascendant economic region because of salt trade and increasing tourism. These infrastructural measures also fostered the economic development of the region: hoteliers around the lake built landing stages to benefit from excursionists. The whole region economically benefitted from increasing demand for leisure activities in the 19th century due to the fact, that Bad Ischl, close to the Wolfgangsee Region, was the summer resort for the imperial court of Emperor Franz Josef I and his entourage. Today, Traunseeschifffahrt offers scheduled service and extra journeys around the lake. As oldest excursion boat paddle steamer “Gisela“ (built in 1871) is still in operation (www. traunseeschifffahrt.at). NASCHMARKT: “Naschmarkt” is Vienna’s most popular market and is 1.5 km long. A market has been operating in near this location since at least 1780s when it was a dairy farmer’s market for the trading of milk and other dairyproducts. Originally it was named “Kärntnertormarkt“ which was because of the bridge which was at that time called “Kärntnertorbrücke“, but is now “Elisabethbrücke“, later it spread along to reach Karlsplatz to the the area now beside the Vienna University of Technology. Later this market was the officially fruit and vegetable market for imported goods not arriving along the Donaukanal (“Danube Canal”).When the cities second river was roofed over more than 100 years ago it was on the long wide plaza created by this that the market which we now know was formed. It was not until 1905 that the current name became official with in 1910 more than 100 stalls being built of a standard design along the street. In the 1980s the market was modernized but many of the traditional buildings were kept. The character of Naschmarkt is changing from a traditional market to a large-scale outdoor food court (www.naschmarkt-vienna.com). MUSEUM OF MILITARY HISTORY: The Austrian Museum of Military History in Vienna is dedicated to the military history of the Austro-Hungarian Armed Forces and Navy. After World War I and the end of the Austrian-Hungarian Empire and the thereby connected loss of territories and direct access to the sea, it was not possible to show military history in original locations. The collections of the Museum of Military History show important epochs of Austrian military history, like The Thirty Years War, the wars against the Ottoman Empire and the Napoleonic Wars. A focus is also on World War I and the end of the Empire and Dictatorship in interwar years (http://www.hgm.at/en.html). A special collection is dedicated to the heritage of the Austrian war navy, which was an important part of the self-image of the empire. As a matter of fact only models of original battleships are presented, but due to the concept of the museum and its didactics, history is presented in a vivid way. VIENNESE COFFEEHOUSES: Possibly “Wiener Kaffeehaus” can be seen as a reference to the strong historical connections between the Austro-Hungarian and the Ottoman Empire: after the failed siege of Vienna in 1683 left behind sacks with coffee beans formed the basis for the first Austrian coffeehouses. But this is more a nice story to tell than historical truth. In fact, an Istanbul-born spy on the payroll of the Royal Court, Johannes Theodat, founded Vienna’s first Kaffeehaus in 1685 (www.austria.info). Since then, “Kaffeehaus” has become an important place of daily culture in Vienna, where you could be “not at home but still not at fresh air” – to quote Peter Altenberg, representative of the so-called “coffeehouse writers”, a group of poets and authors at the end of 19th / beginning 20th century, who made the coffeehouse their preferred living and work place. Just to name a few: Peter Altenberg, Arthur Schnitzler, Hugo von Hofmannsthal, Alfred Polgar, Karl Kraus, Stefan Zweig, Hermann Broch and Friedrich Torberg. But also for artists, scientists, engineers, politicians in these times, Kaffeehaus was an important place to see and to be seen, among them Egon Schiele, Gustav Klimt, Oskar Kokoschka, Adolf Loos, Theodor Herzl, Siegfried Marcus and even Leo Trotzki (https://de.wikipedia.org). It might also have played a role, that in traditional coffeehouse it was possible to stay for hours or a whole day consuming only a cup of coffee. Due to changing lifestyles and consumer behavior, Viennese coffeehouses since the 1950s have faced difficulties. And in the last years, more and more coffeehouse chains and international-style self-service coffee bars entered Vienna, bringing more competition to traditional providers. Nevertheless, traditional coffeehouse could survive and still contribute to typical Viennese lifestyle and tourism experience. Some of the most famous coffeehouses in Vienna are Café Frauenhuber, Café Sperl, Café Hawelka, Café Central, Café Landtmann and Café Prückl (www.austria. info). Each of them having a unique character and lots of stories to tell. Viennese “Kaffeehauskultur” since 2011 is on the UNESCO list of intangible cultural heritage (UNESCO, 2015). The importance of traditional Viennese coffeehouses for tourism in Vienna must not be underestimated. In December 2015 Strohschneider (2016) carried out a research on the case of “Café Sperl”. In course of this study, a questionnaire research amongst tourists visiting Café Sperl (opened in 1880 and still remaining in original style) was carried out (94 guests, 82 % staying more than 2 days, 2/3 from Europe) to analyze structure and motivation of tourists visiting coffeehouses and in particular their expectations towards a Viennese coffeehouse. Eight out of ten respondents expected an “old classical interior” and a “good quality of coffee”, two thirds demand for “wide variety of cakes and coffee” (Strohschneider, 2016, p. 28). The perceived value for Tourism was also analyzed: respondents were asked to scale their personal opinion on a scale between 1 (minimum) and 10 (maximum). Two thirds of the respondents (65 %) rated 8 or higher, the mean value is 8.1. (Strohschneider, 2016, p. 34). This indicates the paramount importance of traditional coffeehouses in the tourists’ perception of Viennese culture.

16

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2.2. Cultural Heritage Resources for Tourism in Turkey Similar as in Austria a wide range of different – tangible and intangible - resources are used to develop tourism offers and to design tourism experiences for national and international visitors. In transformation and re-use examples in Turkey, despite the efforts of preserving and commemorating the structure, industrial archaeology discipline and the concept of conservation of a building with its equipment as a complex is a quite new practice. In terms of competition between cities, transformation areas could contribute to the representation of the cities and their social environments (Kaya & Arikan, 2009). The examples in Turkey were chosen in view of similarity and comparability with the described cases for Austria. STEAM LOCOMOTIVES: A steam locomotive is a railway locomotive that produces its pulling power through a steam engine. The steam locomotives could be restored to running condition and should be maintained operational as a means of preserving railway heritage and as a tourist attraction. Today, most steam locomotives still in operation are for historical, educational and entertainment purposes. In some cases, like the Schafberg Bahn in Austria, they may even offer excursions to the public (www.custom-qr-codes.net/history-steam-locomotive.html). Several hundred rebuilt and preserved steam locomotives are still used on preserved volunteer-run heritage railway lines in the UK. On the Finnish state-owned rail network, the section between operating points of Olli and Porvoo is dedicated as a museum line. In Turkey however almost all commercial steam locomotives were put out of service and most of them were scrapped. Those steam locomotives are located at Alasehir, Soma and Yesilkavak stations (http://www.trainsofturkey.com; http:// www.modeltrenciler.com). Today some of them are preserved in Çamlık Museum, TCDD Ankara Steam Locomotives Museum and at very few railway stations for public viewing. Only a few steam locomotives are still operating in Turkey, namely the ones being used between Izmir and Selcuk and some tourist trains operated by tour operators. HERITAGE RAILWAY STATIONS: In Turkey, on the European and Asian side of the country, more than 20 heritage railway stations are not used anymore and also are not being protected. Railroad museums have also exhibits on the history of steam locomotives. The creation of a museum is often one the first consideration in redevelopment plans for older industrial sites and buildings (Jansen-Verbeke, 1999). Protection of heritage railway stations needs support of all stakeholders of a country. In Turkey, because of improvements in the technologies and high operational costs, the trains were rerouted and lots of heritage stations were closed. In Istanbul, Göztepe, Gebze and Tuzla stations are not used any more (http://kentvedemiryolu.com). These buildings can be opened to visit and visitors can follow the process without losing its industrial function which could be seen as a new heritage attraction. In Canada for example: The protection of heritage railway stations applies to all railway companies under the Canada Transportation Act. No railway company may in any way alter, demolish, or transfer ownership of a designated heritage railway station without the authorization of the Government of Canada. SMS GOEBEN: After the outbreak of World War I in 1914, Goeben and Breslau evaded British naval forces in the Mediterranean and reached Bosporus. The two ships were transferred to the Ottoman Empire, and Goeben became the flagship of the Ottoman Navy as Yavuz. By bombarding Russian facilities in the Black Sea, she brought Turkey into World War I on the German side. In 1936 she was officially renamed TCG Yavuz (“Ship of the Turkish Republic Yavuz”) and remained the flagship of the Turkish Navy until she was decommissioned in 1950. She was scrapped in 1973, after the West German government declined an invitation to buy her back from Turkey. She was the last surviving ship built by the Imperial German Navy, and the longest-serving dreadnought-type ship in any navy (www.denizhaber.com.tr). SHIP AKDENIZ: Akdeniz (“Mediterranean Sea”) was built for state-owned Turkish Maritime Lines. The 8,809 gross ton ship was completed by the Bremen-based yard of AG Weser in late 1955. The ship was saved from almost certain demolition by the Istanbul Technical University Maritime Facility for use as a training ship in 1997, initially spending most of her time at anchor. The ship, still in TML’s handsome livery, was in immaculate condition and completely unchanged from her most recent cruising configuration. Her public areas were magnificently original and ready to begin serving a new incarnation as classrooms and lecture halls and her cabin accommodation would be used as occasional student housing (www.maritimematters.com). PASSENGER FERRY 67 KALENDER: 67 Kalender is a passenger ferry which crossed Bosporus in Istanbul for 75 years. The ship was built in 1911 in Newcastle Hawtorn – Leslie port in UK. From 1978 to 1981 the ship was operated for touristic purposes by the travel agencies. In 1981 the ship was converted in a museum for Atatürk, but in 1986 she was scrapped. One of the engines is at the Rahmi Koc Museum in Istanbul (http://www.denizce.com). SILKMARKET KOZAHAN-BURSA: Situated between Bursa Grand Mosque and Orhan Mosque, Kozahan was built in 1491. It was a place where pod (silkworm cocoon) was sold. The silk fabrics obtained the cocoons played the first role to be a textile center of Bursa. Approximately, having lived around Bursa for a thousand year and called as ‘’Greengrocers’’, Turks have made the production of pod for centuries as a tradition. Being a masterpiece of Bursa, the heritage of Ottoman, the deep tissues of history, the taste of natural, the grace of silk and indispensable place for the photographer, Silk Market

2016 - M SPHERE

B O O K O F PA P E R S

-

17


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

(Koza Han in Turkish) is a two-store building located on the rectangle yard. There is found a şadirvan (water-tank with a fountain) with 95 rooms in the middle of that magnificent structure. Today the stores of Silk Bazaar contains high quality and cheap productions such as silk fabrics, silk scarfs, shawls, outfit materials, artistic goods, home textile products, underwear, silver and the other valuable souvenirs (www.kozahan.org). SIRKECI POST OFFICE: Construction of the Grand Post Office in Sirkeci began in 1905, and it opened in 1909 as the Post and Telegraph Ministry. The building was designed by Vedat Tek, a major architect of First Nationalist Architecture, who adapted forms of classical Ottoman architecture to the international rules of Beaux-Arts. Named the New Post Office in the 1930s the building hosted the Istanbul Radio between 1927-1936. From 1958 on, it was used solely for postal and telegraphy services. Now known as Grand Post Office the building remains the largest post office in Turkey and accommodates the PTT İstanbul Regional Head Directorate. The museum at the building informs visitors about the history of communication and telecommunication services in the country that officially began in 1840. (https://www. flickr.com/photos/saltonline/13080334314). MARKIZ PASTRY SHOP: It is a historical and elegant pastry shop, cafe and restaurant in Istiklal Street, Beyoglu. The name of the place is said to have originated with chocolates. The founder had desired to produce chocolates of good quality as good as the famous chocolate firm Marquise de Sevigne. It is the reason the place is named Marquise (Markiz). Marquise became a popular place for famous people. The elegant atmosphere, the quality of the products as well as the decoration helped to increase the popularity of the place. As in the cases in Vienna the importance of traditional coffeehouses for tourism must not be underestimated. Marquise was opened in 1940, and in 1970 the building where the pastry shop is, sold to a man who sells spare parts of automobiles. After many struggles the pastry shop was renovated in its original form in 1990 and reopened in 2003 again as a pastry shop (veryturkey.com/destination-info/.../markiz-pastanesi-cakeshop-istanbul). ŞIMDI, BIBLIO BAR – BEBEK: Özdemir Asaf, a Turkish famous poet used to run a pub in Bebek between the years of 19711980. The place is called and commonly known as Özdemir Asaf’s place. There were paintings, photographs and poems on the walls of the pub. Lines of poetry and some messages were signed on the tables. There were lots of books on the shelves, gramophone records and the gramophone itself. This place couldn’t have been preserved as it used to be, and today the place is a boutique. GALATA BRIDGE: The Galata Bridge was built in 1912 by the German firm M.A.N. The Historical Galata Bridge was burnt for an unknown reason and a large fired damaged half of the bridge before the construction of the new bridge. After the fire, construction of the new bridge was accelerated, and it was opened on the site of the old bridge in 1992. The old floating bridge, that was badly damaged in the fire is towed up the Golden Horn to make way for the current bridge (www.ibb.gov.tr/sites/ks/en-US/1-Places../bridges/GalataBridge). DOLMUŞ (SHARE TAXI): Dolmuş is the Turkish word for filled, stuffed or full, and refers to the shared taxis or minibuses that operate in Istanbul and elsewhere in Turkey. They are an easy, quick and useful means of transportation for small rides to and from destinations just outside the city center. They drive day and night on pre-determined routes, but without set stops. In some cities dolmuş are only allowed to board and disembark passengers at designated stops or at terminals; in less busy locations passengers may board anywhere along the route (www.istanbultrails.com/.../how-andwhere-to-take-a-dolmus-or-shared-taxi). For almost half a century, numerous American cars from the 1950s were in daily use in Turkey. By the 2000s, the time of the 1950s American car dolmuş had passed. The dolmuş business continues to thrive in Turkey, but classic American cars have disappeared from the queues. Dolmuş operators replaced them with new minibuses from Mercedes, Renault, and other manufacturers. Some dolmuş veteran American cars survive in Turkey, restored for use as nostalgia transport for hire. (http://www.curbsideclassic.com/blog/history/cc-global-historythe-dolmus-forgotten-long-lost-americans-overseas) SULUKULE: Sulukule (literally: “Water tower”) was a historic settlement within the area of Istanbul’s historic peninsula, adjacent to the western part of the city walls. The area has historically been occupied by Romani communities and was notable for its entertainment houses, where the Romani performed music and dance to the visitors from in and outside Istanbul till 1992. Today, the quartier of Sulukule with its centuries-old cultural heritage does not exist due to the urban transformation process developed by the Istanbul municipality. This redevelopment has taken place in what is part of the UNESCO World Heritage Site. An “urban regeneration” scheme has turfed thousands of Roma in the name of town planning out of their historic settlement (www.theguardian.com). Even if there exists enough time between the purchases, neither the customer is the same person nor the product bought is the same product in the second purchase. Nothing states the same under the sun or “ Panta rei, oudei menei” “everything flows and nothing abides” (Heraclitus). The law of inertia (inaction) in Physics states that “unless urged to change its state through the application of a force, every substance stays standstill and in steady motion... A substance that stays standstill or moves with a constant speed, preserves this stationary state and its constant speed unless applied

18

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

another force”. Is the customer loyalty something different from the inertia (the inactive state) of the people? Changing frequently of different brands of the same product is indeed a product loyalty despite regarded as customer disloyalty; what is changed is not the product (consumption) but the firm offering the product. The customer may have product (consumption) loyalty, however, his/her loyalty to the firm is a highly controversial concept (probably it does not exist). There are a great number of people who do not want to attach to anything. Unless there is a much more attractive presentation, people will preserve their existing consumerist habits (in case the conditions do not change, those who often change brands will go on changing; on the other hand, those who use the same brand permanently will choose the same brand). How can the conditions change? And when? The answer can be found in the notions of the critical mass, the bifurcation or the simple evaporation. Critical mass determines the change in a substance. Just as in the substances, a behaviour may begin or transform when it reaches the critical mass (or the tension, a term favoured by the social sciences) (for instance, during a sports match, the level of the sound that a quiet person makes among a small number of spectators will be more different from the level of sound he will make if there exist much more spectators. The person whose neighbourhood starts to allow immigrants from the outside, will start to feel unrest after the number of the immigrants reaches to a certain level, and s/he will change his/her shopping places, walking trail or his/her residence)... As in the human behaviour, the change in the social behaviour can occur when it reached to the critical mass (such as the change of the hospitality that people at first show towards the incoming visitors in the areas when the number of the visitors reaches the critical mass... etc.). Interaction is a necessity for the change of the condition. Let us take the evaporation in nature. As for the evaporation occurred in the water and wet surfaces, the water vapour leaving the water surface changes according to the properties of the air (meteorological conditions), to the water and the environment (under the effect of diffusion, convection or the wind) on the unit area. The change in the water takes place as a result of the impact of an energy (539-597 calories of heat is required for the evaporation of 1 gram water). The diffusion event continues till the vapour pressure of air decreases below the saturated vapour pressure in parallel with the water temperature. The convection movement (vertical motion) begins when water is warmer than the air. As for a simple metaphor, we can consider the water loss occurred on the water surface as the customer attrition. Whenever the presentations of the existing firms turn into less qualified/beneficial than the other firms and their products (or reach a certain level of saturation point), and when the positive opinions towards the other firm increase among the customers (when the water is warmer than the air), vertical transition will take place. This process can occur in the form of evaporation, transpiration or evapotranspiration. Temperature has a significant place in all natural events; temperature preparing for the interaction can be physical or social (see also ‘social temperature). As in the example of the imitation of a person by those who are passing by him/her on the street when s/he is staring up, the interaction (a type of feedback) is the initiator of behaviour, the complexity or the simplicity of the interaction will be able to define the behaviour. Feedback is not steady and it is a circle (you cannot see yourself as the same person in the mirror everyday)... There is the concept of iteration in Mathematics (it means recursion in Latin), and it is a special process. The output of the equation in each iteration process (your behaviour) will be the input of the same equation in the next iteration (http://members.tripod.com/MustafaCemal/Articles/KAOS/Kaos1.htm ). At that point, we are challenged by the notion of human free will claiming that human beings act in accordance with their free wills. Actually, free will is not as ‘free’ as it seems. The options of human being cannot be infinite; but limited (for instance: you cannot vote for your grandmother even if you want to) and the choice of any option will be affected by the attitudes and behaviours of the people nearby (positively or negatively). Even while ordering food, you may make choice considering what another eats. The tradition (positivist thinking) based on the claim that relations are linear, is far from predicting the outputs resulted from the nonlinear relations. The distance between the two closest points in a straight line is inclined. Understanding the behaviour with respect to mere a single cause is impossible, the presuppositions made are problematic.

2016 - M SPHERE

B O O K O F PA P E R S

-

19


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

CONCLUSION Current paper must be seen as a collection of cases to illustrate, how cultural heritage can be used. The aim is not a systematic collection or analysis but an exhibition of typical cases to remind the reader of the importance of handling cultural objects respectfully in order to use them as a basis for touristic offers. Respectful treatment implies obligations of different stakeholder groups – political authorities, tourism industry, tourist boards, universities, local authorities and local people – to support preservation and sustainable use of cultural heritage and historic artifacts. The authors therefore developed the following list of assumptions and propose these assumptions as a basis for further discussions: •

This study indicates that cultural and historical heritage has to be seen as an important resource for a country and that authorities who are responsible for tourism industry should care about it. The authorities who are responsible for tourism have to create an appropriate framework for the protection of heritage and for the development of cultural tourism. Tourism legislations should be “directive” rather than “compulsory”. They should also seek to find solutions to stimulate the specific projects that would protect the cultural heritage and enhance the cultural tourism product.

It is observed that municipalities in Turkey and in Austria seek to develop cultural tourism through projects, and the states also invest in the development and promotion of cultural tourism in both countries. Primary cultural sites are normally protected by national laws and international agreements (like UNESCO guidelines) and therefore conserved for use as major tourism products.

On the other hand, when it comes to heritage and cultural tourism, there could be lack of sense among citizens of a country, like in Turkey that all of them are somehow part of the tourism industry. Common sense should prevail over policy, lessons learned from mistakes of other destinations should direct destination development. By encouraging an appreciation of the cultural significance of cultural heritage public support for the ongoing preservation and protection of the cultural resources might be won (Douglas & Derrett, 2001).

All stakeholders of a region involved within cultural tourism should seek to improve the cooperation among themselves and with the foreign tourism stakeholders. It could be one of the key solutions to overcome the current obstacles and the challenges in cultural heritage protection. Activities necessary for strategic planning should be carried out, and the cooperation of public and private sectors should be ensured after determining the applicability of tourism equinox approach.

By suggesting industrial heritage tourism programs, a city can offer a unique experience to visitors. Creating industrial heritage tourism programs may contribute not only to conserving the industrial structures and heritage but also provide benefit to the region’s economy. A significant proportion of revenue earned from tourism should be applied for the benefit of conservation of historical heritage (www.icomos.org). Most importantly tourism should not be conceptualized as a finite stream of revenue where profit maximization is the logical course of action, but as a renewable resource that requires care and attention in its utilization.

Heritage tourism may also encourage the development of cross-cultural relationships and exchanges of knowledge; understanding one’s past and the past of others can be a pathway to understanding and reconciliation (Douglas & Derrett, 2001). The importance of visitor attractions in the development of tourism destinations is widely acknowledged. Taking into account the role of heritage assets in a growing tourism destination, it is inevitable that some new policies should be applied for sustaining these values. Based on an understanding that is distinct from mass tourism, a new tourism destination approach where the cultural and historical heritage is utilized needs to be created through investment, promotion and marketing that is focused on sustainability.

Communities with an interest in particular heritage may come to feel dispossessed and alienated from it because of a sense that it has been appropriated by strangers, by management bodies and/or industry operators. Again, site-specific techniques and management strategies are called for that offer a range of approaches, depending on the particular heritage involved (Douglas & Derrett, 2001). Good management should define the level of acceptable tourism development and provide controls to maintain that level (www.icomos.org). Whether cultural heritage site becomes an element of the regional tourism product mix depends on a number of factors, including the political need for regional cultural identification and the economic need to develop new activities and products. The economic potential of heritage tourism, in particular is strong incentive to examine the different tourism options available.

Conservation covers conservation of tangible and intangible heritage, authenticity of presentation and interpretation, observation of protocols and heritage regulations, conventions and so on, and recognition of the cultural and economic rights of the community. Community participation, presentation and interpretation, heritage and tourism partnerships and identity, image and profile are other principles that are needed for the protection and reuse of

20

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

cultural resources (Douglas & Derrett, 2001). The awareness of locals and visitors should be raised in order to prevent damage to the historical and cultural environment. Local population should be encouraged to participate in the new tourism strategy. •

Intensive development of tourism results in the annihilation of the attraction of the districts and ever-increasing environmental deterioration. That is why unplanned development and the practices which give harm to the natural and cultural texture of the touristic locations should not be allowed. The carrying capacity of the region should be determined under sustainable principles. The main point is to make these studies in line with the culture of the district and not to allow the deterioration of the local architectural texture, local culture and natural environment. Tourism management plans are employed with the aim of this kind of protection and development around the world. Therefore, the support of the communities could minimize the exploitation of resources in the field of tourism and cultural resources could be treated in a sustainable and responsible way.

Foremost the cooperation stands for intercultural encounters to convey a feeling of solidarity, teach history, culture and traditions, to encourage awareness of identity, mutual respect and communication. The outstanding universal value is significant for the global future but also present generations. It should not only be focused on how to protect the heritage from present threats and preserve it for the future, but on how to present it to present generations to enable cross-cultural dialogues in a world where such communications more and more often fail. Therefore it should be a fundamental principle of any tourist development plan that both conservation, in its widest sense, and tourism benefit from it (www.icomos.org). The best way to start to reconstruction of tourism is to prepare a participative Tourism Development Plan.

The goals of pleasing the visitors and making them want to come again will be accomplished within the framework visitor management objectives. Part of the managers’ task is to make the visit enjoyable and interesting for everyone so that the political support for conservation is increased, foreign currency is gained, jobs are created, and income is obtained. Comprehensive tourist development plans are essential as the pre-condition for developing any tourist potential (www.icomos.org). Local governments, non-governmental organizations, universities and professional organizations should cooperate and local authorities should be informed very clearly that it is not possible to achieve sustainable tourism development without respecting natural and cultural environment.

Cultural tourism today has emerged as a leading growth sector in the tourism industry and these cultural tourists will inject more revenue per trip in the host community than other types of tourists. The success of the communities depend on effective destination management and marketing involving the principles of tourism. To maximize the revenue potential offered by the cultural tourism industry, it is necessary to give more technical attention to managerial guides on their components. It could be reached by better fit of tourism development or planning along with a better understanding of nature of cultural heritage and cultural tourism.

REFERENCES 1. Arikan, I. & Kaya, E. (2009) The Bomonti Beer Factory: An Example of the Industrial Heritage Transformation Process, Cities As Creative Spaces For Cultural Tourism, Bogazici University, Istanbul, Turkey. 2. Arikan, I. & Unsever, I. (2015) The Tratment is Within the Disease: Tourism Paradox, Tourism Equinox and Tourism Detox. International Tourism and Hospitality Management Conference, (Best Paper Award), Sarajevo, Bosnia and Herzegovina. 3. Dolgorsüren, J. (2004) Cultural Tourism Survey Report. International Conference: Building Partnerships in Cultural Tourism, Ulaanbaatar, Mongolia. pp. 9-12. 4. Douglas, N. & Derrett, R. (2001) Special Interest Tourism. John Wiley & Sons, Australia. pp. 154-158. 5. Europa Nostra Congress (2006) http://www.europanostra.org/UPLOADS/ FILS/ Malta_declaration_Cultural_Tourism. pdf. 6. Federal Ministry of Science, Research and Economy (2015) Kulturtourismus. http://www.bmwfw.gv.at/Tourismus/ TourismuspolitischeAktivitaeten/Seiten/Kulturtourismus.aspx 7. ICOMOS (1999) www.icomos.org/tourism/charter.html. 8. Jansen-Verbeke, M. (1999) Industrial Heritage: A Nexus for Sustainable Tourism Development, Tourism Geographies, 1 (1), pp. 70-85. 9. McKercher, B. & Cros, H. (2002) Cultural Tourism: The Partnership between Tourism and Cultural Heritage Management. Haworth Press. 10. OECD (2010) Culture and Tourism, http://www.oecd.org/document/html. 11. Sung-chae, J. (2011) Cultural Tourism: Past and Future, 12 th International Joint World Cultural Tourism Conference, Istanbul, ISBN: 978-89922250-05-4, p. 224. 12. Strohschneider, C. (2016) Cultural Heritage in Austrian Tourism: a Case Study on the Café Sperl. IMC University of Applied Sciences Krems. 13. UNESCO. Austrian Commission for UNESCO (2015) http://www.unesco.at/ kultur/oe_welterbe_eng.htm. 14. UNESCO EIIHCAP (2007) Regional Meeting, Safeguarding Intangible Heritage and Sustainable Cultural Tourism: Opportunities and Challenges. Hué, Vietnam, p. 224. 15. WTO (2009) https://www.wto.org/english/res_e/booksp_e/anrep_e/anrep09_e.pdf.

2016 - M SPHERE

B O O K O F PA P E R S

-

21


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

WEBSITES: www.austria.info www.curbsideclassic.com/blog/history/cc-global-history-the-dolmus-forgotten-long-lost-americans-overseas www.custom-qr-codes.net/history-steam-locomotive.html www.denizce.com www.flickr.com/photos/saltonline/13080334314 www.hgm.at/en.html www.ibb.gov.tr/sites/ks/en-US/1- Places../bridges/GalataBridge www.icomos.org/publications/93sy_tou7.pdf www.istanbultrails.com/.../how-and-where-to-take-a-dolmus-or- shared-taxi www.kentvedemiryolu.com www.kozahan.org www.majestic-train.com www.maritimematters.com www.modeltrenciler.com www.naschmarkt-vienna.com www.schafbergbahn.at www.theguaridan.com www.trainsofturkey.com www.traunseeschifffahrt.at www.wikipedia.org www.veryturkey.com/destination-info/.../markiz-pastanesi-cake-shop-Istanbul

DETAILS ABOUT AUTHORS: IRFAN ARIKAN PROFESSOR Dr. IMC FH KREMS UNIVERSITY OF APPLIED SCIENCES DEPARTMENT BUSINESS KREMS AUSTRIA irfan.arikan@fh-krems.ac.at GEORG CHRISTIAN STECKENBAUER PROFESSOR (FH) Dr. IMC FH KREMS UNIVERSITY OF APPLIED SCIENCES DEPARTMENT BUSINESS KREMS AUSTRIA georg.steckenbauer@fh-krems.ac.at

22

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

TOURIST HEURISTICS AND BIASES EKREM TUFAN BAHATTİN HAMARAT NUR UNDEY EROL DURAN

ABSTRACT Human is not always rational which Traditional Economics contradicts. Tourists’ judgments under uncertainty often rest on a limited number of simplifying heuristics rather than deeply analysing. This paper investigates how some heuristics and biases effective on tourist decisions who visited Turkey. It has been applied a questionnaire. KEY WORDS: Behavioural Economics, Heuristics, Biases, Turkish Tourism Sector.

1. INTRODUCTION From birth to die human life passes between preferences. We have to decide many things for daily life. We tend to believe that these decisions are correct. Decision process is not simple and differs from person to person but there are common truths about it. How to make our decisions? Human brain is very lazy and always takes easy and basic ways when has to decide something. Kahneman (2011, p.35) explains it law of least effort. The law asserts that if there are several ways of achieving the same goal, people will eventually gravitate to the least demanding course of action. But we face many different problems and situations which we have to take decision and not all of them are basic and easy. For example, go from home to work is an easy decision but about the decision of which car is the best alternative to buy? Kahneman (2011, p.20-21) explains it as System 1 and System 2 where System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control. For example, sometimes we walk through home with thinking something and suddenly we notice that we have come to home. During travel we do not think which way should we take but our brain takes us to home safely. Because System 1 works for us. System 1 also apples cognitive short-cuts (rule of thumbs) when make decisions. In Behavioural Finance and Behavioural Economic literature it is being called as Heuristics. The technical definition of heuristic is a simple procedure that helps find adequate, though often imperfect, answers to difficult questions. The word comes from the same root as eureka Heuristics create biases. Biases are systematic errors in decision making and cognitive biases stem from the reliance on judgmental heuristics (Kahneman, 2011, p.98). Even many biases have been introduced by behavioural finance and behavioural economics researchers; we can write here some basics such as anchoring, availability, overconfidence, sunk cost, mental accounting, framing, overreaction, optimism, hindsight and regret biases. Why these biases are important for economists and finance experts? Traditional economics postulates that human is rational and if you give some choices, she/he chose the best alternative for her/him. If so why we have been faced bubbles in economics all around the world such as mortgage crisis in U.S.? Irrationality and biases are close friends and go hand in hand many times but not all time. Some heuristics such as representativeness and availability are retained, even though they occasionally lead to error in prediction or estimation (Kahneman, ibid, p.430).

2. DEFINITION OF SOME BIASES a. Representativeness: Because people like basic and easy ways of thinking in decision process they tend to believe small examples could represent big events. “..Representativeness-according to which the subjective probability of an event, or a sample, is determined by the degree to which it: (i) is similar in essential characteristics to its parent population; and (ii) reflects the salient features of the process by which it is generated. This heuristic is explicated in a series of empirical examples demonstrating predictable and systematic errors in the evaluation of uncertain events. In particular, since sample size does not represent any property of the population, it is expected to have little or no effect on judgment of likelihood…” (Kahneman and Tversky, 1972, p.1). This is also related with gambler’s fallacy bias.

2016 - M SPHERE

B O O K O F PA P E R S

-

23


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

b. Anchoring: In many situations, people make estimates by starting from an initial value that is adjusted to yield the final answer. Different starting points yield different estimates, which are biased toward the initial values. We call this phenomenon anchoring (Kahneman et all., 2001, p.14). Probably, the most used area of anchoring is in marketing sector. We usually see psychological prices on the shop windows of the companies. Ariely (2010, p.46) says; “…the standard economic framework assumes that the forces of supply and demand are independent, the type of anchoring manipulations we have shown here suggest that they are, in fact, dependent. In the real world, anchoring comes from manufacturer’s suggested retail prices (MSRPs), advertised prices, promotions, product introductions, etc.—all of which are supplyside variables. It seems then that instead of consumers’ willingness to pay influencing market prices, the causality is somewhat reversed and it is market prices themselves that influence consumers’ willingness to pay”… c. Lost Aversion: Kahneman gives examples in his article namely Prospect Theory (Kahneman 1979, pp.268269) about lost aversion. He reports that when people come up against to make decisions under risky conditions, they usually risk averse when they in profit and reverse when they in loss. On the other hand, “…the degree of loss aversion depends on prior gains and losses: A loss that comes after prior gains is less painful than usual, because it is cushioned by those earlier gains. On the other hand, a loss that comes after other losses is more painful than usual: After being burned by the first loss, people become more sensitive to additional setbacks…” (Barberis and Huang, 2001, p.1248) d. Overconfidence: People usually tend to overvalue their ability and skills. When take decisions overreliance by them. It causes wrong or irrational decisions. It has the consequence to influence the people to tend to overestimate the probability of success and underestimate the likelihood of they failed (Cornicello, 2004, p.30) e. Framing Effect: It is possible to change individuals’ decisions to present same choices differently. For example (Hammond, Ralph, Raiffa and Howard, 1999, p.200): “…A young priest asked his bishop, “May I smoke while praying?” The answer was an emphatic “No!” Later, encountering an older priest puffing on a cigarette while praying, the younger priest scolded, “You shouldn’t be smoking while praying! I asked the bishop, and he said I couldn’t.” “That’s strange,” the older priest replied. “I asked the bishop if I could pray while I’m smoking, and he told me that it was okay to pray at any time…” A frame can be defined as the form used to describe a decision problem (Cornicello, 2004, p.27-28). The paper organized as follows: The importance of the subject and literature review is given at the first part. Data description and methodology is given second part where empirical results and summary is given at last part.

3. DATA AND METHODOLOGY In this research we have investigated framing effect, overconfidence effect, lost aversion and anchoring biases on tourism sector by applying a questionnaire. The questionnaire consists of ten questions which have been inspired from Daniel Kahneman’s book namely Thinking, Fast and Slow and Dan Airely’s book namely Predictably Irrational. Except from lost aversion all biases parts have two questions in questionnaire while lost aversion bias has four questions. Our hypotheses are: H0: There is no framing effect at pricing in tourism sector H1: Tourists are not overconfidence who estimate Turkey’s economic ranking as high in the world H2: People take more risk when they face loss situation H3: New information does not change peoples’ mind H4: Age does not related with biases H5: Gender does not related with biases The answers count was 72 and have collected both web based and face to face methods. Because Turkey’s many troubles

24

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

such as terrorist attacks, Syrian war etc. we could not collected more questionnaires. Consequently, the results cannot be generalized. Even we have limited results because of limited participation; we created cross tables and have not applied statistics. The results should be accepted as pre-test results. We will extent the data and apply statistics when we transform it as an article in the future.

4. EMPRICAL RESULTS Because of special conditions in politics issues of Turkey, we could not reach enough tourists to apply this questionnaire. So we got only 72 respondents which 30 of them are women and 42 are men. Average age is 35 and 61% of the respondents are less than 35 years old. Table 1. Framing effect at expecting pricing in tourism sector Question 1 / Question 2

25-90 Euro

100 Euro

105-140 Euro

150 Euro

160-200 Euro

200> Euro

Total

Mean

YES

8 (17.3%)

11 (23.9%)

11 (23.9%)

5 (10.8%)

8 (17.3%)

3 (6.5%)

46 (100%)

123.25

NO

3 (13.04%)

9 (39.13%)

4 (17.3%)

0

5 (21.7%)

1 (4.3%)

23 (100%)

Table 1 shows answers of the Question 1 and 2 which are shown below.

Question 1: Do you think last year one night room price was 150 Euro per person for a five stars hotel in Taksim Square/ Istanbul? Question 2: How much could be a five star hotel room price for one person in Taksim-Istanbul now? Main aim of the questions was to search framing effect at pricing in tourism sector. We have given 150 Euro price at the first question then asked respondents price expectations. Because some respondents replied second question as two expectations such as 150-200 Euros we got arithmetic average. We expect that mean of estimation of hotel room price will be close to given price (150 Euro). Respondents have taken consider terrorist attacks in Istanbul and estimated lower price than given price. Three quarter of yes and no responds’ price expectations were below 150 Euros. Yes responds’ were accumulated between 100 Euro and 150 Euro (58.6%) while no responds’ were accumulated in same region (56.43%). If we accept that 20% below (120 Euro) and upper (180 Euro) 150 Euro coherent with the theory which says people stick on given reference point, yes respondents’ accumulate (42.55%) while no respondents’ accumulate (33.3%). Total responds mean was calculated as 123 Euro. We have failed to accept H0 hypothesis. We have also searched overconfidence bias with asking two questions below: Question 1: Turkey which ranks in the world economy may sort? Please write here: Question 2: What percentage could be correct of your answer? With these questions we try to measure overconfidence bias. In reality, Turkey is ranking as 19th the biggest economy in the world. We expect that people who estimated higher ranks of Turkish economy which means lower than 19 should have more overconfidence while others not. Estimations accumulated at 10th (6 responds), 20th (6 responds), 30th (5 responds), and 17th (4 responds). Respondents who say Turkey is the 10th biggest economy have high overconfidence (4 responds out of 6 have high overconfidence). Respondents who estimate Turkey’s ranking is 20, have balanced confidence (3 respondents out of 6). Respondents who say Turkey is the 17th biggest economy has 2 respond out of 4 (half of the respondents) have overconfidence. Respondents who estimate Turkey’s ranking is 30, have lower overconfidence (2 out of 5). Even our example size is small, the results confirms to theory and our expectation. We have also failed to accept H1. We have also investigated loss aversion bias with asking these questions: Your guide offers you two options, which one do you prefer?

2016 - M SPHERE

B O O K O F PA P E R S

-

25


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Question 1: You will get one tour free which price is 200 Euro Question 2: An 80% chance of getting two free tours which total price is 320 Euro per tour but a 20% get nothing

Something went wrong with your trip and your guide offers you two options, which one do you prefer? Question 1: You will lose one free tour which price is 200 Euro Question 2: An 80% chance of losing two free tours which total price is 320 Euro per tour but a 20% lose nothing We expected that people take more risk when they face loss situation. First two questions represent taking risk in profit while last two questions in loss.

Table 2. Risk Taking in Profit Question10

Question5

Total

1

2

1

22

26

48

2

8

16

24

30

42

72

Total

Question 5 indicates certain gain while Question 10 indicates gender. We expect that respondents will chose certain gain. As it expected majority of the respondents have chosen certain gain option (48 against 24). Both men and women respondents openly have chosen certain gain.

Table 3. Risk Taking in Loss Question10

Question6

Total

1

2

1

15

26

41

2

15

16

31

30

42

72

Total

In this question respondents should take decision in loss situation. We expect that respondents chose risky option which is 2. Surprisingly women respondents have chosen equally both options while men respondents have chosen mainly 1 option which indicates certain loss. Last bias that we have searched is Anchoring bias. To search it we asked these questions: Turkey, last year was ranked 82th most visited country among with 170 countries by World Tourism Organization (UNWTO). Question 1: What is your guess of Turkey’s this year’s ranking? Please write here…. Turkey, the year before last year was also ranked 45th most visited country among with 170 countries by World Tourism Organization (UNWTO). Question 2: What is your guess of Turkey’s this year’s ranking? Please write here…. We have given two different historical ranks of Turkey’s tourism. First one is last year and second year before last year. We expect that if respondents will use given ranking information as a reference point, they should give more importance to new information than old one.

26

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 4. Does New Information have an Effect on Anchoring? Question10

Question7

Total

Total

1

2

0

1

2

3

20

1

0

1

52

1

0

1

55

0

1

1

57

1

0

1

65

1

0

1

75

0

1

1

78

3

0

3

80

0

2

2

82

0

1

1

85

3

0

3

86

1

0

1

90

0

1

1

92

0

1

1

95

2

1

3

97

1

0

1

99

2

0

2

100

2

9

11

102

0

2

2

105

2

0

2

110

1

2

3

112

1

0

1

115

0

1

1

120

3

8

11

125

0

1

1

129

1

0

1

130

1

2

3

135

0

1

1

140

1

1

2

150

0

4

4

160

0

1

1

200

1

0

1

30

42

72

As it could be seen on the Table 4, density of the answers could be seen at 100 and 120 ranks (both have been given by 11 respondents). Given reference point was 82. So respondents’ estimation 100 is supporting our expectation.

2016 - M SPHERE

B O O K O F PA P E R S

-

27


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 5. Does Old Information have an Effect on Anchoring? Question10 Question8

2

0

2

4

6

20

2

0

2

25

0

1

1

30

1

0

1

40

1

2

3

41

1

0

1

44

0

1

1

46

0

1

1

50

7

0

7

51

0

1

1

57

1

0

1

60

0

1

1

62

0

1

1

65

0

1

1

68

0

1

1

70

1

2

3

75

0

3

3

76

0

1

1

78

1

0

1

80

1

1

2

85

1

0

1

86

1

0

1

90

1

0

1

92

0

1

1

95

1

0

1

97

1

0

1

100

2

6

8

105

2

0

2

110

1

1

2

112

1

0

1

115

0

1

1

120

0

5

5

125

0

1

1

130

0

1

1

140

0

1

1

142

0

1

1

145

1

0

1

150

0

3

3

30

42

72

Total

28

-

Total

1

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Density of the answers could be seen at 50 and 100 ranks (have been given by 7 and 8 respondents respectively). Given reference point was 45. So respondents’ estimation 50 is supporting our expectation. But we fail to accept H3: New information does not change peoples’ mind. Sorting of the given information has more importance than contemporary of information. There are some other interesting results too. Women are anchoring more than men. At Question 7, women have estimated 78 (3 women and 0 men out of 29) and 85 (3 women and 0 men) which given reference point was 82. At Question 8 women have estimated 50 (7 women and 0 men). Men also have seemed to stick their own anchoring which they estimated 100 Euros at first question 13 out of 20. Now they seem to be apply same number as a ranking number. So we also have failed to accept H5: Gender does not relate with biases. Lastly, we have searched age and biases but we could not find any relationship.

CONCLUSION We have searched Framing Effect, Overconfidence Effect, Lost Aversion and Anchoring biases in tourism sector and we found evidences for all. Age does not relate with biases while gender related. We found that women have more biases than men.

LITERATURE 1.

Ariely Dan, 2010, Predictably Irrational, Harper Perennial Edition, ISBN 9780061353246, pp.1-797.

2.

Barberis Nicholas and Ming Huang, 2001, Mental Accounting, Loss Aversion and Individual Stock Returns, The Journal of Finance, Vol: LVI, No: 4, pp.1247-1292.

3.

Cornicello, Giuseppe, 2004, Behavioural Finance and Speculative Bubble, Thesis, Universita Commerciale, Luigi Boggoni Milona-Economia, No: 771527, pp.1-72.

4.

Hammond, John S.; Keeney, Ralph L.; Raiffa, Howard, 1999, Smart Choices : A Practical Guide to Making Better Decisions, Harvard Business School Press, ISBN: 9780875848570, pp.1-152.

5.

Kahneman Daniel, 2011, Thinking, Fast and Slow, Penguin Books Ltd., London, ISBN 978-0-141-03357-0, pp. 1-499.

6.

Kahneman Daniel and Amos Tversky, 1972, Subjective Probability: A Judgment of Representativeness, Cognitive Psychology, 3, pp.430-454.

7.

Tversky Amos, Daniel Kahneman, 2001, Judgment Under Uncertainty: Heuristics and Biases, Editors: Amos Tversky, Daniel Kahneman and Paul Slovic, Cambridge University Press, ISBN: 0521 28414 7, pp.1-422.

DETAILS ABOUT AUTHORS: EKREM TUFAN ASSOC. PROF. DR. (PHD) etufan@yahoo.com BAHATTIN HAMARAT LECTURER b_hamarat@hotmail.com NUR UNDEY ASSIST. PROF. DR. (PHD) HALIÇ UNIVERSITY, BUSINESS ADMINISTRATION FACULTY İSTANBUL TURKEY nurdey@yahoo.com EROL DURAN ASSOC. PROF. DR. (PHD) eroldurantr@yahoo.com FOR ALL AUTHORS (EXCEPT NUR UNDEY): ÇANAKKALE ONSEKIZ MART UNIVERSITY FACULTY OF TOURISM ÇANAKKALE, TURKEY

2016 - M SPHERE

B O O K O F PA P E R S

-

29


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

OPERATIONAL RISK MANAGEMENT IN CREDIT INSTITUTIONS: AN OVERVIEW AND INSIGHT FROM PRACTICE. THE CASE OF CROATIA IVANA DVORSKI LACKOVIĆ VLADIMIR KOVŠCA ZRINKA LACKOVIĆ VINCEK

ABSTRACT The Basel Committee on Banking Supervision introduced operational risk framework in banking starting from 2004. Operational risk is generally defined as the risk of financial loss arising from inadequate or failed internal processes, people, systems or external events. According to the Basel Committee there are seven event types that can cause operational risk and these include: (1) internal fraud, (2) external fraud, (3) employment practices and workplace safety, (4) clients, products and business practice, (5) damage to physical asset, (6) business disruption and systems failure and (7) execution, process and delivery management. Operational risk is immanent to every business process in organisation and can therefore have significant material and even more reputational consequences for organisation. Having in mind the sensitivity of credit institutions to reputational risk it is evident that the impact of operational risk on business activity is significant. There are several aims of this paper. Firstly, authors will give an overview of operational risk management framework and operational risk events that may occur in banking practice will be identified. Secondly, an overview of regulatory requirements regarding operational risk will be presented with special accent put on historical lessons learned in the decade since operational risk regulatory framework has been introduced. Thirdly, operational risk practices in Croatian credit institutions will be analysed based on publicly available data. The last mentioned aspect is of special importance when having in mind the relationship between operational and reputational risk on one hand and principal – agent theory on the other. Expected contributions of this paper are: detailed systematic analysis of operational risk management framework in banking, increased awareness of scientific community about operational risk and an analysis of Croatian credit institutions’ exposure to operational risk. KEY WORDS: operational risk, credit institutions, reputation management, publicly available data.

1. INTRODUCTION Operational risk emerged as one of the last categories of risks banks are exposed to, initially being defined as “all other risks besides credit and market risk”. According to Power (2005) “this marginal conceptual position belied the significance of its role in the architecture of risk management knowledge, a role made more visible with the re-diagnosis of large loss events as operational risk failures”. The emergence of Basel II led to sustainable monitoring and management of operational risk. Power (2005) argues that “the term ‘operations risk’ existed in 1991 as a generic concept (COSO, 1991), but that the category of ‘operational risk’ did not acquire widespread currency until the mid to late 1990s when the Basel II proposals were developed and published”. In this paper the authors aim to: (1) give an overview of operational risk management framework and identify operational risk events that may occur in banking practice; (2) give an overview of historical movements related to operational risk management; (3) analyse operational risk practices in Croatian credit institutions based on publicly available data. The structure of the paper follows its aims so that the paper is divided in seven parts. After the introductory notes, in second section the authors are presenting a short historical overview of operational risk management development and general terms related to operational risk management, such as its definition, main features, event types and methods of calculation of regulatory capital requirements. The third section is related to summarize knowledge on determinants of operational risk. In fourth section authors are presenting why operational risk management is important for banks besides satisfying regulatory requirements. Fifth section relates to risk disclosure as a way of strengthening relationship with clients. In sixth section operational risk practices and public disclosure in Croatian banks are presented. Final section is devoted to presentation of concluding remarks.

30

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2. GENERAL OVERVIEW OF OPERATIONAL RISK According to Bodur (2012) some of the cases of large banking scandals and operational risk losses encompass cases such as the influence of corruption on banking business (Bank of Credit and Commerce International), deficiencies in internal systems control and unauthorised trading activities (Societe Generale), speculative investing (Barings Bank), illegal trading with government bonds (Daiwa Bank), bomb attacks on bank headquarters (HSBC), the influence of earthquake on banking losses (banks in North-western Turkey). As already mentioned in the introductory notes, the role of operational risk has been marginal until Basel II documents release. With these documents operational risk has been established as risk equal to credit and market risk due to the fact that Basel II requires banks to calculate and allocate certain amount of capital for operational risk. According to Principles for the Sound Management of Operational Risk (2011) operational risk is defined as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.” One of main features of operational risk is that it is inherent to all business processes in a bank, i.e. every activity done in a bank in itself carries the risk of operational loss. How operational risk is present in every activity can best be seen when having in mind the classification of events that lead to operational risk. The Regulation 575/2013 (2013) defines following operational risk event types: 1. Internal fraud - Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/ discrimination events, which involves at least one internal party; 2. External fraud - Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party; 3. Employment Practices and Workplace Safety - Losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims, or from diversity/ discrimination events; 4. Clients, Products and Business practices - Losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product; 5. Damage to Physical Assets - Losses arising from loss or damage to physical assets from natural disaster or other events; 6. Business disruption and system failures - Losses arising from disruption of business or system failures; 7. Execution, Delivery and Process Management - Losses from failed transaction processing or process management, from relations with trade counterparties and vendors. With establishment of Basel rules and national discretions banks are obliged to follow strict rules and regulatory requirements regarding their risk management. The mentioned Regulation 575/2013 and Principles for the Sound Management of Operational Risk (2011) define general framework for operational risk management, quantitative and qualitative standards banks need to satisfy regarding risk management and the rules for calculation of capital requirement for operational risk. The Regulation 575/2013 (2013) defines three possible approaches to calculation of capital requirements for operational risk, namely: 1. The basic indicator approach – the simplest approach to calculation in which the capital requirement for operational risk amounts 15% of the three-year average of relevant indicator. 2. The standardised approach – is based on bank’s division of its activities into business lines proscribed by the Regulation 575/2013. Further to this, institutions are calculating capital requirement as three-year average of sum of yearly capital requirements for all business lines. The Regulation also allows calculation by use of alternative standardised approach. 3. The advanced measurement approach – is based on development of internal system for calculation of capital requirements. Strict qualitative and quantitative criteria need to be fulfilled in order for a bank to receive approval for use of advanced approach.

2016 - M SPHERE

B O O K O F PA P E R S

-

31


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

3. DETERMINANTS OF OPERATIONAL RISK Li and Moosa (2015) point out that the empirical literature on operational risk and determinants of operational losses is scarce due to following: 1. there is a lack of good-quality data (because financial institutions are secretive about their operational risk profile) and 2. difficulties in modelling operational risk (because the causes of operational losses are extremely heterogeneous). According to Li and Moosa (2013) research the determinants of severity and frequency of operational risk losses are: 1. people risk depends on corporate governance, corruption, ethical standards, internal controls within firms, transparency and disclosure requirements, and management style; 2. process risk depends, inter alia, on regulation, transparency and disclosure requirements, and legal issues such as copyrights and patents; 3. system risk depends, inter alia, on the state of technology; and 4. external risk is determined by the severity of economic fluctuations, regulation, disclosure requirements, compliance requirements and environmental standards. In their recent research Li and Moosa (2015) discuss the connection between operational risk, regulatory framework (law) and corporate governance. They state: “Corporate governance is clearly connected to operational risk, simply because it is a control function in the monitoring of operations. As for the rule of law, the connection with operational risk is conspicuous. The rule of law has direct implications for operational losses, resulting from events such as fraud, copyright infringement, consumer protection and many others. It is also the case that the rule of law determines to a large extent the system of corporate governance.� (Li, Moosa, 2015) Chernobai, Jorion and Yu (2011) investigate the firm-specific and macroeconomic variables connected with the incidence of operational risk events among financial institutions. The variables that are subject to the research are: 1. Firm-specific: a. Accounting and market variables, b. Governance and Directors Data, c. Executive Compensation Data. 2. Macroeconomic: a. Corporate bond yield spread, b. Growth in personal disposable income, c. S&P return and it standard deviations, d. Rate of growth in gross domestic product, e. Rate of growth in the SEC budget divided by the number of financial institutions. The findings of the research suggest: 1. All of operational risk events could be mitigated by an improvement of internal control and management oversight. 2. Firms suffering from different types of operational risk events tend to be younger, more complex, and financially weaker. They have a higher number of antitakeover provisions, and they have CEOs with a larger amount of option and bonus-based compensation relative to salary. 3. These results indicate the importance of financial distress, corporate governance and executive compensation in our understanding of the risk in financial institutions.

32

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

4. WHY IS OPERATIONAL RISK MANAGEMENT IMPORTANT FOR BANKS? Cummins, Lewis and Wei (2006) state that “by managing operational risk, financial institutions can maximize future expected cash flows by reducing the expected costs of operational loss events”. According to Koyuncugil and Ozgulbas (2009) “measuring and detecting operational risk is a complicated task fundamental element of business success and as well as hedging financial risk”. Fiordelisi, Soana and Schwizer (2014) state that “reputation is a key asset for any company whose affairs are based on trust”. The authors have therefore empirically tested in which extent reputational losses are linked with operational risk. The results of their research suggest following: 1. Larger reputational losses are not linked to legal or regulatory sanctions, but mainly follow the announcement of ‘pure’ operational losses to the market. 2. Regarding the event type generating the operational loss, “external fraud” is the event type that produces the greatest impact in terms of reputation. “Employment practices and workplace safety”, “execution, delivery, and process management” and “clients, products, and business practices” event types are also related to significant reputational losses. 3. Regarding the business lines that are most exposed to reputational risk, “trading and sales” and “payment and settlement” activities generate the most substantial reputational losses. 4. Investors assign similar reputational penalties to both large and small operational losses and reputational damages in Europe are higher than those in America.

5. RISK DISCLOSURE AS A PATH FOR STRENGTHNING RELATIONSHIP WITH CLIENTS Information disclosure can be classified as voluntary and mandatory. According to Macchioni and Maffei (2011) voluntary disclosure increases the transparency of information and it is considered to be a signal of management accountability. Same authors state that the agency theory predicts that agency costs vary with different corporate characteristics and that primary variable is related to size – there is an expectation that disclosure cost is decreasing in firm size (Macchioni and Maffei, 2011). Gillet, Hubner and Plunus (2010) base their research on examination of stock market reactions following the announcement of operational losses in listed financial companies. Authors are primarily focused on firm-specific characteristics. Results obtained by research indicate following: 1. Firm-specific characteristic that matters for stock market reaction is the Value/Growth distinction. 2. Large PTBV companies suffer more from the reputational consequences of an operational loss event. Authors explain this finding by the fact that market participants may sanction more, largest market actors due to anticipated externalities caused by operational risk events. Willeson (2014) summarizes the results of existing research on disclosure of operational risk management and concludes that “there is weak risk transparency and limited risk disclosure, but there are substantial variations in risk reporting even when disclosure is mandatory”. Willeson (2014) argues that “the information provided in mandatory disclosures is not necessarily as effective as voluntary disclosures as a tool for corporate governance”. Thus, he based his research on voluntary operational risk disclosure of Nordic banks, giving the context regional character. Main conclusion of the research is that “although Basel II has affected overall operational risk disclosures, mainly determined by the bank size, the quality of disclosure is generally low”. As Willeson (2014) points out, from agency theory perspective “in terms of voluntary disclosures, a company elects to disclose information to reduce information asymmetries between the principal and the agent, resulting in reduced capital costs. The “market”, which consists of various stakeholders, can assess a company based on more accurate information and may punish (discipline) companies that fail to disclose a significant amount of accurate information.”

6. RESEARCH: OPERATIONAL RISK MANAGEMENT IN CROATIAN BANKS In this section the authors will analyse operational risk practices in Croatian banks based on publicly available data. Firstly, the authors are presenting last available data from European Banking Authority (EBA) for the year 2013 related to the allocation of capital for operational risk for credit institutions in Croatia. Observed data are related to: (1) the percentage of institutions using certain method for calculation of operational risk capital requirements and (2) percentage of own funds requirements in own funds requirements on operational risk.

2016 - M SPHERE

B O O K O F PA P E R S

-

33


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 1. Distribution of Croatian credit institutions by operational risk capital requirement calculation approach. Adjusted according to: http://www.eba.europa.eu/supervisory-convergence/supervisory-disclosure/aggregate-statistical-data

% number Credit institutions: distribution by approach Own funds requirements % of Own Funds requirements on OpRisk

BIA

68,57%

SA

25,71%

AMA

5,71%

TOTAL

100,00%

BIA

13,67%

SA

47,43%

AMA

38,90%

TOTAL

100,00%

As can be seen from Table 1, in year 2013 most of credit institutions in Croatia have been using the simplest, basic indicator approach, for calculation of operational risk capital requirements, followed by the standardised approach, while only 5,71% of credit institutions have developed internal model for calculation, i.e. have been using the advanced measurement approach. As for the share of own funds requirements on operational risk in total own funds requirements, the distribution differs in sense that the most funds are allocated under the standardised approach followed by the advanced measurement approach. At the same time the basic indicator approach carries the least share of requirements. Unfortunately, there are no underlying data available for these data on EBA, but it would be interesting to know the determinants of banks using certain approach. When having in mind the regulatory requirements that need to be satisfied in order for a bank to receive approval to use the advanced measurement approach, it is reasonable to suppose that larger banks that have more sophisticated material resources on their disposal are users of the advanced measurement approach. This would also explain the allocation of requirements, i.e. the fact that less banks that are using the advanced measurement approach versus the basic indicator approach, are accounting for greater share of requirements. In order to investigate the operational risk practices in Croatian banks in more detail, the authors analysed yearly financial reports of four largest (in term of particular banks assets share in total assets of all banks; these banks all together account for more than 70% of total banking assets) Croatian banks in period 2008-2015. The analysis of reports indicates following: 1. All of the banks from sample have been disclosing mostly qualitative information rather than quantitative in their financial reports in selected period. 2. The share of qualitative information in financial reports is showing increasing dynamics from year 2008 onward on yearly basis. 3. Qualitative information that banks are revealing in their yearly financial statements consist of several elements: general definitions of operational risk (according to Basel committee), naming internal acts that are related to operational risk management, managerial structure (hierarchy and obligations) in the operational risk management process, naming the calculation approach used for regulatory requirement calculation, list of methods used in the operational risk management process. 4. All banks are using (by Basel documents) standardised definition for operational risk. 5. All banks report existence of internal Board that is in charge for operational risk management. 6. Two banks have been using the advanced measurement approach for calculation of regulatory requirement for operational risk. One bank is using the standardised approach on individual basis and the advanced measurement approach on consolidated basis (Group level). One bank is using the standardised approach. 7. As for quantitative information, most banks are announcing only one obligatory information: the amount of operational risk capital requirement. 8. Only one bank has been announcing voluntary quantitative information: the percentage of event types that have led to operational risk loss events in certain financial year, with main category of event leading to operational loss being Clients, products and business practice.

34

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Main conclusion of this research related to Croatian banks’ operational risk practice conducted on the sample of leading banks is that these banks have adopted regulatory requirements related to operational risk, but as for disclosure of information, most banks are remaining in the area of obligatory disclosure and are not keen to reporting voluntary information. This indicates that operational risk management events remain rather secretive and that banks are not so transparent in communication with clients regarding operational risk.

CONCLUSION In this paper authors have defined general operational risk management terms, definitions, events leading to operational losses and short historical background of operational risk management. The importance of public disclosure of operational risk management from the agency theory perspective has been pointed out. The authors conducted research on the sample of Croatian largest banks in period 2008-2015 based on yearly financial reports. Main conclusions of research are listed in the above section and indicate satisfaction of obligatory requirements related to operational risk management disclosure, but avoidance of voluntary disclosure on the topic. One of limitations of the research is that only large banks were included. Guidelines for future research include: encompassing banks of all sizes in the research, comparison of subsidiary banks with practices of mother banks and comparison with banks located in the region.

LITERATURE 1. Bodur, Z. (2012). Operational risk and operational risk related banking scandals / large incidents. Maliye Finans Yazilari, pp. 64-86 2. Chernobai, A., Jorion, P., Yu, F. (2011). The Determinants of Operational Risk in U.S. Financial Institutions. Journal of Financial and Quantitative Analysis. 46 (6), pp. 1683-1725 3. Cummins, J.D., Lewis, C.M., Wei, R. (2006). The market value impact of operational loss events for US banks and insurers. Journal of Banking and Finance, 30, pp. 2605-2634 4. Fiordelisi, F., Soana, M.G., Schwizer, P. (2014). Reputational losses and operational risk in banking. The European Journal of Finance, 20:2, pp. 105-124 5. Gillet, R., Hubner, G., Plunus, S. (2010). Operational risk and reputation in the financial industry. Journal of Banking and Finance, 34, pp. 224235 6. Koyuncugil, A.S., Ozgulbas, N. (2009). Financial Profiling for Detecting Operational Risk by Data Mining. Academic and Business Research Institute Conference, Orlando, 2009. Available at: http://www.aabri.com/OC09manuscripts/OC09117.pdf 7. Li, L., Moosa, I. (2015). Operational risk, the legal system and governance indicators: a country-level analysis. Applied Economics, 47:20, pp. 2053-2072 8. Macchioni, R., Maffei, M. (2011). The determinants of risks disclosure in the third pillar report. Evidence from the Italian banks. Financial Reporting Workshop. Florence, 2011. Available online: http://frworkshop.com/firenze/eng/engpaper/Risk_disclosure_-_MACCHIONI,_MAFFEI.pdf 9. Moosa, I. A. and Li, L. (2013) The frequency and severity of operational losses: a cross-country comparison, Applied Economics Letters, 20, pp. 167–72. 10. Power, M. (2005). The Invention of Operational Risk. Review of International Political Economy. 12:4, pp. 577-599 11. Principles for the Sound Management of Operational Risk, Bank for International Settlements, Basel, 2011 12. The Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 13. Willeson, M. (2014). New Experiences from Voluntary Risk Disclosures. Operational Risk in Nordic Banks. Journal of Financial Management, Markets and Institutions, 2 (1), pp. 105-126

DETAILS ABOUT AUTHORS: IVANA DVORSKI LACKOVIĆ TEACHING ASSISTANT ivana.dvorski@foi.hr VLADIMIR KOVŠCA ASSISTANT PROFESSOR vladimir.kovsca@foi.hr ZRINKA LACKOVIĆ VINCEK YOUNG RESEARCHER / TEACHING ASSISTANT zlackovi@foi.hr FOR ALL AUTHORS: UNIVERSITY OF ZAGREB FACULTY OF ORGANIZATION AND INFORMATICS VARAŽDIN, CROATIA

2016 - M SPHERE

B O O K O F PA P E R S

-

35


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

THE PRIORITIES OF TAX REFORMATION IN DEVELOPING COUNTRIES: TURKEY’S TAXATION MATTER THAT AIMED AT EU A. NIYAZI ÖZKER

ABSTRACT In this study, we aim to state the priority reasons of tax reformation that are especially situated in developing countries like Turkey, which aim to join in EU (European Unity) as perfectly member. Tax reform process is an important part of this financial evaluation programs in developing countries and this fact is dependent on the structural reforms as well as the other financial related areas that are shaped by public decision process that include taxes’ deregulations with public enterprise reform. But surely, every country has financial private affairs like Turkey that are considered in the desired tax reforms together with the other financial alterations which get difficulties in this reformation process. So, the important liability regulations have been involved in the concerned process as a whole of normative standards being obligatory applications that state these priorities of tax reformations. These priorities are to further more meaning the detailed tax reformations than meaning more accumulation of capital that is related to political benefit which manipulate government to the tax reformations. In other words, the priority of tax reformations must be considered with the international taxation criteria especially for developing countries like Turkey that aim to be perfectly member of EU, and which state absolute necessity of the considered tax integration should be in the harmony of EU countries’ taxation rules. Therefore, the priorities of tax reformation express also the basically international frame of tax integration’s normative structure that promote financial reformation content, which every country aim to be a part of international countries as a financial metamorphosis orbit. KEY WORDS: Tax Reformation; Obligatory Applications; Tax Integration; Public Decision Process; International Tax Criteria. JEL Code: E62; H21; H25.

1. INTRODUCTION Tax reform is usually undertaken to improve tax administration related to collect the desired tax revenues in a being process which aim at to provide economic or social benefits. This structural topic provides not only an overview of the limited, but also contains the components of tax reform priorities as the required evaluations financial features that are perceived by developing countries. As priority principles, tax reforms should be primary considered for a lot of countries, especially at the basic of developing countries that aim at integration into international units, which perceive responsibly as a financial important matter. In this context, tax reform priorities may be considered such as developing countries’ matter, but also this fact has been interested in being the other top-notch of developed countries all over the world or to regionally leadership since long years. At this point the general aim is national, but international tax issues contribute the reform efforts in that should be prioritized as the accepted international features generally towards taxation’s impact on development outcomes1. In addition, horizontal and vertical tax equality should be taken consideration together in themselves in the reform process to ensure the aimed capital revenues catching capital investment desired, which can be accepted the priority object of tax reform process2. Besides, tax liabilities that have ability to pay with all person and companies, should be taken into consideration in the financial reforms which come to mean the reformist contemporary metamorphosis as an obligation of social and economic in the scope of political economy. Turkey’s needs for a financial stable institutional environment, along with its comparatively stable financial system and highly-organized and cohesive business sector, should be contributed to a consistent pattern of tax policy making discussing of priorities as a reform process. In other words, tax reform priorities, as a the whole associated criterions, should aim at placing global integration morality in the process, and these criterions should be accepted meaningful in the global financial values, especially in developing countries that aim at a member being of a global associated. In this context, global tax burden justice is priority macro component together with the other tax justice features in the redistribution income as a proportional of GDP, which mean the marginal tax rates’ straight distribution. This approach should include especially directly tax applications like personal head tax and corporation tax, if this fact is taken into 1 2

OECD (2007), Improving The Resolution of Tax Treaty Disputess, Report adopted by the Committee on Fiscal Affairs on 30 January 2007, OECD: Centre for Tax Policy and Administration, February 2007, p. 4. Duane Swank (1998), “Funding The Welfare State: Globalization and The Taxation of Business in Advenced Market Economies”, Political Studies, No: XLVI, 1998, p. 679.

36

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

consideration to ensure tax justice via tax reform attributed benefiting from directly taxes’ positive effects towards to achieve tax justice in the scope of vertical and horizontal tax justice3. Moreover, in this case it appear that corporation tax rates have been reduced in the most countries especially in EU countries related to as produce this priorities’ objectives. Turkey’s reform priorities need to these structural variations in the light of EU countries’ contemporary financial alteration formations in the adaptation process of EU for perfectly being member via removing or preventing unjust-wrong tax competition4, which mean also a tax reform’ priorities5. Turkey, as the sanction of its tax priorities against tax evasion and tax avoidance, including increasing transparency in efforts to tackle directly tax avoidance, based on the package of measures agreed as part of the EU’s Shifting (BEPS) project in October 20156.

2. TAX REFORM’S STRUCTURAL PRIORITIES AND DYNAMICS IN DEVELOPING COUNTRIES The international community has been paying attention to ensure tax reforms towards the desired tax reform which purpose to cope with especially the associated global integrations’ financial matters via technical assistance since a long time. This approach contains changes in the value of variable moves toward transparency with openness, and clarity in how we do structural tax reform analysis in the global priorities’ dynamics7. Also, any discussion of the effects of the overall level of taxation on the economy is meaningful throughout the point of view of this tax reform context, In addition, this reform approach’s core is that we focus on the way the tax system is structured, not on its overall size. Because, we know well that fundamental tax alterations will have to depend on how the revenue raised is to be gathered by government especially in developing countries. But, we should understand via reform process that, as a part of socialeconomics, the taxing matter is directly related to social priorities, and also it should be required in each case the total institutional size of the collected tax. Namely, it should mean that we focus on the way the tax system is to express the whole financial structure, not only on its overall financial size. Figure (1) expresses a tax reform’s structural priorities in the scope of the discussed concept, below: Figure 1. The Dynamics of Tax Reform Process and Change’s Priorities

In the light of this approach we can array the most important priorities of tax reforms together with figure (1): •

3 4 5 6 7 8

The registered taxpayer base should be clear sharply to but not only catch the desired tax revenues, it should deal with the tax accounting really toward to prevent the unregistered economy which also mean to ensure difficulties for economic growing8. J effrey Owens (2009), “Why Tax is Important for Development”, Tax Justice Focus, First Quarter, Vol. 4, Issue: 4, (2009), p. 2; https://www.oecd. org/ctp/harmful/43061404.pdf (07.07.2016). Ziya Öniş and Caner Bakır (2007), “Turkey’s Political Economy in the Age of Financial Globalization: The Significance of the EU Anchor”, South European Society & Politics, Vol. 12, No: 2, (June 2007), p. 151. Ömer Faruk Batırel (2016), Avrupa Birliği ve Türkiye’de Son Vergi Reformları, İstanbul Ticaret Üniversitesi Sosyal Bilimler Dergisi, Cilt. 15, Özel Sayı 29, Bahar/1, p. 159. European Parliament (2016), Briefing: Understanding The OECD Tax Plan to Address Base Erosion and Profit Shifting – BEPS”, European Union: Members’ Research Service, European Union, 2016, p. 1. Christopher John Wales and Christopher Peter Wales (2012), Structures, Processes and Governance in Tax Policy-Making: an Initial Report, Oxford: Oxford University Centre for Business Taxation, December 2012, p. 27. J. E. Meade (1978), The Structure and Reform Direct Taxation, London Becless and Colchester : The Institute for Fiscal Studies (IFS), 1978, p. 34.

2016 - M SPHERE

B O O K O F PA P E R S

-

37


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

As a whole structure, the tax reforms must take on the risk responsibility to deal with some taxation matters in the future for ensuring the desired risk management because of the financial deviation probably it will be place in process9.

Voluntary tax compliance, as a tax adaptation, is an important key to ensure the positive tax payer compliance. Also, this fact expresses that the whole structural alterations, which mean the previously mentioned tax reform formations can be supported from the point of view of the obligated to new financial formations10.

As the intellectual tax reform, the proportion of public expenditures should be mutually consistent via return of tax revenues for convincing tax revenues’ profit financial values that mean expenditure burden. This approach also brings up tax revenues’ direction toward public services that have important features for persuading on tax payer. Therefore, payment obligations act in agreement on the collected tax revenues, and also these social behaviors support the tax reform procedure including new financial constructive formations, which mean to perceive simpler from the point of view of taxable persons11.

In tax applications, as feedback attitudes, tax reporting fact related to the conclusion effects states some taxing criteria on the tax reforming. Therefore, this fact means that tax expenditure reporting for taxing at regional or local level that can be improved via ensuring accuracy of tax reporting too. In this point, the objective of accuracy reporting that is manipulated the produced tax options within the formed tax revenues is to measure at which level of an optimal tax system effects via the reform dynamics. This approach toward taxing problem in tax reform process, not only it decrease their costs, but also it ensures fiscal transparency in the reform process in spite of this reform process that can be increasing government expenditures by several percentage points12.

Tax dispute resolution process is an important piece of tax reform process that cannot be ignored aimed at the defined tax reform process. The existing mutual agreement procedure, as a tax resolution, provides a generally effective and efficient method of resolving international tax disputes in tax reform. In other words, in the scope of tax disputes create the greatest alteration extent possible is resolved in a final of tax reform. Especially this fact is interested in the taxpayers’ solutions concerned which are principled a structural manner for these countries’ reform goals as a tax dispute resolution13 in developing countries.

Efficiency and the understanding of operational effectiveness level are related to the structural results of tax reform’s process. Tax efficiency depends on the operational tax attributes that mean generally increasing socio-politic welfare level in the concerned process. Also this fact is fairly related to the other operational financial activities’ efficiency level of the concerned country aiming at ensuring the desired tax reformation process. If there is not tax efficiency via tax applications, by no means it is talked about the effective tax reform process which expresses the desired reconsideration alterations14. In addition, the effective tax rates play a fairly important role on the tax applications as an average rate from the individuals together with corporations towards to ensure tax efficiency15. Especially the effective rates of tax for individuals are the effective average rates at which their earned income is taxed via the tax revision.

Accountability together with tax transparency, as an important tax transparency fact, is a meaningful fact that is related to understanding of taxpayers in all operational of taxing operational touched with investment and fund managers. It bring up balance sheet potentially tax accounting of assets reviewed how this would affect the developing countries presenting it in their budget representation to the tax payers. A failure to pay, or tax evasion or resistance to taxation, has been appeared usually due to the lack of accountability approaching within fiscal transparency. Taxing operations that include consisting of direct or indirect taxes should be observed by tax payers and tax institutions to ensure tax accountability that would be the most important dynamic of tax revision process. It should be forgotten that especially, tax reforms’ accomplishment depends on this structural alteration fact for some developing countries, also having important role on the global integrations in the some of developing countries like Turkey16.

9

S teve Bond (2014), “Business Tax Incentives”, in The Use of Tax Expenditures in Times of Fiscal Consolidation, Lovise Bouger (ed.), European Economy Economic Papers 523, Brussels: European Commission Economic and Financial Affairs, July 2014, p. 36. 10 Alfons J. Weichenrieder (2007), Survey on The Taxation of Small and Medium-Sized Enterprises: Draft Report on Responses toThe Questionnaire, OECD: Centre for Entrepreneurship, Smes & Local Development / Centre for Tax Policy and Administration, September 2007, p. 4. 11 Meade, p. 39. 12 Chris Heady (2014), “Discussion of Presentations by Pierre Leblanc, Leonard E. Burman and Serena Fatica”, in The Use of Tax Expenditures in Times of Fiscal Consolidation, Lovise Bouger (ed.), European Economy Economic Papers 523, Brussels: European Commission Economic and Financial Affairs, July 2014, pp. 30-31. 13 OECD (2007), Improving The Resolution of Tax Treaty Disputes, OECD Report Adopted by the Committee on Fiscal Affairs on 30 January 2007, OECD: Centre for Tax Policy and Administration, February 2007, p.4. 14 OECD (2007), Tax Incentives for Investment–A Global Perspective: Experiences in MENA and non-MENA Countries, OECD Mena-OECD Investment Programme, September 2007, p. 13. 15 OECD (2007), Tax Incentives for Investment–A Global Perspective: Experiences in MENA and non-MENA Countries, p.16. 16 Mario I. Blejer and Adrienne Cheasty (1991), “The Measurement of Fiscal Deficits: Analytical and Methodological Issues”, Journal of Economic Literature, Vol. XXIX, (December 1991), pp. 1651-1652.

38

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

3. THE REFORMISTIC TAX APPROACH OF TURKEY AND THE MEANINGFUL STRUCTURAL OBJECT VARIETIES TOWARDS EU’S PATH As a developing country Turkey realized a lot of revisions about Its tax structure, which mean the integration process of being perfectly member EU since 2000. On The tax burden, measured by total tax revenue as a percentage of GDP, were tried to make changes related to tax revenues considerably in Turkey aiming at balanced tax burden during the last decades. A medium-term tax reform strategy was put in place based on reviews carried out jointly which aimed at ensure being well adjusted directed towards the financial strategy of the World Bank in 200217. The tax base and its optimal improving, as an efficiency of the tax administration, were accepted main goal to produce the evaluated tax reform components. In line with the tax strategy, a legislative package under the direct tax reform was implemented as of January 2004 as a remarkable financial attributes in the whole reform package18 further simplifying the tax system in particular by eliminating tax decreased.

3.1. The Appearance of Tax Balances of Turkey and Its Tax Reform Needing The present level of the tax burden in Turkey has a fairly specific appearance in reflecting the economic, institutional, and political conditions of Turkey as structural national tax system. The main objective of the strategy was to improve the stability together with in the transparency process that objectively equity of the tax system through measures that minimize tax distortions in the recent years. In this context, government budget’s appearance is meaningful to express fiscal position related to tax options being present, and that fact also promotes to requirement tax revision towards the future. Certainly, it is not possible to not consider this financial position related to GDP being separately from tax level options currently. GDP is the main definition term that expresses real values in current period to mean presenting to both economic growths level with collectively tax amount required and this macro value also shed light on the real budget balances that is to be expressive matter in tax reforms. Figure (2) shows the total macro balances related to directly real tax revenues from 2001 to 2011 and also why it put forward to the tax reform process required in the considered years has been produced since 2001, below19: Figure 2. The appearance of Budget Balances related to Fiscal Position of Turkey Along The Last Period

Figure (2) expresses Turkey’ growth process related GDP which mean throughout the alteration of economic development between 2001 and 2011. All the seen values are in the figure (2) are directly interested in tax options including specially debt payment in government budget which require being in the right tax reform process. Certainly, the most important criteria are the Maastricht criteria on the way of being member of EU which express budget deficits connected with the tax revenues collecting as a proportion of GDP. The firstly two conditions that are the most important that fact ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year, and the budget deficits must not be over 3% of GDP for aiming to be perfect membership of EU. This financial phenomenon, there is not with doubt, that is directly related to tax revenue limits that appear as a macro matter in developing countries, which aim to be membership of EU. Even if the target cannot be spotted due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory

17

OECD (2007), Tax Policy Reforms in Turkey, OECD: Centre for Tax Administration, 2007, p. 6. OECD (2007), Tax Policy Reforms in Turkey, OECD: Centre for Tax Administration, 2007, p. 7. 19 Maliye Bakanlığı (2015), Yıllık Ekonomik Rapor 2015, Ankara: Maliye Bakanlığı, 2015, pp. 41-44 and p. 91; İş Bankası (2015), Bütçe Dengesi-Aralık 2015, Ankara: İş Bankası İktisadi Araştırmalar Bölümü, 15 Ocak 2015, pp. 1-2; 18

2016 - M SPHERE

B O O K O F PA P E R S

-

39


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

pace. Even if the aimed financial location cannot be spotted due to the specific conditions, the debt ratio must have sufficiently diminished via tax reforms or it should be closer to the concerned references at satisfactory location of values. Figure (3) expresses the debt ratios of Turkey that depends on directly tax revenues as a proportion of GDP, which became a reality via tax reforms in the recent years that expressing in the scope of Maastricht, below20: Figure 3. Achieved Maastricht Criteria that are related to Tax Revision in Turkey

Figure (3) point at budget deficits as a proportion of GDP that especially came into being by lack of tax revenues from 2001 to 2011. Fiscal position that is related to financial deficits have been seen fairly changeable location during the being of years considered. But, there is a consensus about the tax reforms of Turkey to ensure stably tax structure, which is the main factors expressing foreign investment decisions via tax incentives have been firstly priorities for a long years especially towards to collect more tax revenues. These priorities that are also the structural priorities of Turkish tax reforms have shaped Turkish financial tax reform process for years especially towards arriving Maastricht criteria.

3.2. The Agenda of Turkish Tax Revision for Changing Structural Tax Location The mainly reason of tax revision is largely why revenues should be increasingly maintained in Turkey’ reform process due to prevent the impact of the financial crisis, this financial phenomenon is directly related to the tax deviations of Turkey as a developing country. In other words, the despite probably value lost in income tax with corporate tax rates should be based-broadening measures such as aligning depreciation for tax purposes via reformist approaches. The historical records of the current taxation approach of Turkey manipulate the discussion ground of reform agenda’s extent that will be helpful in navigating the future path of tax revision. In this context, changing structural tax options should be contractually revised together with new tax formations in three terms as a preliminary study of tax revision in Turkey as essence summary items below: 1. Before all else, simplifying tax applications in the scope of tax legislations, as a main objective, is the basic goal that is related to the process of tax reform in Turkey. Also, the revisions of tax legislation must be in harmonious status together with the other member countries of EU and this financial factor will able to ensure making simpler adaptation within integration process for being perfectly member of EU in membership process of Turkey21. 2. The adaptation process requires creating a foreseeable and stable tax legislation which is supported via national constitution together with the other well-adjusted countries of EU to maintain a harmonious process. Therefore, institutional structure should be constructed in this harmonious process that means a mutual support within EU countries taking consideration of financial legislations’ global features. In this respect, personal and corporate income tax rates express very important meaningful concepts the laws of these taxes should be made these taxes’ laws dependent on EU’ taxes for Turkey22.

20

Kalkınma Bakanlığı (2015), Ekonomik ve Sosyal Göstergeler 1950-2015, Ankara: Kalkınma Bakanlığı, Temmuz 2015, pp. 131-139. Cem Çebi and Umit Ozlale (2011), Türkiye’de Yapısal Bütçe Dengesi ve Mali Duruş, Türkiye Cumhuriyet Merkez Bankası, Çalışma Tebliği No: 11/11, Temmuz 2011, p.1. 22 Sureyya Serdengecti and Anne O. Krueger (2007), “Opening Remarks”, in Macroeconomic Policies for EU Accession, Erdem Basci, Subidey Togan and Jürgen von Hagen (eds.), The Turkish Bank of The Republic of Turkey 2007, Massachusetts: Edward Elgar Publishing, Inc., 2007, p. 8. 21

40

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

3. Increasing overall efficiency within the tax collection system can be also accepted one of the most important matter in Turkey, which create adaptation problem within the different macro indications of EU’s countries. The collected tax revenues produce important different values for years as a proportion of GDP, and these different financial values mean that both the lost tax values and not enter in register economy of Turkey23. Turkey must make lawful regulations to be the membership of EU towards to prevent not enter in register economy that support the desired collected tax revenues produce optimal tax values24. The fact that in Turkey the problem of tax collecting keep on low remaining relatively in respect of international perspective suggests that should be taken consideration for raising it gradually over the medium term in the revision tax process as an inevitable feature towards solution matter25. 4. The anti-abuse legislation that must be reviewed, as a tax phenomenon, will be part of Turkey’s tax law, which contributes remarkably the aimed tax revenues. In the whole EU’s countries this laws, as tax application components, the efficiency of the tax collection system and to taxable loopholes are inevitable financial elements particularly for remittances to tax havens, which have to be located in Turkish tax reform package26. The Turkish Ministry of Finance also has retained to adjust tax rates in this reform package for certain foreign payments where there was potential for revenue diversion and also with the new tax regulations have been aimed to increase corporation tax revenues, but via increasing tax incentives for corporation investments that are located in tax reforms. The profits of controlled foreign corporations have been taxed as part of the income of its locally resident controlling foreign investments in the scope of tax revision. But at the same revision package has been not formed to ensure controlling to foreign corporations revenues for taxing paid on the off shore income up to currently day, and even at any time this fact has been seen as a lack of Turkish tax reforms. 5. Lack of the delayed collecting tax revenues as the created tax compliance solutions because the law was vague on some of the new concepts are important financial budget problems in Turkey. The negative impact on revenue collections have been the priorities of tax reforms to deal with the concerned problems via the new laws. In this approach of reform framework, the Revenue Administration reported a reduction in the amount of revenue collected in 2015, given the lowered tax rates for preventing the lags of taxes collecting in the same reform package as a tax reform step27. The desired main goal is that amount of increased taxable income to ensure the tax revenues increasingly even as the number of taxpayers remained constantly directed towards preventing the lags of tax collecting via the lower rates in tax reforms. Also, this fact has inevitable an important role to eliminate on the tax burden differences in EU countries should be in every tax reform of each country assisting in the forming effects positively of fiscal contributions for countries’ targeting membership.

CONCLUSION Tax reforms have been needed by different governments for a long time to ensure more stability into fiscal institutional formations which mean that can also cover all the necessary fiscal features aimed at being perfectly membership of EU in Turkey. Surely, it appear that the different politics approaches put tax reforms structurally in agenda of the past, but it is not possible to claim that all the attempts which had been considered in the past have been successful until our today towards to ensure perfectly membership of Turkey to EU. Apart from the some of financial structural features, it appear that Turkey’s other problems has been affecting tax reforms’ process that put forth present financial realities, and it is understood that this fact has made unfortunately digress tax reforms’ priorities from related to aiming tax applications until our today. Tax reform priorities express the shared financial criteria especially for countries that aim to be membership of EU to developing countries like Turkey. In this context, tax relief may enhance the attractiveness of Turkey as a candidate membership country. But the new financial experiences with new alterations have to ensure that in many cases the relief provided that will be sufficient to offset additional financial costs incurred, and therefore it must be realistically towards meet a need the actual need via tax reforms. Tax legislation process produced the tax reform structure that is 23

Sureyya Serdengecti and Anne O. Krueger, p. 16. Jürgen von Hagen (2007), “Fiscal Policies and Sustainability of Public Finances in The European Union”, in Macroeconomic Policies for EU Accession, Erdem Basci, Subidey Togan and Jürgen von Hagen (eds.), The Turkish Bank of The Republic of Turkey 2007, Massachusetts: Edward Elgar Publishing, Inc., 2007, p. 27 . 25 Nihat Bülent Gültekin and Kamil Yılmaz (2005), “The Turkish Economy Before The EU Accession Talks” in The EU & Turkey: A Glittering Prize or Millstone?, Michael Lake (ed.), Federal Trust for Education and Research London: The Federal Trust is a Registered Charity No: 272241, 2005, p. 74. 26 John T. McCarty (2005), “Turkey’ Financial Sector: A Practitioner’s View of Work in Progress”, in The EU & Turkey: A Glittering Prize or Millstone?, Michael Lake (ed.), Federal Trust for Education and Research London: The Federal Trust is a Registered Charity No: 272241, 2005, pp. 83-84 27 Nihat Bülent Gültekin and Kamil Yılmaz, pp. 73-74. 24

2016 - M SPHERE

B O O K O F PA P E R S

-

41


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

related to the revision laws in spite of the lack of optimal applications which should be inevitable to adaptation towards the perfectly membership of EU countries for recent years in Turkey. The Turkish tax reform should present the relationship between existing domestic legal remedies in location the taxpayer has not undertaken these legal remedies. In this case, the approach that would be the most consistent with the basic structure of the mutual tax reform procedure would be to apply the same general principles when tax priorities are involved for Turkey that aim to be a member of EU. But, if this tax revision approach mean not the financial tax objects produce to state taxable resources in tax reform process, tax reform process will lead to a mutual non-agreement that will be not accepted by the taxpayers, and this situation will mean the unsuccessful reform attempted in Turkey. Also, the administrative tribunals to take consequences of the fact that the taxpayer have been offered an administrative solution in Turkish tax reform must have satisfactory justice solutions via tax revision structure that would be understood the tax reforms’ successful level in Turkey. So, because of these results in our study Turkey’s tax reform has inevitable financial priorities are rather meaningful and have to be taken into consideration on the path of membership of EU that were arrayed especially to the future.

LITERATURE 1. Batırel, Ömer Faruk (2016), “Avrupa Birliği ve Türkiye’de Son Vergi Reformları”, İstanbul Ticaret Üniversitesi Sosyal Bilimler Dergisi, Cilt. 15, Özel Sayı 29, Bahar/1, (Bahar 2016), pp. 159-169. 2. Blejer, Mario I. and Adrienne Cheasty (1991), “The Measurement of Fiscal Deficits: Analytical and Methodological Issues”, Journal of Economic Literature, Vol. XXIX, (December 1991), pp. 1644-1678. 3. Bond, Steve (2014), “Business Tax Incentives”, in The Use of Tax Expenditures in Times of Fiscal Consolidation, Lovise Bauger (ed.), European Economy Economic Papers 523, Brussels: European Commission Economic and Financial Affairs, July 2014. 4. Çebi, Cem and Umit Ozlale (2011), Türkiye’de Yapısal Bütçe Dengesi ve Mali Duruş, Türkiye Cumhuriyet Merkez Bankası, Çalışma Tebliği No: 11/11, Temmuz 2011. 5. European Parliament (2016), Briefing: Understanding The OECD Tax Plan to Address Base Erosion and Profit Shifting – BEPS”, European Union: Members’ Research Service, European Union, 2016. 6. Gültekin, Nihat Bülent and Kamil Yılmaz (2005), “The Turkish Economy Before The EU Accession Talks” in The EU & Turkey: A Glittering Prize or Millstone?, Michael Lake (ed.), Federal Trust for Education and Research London: The Federal Trust is a Registered Charity No: 272241, 2005. 7. Hagen, Jürgen von (2007), “Fiscal Policies and Sustainability of Public Finances in The European Union”, in Macroeconomic Policies for EU Accession, Erdem Basci, Sübidey Togan and Jürgen von Hagen (eds.), The Turkish Bank of The Republic of Turkey 2007, Massachusetts: Edward Elgar Publishing, Inc., 2007. 8. Heady, Chris (2014), “Discussion of Presentations by Pierre Leblanc, Leonard E. Burman and Serena Fatica”, in The Use of Tax Expenditures in Times of Fiscal Consolidation, Lovise Bouger (ed.), European Economy Economic Papers 523, Brussels: European Commission Economic and Financial Affairs, July 2014. 9. https://www.oecd.org/ctp/harmful/43061404.pdf (07.07.2016). İş Bankası (2015), Bütçe Dengesi-Aralık 2015, Ankara: İş Bankası İktisadi Araştırmalar Bölümü, 15 Ocak 2015. 10. Kalkınma Bakanlığı (2015), Ekonomik ve Sosyal Göstergeler 1950-2015, Ankara: Kalkınma Bakanlığı, Temmuz 2015. 11. Maliye Bakanlığı (2015), Yıllık Ekonomik Rapor 2015, Ankara: Maliye Bakanlığı, 2015. 12. McCarty, John T. (2005), “Turkey’ Financial Sector: A Practitioner’s View of Work in Progress”, in The EU & Turkey: A Glittering Prize or Millstone?, Michael Lake (ed.), Federal Trust for Education and Research London: The Federal Trust is a Registered Charity No: 272241, 2005. 13. Meade, J. E. (1978), The Structure and Reform Direct Taxation, London Becless and Colchester : The Institute for Fiscal Studies (IFS), 1978. 14. OECD (2007), Improving The Resolution of Tax Treaty Disputes, OECD Report Adopted by the Committee on Fiscal Affairs on 30 January 2007, OECD: Centre for Tax Policy and Administration, February 2007. 15. OECD (2007), Tax Policy Reforms in Turkey, OECD: Centre for Tax Administration, 2007. 16. OECD (2007), Tax Incentives for Investment–A Global Perspective: Experiences in MENA and non-MENA Countries, OECD Mena-OECD Investment Programme, September 2007. 17. Owens, Jeffrey (2009), “Why Tax is Important for Development”, Tax Justice Focus, First Quarter, Vol. 4, Issue: 4, (2009). 18. Öniş, Ziya and Caner Bakır (2007), “Turkey’s Political Economy in the Age of Financial Globalization: The Significance of the EU Anchor”, South European Society & Politics, Vol. 12, No: 2, (June 2007), pp. 147-164. 19. Swank, Duane (1998), “Funding The Welfare State: Globalization and The Taxation of Business in Advenced Market Economies”, Political Studies, No: XLVI, 1998, pp. 671-692. 20. Wales, Christopher John and Christopher Peter Wales (2012), Structures, Processes and Governance in Tax Policy-Making: an Initial Report, Oxford: Oxford University Centre for Business Taxation, December 2012, p. 27. 21. Weichenrieder, Alfons J. (2007), Survey on The Taxation of Small and Medium-Sized Enterprises: Draft Report on Responses to The Questionnaire, OECD: Centre for Entrepreneurship, Smes & Local Development / Centre for Tax Policy and Administration, September 2007. DETAILS ABOUT AUTHOR: A. NIYAZI ÖZKER ASSOC. PROF. DR. PUBLIC FINANCE DEPARTMENT FACULTY OF ECONOMIC AND BUSINESS ADMINISTRATION BANDIRMA ONYEDI EYLUL UNIVERSITY – 10200 \ TURKEY niyaziozker@yahoo.com

42

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

EQUILIBRIUM OF NATIONAL MORTGAGE SYSTEM - PROBLEMS AND OPPORTUNITIES FOR IMPROVEMENT AND MODELLING JORDANKA JOVKOVA

ABSTRACT This paper deal with the bilateral relations between the actors involved in mortgage lending. Mortgage lending is presented as a dynamic system. Its operation is directed to equilibrium, which depends on two groups of factors macroeconomic and internal for the system. Criterion and restrictive conditions are formulated and the author offers a model for gradually bringing the system of national mortgage lending in equilibrium. KEY WORDS: mortgage system, criterion, macroeconomic factors, equilibrium, model.

1. INTRODUCTION Mortgage system of a country, including Bulgaria in a broad sense is a combination of legal, financial and institutional elements which functioning regulates and organizes the recruitment of certain financial resources aimed at granting mortgages. The legal framework of the mortgage system is represented by all applicable laws, ordinances and other regulations that determine the legality of the institutions and actors, and the relationships between them, and between them and the conditions of the performance of mortgage lending, mortgage law (Banks Act, Mortgage Loans Act, Mortgage Bonds Act, Commercial Act, etc.). The institutional component covers all institutions involved in the entire process of mortgage lending (banks, nonbanking financial institutions, the Registry Agency, etc.). The financial element relates to the financial conditions and cash flows that are formed in the performance of mortgage business. This report examines the financial element of the mortgage system and therefore it concerns the mortgage system in the narrow sense of the term.

2. BULGARIAN MORTGAGE SYSTEM The variety of mortgage loans and schemes assumes substantial financial resources accumulated in the credit institutions to be used for mortgage lending for end users. This indicates that credit institutions should endeavour themselves to recruit financial resources from various general and specific sources. Common sources are well known and they serve for carrying out active operations of any kind — short-term loans, consumer loans, investment in securities, etc. One part of the capital formed at the expense of the conditionally called general sources, of course, may be used for granting mortgage loans to end users. Since mortgage loans in Bulgaria are granted mainly by universal banks, deposits appear to be a major source of their financing. However, for large-scale lending also specific sources are needed, as the mortgage bonds appear to be. The process of recruitment of financial resources for mortgage lending can be represented by the following schemes:

2016 - M SPHERE

B O O K O F PA P E R S

-

43


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Scheme 1: Bilateral relations between the actors involved in the mortgage lending

The pool of cash flows between the actors involved in mortgage lending constitutes a dynamic system which strives for balance during its operation. According to us this balance depends on one part on the macroeconomic situation (characterized by selected macroeconomic indicators — basic interest rate, inflation rate, unemployment, income level, etc.), and on the other hand — on the structure and the ratio of the internal factors which the mere cash flows appear to be, and the cost of financial resources expressed by their magnitude.

Scheme 2: Cash flows between the actors involved in the mortgage lending

44

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Given the pattern of functioning of the mortgage lending in Bulgaria we may assume that the system mentioned within the above scheme will be in equilibrium when in long term by amount and maturity proceeds from the sale of mortgage bonds plus certain proportion (percentage) of deposits of the commercial banks are equal (respectively match) to the sum of the amounts of mortgage loans granted to the borrowers subject to restrictive conditions concerning: a) objectivity of the mortgage evaluation of mortgage security (real estate); b) limitations on the maximum value of the mortgage for certain percentage of the mortgage evaluation; c) compliance with certain proportions between the prices of different types of financial resources involved in the system of cash flows in order the mortgage lending to be profitable for the banks, to be available to end borrowers and attractive to investors in mortgage bonds. It is necessary to respect the proportions between the following indicators: •

mortgage interest rate (weighted average cost of mortgage loans) — ;

interest rate on the central bank credits (respectively BIR) —

interbank interest rate —

interest rate on deposits —

dividends (in percentage) — dj;

Interest rate of the mortgage bonds from the i-th issuance of the j-th financial institution – lij.

interest rate (cost of financing from other financial institutions) —

l3j

Scheme 3: Mortgage loans collateral

2016 - M SPHERE

B O O K O F PA P E R S

-

45


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

In Bulgaria mortgage lending is carried out mainly by commercial banks, which are of universal nature. The contracts are not deemed as marketable securities. For refinancing of mortgages, since 2000, banks may issue mortgage bonds.1 According to this Act “mortgage bonds are securities issued by banks based on their portfolios of loans secured by one or more first in line mortgages in favour of banks on real estate (mortgages” (Art. 2)). Houses, including rented ones, villas, seasonal and holiday homes; commercial and administrative offices, hotels, restaurants and other similar properties; industrial and warehouse premises, may be used as collateral. The mortgage bonds are covered by mortgage loans of the issuing bank (basic coverage), while in full or partial repayment of loans, the bank may include in the coverage its assets (replacement coverage). The Bank maintains a public register of the coverage of the mortgage bonds it has issued. Upon issuance of the mortgage bonds the bank should disclose details about the mortgage loans of its portfolio on the basis of which the issue is made. These data must be indicated in the prospectus of the issue for each loan portfolio and are related to: •

the amount of the principal outstanding at the time of the loan and the end of the last completed quarter;

deadline when granting the loan and the remaining period of repayment;

interest, fees and commissions on the loan;

risk classification of the loan at the end of each calendar year from the date of granting the loan and by the end of the last completed quarter;

type of the properties mortgaged as collateral, their mortgage evaluation and the amount of ratio between the outstanding principal and the mortgage evaluation at the time of granting the loan and the end of the last completed quarter. Moreover, it is necessary characteristic of the mortgage loan portfolio to be provided, based on which the issue is made. This characteristic should show the distribution of loans by: →→ the amount of the outstanding principal; →→ remaining period to the final repayment of the loan; →→ interest rates; →→ their risk classification at the end of the last completed quarter; →→ amount of the ratio between the outstanding principal and the last mortgage evaluation2.

In most cases, mortgage bonds are attractive tool for investors, which imposed amendments to be made in the Voluntary Pension Insurance Act and the Insurance Act, aimed at investment in this mortgage product. The state of play of the mortgage lending in Bulgaria is characterized briefly by the following points:

1 2 3 4

The relative share of mortgage loans in the total lending is about 20% and has increased in comparison to 2006 by approximately 50%.

Permanent increase of the liquidity in the financial sphere. From 24 288 040 thousand BGN in 2006, deposits in the banking system increased to 72 440 436 thousand BGN. (from 12 455 405 thousand EUR to 37 148 942 thousand EUR in 2015). The same trend appears for credits — from 22 299 361 thousand BGN (11 435 570 thousand EUR) in 2006 to 55 295 648 thousand BGN (28 356 743 thousand EUR). In 2006 the coefficient of coverage of credits by the deposits is 1.09, and in 2015 — 1.31. Therefore the banking system has the funding resources needed for crediting.3

Changes in interest rates. From levels in the range between 9 — 14% in 2006 interest rates on mortgage loans, in 2015 interest rates are in the range between 6 — 12% with anticipation until the end of 2016 to reach values between 4,25 – 5,25 %.4

Changes in other credit conditions (beyond the interest rates). The crisis period (2007 — 2009) is characterized by liberalization of the criteria for assessment of creditability and transition of the creditors from price to non-price competition. Post crisis period is characterized by increasing the requirements in this regard.

Divergent changes in the yield on mortgage loans for creditors. In 2006 it was about 3% (decreased compared to previous years) and in 2015 it approached 5% (due to a reduction in the price of credit resource, primarily in interest rates on deposits);

A trend is formed for increasing the loans in BGN, followed by these in EUR and in third place — in US dollars;

Lending is predominantly in floating interest rate coupled with LIBOR.

Mortgage bonds Act. Mortgage evaluation of the property is the monetary amount for which the property may be sold at the time of evaluation (Art. 15 of the Act) Source: BNB — monetary and interest statistics. Forecast of Credit Centre, Bulgaria.

46

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

3. METHODOLOGY OF BALANCING THE MORTGAGE SYSTEM It may be said that globally, including in Bulgaria, the effects of the financial and economic crisis are still felt. This requires action by governments and specialized regulatory bodies, including regulatory standards and control over their application aimed at achievement of two main objectives: 1. Reaching a state of effective structure and functioning of the national mortgage markets (to a reasonable degree possible). 2. Harmonisation of conditions, standards, requirements, structure and functioning of mortgage markets (initially within the European Union, and subsequently — globally). Achieving the above objectives is possible by gradually bringing the national mortgage system in the process of equilibrium (balance). The balance of the system involves implementation of several requirements: 1. Accessibility to mortgage lending for every potential borrower (without artificial restrictions, but without excessive liberalization). 2. Ability to repay the mortgage loan, according to the repayment schedule (within the mortgage system it means acceptable interest rate on mortgage loans). 3. Possibility of financing and refinancing of mortgage loans within the legislations and specifics of the national mortgage system. 4. Normal (average) yield (profitability) of mortgage lending for the commercial banks. 5. Maintaining acceptable difference between the weighted average cost of mortgage financing and the weighted average price of the mere mortgage loans. 6. Possibilities for variation of the above (pt. 5) difference in predetermined limits. 7. Maintaining a balance between the amount of total mortgage lending in the system and the funding of mortgage loans (including some excess funding, which may vary in a predetermined range). Achieving equilibrium (balance) of the system in terms of implementation of the above requirements may happen (or at least be supported) by constructing a mathematical model that through a system of equations and inequalities may describe the elements of the system and the links and dependencies between them. At the same time by using different inputs (range of input variables within certain limits) different options (scenarios) are realised of system behaviour. On this basis an opportunity is created for these options (or this option) to be chosen where the requirements (equations and inequalities) are satisfied, i.e. these (this) providing (that provides) equilibrium of the system. The model of the mortgage system which is offered, includes the following equation and inequalities:

(1)

where:

yj – mortgage loans granted by the j-th financial institution (bank); m – number of the financial institutions; xij – amount of the i-th issuance of mortgage bonds by j-th financial institution; dj – amount of deposits in the j-th financial institution; d1j – relative share of deposits (average) that are used for funding of mortgage loans in the j-th financial institution; Oj – amount of the capital of all (common) funding sources in the j-th financial institution; pj – relative share of funds (of common sources) used for funding of mortgage loans (average); Vj – proceeds from repayment of the loans granted by the j-th financial institution; wj – relative share of funds (or proceeds from repayment of loans) used for granting new loans in the j-th financial institution. 5

In this case, the concept of national mortgage system is used in a narrow sense and means a set of principles and methods of “forming the total portfolio of credit resources for mortgage lending (Razumova, I.A. credit resources for mortgage lending” (Razumova, I.A. Mortgage lending, Piter, M., 2009, page 6).

2016 - M SPHERE

B O O K O F PA P E R S

-

47


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

In practice, the above inequality expresses the requirement cash resources for the funding of mortgage loans (offering) to be at least equal or exceeding the demand for mortgage loans. This may be expressed in another way:

(2)

Z – predetermined (adjustable, for example by the Central Bank) excess supply of mortgage loans over their demand (for the entire banking system);

u – factor determining the tolerance of excess of Z. Admissible value for u for example may range between 0,05 – 0,1, i.e. from 5 % to 10 %.

(3)

d2j – relative share of funds (of total deposits) of the j-th financial institution that (on average) are used for funding investments in real estate;

d3j – relative share of deposits that are used for other purposes in the j-th financial institution (average).

(4)

(5) where:

rj – weighted average cost of mortgage loans; aj – share capital of the j-th financial institution; dj – dividend (in % of the share capital) paid by the j-th financial institution; zj – refunding (if admissible) by the Central Bank. In the conditions of currency board this source drops off. lij – interest rate of refunding by the Central Bank (basic interest rate); mj – funding by the interbank market of the j-th financial institution; l2j – interest rate at the interbank market; fi – funding (credits, deposits) from other financial institutions; l3j – interest rate (cost of funding from other financial institutions); l4j – interest rate on deposits of the j-th financial institution; lij – interest rate on mortgage bonds from the i-st issuance of the j-th financial institution.

(6) — weighted average cost of mortgage loans for end users;

li – average interest rate on mortgage loans of the j-th financial institution.

48

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

, as

(7)

, where

q – permissible (acceptable, adjustable) difference between the weighted average price of mortgage loans and the weighted average cost of mortgage loans;

b – coefficient determining the permissible deviation of the difference. Its appropriate value may be between 0.05 — 0.1. CONCLUSION The formalization of processes in the mortgage system by the above model, representing a set of mathematical equations and inequalities, allows quick and relatively easy development of options of behaviour of the mortgage system in different solutions about the volumes, structure and pricing of mortgage loans and the sources of their funding. Moreover, it would be appropriate for all options to be developed in accordance with external system variables, such as rents and real estate prices, as well as employment and income of households, individuals, corporate and institutional investors. Especially in times of recovery from the financial and economic crisis, these indicators should be subject to some regulation (direct or indirect) in order to ensure normal conditions for repayment of mortgage loans according to their repayment schedules.

DETAILS ABOUT AUTHOR: JORDANKA JOVKOVA PROFESSOR UNIVERSITY OF NATIONAL AND WORLD ECONOMY BUSINESS FACULTY SOFIA, BULGARIA jjovkova@abv.bg

2016 - M SPHERE

B O O K O F PA P E R S

-

49


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

FINANCIAL MANAGEMENT IN THE CONTEXT OF FINANCIAL CONTROL AND AUDIT NORA ŠTANGOVÁ AGNEŠA VÍGHOVÁ

ABSTRACT Monitoring of the functioning of public finances is in charge of Financial Control in the state. It is a distributing and redistributing of the funds primarily for public administration, it is important for these processes to act smoothly and efficiently for the benefit and development of the citizens. This implies thorough approaches, while carrying out a financial control. The article presents the financial control in context of the management and audit of public finances. KEY WORDS: financial control, audit, public finances, basic financial monitoring, administrative financial control, fieldwork financial control.

1. INTRODUCTION Public finances, that have specific task, are presented in the state budget. Basically, they represent incomes and expenses in the state. Their guidance is an economic policy of the state, therefore, it is necessary to pay attention on them.

2. PUBLIC SECTOR AND THE FINANCIAL CONTROL The public sector is the category of market economy, made up of private and public sector management. The public sector is the set of activities, or institutional units, that are managed and directed by the government on the basis of public finances. Public finances are a set of specific financial relationships and interventions that take place between entities in a market economy and government level. They are presented by the state budget and they are the activities and processes, which are focused on the creation and implementation of public income and public expenditure. Surveying the actual state in above mentioned areas, also derogations detecting, in order to implement the necessary measures, belongs to operations called – controlling. In the public sector, it is an activity focused on providing information, but also a critical assessment of the subject of control and creating of the favourable conditions for achieving the desired state. The public sector is Public funded on the basis of public budgets. The system of public budgets is formed by the central budget and the budgets of lower levels of government. Their content is a complex of financial flows and relationships. Every level of the budgets has its own budget of incomes and realizes its expenditures – it finances their tasks and enters into the relations with other entities.

2.1. Financial control as a tool of indirect management of finances As the public finance has two basic functions: allocative – providing economic efficiency, and redistributive – economic security of social policy, it is necessary for the state to follow these incomes and expenditures in terms of the efficient functioning of entities in the state, when the financial control has its important and irreplaceable place. Regulation of financial processes – flows of funds represents the financial management, which is an essential element of financial control. Its basic criteria are: legality and the “3 E“. This means: Effectiveness – in functioning of public administration, is a type of financial management where the indicators are in order to meet the set targets, and the results correspond to those targets. Economy – whether the stated objectives are achieved with the least amount of resources – inputs. Efficiency – is a relationship between the results of operations and used resources, it is a measure of the achievement of the goals. So, monitoring is irreplaceable in terms of fulfilment of conditions for disbursement of public funds – finances, and it is irreplaceable in the evaluation of ongoing events and the overall state of the finances. The financial management system is a complex system of interlocked systems and activities in implementing the objectives of the organization, in a way, that an internal control system can operate in a particular organization.

50

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2.2.Financial management in the context of financial control For the need to ensure the protection of public finances, it is important for the state to build a secure and effective system of public control, whose inseparable part is a financial management. The main precondition for an effective financial control system is to ensure the necessary exchange of information on weaknesses in the different stages of the controlling process. Financial control is part of the financial management and it is one of the tools for the statutory public authority how to manage effectively and to achieve all of its objectives and goals of the public administration body. Financial control is performed as: •

Basic financial monitoring

Administrative financial control

Fieldwork financial control

a) Basic financial monitoring in the context of verification of financial operations and their parts, plays the role of the primary control and mandatory part of the financial management of the public administration body. Verification of financial operations and its parts includes verifying compliance with: •

Budget of public administration for the relevant budget year,

The budgets of public administrations for two financial years in state budgetary organizations,

Special regulations and international treaties binding the Slovak Republic and under which the Slovak Republic receives funds from abroad,

Contracts made by a public authority,

Decisions issued under special regulations,

Internal regulations on the management of public finances.

Basic financial control is made by the head of the public administration body, or an authorized senior employee and the employee responsible for the relevant character of the financial transaction.

b) Administrative financial control is carried out in the following cases:

c)

before granting of the public funds from the budget,

after the actual granting of funds or,

in the case of the provision of funds by the European Union regulation No.1299/2013

The report is a result of the administrative financial control management. When the administrative and financial monitoring does not affect that part of the public finances, which are linked to organizing of their own operation of the public administration, including the entities involved in the budget of a public administration body, or to its substantive scope.

Fieldwork financial control Apart from the basic financial control and administrative financial control, the law has also introduced the institute of financial control on the spot, that is carried out, at least, by two employees of the public administration body, based only on the written authorization. From the written authorization it have to be clear which persons are authorized to perform the inspection, who is the audited entity, and what is the subject of the control. In practice, spot checks shall verify the actual delivery of goods, services and works, the accounts of the obliged person, personnel expenses, the compliance of the financial operations realization with the conditions agreed in the contract are verified. This form of control can also be performed on a sample, or as an 100% financial control. The subject of the financial control are the financial operations, when the financial operations are incomes, providing, or using of the public finance, legal action, or other legal act of the property ownership.

2016 - M SPHERE

B O O K O F PA P E R S

-

51


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

3. GOVERNMENT AUDIT AND COMPETENCIES OF THE GOVERNMENT AUDIT OFFICE Government audit is a tool of the Ministry of Finance of SR, with which the public finances are protected from unauthorized access, or disclosure. Government audit is performed by the employees of Ministry of Finance and by the employees from the Government audit office. From 1st January 2016, the area of financial audit and government audit is regulated by the Act no357/2015, on financial controlling and auditing. According to this Act, the Financial Control Administration terminates, and the Government Audit Office is created. This change is implied from the introduction of ESO system, and it is created to improve the management and coordination of the process of the government audit. Government Audit Office is a budgetary organization, whose incomes and expenditures depend od the budget of the Ministry of Finance. Government audit office performs the following tasks: •

Performs government audit,

Decides in proceeding and in violations of financial discipline in the management of the funds from abroad, which were provided under international agreements by which, the Slovak Republic is bound, and the state and with the state budget funds, if their granting is a condition of granting of these funds,

Imposes and enforces the sanctions for violations of financial discipline in the management of funds from abroad, which were provided under international agreements by which, the Slovak Republic is bound, and with the state budget funds, if their granting is a condition of granting of these funds,

Decides in proceeding and in violations of financial discipline in the management of the funds provided as a share of taxes paid,

Imposes and enforces the sanctions for violations of financial discipline in the management of funds, as a share of taxes, that are the state budget income,

Provides any assistance to the Ministry of Finance,

Evaulates the quality of performance of financial control and internal audit.

3.1. Analysis of government audits – results The above mentioned competencies has the office: Financial Control. In the performing of government audits and subsequent controls there were found out, by this office, repetitive weaknesses in several areas, as shown in table no. 1 and further description is in the text below. This institution has the right to issue a decision imposing a fine. In 2014 in Bratislava, it issued 64 decisions, 15 of them on the basis of government audit, carried out by SFK Bratislava. The total number of suggestions for deficiencies on the basis of government audit in 2014 was 115. Issued decisions of imposed fines are alert warnings for the controlled entity, and also for the similar violations of financial discipline. Table 1. Summary of findings for the years 2007 to 2009 Findings

Year 2007

Year 2008

Year 2009

Breach of financial discipline

3.833.200 €

2.061.309 €

2.540.835 €

Other findings

54.305 €

530.273 €

1.253.795 €

The findings together

3.887.505 €

2.591.582 €

3.794.630 €

Source: authors’ own processing on the basis of the annual reports of the Financial Control

52

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The most common forms of violation of financial discipline were: •

Use of public funds contrary to the purpose,

Use of public funds in excess of entitlement, which causes the higher use of public funds, wasteful, inefficient and ineffective use of public funds,

An advance payment of public funds, contrary to the legal rules and contrary to the Act on budgetary rules,

Violation of the rules and conditions under which public funds were granted.

In performance of government audits and subsequent financial controls there were observed these repetitive deficiencies: •

Payment of unrealized works and supplies of goods, and services of special – purpose subsidies in the construction of rental housing, technical infrastructure, water supply, sewerage and sewage treatment plants,

Insufficient preparation of investment projects – frequent changes in projects and budgets,

Implementation of financially demanding actions without securing of their own funds,

High deployment and incompleteness of investment shares – further delays in construction,

Deficiencies in the accounting,

Insufficient provision of the financial control.

4. COMPARISON OF THE LAWS ON FINANCIAL CONTROL AND AUDITING Till 31st December 2015 there was valid the Act no.502/2002 Coll. On Financial Control and Internal Audit as amended. From 1st January 2016 Act no 357/2015 on Financial Control and Auditing came into force. Table 2. Comparison of Laws on Finnacial Control in 2015 and 2016 Act in 2015

Act in 2016

Description of changes

Internal Administration Control

Basic financial control

Change of the name (ie. The preliminary financial control), which contains the unchanged diction of the Act, with the novelty, that is confirmed by the government agreement with the realization/with the continuing of the financial operation (signed by the manager of the organization)

Administrative control of the audited person

Aministrative financial control

Changing the name and its exclusive implementation in the case of granting of funds

Fieldwork financial control

Fieldwork financial control

From 2016 it does not belong to the preliminary financial control as it was in 2015

8 criteria of compliance of financial operations

7 criteria of compliance of financial operations

Merging of special regulations and international agreements in a single criteria

Compliance with internal regulations on the management of public funds

Compliance with internal regulations

The new law requires, where relevant, by the financial operation, or by its part, to verify compliance with internal directive, which does not have to be only the directive after the new, that is adjusting the area of management of public funds.

Preliminary financial control

-

Waiving of the preliminary financial control

Post financial control

Fieldwork financial control

Deletion of the term “post financial control“ and it is replaced by Fieldwork financial control for the statutory needs and for verification of the financial operations and their conformity with the criteria pursuant to § 6.4 of the Act on Financial Control and Auditing

Finance Control

Government Audit Office

Replacement by a new public administration entities and organizations established by the Ministry in Zvolen

Source: Sýkora, J. (2016), Practical implementation of financial control in public administration, p. 45

2016 - M SPHERE

B O O K O F PA P E R S

-

53


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

4.1 Which Act is better, or more effective The Act no.357/2015 Coll. Was conceived in relationship with the public administration reform “ESO“ ie. (an effective, reliable and open government), there also appeared the social need to replace the Act no. 502/2001, by the Act that will strengthen financial control and audit government. To the above mentioned rule, there are also applied current EU directive. The advantage of that legal standard in comparison to the previous legal norm is to strengthen the competencies for the newly created Government Audit Office and to improve the process of quality of performance evaluating of the Government Audit Office, in the area of acceleration, streamline and optimization of the coordination of government audits. Here mentioned legal regulation does not introduced new tasks to the autonomous regions and municipalities, especially to the municipalities with a small number of employees, where there was not possible to ensure the implementation of basic financial control by two employees. According to the new Act, in this case, there can be performed the basis financial control by a mayor, respectively by a person – appointed by the municipal council.

CONCLUSION AND OPEN QUESTIONS As we can see from the reduced analysis, all the deficiencies meant more spending, respectively, they meant more additional costs for the organization. So these funds have been spent and burdened the state budget, and moreover they often have not been in the line with the purpose for which the funds were intended, which means the deficiencies in the financial discipline. Also, the lack of financial control enables the application of the creative accounting, what is evident from the results of the analysis. It is clear, that the financial control has its fixed place in the economy of the state and therefore, it should put emphasis on it. Here we submitted compacted and abbreviated analysis results, which represent the open questions, and these will be dealt with in our future research.

LITERATURE 1. Beňová, E. (2007) Finance and currency, Iura Edition, Bratislava 2. Cibáková, V. a kol. (2012) Economics of public sector, Iura Edition, Bratislava 3. Hamalová, M. kol. (2014) Management theory organization of public administration, Iura Edition, Bratislava 4. Matušovič, M. (2010.) Identifying research company = Research identification of business. In current views on competitiveness and entrepreneurship, EKONÓM, Bratislava 5. Medveď, J. a kol (.2011.) Public finance. Sprint dva, Bratislava 6. Sýkora, J. (2016.) Practical implementation of financial control in public administration. Wolters Kluwer, Bratislava 7. Tekeli, J.( 2013.) Control in municipal government. EUROKÓDEX, s.r.o. Žilina. 8. Veverková, I. (2013.) Economics minimum main controller. Iura Edition. Bratislava, 9. Annual reports of the Institutions of Financial Control Administration 10. Act no. 357/2015, Coll., on Financial Control and Auditing

DETAILS ABOUT AUTHORS: NORA ŠTANGOVÁ PROFESSOR SCHOOL OF ECONOMICS AND PUBLIC ADMINISTRATION IN BRATISLAVA, BRATISLAVA, SLOVAKIA nora.stangova@vsemvs.sk AGNESA VÍGHOVÁ SENIOR LECTURER SCHOOL OF ECONOMICS AND PUBLIC ADMINISTRATION IN BRATISLAVA, BRATISLAVA, SLOVAKIA agnesa.vighova@vsemvs.sk

54

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

OPINION LEADERS - OPPORTUNITY OR THREAT FOR THE COMPANY? DRAŽEN MARIĆ RUŽICA KOVAČ ŽNIDERŠIĆ ALEKSANDAR GRUBOR

ABSTRACT Contemporary business conditions set up a new complex problem for the companies – a dramatic decline in the return on investment of different types of promotion activities. Consumers on the global market are showing increasing levels of resistance and lack of confidence in a growing number of marketing messages sent to them by companies, mostly because those messages communicate only on the positive and often embellished aspects of the products and services. Consumers wishing to reduce the risk of wrong purchase decisions are turning to other consumers in whose advice and attitudes they have confidence, and thus get a true picture of the market situation. Those consumers are very specific individuals recognized as opinion leaders in marketing literature. In this way, the company’s control on consumer purchase decision is reduced significantly, thereby increasing the overall risk of doing business. The paper aims to highlight the importance of the research of consumer opinion leaders in marketing theory and practice, to identify their characteristics and behaviour, and to point out possible ways of their identification. The empirical research will test the hypothesis of the existence of the gender impact on consumer display of opinion leadership in the Republic of Serbia. KEY WORDS: Consumer, opinion leaders, purchase decision, gender.

1. INTRODUCTION In its analysis of market developments and laws, marketing theory has directed its focus predominantly to studying interactions between businesses participating in competition, and to studying measuring interaction between businesses and consumers. For a long time, there was a noticeable absence of any comparable intentions and efforts for conceptualization and systematization of interactions between consumers themselves, in relation to choices and decisions they make in purchasing. Typical thinking pattern and conviction could be formed into the opinion that consumers make their choices and purchase decisions based on the influences and offered alternatives coming exclusively from business producing and offering goods and services on the market. Interactions between consumers themselves were completely set aside and did not receive any significance at all; studies into this direction were left to sociologists and psychologists, and were regarded only as periodical deviations from set rules. The actual business environment and marketing environment implies that the situation has changed diametrically – the economic, especially marketing literature, theory and practice devote an increasing amount of attention and effort to contacts and relations established between consumers on the market. It is generally known that interactions between consumers take the dominant position in most studies, and that individual consumer behaviour on the market, their choices and decisions to purchase and use various products and services are most determined by these interactions. Researchers and business people in almost all industries without an exception often point out that satisfied customers are the best sellers of products and services on the market. The reason for this belief lies in the fact that the individual, the current consumers, disseminating information on a business and its offer of products and services through word of mouth communication, has a high level of credibility and trust, and consequently influence, in the eyes of other potential consumers. For potential buyers i e. consumers, it is very important that these individuals in most cases already have the experience of purchase and use of products and services that are the subject of purchase decision, but also because their word and suggestion, due to its sincerity, bears a much more greater specific weight than any other commercial advertisement. They have no direct material interest in the sale and success of a business’ product and service on the market. Potential customers see these specific individuals as the most reliable way of reducing risk related to the purchase of products and services, and marketing science identifies them as opinion leaders.

2016 - M SPHERE

B O O K O F PA P E R S

-

55


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2. LITERATURE REVIEW Individual consumers, possessed of a higher level of knowledge about products and services, and the producers and suppliers thereof, are referred to as opinion leaders. The concept of opinion leader dates back to the 1940s and originates from research for the needs of political analyses, which revealed that the political public opinion is influenced not only by mass media but, more often, individuals and interpersonal communication they generate based on information obtained from mass media, which they transfer further to other voters who are not so active or informed. Individuals who are the first to gather information intensively create their attitudes and opinions, and transfer them further to other individuals thus influencing their attitudes and opinion, are referred to as opinion leaders. Opinion leaders emerge and realize their role in situations when other consumers are looking for products and services to buy, which they believe will meet their expectations in the sense of satisfying needs and wishes, when possibly trying and evaluating these products and services, before they make a decision to purchase them. It is a personal influence that consumers make one on another through interpersonal communication. The concept of opinion leadership was dealt with and significantly contributed by Schiffman and Kanuk (2004, p.500), who identify it essentially with word of mouth communication and define it as a process in which an individual – an opinion leader – informally influences the attitudes and actions of other individuals, whom they call opinion seekers and recipients. The authors characterise this type of relationship and interaction between consumers and non-commercial and independent, and it can be carried out by means of various, increasingly electronic media, rather than merely by face-to-face contact. Hanna and Wozniak (2009, p. 463) point out that the personal influence that opinion leaders can have on other consumers is characteristic of situations in which there are strong social connections between information givers and recipients, and when the products in question feature as some sort of status symbols in the observed environment. The personal opinion of opinion leaders predominantly occurs in the following situations: When consumers •

do not have sufficient knowledge and information on products and services,

do not have an objective criterion for the assessment of alternative brands,

are emotionally related to a product or service,

are strongly attached for the person providing information, i.e. opinion leader,

are becoming members of various reference groups,

are making significant changes in their lives and acquiring new relationships.

When products and services are •

new

expensive

without high purchase frequency

very important

very complex

difficult to assess real value

possess an expressed value,

reflect personal taste.

Solomon, Bamossy and Askegaard (2002) view opinion leaders as persons – customers – consumers who are the first to buy and/or use a certain product and/or service, and can be monomorphists – specialists in a specific area – or polymorphists – specialists in several areas. Many consumers take opinion leaders as very valuable information sources for many different reasons (p.323) •

56

-

opinion leaders are mostly technically competent and very persuasive, for they possess expert knowledge of the product or service;

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

opinion leaders underwent the process of research, analysis, evaluation and synthesis of information about the desired product and service earlier, and unlike the commercial means of persuading the target auditorium they are not defending the interest of a business, which affects the rapid growth of their credibility in the eyes of potential customers consumers;

opinion leaders always strive to be socially active and highly connected with all the members of their environment, even in the formal sense, which gives them legitimate poser based on the value of their social status;

opinion leaders strive to be very similar to other consumers, in the sense of their beliefs and value system, which also gives them a high level of referential power;

in the eyes of potential consumers, opinion leaders are the first ones to buy new products and services, are the bravest and take the highest degree of risk in purchase, which reduces the level of uncertainty and insecurity in their followers in purchase;

potential consumers know very well that all marketing activities of a company are focused only on the positive aspects of their offer, whereas all possible negative features are pushed into the background; this situation does not exist in opinion leaders and this is why their word is far more significant for potential consumers.

Rather than the term opinion leader, McConnel and Huba (2007) use the term consumer evangelist for consumers who speak out and advise others what to buy, where to buy, why to buy, who to buy from. The term itself is associated with actual evangelists –believers who spread the living word of their faith, Christianity, teaching others religion based on strong emotional links, love of others and strong convictions. Similarly, consumers who help their environment in shopping do not do this for any material interest, but rather out of good and noble intention, which places them into the category of consumer evangelists. Salomon (2011) makes a distinction between opinion leaders and consumers he calls market mavens, who are actively involved in the transmission of information that a business emits without their correction by their experience or opinion. Market mavens are most often not innovators who are the first to buy a certain product or service on the market; this is done by opinion leaders. Mavens are often not even that interested for certain categories of products and services; they simply enjoy the shopping process and like to be informed about all developments on the market. Chakravarthy and Prasad (2011) direct the focus of their research on the analysis of the influence of opinion leaders on other consumers’ purchase decision. The authors argue that the interpersonal impact of opinion leaders also occurs in final consumers who make the decision on the purchase of products and services for their own needs or as a gift to others, also in industrial consumers, but likewise in non-profit organizations. Opinion leaders determine and shape opinion seekers’ purchasing decision through interpersonal communication in the form of advice and recommendations. Opinion leadership is opinion leaders’ ability to occasionally informally interpersonally influence the attitudes and behaviours of other consumers, in the manner they want. Opinion leaders bridge the communication and information gap existing between businesses and consumers, transmitting adapted businesses’ messages. Meiners, Scwatring and Seeberger (2010) point out that many businesses set up a position, i.e. operative function dealing with such consumers. Carl (2006) examines the foundations of interpersonal communication between consumers and possible directions of action of businesses on opinion leaders and concludes that opinion leaders are friends, relatives, personal emotional partners generating interpersonal communication on daily an general topics, and thus enable other consumers in their environment to acquire the sense of their life and being, of their role in it, and on correctness of their opinions. Nisbet and Kotcher (2009) investigate the engagement and impact of opinion leaders in situations that are not related to purchase decision, but rather on questions that have a broader social sense, and point out that solving this type of problems – e.g. climate changes – is impossible without the active participation of opinion leaders in the campaign. One of opinion leaders’ key qualities is that they are very good listeners of not only business, but, much more, of other consumers and their fears, dilemmas, or delights. Opinion leaders must be integrated in businesses’ marketing strategies and they enjoy it, and at the same time represent the source of the business’ feedback from the market, whereby the business gains invaluable information on the success of their marketing activities, and ideas for new products and general improvement of business operations. Ignoring this reality also bears the side of coin related to the influence of opinion leaders which is not affirmative for the business, but on the contrary, extremely negative, whereby the business’ opportunity is turned into threat.

2016 - M SPHERE

B O O K O F PA P E R S

-

57


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

3. RESEARCH METHODOLOGY AND DISCUSSION The survey conducted in order to confirm or reject the hypotheses set in the study is a segment of a complex project of research into the phenomenon of the impact of opinion leaders to consumer word-of-mouth communication on purchase decisions in the Republic of Serbia. The study uses a research method in the form of structured personal communication, i.e. questionnaire, whose dissemination and response retrieval was conducted through the Internet – 80.2%, and personally – 19.8% respondents. The survey aimed at accomplishing the set research goals and confirming or rejecting the defined hypotheses was conducted from March until September 2015 on a defined stratified sample of 1009 respondents. Stratification was performed by gender, respondents’ age and education levels. The data gathered by means of the questionnaire were processed by appropriate mathematical and statistical methods, with the application of statistical SPSS software, as follows: •

Parametric tests: •

Normal distribution – testing the hypothetical proportion value of the basic set, based on the sample;

Analysis of variance, i.e. ANOVA dispersion analysis with 1,2, and 3 samples: • t-test • Levene’s test

The questions from the questionnaire that was used were tested by Cronbach alpha method. The basic idea behind this method is that the measurement instrument that has more variables can be regarded as reliable if all variables express the same phenomenon but in a slightly different way. Cronbach alpha coefficient is 0.738, pointing to high internal consistency, i.e. questions in the questionnaire are positively mutually correlated. The scale applied in this research was used by Marić (2014) and consists of 30 items, but, due to paper length limitations imposed by the conference, this article only presents a number of items, i.e. statements aimed to confirm or reject the defined hypotheses. The items are arranged with a Likert scale of offered reply options. strongly disagree

disagree

neither agree nor disagree

agree

1

2

3

4

strongly agree 5

H0: Manifestation of leadership among consumers depends on their gender – male consumers in the Republic of Serbia are more prone to seeing themselves as opinion leaders in comparison with female consumers Question: I regard myself as someone whom acquaintances often ask for advice and opinion, i.e. I give shopping advice to others more often than I seek it.

4. COMPARISON OF THE LAWS ON FINANCIAL CONTROL AND AUDITING Till 31st December 2015 there was valid the Act no.502/2002 Coll. On Financial Control and Internal Audit as amended. From 1st January 2016 Act no 357/2015 on Financial Control and Auditing came into force. Table 2. Comparison of Laws on Finnacial Control in 2015 and 2016

58

frequency

%

partially disagree

114

11.3

partially agree

410

40.6

neutral

292

28.9

fully agree

48

4.8

fully disagree

145

14.4

total

1009

100.0

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 2. Structure of respondents’ answers

Although the self-nomination method is a method which is often used in identification of opinion leaders due to its effectiveness and efficiency, it has a significant weakness – the respondents’ subjectivity. The results should therefore be taken with reserve, but some conclusions can still be drawn – first of all, most consumers on the territory of the Republic of Serbia regard themselves as opinion leaders, i.e. persons of reputation and trust, approached by other consumers from their environment for advice when shopping. As many as 14.37% consumers are absolutely sure that they are opinion leaders in the eyes of other consumers, and when 40.63% consumers who also regard themselves as opinion leaders with a slight reserve is added to this, the result reads that in a sample of 1009 respondents in Serbia more than a half – 55% of them – see themselves as someone whom other consumers approach for help when making a purchase decision, i.e. as someone who has influence on decision making and purchases of other consumers. It is important to point out the relatively high percentage of respondents who had a neutral attitude (28.54%), whereas the total percentage of respondents who do not regard themselves as opinion leaders is only 16.06%, an extremely small number of whom (4.76%) absolutely do not see themselves as someone who has any influence on other consumers’ purchase decision. A part of the explanation of such a distribution of respondents’ answers may also lie in the respondents’ mentality, where the cult of leaders is fostered through history, so that this position is regarded as something especially important and valuable, so that the desire to obtain this status in the eyes of others is fairly high. Table 2. Structure of respondents’ answer by gender Question 21

valid

male

%

female

%

fully disagree

10

4%

38

5%

partially disagree

49

19%

65

9%

neutral

53

21%

239

32%

partially agree

104

40%

303

41%

fully agree

45

16%

103

14%

total

261

100%

748

100%

blank

0

0.0

/

0.0

261

100%

748

100%

total

Analysis of variance by the application of t-test for two variables and Levene’s test for equality of variances did not establish the existence of statistically highly significant differences between respondents by gender for question 21, as p-value is higher than 0.05, with the probability of 95%.

2016 - M SPHERE

B O O K O F PA P E R S

-

59


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 3. ANOVA t-test

Question 21

Gender

N

Mean

Std. deviation

Std. error mean

male

261

3.49

1.108

.056

female

748

3.47

1.032

.031

Table 4. Levene’s test for equality of variances Levene’s test for equality of variances F

Question 21.

Equal variances assumed

9.335

Equal variances not assumed

Sig.

.002

t-test for equality of means

t

df

Sig. (2-tailed)

Mean difference

Std. error difference

95% confidence interval of the difference Lower

Upper

.306

1506

.760

.019

.062

-.103

.141

.295

629.885

.768

.019

.064

-.107

.145

Fig. Structure of answers of respondents of both genders

As p-value is higher than 0.05, with the probability of 95% it is concluded that there are no statistically significant differences between male and female respondents as regards question 21, in the sense that the zero hypothesis is accepted and it is concluded that the mean deviations of individual responses from the mean vale are equal in men and women when it comes to the statement that respondents regard themselves as opinion leaders, i.e. persons that other consumers approach for advice and help before the former ask this from other consumers. Identically – by analysis of variance with Levene’s equality test – questions for the studied phenomenon were processed, where statistically significant difference according to gender were identified. Those questions were: Question: I disseminate my experience more actively when I am maximally appreciated as a buyer by the seller or disappointed by the seller’s attitude than when the product is of maximum or disappointing quality. Variance analysis by application of t-test for two variables and Levene’s test for equality of variances established the existence of statistically highly significant differences between respondents viewed by gender for question 15. As p-value is smaller than 0.05, it is concluded with the probability of 95% that there are significant difference3s between male and female respondents regarding question 15 in the sense that zero hypothesis is discarded and more strict criterion is used, starting from the assumption that variances are different in samples. By observing the values of

60

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

standard deviations it is concluded that mean deviations of individual responses from the mean value are much higher in female respondents in comparison with men when it comes to more active dissemination of personal experience by interpersonal communication when the respondents are maximally appreciated or disappointed by the attitude of the business and employees than when the performance of the product and service are maximum or disappointing. It is also necessary to point out the fact that a significant number of both male and female respondents were neutral (25.9% and 15.2% respectively) when assessing the statements. Table 5. Structure of responses to this question of those who identified themselves as opinion leaders in the initial question (answers with 4 and 5, i.e. with partial and full agreement)

valid

Frequency

%

1.00

21

3.8

2.00

74

13.3

3.00

90

16.2

4.00

177

31.8

5.00

194

34.9

Total

556

100.0

Question: I share my experiences about products and services more with consumers I know such as friends and relatives than with those I do not know. Variance analysis by application of t-test for two variables and Levene’s test for equality of variances established the existence of statistically highly significant differences between respondents viewed by gender for question 16. As p-value is smaller than 0.05, it is concluded with the probability of 95% that there are significant differences between male and female respondents regarding question 16 in the sense that zero hypothesis is discarded and more strict criterion is used, starting from the assumption that variances are different in samples. By observing the values of standard deviations it is concluded that mean deviations of individual responses from the mean value are much higher in male respondents in comparison with women when it comes to more active dissemination of personal experience by interpersonal communication to other consumers that respondents know in comparison with other consumers that respondents do not know personally. Table 6. Structure of responses to this question of those who identified themselves as opinion leaders in the initial question (answers with 4 and 5, i.e. with partial and full agreement)

valid

Frequency

%

1.00

25

4.5

2.00

30

5.4

3.00

26

4.7

4.00

163

29.3

5.00

312

56.1

Total

556

100.0

The obtained respondents’ answers confirm that self-identified opinion leaders among the respondents really do act that way in the sense of their consumer interpersonal impact on their environment, where the sellers’ attitude towards them is much more important for expressing this leadership than the quality of the purchased product or service, and that they are more prone to being leaders and influencing the behaviour of other consumers with whom they are in more solid and closer relationship. Opinion leadership is a predominantly human relation in its essence, which has a very significant economic dimension and implications.

CONCLUSIONS One of the dominant characteristics of the modern business environment is a dramatic decline in the trust of consumers to all forms of advertising and marketing communication in general. They therefore increasingly turn to information sources that do not have this commercial dimension, above all friends and family. Interpersonal word of mouth

2016 - M SPHERE

B O O K O F PA P E R S

-

61


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

communication has a greater impact on forming consumers’ attitudes to products and services in comparison with other forms of communication. Individual consumers, possessed of a higher level of knowledge of products and services, and the producers and suppliers thereof, are referred to as opinion leaders. These individual consumers, in most cases, already have the experience of purchasing and using the observed products and services, and therefore their word, due to its sincerity, has a much higher specific weight than any other commercial advertisement. They have no direct material interest in the sale and success of a business’ product and service on the market. Potential customers see these specific individuals as the most reliable way of reducing the risk of making a wrong purchase decision. Opinion leaders emerge in situations when other consumers are looking for products and services to buy, during possible trial and evaluation of these products and services, before they make the purchase decision. Opinion leaders are very often consumers who help the introduction and acceptance of new trends and behaviours on the market, so that they are often considered to be trendsetters. It must also be pointed out that not all consumers are equally susceptible to opinion leaders’ personal influence. The most susceptible consumers to this influence are those who are otherwise oriented to others’ opinions because they do not make independent purchase decisions for certain reasons, and also consumers without experience in the purchase of products and services. Opinion leaders speak about what was bought, why, how, and how it is used. In this way they direct the meaning, trust and attention of other consumers – followers. The characteristics possessed by opinion leaders are different for different markets and culturological environment, as well as different product categories, including, above all, expertise, social networking, charisma, energy, etc. However, studies so far have not established that consumers’ gender influences the manifestation of opinion leadership – both men and women can equally feature in the role of opinion leaders. Businesses must be aware of the existence of these consumers and direct their marketing effort to them so as to achieve business success. The phenomenon of opinion leadership is generally present on the market; its potential and real effects on the increase or decrease of a business’ sale are extremely large, but it is a still insufficiently studied phenomenon which is hard to use and control within businesses.

LITERATURE 1. Arnould J. E., Price L. L., Zinkhan M. G., “CONSUMERS”, McGraw-Hill, 2004. 2. Carl W.J., “WHAT’S ALL THE BUZZ ABOUT?”, Management Communications Quaterly Vol. 19 No. 4, 2006. 3. Chakravarthy S., Prasad B.G.V., “THE IMPACT OF OPINION LEADER ON CONSUMER DECISION MAKING PROCESS”, International Journal of Management and Business Studies, Vol.1., No.3., 2011. 4. Gabriel Yiannis, Lang Tim, “THE UNMANAGEABLE CONSUMER”, SAGE Publication, 2006. 5. Gronroos Christian, “SERVICE MANAGEMENT AND MARKETING”, John Wiley & Sons Ltd., 2007. 6. Hanna N., Wozniak R., “CONSUMER BEHAVIOR – an applied approach”, Kendall Hunt Publishing, 2009. 7. Harvard Business Rewiev, “WHAT MAKES A LEADER”, Harvard Business School Publishing Corporation, 2001. 8. Hawkins I. D., Best J. R., Coney A. K., “CONSUMER BEHAVIOR”, Prentice Hall, 2006. 9. Jadish N. Sheth, Banwari Mittal, Bruce I. Newman, “CUSTOMER BEHAVIOR”, Thomson/Southwestern Publishing, 2004. 10. Keller Ed, Berry Jon, “THE INFLUENTALS”, The Free Press NY, 2003. 11. Kesić, T., “INTEGRIRANA MARKETING KOMUNIKACIJA”, Opinio d.o.o. Zagreb, 2003. 12. Kotler Philip, Keller Kevin Lane, “MARKETING MENADŽMENT”’, Data Status Beograd, 2006. 13. Kotler Filip, Vong Veronika, Sonders Džon, Armstrong Geri, “PRINCIPI MARKETINGA”, Mate.d.o.o. Belgrade, 2007. 14. Kovač Žnideršić Ružica, Marić Dražen, “DRUŠTVENE DETERMINANTE PONAŠANJA POTROŠAČA”, Faculty of Economics in Subotica, 2007. 15. Maričić Branko, “PONAŠANJE POTROŠAČA”, Centar za izdavačku delatnost Ekonomskog fakuleta u Beogradu, Belgrade, 2011. 16. McConnell Ben, Huba Jackie, “CREATING CUSTOMER EVANGELISTS”, Dearborn Trade Publishing, 2007. 17. Meiners Norbert H., Schwarting Ulf, Seeberger Bernd, “THE RENAISSANCE OF WORD OF MOUTH MARKETING: A NEW STANDARD IN 21ST CENTURY MARKETING MANAGEMENT”, International Journal of Economics Science and Applied Research 3 (2), 2010. 18. Mowen C. John, “CONSUMER BEHAVIOR”, MacMillan Publishing Co., 1995. 19. Nisbet M.C., Kotcher J.E., “A TWO STEP FLOW OF INFLUENCE? OPINION LEADER CAMPAIGNS ON CLIMATE CHANGES”, Science Communication, Vol. 30, No. 3., 2009. 20. Rosen Emanuel, “THE ANATOMY OF THE BUZZ”, A Currency Book Doubleday, 2009. 21. Schiffman G. Leon, Kanuk Lazar Leslie, “CONSUMER BEHAVIOR”, Prentice Hall, 2004. 22. Sernovitz Andy, “WORD OF MOUTH MARKETING: HOW SMART COMPANIES GET PEOPLE TALKING”, GreenLeaf Book Group Press, 2012. 23. Silverman George, “THE SECRETS OF WORD OF MOUTH MARKETING”, AMACom, 2001. 24. Solomon R. Michael, “CONSUMER BEHAVIOR”, Pretince-Hall, 2011. 25. Solomon Michael, Bamossy Gary, Askegaard Sören, “CONSUMER BEHAVIOR-AN EUROPEAN PERSPECTIVE”, Prentice Hall, 2002.

DETAILS ABOUT AUTHORS: DRAŽEN MARIĆ PHD, ASISTANT PROFESSOR drdrazen@ef.uns.ac.rs

62

-

B O O K O F PA P E R S

RUŽICA KOVAČ ŽNIDERŠIĆ FULL PROFESSOR znikor@ef.uns.ac.rs

ALEKSANDAR GRUBOR FULL PROFESSOR, DEAN agrubor@ef.uns.ac.rs

FOR ALL AUTHORS: UNIVERSITY OF NOVI SAD FACULTY OF ECONOMICS SUBOTICA SUBOTICA, SERBIA

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

APPLICATION OF MARKETING STRATEGY FOR CREATION OF COMPETITIVE OFFER FOR RIVER CRUISE DRAGO RUŽIĆ IRENA BOSNIĆ MARIJA ZDUNIC BOROTA

ABSTRACT In modern tourism segmentation of the tourism market and determination of targeted markets, which would differentiate the tourist offer is becoming a necessity of all subjects that want to be competitive in the global market. Therefore, it is becoming necessary to determine marketing strategies that can increase the competitiveness of river cruise, taking into account the incentives and restrictive factors for further development of this form of tourism in Croatia, and considering the demands of the market, the demand for river cruises and taking into account the comparative advantages of Croatian rivers and destinations in their surroundings. In order to determine the current trends in the river cruise market, incentives and limiting factors for future development of river cruises and effective marketing strategies that will enable the growth of competitiveness of river cruises in Croatia, in addition to the analysis of secondary data, a primary research was conducted. Information were collected by conducting individual interviews with key stakeholders in river cruises in Croatia. Research has shown that by implementing the strategy of differentiation and market segmentation it is possible to create a variety of unique new tourism experience that will satisfy a certain segment of consumers and thus position the Croatian Danube region as an attractive destination for travelers who are going on river cruises. In this paper are identified marketing strategies that are currently used by riverboat companies to strengthen their positions on the river cruise market, as well as possible marketing strategies of other participants in the creation of river cruise products that would contribute to the further development of this form of river tourism in the Republic of Croatia and strengthen the competitive position of Croatian destination ports with international cruises on the Danube river. KEY WORDS: river cruise, marketing strategy, destination ports, destination management companies.

1. INTRODUCTION Cruising on the rivers currently has a symbolic share of the overall cruise market which is about 5% relative to the whole cruise industry. However, in the last few years there is a continuous accelerated growth in demand for this form of holiday, especially when looking at European rivers. In Croatia, the product of river cruising is almost exclusively related to the Danube river. Current traffic prognosis of ships and passengers on cruises on the Danube in Croatia indicate a probable continued and accelerated growth in demand and this imposes problems as how to be adequately prepared so that positive effects of this type of tourism would be as large as possible for the region. In this sense, it is necessary to determine how to take advantage of the existing potential and comparative advantages of the Croatian Danube region for the further development of river cruising in Croatia in order to achieve the expected growth in demand, which requires, among other things, marketing deliberation and determination of marketing strategies that can increase competitiveness of Croatian destination ports and to position Croatia as an attractive destination for river cruises.

2. RIVER CRUISES – DEFINITION AND KEY FEATURES The term cruise according to the Dictionary of Tourism means “sailing for fun, entertainment, ie. to sail from-to or from place to place, on a boat, ship or motor yacht for satisfaction, usually by sea (more often), but also on lakes and rivers (less)”.1 In the maritime lexicon a cruise is defined as “voyage by sea or inland waterways according to a predetermined itinerary (one-way or round-trip, coastal or oceanic, domestic or foreign)”.2 Gibson3 in his considerations points out that a cruise is a vacation that includes travel the seas, lakes or rivers. Consequently, the concept of a cruise includes sailing, which can take place on a sea or some of internal waterways (rivers, lakes) mainly for the purpose of recreation and rest, and in this context, cruising on the rivers forms part of the “cruise industry.”

1 2 3

Vukonić, B., Čavlek, N. (ed.) (2001.) Riječnik turizma. Zagreb: Masmedia, pp183 Simović, A. (ur.) (1990.) Pomorski leksikon, I izdanje. Zagreb: Jugoslavenski leksikografski zavod Miroslav Krleža page 399 Gibson, Ph. (2006.) Cruise Operations Management. Burlington USA: Elsevier, pp. 14

2016 - M SPHERE

B O O K O F PA P E R S

-

63


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

River cruises are similar to the sea (ocean) cruises, both are based on sailing by boat on a water route, and the purpose of sailing is rest, leisure and entertainment on board a ship where passengers, among other things reside during the trip, which consists of navigation and stops in ports along the route, all of this makes all basic content of the cruise.4 Nevertheless, river cruises have certain specifics in relation to cruising the sea arising from the characteristics of the means of transport, characteristics of transport routes, the content on board and the tour program. Ships intended for cruise on rivers are considerably smaller than ships that cruise the sea due to the limited depth of river courses, which greatly influences the offer that a ship has, or the content and other services offered to passengers on board for the purpose of rest, leisure and entertainment during their travels. Offer onboard cruise ships for rivers is generally by offer and structure poorer, and the very voyage is towards predetermined targets (ports, cities, natural attractions)5 and passengers on river cruises can tour attractive sites along the rivers (cities, national parks ...) from the comfort of the ship which is especially attractive to older travelers, who are the main markets for river cruises.6 Offer of river cruises and ship capacities is mainly connected to each individual river and tributaries, but offers are spread on every continent. The largest share of the global market of river cruises has Europe (47.3%), followed by Africa on the Nile river (39.8%), while the lowest share of the river cruise market has Australia (0,5%).7 Thus, the leading regions for river cruising are European and African continent (ie Nile river) with 87.7% share. On the European market, river cruising is mostly comprised of cruises on the Danube River and its tributaries, the Rhine and its tributaries, the Danube-RhineMain Canal and the Dutch and Belgian waterways (a total of 170 ships, or 42.8% of all ships on the European continent).8 In the last few years there is a continuous rapid growth in demand for river cruises, especially when looking at the number of passengers on European rivers. Demand for river cruises in the world and Europe, looking at individual countries of origin of passengers, the largest part come from Germany, followed by travelers from the US, UK, France and Australia while travelers from other countries have a significantly smaller share.9 The analysis of qualitative characteristics of the demand for river cruises suggest an older age population. According to Straubhaaru10 a typical traveler on European river cruises is an experienced traveler, well-educated, interested in the culture and history, enjoys a high income and usually travels with a partner. In the future a further growth in demand for river cruises is expected, particularly on exotic rivers (such as the Asian rivers Mekong and Irrawaddy) which is in line with the increasing need of passengers for adventurism when traveling and discovering new and unknown locations, and the acquisition of unforgettable experiences. On the river cruise market a major role have large companies, specialized riverboat operators (shipping/riverboat companies). According to Mintel11 study, some of the leading companies on the European market are French Croisi Europe, German Nicko Tours GmbH and Russian Vodohod. On the market of the United States of America (USA) among the companies that organize cruises outside America most noted are the Viking River Cruises (now the largest company for river cruises in the world), Avalon Waterways and Ama Waterways while a leading company that organizes river cruising in the area of North America is American Cruise Line.

4

Ban, I. (1998.) Krstarenje rijekama. Ekonomska misao i praksa, 7(2), pp.251 Ban, I. (1998.) Krstarenje rijekama. Ekonomska misao i praksa, 7(2), pp.252 6 Goeldner, Ch. R., Brent Ritchie J.R. (2009.) Tourism: Principles, Practices, Phylosophies. Hoboken, New Jersey: John Wiley & Sons, Inc., pp. 147 7 Regional Cruise Market Report 2011. according to Vojvodić, K. (2012.) Promjene na tržištu riječnih krstarenja. Suvremeni promet, 32(1-2), pp. 89 8 Regional Cruise Market Report 2011. according to Vojvodić, K. (2012.) Promjene na tržištu riječnih krstarenja. Suvremeni promet, 32(1-2), pp. 89 9 Grammerstorf, H.H. (2013.) European River Cruising, The European River Cruise Association, Hamburg, http://www.ccr-zkr.org/files/documents/ workshops/wrshp081013/6_HGrammerstorf_en.pdf (accessed 23.10.2014.) 10 Straubhaar, R. (2005.) Passenger transport on European waterways – Economic Situation, 5th IVR-Colloquium, Vienna, 28th January 2005, http:// www.ivr.nl/downloads/Straubhaar.pdf (accessed 02.12.2014.) 11 Mintel (2015.) River Cruising - Travel & Tourism Analyst, No. 4, March 2015, Mintel Group Ltd, London., pp.30-35 5

64

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Image 1. Participants of river cruise

Source: modified according to Bremerhaven Touristik, Waterways for Growth Analysis of the German river and ocean cruise market: http://www. northsearegion.eu/files/repository/20141202173207_BIS_FR_RiverCruise_OceanCruiseShip_Part1_Dec12_en.pdf (accessed 14.8.2014.)

Considering that at the river cruise sailing to certain ports / cities / destinations is more pronounced it can be concluded that they form part of the basic product and experiences of river cruises and river-cruise companies emphasize the advantages of their equipment and their luxurious accommodation, as well as the destinations included in the itinerary of the cruise. Therefore, in the creation of products of river cruises, in addition to riverboat companies, destination ports and destination management companies are also participating (Image 1). Considering mentioned it is possible to identify three key holders of offers of river cruises: riverboat companies (specialized river-cruise companies and operators who play a major role on the market of river cruises), destination ports (part of the river cruising industry) and destination management companies (key for organizing various programs on land within the product of river cruise).

3. FEATURES OF RIVER CRUISE IN CROATIA River cruises offer a number of unique experiences, from the view of an exceptional landscape to learning about local culture and heritage of places along the cruise path. In Croatia, the most represented river cruises are on the Danube River which passes through the eastern Croatia and the Drava River on the section from the confluence of the Drava into the Danube to the city of Osijek. Danube River is the most important river for domestic traffic in the Republic of Croatia because of its length i and natural characteristics that allow the navigation of large vessels throughout the year, but also because of its significant position with regard to international transport corridors. Danube has a central role on the European river cruise market. The most popular itineraries in Europe are on the Danube and its tributaries, Rhine and its tributaries, canal Rhine - Main - Danube and the Netherlands waterways. Croatia has one of the smallest, but very attractive share of the Danube waterway, which can be used for tourism purposes. Currently, the offer of cruises on the Danube in Croatia, mostly include Vukovar, Batina and Ilok. According to data from the Port Authority of Vukovar, ships on international cruises on the Danube began to visit Vukovar in 2002, Ilok in 2007 and Batina in 2015. In the period from 2002 to 2015, the port of Vukovar has recorded a positive trend in the number of docking of ships and passengers on board the ships with some exceptions in 2009 and 2015. (Chart 1).

2016 - M SPHERE

B O O K O F PA P E R S

-

65


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Chart 1. Number of ship dockings and number of passengers on international cruises on the Danube in the port of Vukovar during the period from 2002 to 2015.

Source: data from Port Authority of Vukovar (accessed 3.5.2016.)

Another important port on the Danube river is Ilok which was in 2015 visited by 2822 passengers that have arrived on 22 cruise ships and Batina which was in 2015 visited by 4485 passengers that have arrived on 36 cruise ships. With regard to the country of origin of passengers on international cruises on the Danube in Vukovar in 2015, most of the passengers were from the USA (48%) and UK (10%), followed by the Germany, Canada, Australia, Switzerland, France and other countries.12 In the coming years a further increase in demand is expected, especially if we take into consideration the highly assessed attractiveness of the Croatian coast and destinations on the Danube as well as strengthening of the market position of Croatian ports. Two-thirds of all cruises with Vukovar are organised by five companies: Nickotours, Viking RiverCruises, Grand CircleTravel, Ama Waterways and Uniworld. The largest choice of cruises that pass through the Croatian part of the Danube are offered by Nickotours (103 cruises), of which approximately one third visits Vukovar (33), while company Viking RiverCruises generates the highest demand for Vukovar with 52 cruises that make up a quarter of the total cruise that are related to the Vukovar.13 Passengers that have arrived by cruise ship to the Vukovar, generally, stay in Croatia for about five hours. Depending on their interests, Agencies/DMC that are cooperating with riverboat companies organize for visitors different excursions which may include a tour of Vukovar, Osijek, Ilok, visit to the Kopački Rit Nature Park, a tour of the Baranja wine roads and cellars with wine tasting, visiting indigenous family farms, exploring the local customs, culture and local cuisine and / or visiting the surrounding area by bicycle and paddle boat rental for a ride on the Danube.

4. MARKETING STRATEGIES IN THE DEVELOPMENT OF RIVER CRUISES Marketing strategy indicates basic guiding principle of every marketing planning, a basic function is to link the market opportunities with the mission and strategies of higher hierarchical rank.14 According to Renko15 marketing strategies are a series of related actions that lead to sustainable competitive advantage. In general, with the development of effective marketing strategies and their successful implementation, it is possible to be positioned in different markets and within different segments of consumers and achieve growth in demand, strengthen the competitive position and better business results. Riverboat companies in their business particularly are applying growth strategy to increase the share of the existing market and look for ways to keep their existing passengers as well as to attract part of the passengers from the competition. A large number of companies are trying to strengthen their position on the river cruise market by developing new markets for their existing products and new products that will be of interest to the current market. Companies are enriching their offer by introducing new destinations (ports) to the existing itineraries, deploy ships on all the rivers and build larger ships, luxuriously furnished and with richer content. By continually monitoring the market trends the can adapt existing products, to new segments of consumers, especially the younger demographic groups (40-55 years of age). They are trying to differentiate their products by mainly different mix of partial products of material and immaterial forms, including the appearance of the ship and content elements on board, followed by high quality of service, consistency, programs adjusted to specific requirements and preferences of consumers, new itineraries that include exotic and so far 12

data from Port Authority of Vukovar (accessed 3.5.2016.) Marušić, Z., Horak, S., Sever, I. (2013.) Istraživanje stavova i potrošnje posjetitelja s međunarodnih krstarenja Dunavom u Hrvatskoj u 2013. godini, Institut za turizam, Zagreb. pp. 20 14 Rocco, F. (2000.) Marketinško upravljanje. Zagreb: Školska knjiga, pp.35 15 Renko, N. (2005.) Strategije marketinga. Zagreb: Naklada ljevak, pp.17 13

66

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

undiscovered rivers and destinations and built a recognizable image (basis of brands). Lately, an increasing number of riverboat companies for river cruises has accepted segmented marketing, which is the basis for the difference between needs and wants of different segments and the development of individual marketing programs for each identified segment.16 For the purposes of segmentation most used are psychographic elements and demographic segmentation, especially the life cycle of a family. Psychographic segmentation is most visible when creating themed cruises that are fully tailored to the specific interests of passengers and increasingly common in the offers of riverboat companies. At the beginning of the new millennium, European river cruises have been transformed from a small, family–run firms with the old and dilapidated ships to a group of professionally managed companies.17 For the purposes of growth and expansion into new markets, companies have mainly used horizontal integrations. Furthermore, companies are commercially connecting with other holders of offer in order to offer higher quality and more diverse partial products and programs, and are commercially connecting with local receptive agencies or destination management companies that are organizing for them land trips to destinations if they are included in the itineraries. Such forms of business connections can achieve better control over the quality of provided individual services, which is reflected in the overall travel experience by travelers. In this respect, and to harness the existing potential and comparative advantages for further river cruises in Croatia and to achieve the expected growth in demand it is necessary to establish the marketing mindset and marketing strategies which will play a significant role in the future development of river cruises and where it is possible to increase competitiveness of Croatian destination ports (and the Croatia as a destination for river cruises in general), taking into account the incentive and restrictive factors of further development of this form of tourism in Croatia, taking into account the requirements of the market demand and comparative advantages of the Croatian part of the Danube basin.

4.1. Methodology In the selection process of methods of research, it was taken in to account, first of all, about the subject of research and the type of questions. The objectives of the research were: to determine that the intensification of marketing activities towards riverboat companies and with use of the marketing concept it is possible to increase the number of dockings of river ships at Croatian ports and harbors, and then determine which marketing strategies will have a significant impact on the further development of river cruises and to point out the importance of interconnection and strengthening of cooperation among holders of offers of river cruising. Primary data has been gathered by the method of interviewing. In order to get a better, more comprehensive and more profound answer about the problem of research, individual interviews with key stakeholders of river cruises was conducted. The survey was conducted during the period from 1.7.2015. until 30.9.2015. A total of nine interviews were made with representatives of receptive tourism agencies and destination management companies, directors of Port Authorities, representatives of relevant ministries and Croatian waters and shipping agents for river cruises with years of experience. Topics of the interview included the issues of development of river cruises in Croatia, opportunities and constraints, trends in supply and demand, competitiveness of Croatian destination ports and destinations in general on the market of river cruises, experience of receptive tourism agencies / destination management companies in the business with the riverboat companies, as well as marketing strategies employed by holders of offers of river tourism, especially from riverboat companies.

4.2. Results of research Highlighted as one of the major limiting factors for development of river cruise is insufficiently qualitative maintenance of the waterways. In particular, the lack of navigability of the Sava River in certain sections was pointed out, and the lack of construction of the Danube – Sava canal, which would contribute to connecting the Sava and Danube. As a limiting factor, in terms of the Sava River, cooperation with the neighboring Bosnia and Herzegovina (BiH) is noted considering that it is a border river and for all activities on the river a permission is needed from neighboring Bosnia and Herzegovina Canton. Furthermore, the limiting factor is infrastructure. When it comes to international river cruise ports, the amount of ports is satisfactory. However, as the limiting factor stand out inadequate technical conditions of certain docks so the riverboat companies tend to avoid them (for instance in Aljmaš there is no parking for buses nor the access road to the port). Dock in Batina, as well as ports in Osijek (on the Drava) have problems during low water levels that limit the possibility of docking for ships, while Ilok as the easternmost town in Croatia riverboat companies usually circumvent because it is too close to the first next port in the neighboring country.

16 17

Ružić, D. (2009.) Marketing u turističkom ugostiteljstvu. Osijek: Ekonomski fakultet u Osijeku. pp. 336 Mintel (2015.) River Cruising - Travel & Tourism Analyst, No. 4, March 2015, Mintel Group Ltd, London., pp. 30

2016 - M SPHERE

B O O K O F PA P E R S

-

67


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Complex administration in destination ports is restrictive on the implementation of the program of river cruises that take place on land, given that passengers are wasting their time (about an hour and a half) on the control, thus they are left with less time for organized tours. By entering Schengen, it is expected to prolong the time between the revision and the fact that it will be done only in one port, a limiting factor appears to be the cost-effectiveness of other existing docks for which there is a danger that they will be avoided by riverboat companies since revision will not be performed in them (return to them after the revision will start to represent a waste of time). A limiting factor is also a poor coordination of participants involved in the implementation of tourism activities in general, including river cruises, which implies a lack of information about additional contents that destination management companies may use when creating a program of land excursions. For example, there is no pre-made calendar of local events for the next year, which would allow the creation of unique programs of excursions on land, especially customized to preferences of individual segments of passengers from river ships, while on the other hand it could give a better negotiating position to agencies and / or destination management companies when selling trips to riverboat companies for the next year. As an incentive factor for the development of river cruises stands out clean and preserved environment (in contrast to neighboring countries: Hungary, Serbia, Bulgaria and Romania), biological diversity, safety in the country and the hospitality of the people. Compared to competitive countries, we have similar cultural heritage and therefore a similar offer in relation to the product of river cruises, but towards the east (when sailing on the Danube) prices are much lower (20-30%) for the offer of same quality and we have positive impact from safety, power of improvisation and hospitality of the people in contrast to competitors. International river cruises market is growing annually at a rate of 10-15%, which is one of the fastest growing segments of tourism. In Europe the most represented cruise is on the Danube River and its tributaries and the canal Rhine - Main - Danube, which opens great opportunities for Croatia to become a part of the tourism product of river cruise on the Danube. Number of travelers on international cruises on the Danube river which visit Vukovar or Ilok has been growing steadily. Given the high attractiveness of the Croatian coast and destinations on the Danube rise in demand can be expected in the coming years. Additional rise in demand on the Croatian part of the Danube is expected due to the fact that currently 80% of river cruise takes place upstream from Budapest, while only 20% downstream from Budapest, which is likely to cause displacement of itineraries downstream from Budapest. Also, research has confirmed that the intensification of marketing activities towards riverboat companies and the usage of marketing concept can increase the number of dockings of river ships in Croatian ports and harbors, and on larger representation of Croatian ports and destinations in guidebooks of riverboat companies. If we take into account similar cultural heritage and similar offers of destinations along the Danube, in the forthcoming period it will be the required that a greater marketing efforts are made as well as better coordination of all those involved in the creation of partial product parts of river cruises relating to activities in the destination (destination management companies, receptive travel agencies, port authorities, tourist boards’ system). Under these conditions, marketing will become one of the main drivers of river forms of tourism in the Croatian Danube Region. Furthermore, research has shown that on the market of river cruise there is a stronger need for diversification and a growing pressure on prices. Riverboat companies are intensively seeking to improve their product of river cruises which consists of diverse but complementary partial parts of the material and immaterial forms. Therefore, they are investing in the construction of modern luxuriously furnished and designed ships and are introducing a variety of new programs to the ships tailored to the specific segments of consumers. An extremely important component of the basic product of river cruises is the opportunity to visit destinations along the river which creates a unique new experience. Companies in the conditions of increasing competition must be innovative and in cooperation with a number of destinations on the mainland, devising new itineraries and new experiences for the specific target segments of passengers that will be different from competitors and will provide a unique offer. Also, they are spreading their offer to exotic rivers and lesser known destinations such as Africa (Zambezi River) and Vietnam and Cambodia (Mekong River). In this sense they require a new offer from destination management companies (but at the lowest cost), tailored to specific interests and needs of consumers and consequently increases the competitive struggle among receptive agencies and destination management companies that organize programs on land. Features of excursions are adapted to the wishes of companies. Some companies are interested in a rich variety of programs that offer unique experiences, while others want only a half-hour trip and some free time for travelers. In general, there are less and less organized tours unique to the entire group of passengers from the river boats. The new trend is becoming an optional excursion, which gives passengers a choice between at least two excursions and they must declare at least two days earlier which one they decide to visit. Normally one of the excursions is related to the active vacation, such as cycling tours or fishing trips since the companies are increasingly turning with the strategy of diversification towards the strategy of market segmentation in particular with regard to the psychographic variables or specific interests and preferences of passengers and their lifestyle. In this context, the most important strategy for achieving competitive advantage on river cruise market will be the product development strategy, strategy of market development, penetration strategy and strategies of product differentiation. To gain competitive advantage, many companies are developing brands and by pointing out specifics of their offers are trying to obtain the targeted consumers.

68

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Destination management companies as well as the destination ports, when it comes to river cruises, are directing marketing activities primarily towards riverboat companies with a goal to present them the destination and interest them so that their destination is included in their itineraries. In this case the most attention is given to personal sales, participation in trade fairs and organizing of specialized study tours for riverboat companies. Considering that on the quality of the organization of excursions and programs on land depends further cooperation, great attention is given to qualified and trained tour guides and generally the whole process of executing the excursion which aims to create a new and unique experience for travelers coming from the river boats. In conditions of growing competition, there is a need for the use of marketing concepts and management of marketing programs of all those involved in the river cruises from riverboat companies, destination management companies / receptive agencies to the destination ports. The application of appropriate marketing strategy is becoming a necessity for the realization of further growth and improvement of the offer which will be in accordance with the needs and interests of consumers in order to achieve a better position on the market.

4.3. Guidelines for improvement of competitiveness of river cruising Trends on the international market indicate that the river cruises are in the take-off phase (with an annual growth rate of 1015%). With the continuous expansive growth of demand for river cruises, there is a differentiation which leads to specialization of riverboat companies and their orientation towards new market niches. In order to achieve growth and maintain a competitive advantage, companies, besides construction of new ships and improving the quality of ship offers, intensively work on enrichment of offers with new itineraries and destinations. Companies are struggle for competitive advantage and enter partnerships with certain destinations in order to jointly create a product of river cruises tailored for specific market segments, which will be fully aligned with the needs, interests and wishes of consumers, or the desired market niche. Related to this, Croatia, where the product of river cruise is almost exclusively related to the Danube, has a chance to position itself as a destination with an attractive offer, traditional culture of life and work and with the local cuisine, based on which it is possible to create a wide range of tourism products and services offered on the mainland and themed itineraries tailored to specific interests of tourists. Forecasts of ship and passenger traffic on cruises on the Danube in Croatia indicate a likely continued and accelerated growth in demand in the next five years, which is consistent with trends in the surrounding and the possible reallocation of itineraries on the Danube. Croatia has to prepare adequately for such a growth in demand so that positive effects of this type of tourism are as larg are possible for the region. In this regard, it is necessary to realize mutual cooperation and partnership in the implementation of marketing activities between all stakeholders involved in the creation and management of river cruising offers (Image 2). Image 2. Marketing activity interrelationship of key stakeholders in river cruise

Source: conclusion of the author according to conducted research

2016 - M SPHERE

B O O K O F PA P E R S

-

69


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Destination management companies and destination ports must have their marketing activities, on one side directed towards the riverboat companies with the goal to present the destination and interest them to include this destination in their itineraries, and on the other hand towards consumers, or travelers with river boats in order to motivate them for another visit to Croatia as part of another journey. This requires cooperation and coordination of destination management companies, destination ports and destination management (DMO/ tourist boards) in the activities to promote the destinations in order to make it attractive to riverboat companies. Only by joint actions it is possible to position Croatia as an engaging and attractive destination on the market of river cruises on Danube river.

CONCLUSIONS Trends present on the international tourism market shape the style of rest and travel, diversification of activities on vacation imposes the need for research, planning, design and management of tourist products. Use of marketing instruments has a crucial role in creating a competitive position of river cruising on a dynamic and changing market, especially marketing strategies as a means of meeting the needs of tourism and profit, as well as tools that encourage and accelerate the development of this form of tourism. Results of the research have shown the need for coordinated activities and the development of cooperation and partnerships in the implementation of marketing activities between holders that offer river cruises in the area as well as the necessity of a two-way marketing communications, on one side towards the end-users, consumers, while on the other side towards the riverboat companies and tour operators who take part in creation of river cruising products. Also, by applying the marketing concept it is possible to increase the competitiveness of river cruising which would enhance the tourist offer of Croatia which has been proven by determining marketing strategies of riverboat companies which strengthen their competitiveness on the market of river cruises, and which are directly reflected upon the product of river cruising in Croatia, as a destination. It is important to actively participate in partnerships with the riverboat companies on the creation of product of river cruises on the Danube, namely that part of the product that relates to the creation of tourist experiences in destinations that are visited during the cruise. Research has shown that by implementing the strategy of differentiation and market segmentation it is possible to create a variety of unique new tourism experience that will satisfy a certain segment of consumers and thus position the Croatian Danube region as an attractive destination for travelers who go on a river cruise and ensure long-term growth of competitive position on the tourist market of river cruises.

LITERATURE 1. Ban, I. (1998.) Krstarenje rijekama. Ekonomska misao i praksa, 7(2), pp. 249-270. 2. Bremerhaven Touristik (2012.) Waterways for Growth Analysis of the German river and ocean cruise market, http://www.northsearegion.eu/ files/repository/20141202173207_BIS_FR_RiverCruise_OceanCruiseShip_Part1_Dec12_en.pdf (accessed 14.08.2014.) 3. Gibson, Ph. (2006.) Cruise Operations Management. Burlington USA: Elsevier 4. Goeldner, Ch. R., Brent Ritchie J.R. (2009.) Tourism: Principles, Practices, Phylosophies. Hoboken, New Jersey: John Wiley & Sons, Inc. 5. Grammerstorf, H.H. (2013.) European River Cruising, The European River Cruise Association, Hamburg, http://www.ccr-zkr.org/files/ documents/workshops/wrshp081013/6_HGrammerstorf_en.pdf (accessed 23.10.2014.) 6. Marušić, Z., Horak, S., Sever, I. (2013.) Istraživanje stavova i potrošnje posjetitelja s međunarodnih krstarenja Dunavom u Hrvatskoj u 2013. godini, Institut za turizam, Zagreb. 7. Mintel (2015.) River Cruising - Travel & Tourism Analyst, No. 4, March 2015, Mintel Group Ltd, London. 8. Port Authority of Vukovar (accessed 3.5.2016.) 9. Renko, N. (2005.) Strategije marketinga. Zagreb: Naklada ljevak 10. Rocco, F. (2000.) Marketinško upravljanje. Zagreb: Školska knjiga 11. Ružić, D. (2009.) Marketing u turističkom ugostiteljstvu. Osijek: Ekonomski fakultet u Osijeku 12. Simović, A. (ur.) (1990.) Pomorski leksikon, I izdanje. Zagreb: Jugoslavenski leksikografski zavod Miroslav Krleža 13. Straubhaar, R. (2005.) Passenger transport on European waterways – Economic Situation, 5th IVR-Colloquium, Vienna, 28th January 2005, http://www.ivr.nl/downloads/Straubhaar.pdf (accessed 02.12.2014.) 14. Vojvodić, K. (2012.) Promjene na tržištu riječnih krstarenja. Suvremeni promet, 32(1-2), pp. 89-92 15. Vukonić, B., Čavlek, N. (ed.) (2001.) Riječnik turizma. Zagreb: Masmedia, DETAILS ABOUT AUTHORS: DRAGO RUŽIĆ PROFESSOR UNIVERSITY OF J.J. STROSSMAYER OSIJEK, FACULTY OF ECONOMICS IN OSIJEK OSIJEK, CROATIA ruzic@efos.hr

70

-

B O O K O F PA P E R S

IRENA BOSNIĆ VIROVITICA COLLEGE, DEPARTMENT OF TOURISM VIROVITICA, CROATIA irena.bosnic@vsmti.hr

MARIJA ZDUNIC BOROTA ADDIKO BANK DD OSIJEK, CROATIA mzdunic@gmail.com

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

CUSTOMER PERCEPTION OF GUERILLA MARKETING ANTONIJA MILAK AMIR DOBRINIĆ

ABSTRACT Marketing represents the company’s activities which they carried out in order to attract new and retain existing customers. Today, companies apply aggressive advertising messages in order to get the attention of customers, but the customers are so “bombed” with a lot of advertising messages that they just ignore them. For big companies, it is easier to reach out to customers because they have large budgets, so they can use various ways of advertising while small companies can’t because they have low budgets. In order to highlight their product or services in the market, they use a new type of marketing developed for small companies called guerilla marketing. Guerrilla marketing is a relatively new type of marketing that seeks to achieve maximum effect with minimal investments. It applies unconventional methods of advertising which aims to attract the attention of customers and it is designed for small companies so they could compete with large companies on the market. However, over time, large companies began to use it because they realized the benefits of guerilla marketing. Due to the presence of the economic crisis in Croatia, guerrilla marketing could help craft, micro and small businesses to prominent among the big companies that have large marketing budgets. In order to prominent among the big companies, they should be acquainted with the guerilla marketing. Therefore, aim of this paper is research and analyzes the perception of guerilla marketing by consumers and businesses in the Croatian market, specifically in Varazdin County. We hope that result of our research will help to better understanding and further development of guerilla marketing. KEY WORDS: guerrilla marketing, businesses, consumers, advertising.

1. INTRODUCTION Marketing is a company activity undertaken to familiarize customers with its products or services. Companies are trying to attract new and retain existing customers, but competition in the market is rather large, and therefore they undertake different marketing activities which make them stand out and attract the attention of consumers. There are various definitions of marketing. The American Marketing Association (American Marketing Association, 2013) defines marketing as follows: “Marketing is the activity, a set of institutions and the process of creation, communication, delivery and exchange of offers that have value for customers, clients, partners and society as a whole. Kotler et al. (2014, 5) state that marketing deals with recognition, as well as with satisfaction of human and social needs. It represents a “profitable needs satisfaction.” Furthermore, the authors believe that it is necessary to distinguish managerial and social definition of marketing, stating that marketing management is “art and science of choosing target markets as well as acquiring, retention and increasing the number of consumers by creating and delivering a superior value to customer and sending a message about it”, while social definition is: “Marketing is the social process by which individuals and groups obtain what they need and want by creating, offering and free exchange of valuable products and services with others.” Senečić (2000, 5, 9-10) believes that marketing is a form of market operation the result of which stems from the increased possibility of goods production. Namely, when the production is so big that offer in the market becomes greater than there is a demand, then it comes to a marketing orientation. Furthermore, he noted that there is no generally accepted definition of marketing and that the authors make a distinction between macro and micro marketing. The term macro marketing refers to the active role of marketing in streaming towards the social welfare, which is reflected in the continuity of economic growth and living standard of the population. Micro marketing is mostly regarded as a business function or concept. It represents a business activity of the company, enabling the identification and satisfaction of the needs of consumers, economy and society with products or services. Meller (2005, 15) also differs macro marketing and micro marketing, regarding macro marketing as macrosystem, and micro marketing as a microsystem. So, he says that a systematic approach to marketing at the level of society as a whole represents macrosystem of marketing, while a systematic approach to marketing at the business system level represents microsystem of marketing. According to Dobrinić (2010, 2-3) marketing is a dynamic area and discipline and therefore the definitions of marketing are changing. However, he states that the essence of marketing activities is connection of manufacturers and customers so as to realize the exchange in which both parties will be satisfied. Furthermore, companies should emphasize pre-sales and post-sales activities because there are many products and services on the market, and companies apply them in

2016 - M SPHERE

B O O K O F PA P E R S

-

71


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

order to establish, maintain and connect with customers, but also to influence their perception and loyalty. Previšić et al. (2007, 1-2) define marketing as an area of business economy that is dynamic, exciting and contemporary, where it rests on the exchange which is the transfer value (tangible and / or intangible) between two or more parties. Also, they consider that the task of marketing is to detect an efficient and successful way, methods and means in order to be able to meet the individual needs of consumers. Meler (2005, 19) considers that the marketing should lead to satisfying the individual needs of consumer (from one side), and the individual needs of economic subjects (on the other side), whereby the company should not focus solely on profit or profit should not be a basic objective, but meeting the social needs of consumers. Given the fact that the competition is strong, companies must find a way to their customers and use their marketing activities to reach them. As large companies have much larger budgets comparable to small ones, they can easily reach out to customers because they can use more marketing channels that require significant funds. Therefore, to enable to small companies to compete with large ones, it comes to the development of a new type of marketing that does not require large finances, which is the guerrilla marketing. Guerrilla marketing is a relatively new type of marketing in Croatia, and therefore, in this work it will be analyzed the perception of guerrilla marketing from the side of consumers.

2. JUSTIFICATION AND METHODOLOGY OF SURVEY The survey was conducted on a sample of 117 respondents through the questionnaire, where 75 respondents completed the survey via the Internet, while 42 respondents completed the questionnaire in paper form. The questionnaire consisted of 13 questions, 10 of which were closed type (including demographic data, qualification and employment status) and three open-type questions. Since there is about a relatively new type of marketing, before the questions the definition of guerrilla marketing was presented to the respondents. The survey was conducted with the aim to assess how much consumers are familiar with guerrilla marketing or whether they ever noticed it. It was also intended to explore how they react to the mentioned type of marketing and how they might describe it, as well as whether it attracts better their attention than ads through television, radio, newspapers, magazines, and so on. Given the fact that the creativity is quite important in guerrilla marketing, respondents were also asked if they think that creativity is important for guerrilla marketing and why. Since there is an intention in marketing to attract the attention of consumers, the respondents were asked what would first attract their attention in guerrilla marketing and what method of promotion would immediately attract their attention and why.

3. DEFINITION OF GUERRILLA MARKETING Although guerilla marketing is not much well known in Croatia, it was created many years ago. The Levinson and Levinson (2011, 18) state that the guerrilla marketing was born in 1957 when Jay Conrad Levinson who worked as a counterintelligence analyst had to write a report on one and a half page. Then he realized how important it is to be concise, what presented a challenge to him, and at the same time led him to start building a career in advertising. The name guerrilla (Isaac, 2014, 175-190) describes a group of people who use violent approach to implement their beliefs and ideology. The only advantage of guerrilla fighters is the fact that only they know where and when to strike, while opponents are those with more people and resources (such as weapons and money). Original approach to guerrilla marketing is as an alternative marketing strategy which is suitable for small and medium enterprises. They must act as guerrilla fighters in the past when they were attacking valuable targets of large enemies by surprising them. Furthermore, guerrilla marketing is not a physical battle, but a psychological one waged with the aim to win in minds of customers and consumers. The strategies that strive to position products and services of the company in customer’s mind are being adopted. Walsh (2014, 32) found that the guerrilla marketing in the past was unconventional and creative, using traditional marketing tools (labels, print ads and posters). However, today is necessary innovation; therefore the successful advertising techniques require the use of old tools and strategies, but with elements of surprise. Newer methods of advertising are, for example, flash mob1 and viral marketing campaigns. Authors define guerrilla marketing in different ways. Bygrave and Zacharakis (2008, 182) state that it is easier to define what guerrilla marketing does than to explain what it is. The guerrilla marketing has a unique effect that make people talk about the product and the company, and in such a way they seem to be “missionaries” of the product brand. Furthermore, it creates drama, interest, positive impact or emotion, and all these achieve incredible results. Klepek (2014, 79-87) believes that guerrilla marketing complements traditional marketing mix, which provides an opportunity 1

Flash mob is a group of people that via an agreement on the social network meet in a public place, and perform an unusual or funny, short-term activity

72

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

for marketers to differ surprise effect of diffusion (spreading effect). In addition to the claims of these authors, Hutter and Hoffmann (2011, 39-54) are of the opinion that guerrilla marketing is a common term for unconventional advertising campaigns to attract the attention of a large number of people in the advertising message at low cost, causing surprise effect and diffusion effect. They conclude that the guerrilla marketing campaign in terms of cost-benefit ratio, are highly efficient. Hallisy (2006, 13) claims that guerrilla marketing activities are designed to build awareness, brand and customer relations. Virk (2011, 19-21) states that the guerrilla marketing activity uses non-traditional media for marketing purposes, where guerrilla marketing campaigns tend to catch potential customers by surprise, resulting in a high rate of impact and retention. Southon and West (2006, 20) claim that in guerrilla marketing it is being worked on building of relationship with customers and is constantly being looked for a way to help the customer. The imagination and spontaneity are quite important. Guerrilla marketing, according to Nufer (2013, 1-6) should be a new, daring and innovative which consequently often make guerrilla advertisers act in a moral and legal zone, balancing between morality and bad taste or legality and illegality, which results from the request to violate the general norms and attract a higher levels of attention. Furthermore, there is greater potential for moral and legal conflict unlike traditional marketing methods. Nufer noticed that guerrilla marketing moves between enthusiasm and boredom, which can have a negative impact on the product brand (and may even destroy the core values of the brand itself). Hiam (2009, 339) defines guerrilla marketing as marketing, which applies creativity and efforts to increase the impact and reduce costs, but he still mentions that the term guerrilla marketing is sometimes used for mainly cheap, small and short-term marketing techniques. Kar Yan and Yazdanifard (2013, 1-5) come to the conclusion that the guerrilla marketing is a combination of cost effectiveness, creativity, unexpected, unconventional and shocking marketing techniques that can lead to WOM (Word of mouth) effect or to convey information from the mouth to mouth. A number of authors have similar opinions regarding explanations of guerrilla marketing. So, Stanojević (2011, 165-180) in a similar way as Yan and Yazdanifard describes guerrilla marketing ‘’unconventionality, maximum results with minimum investment and the importance of creativity and innovation’’. In the same way guerrilla marketing is described by Zavišić and Medić ( 2006, 414-425), where they state that guerrilla marketing thoroughly investigate every possibility in order to implement the best possible business combination (winning combination), and the foundation of a successful guerrilla marketing make control, correction and overcoming problems. They also think that psychology plays a very important role in the guerrilla marketing because the purchase decisions are mainly brought unconsciously. Guerrilla marketing also has an impact on the brand of company. So it presents a creative and innovative marketing strategy for product brand (Farouk, 2012, 111-119), where a much bigger impression is don by the customer than with traditional forms of advertising. Given that it aims to influence the customer on a personal and memorable level, it creates an indelible impression on the brand of the product itself. In addition, it enriches the aesthetic and functional values of the brand and that makes it seem more innovative and different. The strategy of guerrilla marketing contributes to achieving distinctive competitive position of the brand on the market, thus allowing advertisers to use creative and innovative ideas. Weisberg et al. (2007, 92-106) claim that the aim of the campaign of guerrilla marketing is to increase awareness and interest of customer for the product and its relationship with the brand. However, it is not intended to achieve this in a way to sponsor, but the intention is that customers experience this spontaneously, and buyers involved, should feel as if they accidentally stumbled upon an exciting new product. Given the fact that traditional media advertising (print media - newspapers and magazines, radio, television, posters and leaflets) is generally more expensive, Yuksekbilgili (2014, 2-7) considers the concept of guerrilla marketing campaigns an alternative that seeks to attract interest and the attention of customers and keep their attention by using unusual methods in unpredictable ways. Bigat (2012, 1022-1029) found that guerrilla marketing draws strength from creativity and imagination, which is why it is often hybrid marketing strategy that applies many practices, which distinguish it from traditional advertising. Through innovative design, materials and methods maximum level of turnover can be achieved at low cost. Finally, guerrilla marketing is a powerful tool for rapidly gaining competitive advantage, especially for small and medium enterprises in an increasingly competitive environment. Its goal is to maximize the public interest for the products and services of the company while reducing advertising costs. Guerrilla marketing (as well as guerrilla warfare) seeks to focus attention in a certain direction, and the way to achieve it is different, surprising, original and amusing, whereby it is carried out with a small budget.

4. CHARACTERISTICS OF GUERRILLA MARKETING Levinson (2008, 21, 80) claims that the companies which apply guerrilla marketing must monitor marketing campaigns of rivals, and be in trend with the latest trends. Also, they have to be aware of the happenings in the world and the situation in immediate surrounding (at local level), otherwise they could lag behind its competitors. Hutter and Hoffmann (2011, 39-54) believe that the reaction of customers to the campaign of guerrilla marketing can basically distinguish from the reaction to classic advertising because the guerrilla ads are extremely unconventional. Guerrilla Marketing appears in

2016 - M SPHERE

B O O K O F PA P E R S

-

73


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

unconventional (unusual) places through unconventional media, where it intends to create surprise and diffusion effect (effect expansion). Isaac (2014 , 175-190 ) noted that large companies with significant budgets, are potential users of traditional marketing that measures success only by the sale, the number of responses or turnover in the store. The traditional marketing ignores future relationships with customers because the purchase takes place by the customers themselves, and focus is on predominantly short-term value of marketing. On the other hand, the strategies of guerrilla marketing are mainly oriented to small and medium-sized enterprises that have a small budgets. Size of profit can be measured only by something what is strived with and the intention is to build long-term relationships with customers. How Levinson and McLaughlin see the difference between traditional and guerrilla marketing, can be seen in Table 1. Table 1. The difference between traditional and guerrilla marketing Traditional marketing

Guerrilla marketing

The focus on business

Is business

Unclear message

Directed message

Investing money

Construction of Intellectual Property

Building a brand identity

Building relationships with clients

Increase revenue

Increase profits

The creation of the media's perception

Reality uncover

Speak and sales

Listens and serves

One size fits to all

One size does not fit anyone

He takes market share

Creates market

Source: Adapted from Levinson, McLaughlin, Guerrilla Marketing for Consultants: Breakthrough tactics for winning profitable clients, 2005, p. 11

Guerrilla marketing can have a positive, a negative or even neutral effect. So, PrÊvot (2009, 33-40) found that guerrilla marketing can have a positive effect on the perception of customers regarding product’s brand. Namely, if the strategy of guerrilla marketing is done correctly, customers can be amazed by the creativity of the campaign of guerrilla marketing, which will not necessarily lead to an increase in the specific value of the brand, but will increase the intangible value of the brand or the firm’s capital. Neutral effect of guerrilla marketing is reflected in the fact that, for example, customers are not aware of advertising directed at them. Given that some guerrilla marketing strategies depend on publicity, there could be absence of effect on the brand of the company if local or national media do not report the story related to the product. Finally, guerrilla marketing can have a negative effect. There is always the possibility that something goes wrong in any campaign, which applies particularly to the guerrilla marketing because it is based on the element of surprise. Guerrilla marketing campaign may endanger or disturb potential of customer, which can cause a negative effect on the brand value. The negative effects of guerrilla marketing are also observed by Zuo and Veil (2006, 8-11) to whom the guerrilla marketing can be an effective weapon in the fight with the competition, but if it is improperly developed and implemented, it can have negative effects on the brand. Levinson (2008, 21) believes that it is necessary to use marketing combinations when advertising, because the use of certain advertising channels (traditional marketing) does no longer works. Therefore, companies must use more marketing weapons or combination of tools of traditional marketing, and gives an example on how to make advertisements, where the company has a website, and how to send emails and promotional materials by mail.

5. SURVEY OF GUERRILLA MARKETING PERCEPTION IN CROATIA The research was conducted on a sample of 117 respondents, where 45 were male and 72 of them were women. With respect to age, the study included 45 persons aged 19-25 years, 21 persons aged 26-32 years, 8 persons aged 33-39 years, 16 persons aged 40-46 years and 27 persons aged 47 years and older. With regard to the employment status, the questionnaire was filled in by 1 pupil, 29 students, 63 employed persons, 13 unemployed persons and 11 retirees. For the need of data analysis, it was provided one hypothesis which states: H1: Younger people better perceive guerrilla marketing comparable to the older ones.

74

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

For testing this hypothesis the age and guerrilla marketing observation variables have been used (whether respondents have ever noticed guerrilla marketing). In analysis it has been used analysis of variance or ANOVA, and in order to check whether it is suitable for testing, Levene’s test of homogeneity of variance in SPSS program was conducted, in order to find out if the assumption of equality of variance has been violated (Table 2). Table 2. Levene’s test Levene Statistic

df1

df2

Sig.

3,382

4

112

,012

Levene’s test showed that the assumption of homogeneity of variance is not broken because the size of significance (Sig.) is greater than 0.05 and it is 0,012, therefore the analysis of variance is conducted (Table 3). Tablle 3. Analysis of variance (ANOVA) Sum of Squares

df

Mean Square

F

Sig.

Between Groups

3,367

4

,842

1,687

,158

Within Groups

55,864

112

,499

Total

59,231

116

As we can see in Table 3, there is no statistically significant difference in the perception of guerrilla marketing between younger and older population (p = 0.158). Therefore, we can conclude that both younger and older populations perceive guerrilla marketing equally. Which age groups perceive best the guerrilla marketing; can be seen on the Figure 1. Figure 1. Perception of guerrilla marketing given the age of the respondents

The averages diagram shows that the consumers aged 26-32 years best perceive guerrilla marketing, while consumers aged 47 and over at least perceive guerrilla marketing. The study also sought to find out how respondents react to guerrilla marketing, and research results showed that to the majority of respondents (77) guerrilla marketing attracts attention, 12 respondents ignore it, while 5 respondents are encouraged to purchase. It should be noted that there were analyzed responses from 94 respondents, because all respondents who gave a negative reply to the question „Have you ever noticed guerilla marketing?” didn’t continue with the survey. Respondents were also asked the question in what way they would describe guerrilla marketing, where they could choose more than one answer. So, most of the respondents selected as guerrilla marketing is creative (54), followed

2016 - M SPHERE

B O O K O F PA P E R S

-

75


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

by an unusual (41), and then an unexpected and surprising (37). Surprising (appears in unexpected places) has chosen 29 respondents, followed by mobile answer (appears in different places) that has chosen 23 participants, and then contagious (the story is about him), and an inspiring and stimulating (18). Aggressive answer was chosen by 11 participants, and finally follow the rest chosen by one participant, who mentioned under the answer that the guerrilla marketing is mostly irritating. When the respondents were asked whether the guerrilla marketing attracts and retains their attention better than, for example ads on television, radio, newspapers, magazines, etc, the majority answered “Yes” (62). 16 respondents claimed that the guerrilla marketing does not attract and hold their attention better than ads on television, radio, newspapers, magazines, etc., while 6 respondents stated that both marketing equally attract and retain their attention. Since these were open type questions, participants had to devise their own answer. The most interesting responses were: “Guerilla marketing is a great thing because it’s about the story talked about in the population, but the ads are more effective because of the amount of information transmitted to the user. The main function of guerilla marketing on the other hand is attention attraction, but it does not transmit information”, “Yes, it encourages me to think and to convey to others my opinion about it.”, “Yes, because it is certainly interesting to see advertisements on unusual places”, “Yes, although I try to resist it , there is always found something interesting” and “When an ad is interesting, it is not important in which way it is presented.” Since creativity is a very important component of guerrilla marketing, respondents were asked whether they think creativity is important for the guerrilla marketing, and research results show that almost all respondents (89) believe that it is important. Only one respondent believes that it is irrelevant, while 4 respondents were not sure. Due to the fact that respondents made themselves clear regarding the importance of creativity, they were required to mention the reason, and they replied that creativity is important for every marketing because it encourages interest and allows a person to pay more attention. If something is new and creative, the better the chances that people notice it. Furthermore, respondents indicated that creativity is needed in order to create a way to attract someone’s attention, and it is even more needed in searching of way to attain the attention. It is also mentioned that a more creative ad will attract attention sooner than a classic form of marketing activity. Respondents claim that creative solutions are interesting and imaginative, and thus attract more attention and also feel that without creativity there is no good marketing. Furthermore, creativity allows spontaneity in communication with the audience and encourages the communication and dissemination of news about seen advertisement. It is believed that it also raises the marketing to a higher level and opens new markets. It is also important because of originality and effectiveness, but also because of creative approach to the problem. Respondents state that creativity is important to reach a good effect with a little resource, and a good and humorous commercial will always attract a customer to buy the product even though he doesn’t need it. Furthermore, they claim that without creativity the meaning is lost, where they mention that non-creative guerrilla marketing is irritating and tasteless. Finally, it is believed that creativity brings something new, where it is important to induce interest, simpler product promotion, but also because it goes beyond the usual offer. As it is increasingly difficult to attract consumers attention because they are „bombarded” with promotional ads, respondents were asked what would firstly attract their attention in guerrilla marketing, and to the majority of respondents is creativity in message transmission what draws their attention (41 respondents). Then follows a message that is transmitted, colors, sounds, channel which carry the message and others. But, a part of the mentioned question, respondents were asked a question about what way of promotion through guerrilla marketing would immediately attract their attention. Majority of respondents would immediately be attracted to fanciful content (43 respondents). Then it follows a humorous content selected by about the same number of respondents (41). While instructive content attracted attention in 7 respondents, the attention of one respondent would be drawn to frightening content, while the attention of no respondent would be attracted to sad content. It is also necessary to specify that one respondent chose answer the other. In the last question it was required to state why the chosen method of promotion would immediately attract their attention. The mentioned question was related to the question: “What content of guerrilla marketing would immediately attract your attention?” So they gave replies following up on the previous question (What content of guerrilla marketing would immediately attract your attention?). Respondents who replied in previous question that humorous content would immediately attract their attention, argued that it would attract their attention because they remember long what make them laugh, they love humor, it is about something new. When the promotion is humorous it gives better mood and brings serenity in everyday life, a message with a touch of humor makes a person laugh and cheer the person up, comit it to memory and keep telling it to others. Furthermore, the respondents believe that the humorous is always easy to remember, creates a positive energy in person and attracts on purchase. In this way a high quality message transfer can be achieved, humor is a cure for all people, they would remember what they saw if it made them laugh, entertaining and humorous ways are the most memorable, longer stay in the memory and creates a positive reaction. Respondents who indicated that creative and imaginative advertising attracts attention argued that in it it is invested a lot of effort

76

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

and talent, creativity provokes thinking, imagination would surprise a person and certainly influence the awareness and curiosity, the content would be different and unusual, a person would be happy and smile to imaginative idea, it is different from any other, due to diversity, the idea itself, because it’s not monotonous, take you away from bitter reality, people are fed up with the expected traditional marketing messages, methods and channels, and because the traditional methods of advertising are too predictable. Respondents who replied that the informative content would attract their attention, mention that an individual will continue to think about it in the next period, they like to receive lessons in life from all sources, due to excitement and because these are new information. One respondent who mentioned that intimidating way would attracted his attention, gives the argument that it is because he cannot be so easy to scare. Testing the hypothesis, it was concluded that both the younger and older population notice guerrilla marketing in the same way, where those in the age 26 to 32 years notice it most. As guerrilla marketing tends to attract attention of the target group, the survey showed that it is successful. Respondents describe it mostly as creative, and they argue that creativity is needed in order to attract customer’s attention. However, the attention cannot be attracted in the same way at all customers because ones like more humorous content of the message, while others prefer creative and imaginative content of the message, whereas to the third ones the instructive content of the message.

CONCLUSION Various authors define marketing in their own way, but most of them put emphasis on the customer. Since companies are aware that customers are crucial for their existence, they try to reach them through various marketing activities. But over the time the customers have become saturated with numerous advertising messages, and therefore were forced to find a new path to its target group, which has resulted in the development of guerrilla marketing. But, it was originally designed for small and medium enterprises in order to compete with large companies that have much larger budgets. The authors describe a guerrilla marketing as creative and unconventional, aiming to attract the attention of customers with minimal expenses. Survey shows that the younger and the older population perceive guerrilla marketing in the same way, but it is mostly perceived by people aged 26 to 32 years, and the least by those aged 47 years and older. Theoretical review shows that guerrilla marketing tries to attract the attention of customers, and survey confirms this because most of the respondents stated that it indeed attracts their attention. Respondents describe it as creative, and then unusual, and theoretically it is described in that way. Most respondents believe that creativity is the most important for the aforementioned type of marketing, which is also referred to in the literature. So, we can conclude that the theory is consistent with the practice or, as the guerrilla marketing is described in the literature, so the companies try to apply it, what is concluded from respondents answers. However, it should be noted that all customers are not the same, so they should be approached carefully because some of them will be attracted by humorous content of the message, while to others will be more interesting instructive or imaginative content. Therefore, in order to be successful in marketing activities, the companies have to know the target to enable them to find out what message content is most appropriate for them.

LITERATURE 1. Ama.org; Definition of Marketing, available on https://www.ama.org/AboutAMA/Pages/Definition-of-Marketing.aspx (etc. 19 of May 2016.) 2. Bigat, E.C.; Guerrilla advertisement and marketing, Procedia - Social and Behavioral Sciences, 2012., Volume 51, pp 1022-1029 3. Bygrave, W., Zacharakis, A.; Entrepreneurship, John Wiley & Sons, Inc., 2008., p. 182 4. Dobrinić, D.; Osnove marketinga, Redak, Split, 2010., p. 2-3 5. Farouk, F.; The role of guerrilla marketing strategy to enrich the aesthetic and functional values of Brand in Egyptian market, International Design Journal, July 2012., Volume 2, Issue 1, pp 111-119 6. Hallisy, B.H.; Taking it to the streets: steps to an effective - and ethical - guerilla marketing campaign, Public Relations Tactics, March 2006., Volume 13, Issue 3, pp 13 7. Hiam, A.; Marketing For Dummies (3rd edition), Wiley Publishing, Inc., Indianapolis, 2009., p. 339 8. Hutter, K., Hoffmann, S.; Guerrilla Marketing: The Nature of the Concept and Propositions for Further Research, Asian Journal of Marketing, 2011., Volume 5, Issue 2, pp 39-54 9. Isaac, A.A.; Analysis of Guerrilla and Traditional Marketing Interface in Improving the Productivity of Organizational Marketing in Small and Medium Size Enterprises (SMEs) in Nigeria, Journal of Small Business and Entrepreneurship Development, March 2014., Volume 2, No. 1, pp 175-190 10. Kar Yan, Y., Yazdanifard, R.; The Review of Guerrilla Marketing in Changing the Face of Productivity in Business Practices, https://www.google.hr /url?sa=t&rct=j&q=&esrc=s&source=web&cd=9&cad=rja&uact=8&ved=0ahUKEwiL5KOx6oTLAhUlJnIKHZlUCXkQFghnMAg&url=https%3A%2F%2F www.researchgate.net%2Ffile.PostFileLoader.html%3Fid%3D54bac9d9d3df3e73638b4616%26assetKey%3DAS%253A273674215591947%254014 42260426021&usg=AFQjCNE8UoyfWrsaWGaeoClHVxiInj3e7g&sig2=1NGvUsO3jbAy-JwM5kTwtQ&bvm=bv.114733917,d.bGQ (etc 21. Of May 2016.) 11. Klepek, M; Guerrilla Marketing Concept and Further Research Possibilities, Journal of Economic Literature, JEL classification: M31, 2014., pp 79-87 12. Kotler, P., Keller, K.L., Martinović, M.; Upravljanje marketingom (14th edition, Mate d.o.o., Zagreb, 2014., p. 5

2016 - M SPHERE

B O O K O F PA P E R S

-

77


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

13. Levinson, J.C.; Gerilski marketing Jednostavne i jeftinije metode stjecanja veće dobiti, Algoritam, Zagreb, October 2008., p. 21, 80 14. Levinson, J.C., Levinson, J.; Guerrilla marketing remix: the best of guerrilla marketing, Entrepreneur Press, United States of America, 2011., p. 18 15. Levinson, J.C., McLaughlin, M.W.; Guerrilla marketing for consultants: breakthrough tactics for winning profitable clients, John Wiley & Sons, Inc., 2005., p. 11 16. Meler, M.; Osnove marketinga, Faculty of Economy in Osijeku, Osijek, 2005., p. 15, 19 17. Nufer, G.; Guerrilla Marketing-Innovative or Parasitic Marketing?, Modern Economy, 2013., Volume 4, No. 9A, pp 1-6 18. Previšić, J., Ozretić Došen, Đ., Vranešević, T., Kesić, T., Prebežac, D., Piri Rajh, S., Tomašević Lišanin M., Tkalac Veričič, A., Renko, N., Pavičić, J., Sinčić, D.; Osnove marketinga, Adverta d.o.o., Zagreb, April, 2007., p. 1-2 19. Prévot, A.; The Effects of Guerilla Marketing on Brand Equity, The Consortium Journal of Hospitality and Tourism, 2009., Volume 13, Issue 2, pp 33-40 20. Senečić, J.; Osnove marketinga, Mikrorad d.o.o., Zagreb, 2000, str. 5, 9-10 21. Stanojević, M.; Marketing na društvenim mrežama, Medianali, 2011., Volume 5, No. 10, pp 165-180 22. Southon, M., West, C.; What can Che teach us?, Director, November 2006., Volume 60, Issue 4, pp 20 23. Virk, A.; Twitter: The Strength of Weak Ties, University of Auckland Business Review, 2011., Volume 13, Issue 1, pp 19-21 24. Walsh, P.; 4 New & Novel Approaches to Guerilla Marketing, Home Business Magazine: The Home-Based Entrepreneur’s Magazine, July/August 2014., Volume 21, Issue 4, pp 32 25. Webster’s New Millennium Dictionary of English; Flash mob, http://www.dictionary.com/browse/flash-mob (etc. 24. of May 2016.) 26. Weisberg, A., Pfleiger, A., Friedberg, J.; Undercover Agency The Ethics of Stealth Marketing, Confronting Information Ethics in the New Millennium, 2007., pp 92-106 27. Yuksekbilgili, Z.; The Use of Guerilla Marketing In SMEs, International Journal of Advanced Multidisciplinary Research and Review, 2014., Volume 2, No. 2, pp 2-7 28. Zavišić, Ž. Medić, M.; The marketing of small enterprises, guerilla marketing, Interdisciplinary Management Research III, 2006. pp 414-425 29. Zuo, L., Veil, S.; Guerilla Marketing and the Aqua Teen Hunger Force Fiasco, Public Relation Quarterly, 2006. Volume 51, Issue 4, pp 8-1 DETAILS ABOUT AUTHORS: ANTONIJA MILAK STUDENT amilak@foi.hr DAMIR DOBRINIĆ PH.D., ASSOCIATE PROFESSOR ddobrinic@foi.hr FOR BOTH AUTHORS: FACULTY OF ORGANIZATION AND INFORMATICS UNIVERSITY OF ZAGREB VARAŽDIN, CROATIA

78

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

TENSIONS IN CORPORATE CREATIVITY CARSTEN DECKERT

ABSTRACT The standard definition of creativity is based on a tension between originality and effectiveness. Borrowing from the waveparticle duality in physics one could say that there is an originality-effectiveness duality at work for creativity. The paper explores how this tension pervades Amabile’s (1997) componential theory of organizational creativity with the components organizational motivation, management practices (including work assignment and work control) and resources. As a method the so called value square (“Wertequadrat”) developed by Helwig (1967) and Schulz von Thun (1998) is used which balances a value with its countervalue. The author identifies a tension of corporate tradition and corporate change for organizational motivation, a tension of skills and challenges for work assignment, a tension of management by control and management by loss of control for work control as well as a tension of organizational efficiency and organizational slack for resources. Additionally different implications of these tensions for the resistance of a company to creativity, for an organizational climate conducive to creativity as well as for resource allocation in creative endeavours are discussed. KEY WORDS: Corporate Creativity, Organizational Creativity, Components of Creativity.

1. INTRODUCTION According to Runco & Jaeger (2012, p. 92) the standard definition of creativity is bipartite and includes the two complementary criteria of originality and effectiveness. Borrowing from the wave-particle duality in physics it could said that creativity can be described by an originality-effectiveness duality (Deckert 2016b). On the one hand creativity should lead to novel and original ideas which surprise us because they are unexpected or are judged to be inconceivable. On the other hand creativity should lead to useful, valuable and appropriate solutions for problems – especially when we speak about creativity in a business environment. This creates a tension between the two poles: A solution can be novel but useless or inappropriate or it can be highly effective as a possible solution but not really original. To be termed “creative” an idea or solution has to incorporate both criteria to a certain extent. The definitions of organizational or corporate creativity usually incorporate both criteria of the originality-effectiveness duality. Woodman, Sawyer & Griffin (1993, p. 293) define organizational creativity as “the creation of a valuable, useful new product, service, idea, procedure or process by individuals working together in a complex social system”. This definition includes the same general tension between originality and effectiveness as proposed by the standard definition. Robinson & Stern (1998, p. 11) use the term corporate creativity and define it as follows: “A company is creative when its employees do something new and potentially useful without being directly shown or taught.” This definition also includes the tension between originality and effectiveness and additionally emphasizes self-initiative and proactivity of the individuals which the work environment conducive to creativity is supposed to stimulate. The paper at hand focuses on the creative work environment of organizations and tries to show how the tension of originality and effectiveness permeates the components of organizational respectively corporate creativity.

2. ORGANIZATIONAL CLIMATE, WORK ENVIRONMENT AND CREATIVITY On the organizational level research concerning creativity deals with management-related factors such as leadership, knowledge utilization and networks, organizational structure, work environment (including resource availability and organizational climate) as well as external environment (Anderson, Potocnik & Zhou 2014, p. 1302 ff., Mumford, Hester & Robledo 2012). The concept of organizational climate usually describes the employees’ perceptions of their work environment in terms of behavioural patterns such as practices and procedures. Thus, organizational climate is an aggregation of individual perceptions (Patterson et al. 2005, p. 380, West & Sacramento 2012, p. 362f.) and can be seen as an “intervening variable between the context of an organization and the behaviour of its members” (Patterson et al. 2005, p. 379). With regard to a work environment conducive to creativity several specific climate models have been proposed. Some of these models have also been elaborated into assessment tools and used to measure organizational climate with regard to creativity. Overviews of the different approaches can be found in Hunter, Bedell & Mumford (2007), Mathisen & Einarsen (2004) and Puccio & Cabra (2010). Furthermore Hunter, Bedell & Mumford (2007, p. 74) developed an integrative climate taxonomy with 14 dimensions from an analysis of 42 existent climate models for creativity.

2016 - M SPHERE

B O O K O F PA P E R S

-

79


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The author of this paper chose to use the work environment model of Amabile and colleagues (Amabile et al. 1996, Amabile 1997). There are mainly two reasons for this choice: Firstly, the model links individual and organizational creativity (see fig. 1) and, thus, complements the author’s previous research concerning individual creativity (Deckert 2015, Deckert 2016b). Secondly, the model seems to be the most widely validated model concerning organizational climate for creativity (West & Sacramento 2012, p. 364). In an early version the model of Amabile comprised five categories (Amabile et al. 1996, p. 1159) which were re-arranged into three in a later version (Amabile 1997, p. 52ff.). The three components of the current model are as follows: •

Organizational Motivation contains the two aspects “basic orientation of the organization toward innovation” and “supports for creativity and innovation throughout the organization”. Organizations differ in organizational encouragement and organizational impediments (Amabile 1997, p. 52).

Management Practices comprise “management at all levels, but most especially the level of individual departments and projects”. The scale for distinguishing different climates are challenging work, work group supports, supervisory encouragement and freedom. The two fostering mechanisms which are frequently confirmed by other researchers are challenging work as well as freedom and autonomy (Amabile 1997, p. 54).

Resources for creativity include “sufficient time for producing novel work in the domain, people with necessary expertise, funds allocated to this work domain, material resources, systems and processes for work in the domain, relevant information, and the availability of training” (Amabile 1997, p. 53-54).

The work environment impacts individual creativity by influencing the components expertise, creativity skills and task motivation of individual creativity. Task motivation is immediately and directly affected, while the other two criteria can be indirectly affected over the medium- to long-term. In the other direction individual creativity fosters organizational creativity and innovation activities in a company (see fig. 1) (Amabile 1996, p. 83ff., Amabile 1997, p. 52ff.). Figure 1: Componential Theory of Organizational Creativity and Innovation

Individual/Team Creativity

Work Environment Creativity Feeds Innovation

Expertise

IMPACTS

Creativity Creativity Skills

Task Motivation

Management Practices

Innovation OrganiResources zational Motivation

Source: Amabile 1997, p. 53

3. METHODOLOGY The method used to describe and analyze the tensions of corporate creativity is the so called value square. The value square (“Wertequadrat”) is a method to describe complementary value pairs and was developed by Helwig (1967) for character description. It was later used mainly by Schulz von Thun (1998) to show dialectical structures in the intervention into communication. The central idea of the value square is that there can be too much of a value which is the reason why a value should be balanced with a countervalue. This phenomenon can be related to the too-much-of-a-good-thing effect (TMGT effect) of Pierce & Aguinis (2011, p. 313) who propose that some positive antecedents have inflection points after which they cease to be beneficial. Schulz von Thun (1998, p. 40, own translation) writes that “in the value square the notion of an optimum ledger has been abandoned and replaced by the notion of a dynamic balance […]. The notion of a yin-yang-relation of the upper values is also appropriate: They permeate each other, and each contains already a trace element of its opposite pole.”

80

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The value square is constructed as follows (see fig. 2): Starting from the positive value on the upper left side (e.g. thrift) one identifies the positive countervalue on the upper right side (e.g. generosity). This upper line represents the positive tension of the two values which together constitute the desired dynamic balance (e.g. one wants to be thrifty while simultaneously being generous). From the value on the upper left along the vertical line downwards one positions the negative exaggeration of this value (e.g. greed). The diagonal leads to the contrarian opposite which at the same time is the negative exaggeration of the countervalue (e.g. prodigality). The lower line represents the overcompensation of the negative values when one goes from one extreme of negative exaggeration to the other extreme (Helwig 1967, Schulz von Thun 1998). The value square is not only a means to describe dialectical structures of values, but also offers the possibility for improvement and can be seen as a development square (“Entwicklungsquadrat”). It helps to choose a developmental path along the diagonal line when one is in a position of negative exaggeration of one of the two values (Schulz von Thun 1998, p. 47). Figure 2: The Value Square Value

Positive Tension

(e.g. thrift)

Negative Exaggeration (e.g. greed)

Positive Countervalue

(e.g. generosity)

Overcompensation

Contrarian Opposite

(e.g. prodigality)

Source: Schulz von Thun 1998, p. 41 (own translation and examples)

4. TENSION CONCERNING ORGANIZATIONAL MOTIVATION The central tension of a company concerning Organizational Motivation is between corporate tradition and corporate change (see fig. 3). The tradition of a company is reflected by the current business model and the current core competences. By moving too far away from its corporate tradition a company risks losing its corporate identity. But a certain amount of change is necessary to adapt a business model to changes in market needs and to react to technological developments, discontinuities or disruptions. By sticking to closely to the core business companies risk obsolescence of their products and business models and eventually endanger the companies’ competitive advantage. Thus, corporate tradition represents the effectiveness side of the standard definition of creativity and corporate change the originality side. Figure 3: Tension Concerning Organizational Motivation

Corporate Tradition

Negative Exaggeration

Corporate Obsolescence

Positive Tension

Contrarian Opposites

Overcompensation

Corporate Change

Negative Exaggeration

Loss of Corporate Identity

Source: Deckert 2016a, p. 10

2016 - M SPHERE

B O O K O F PA P E R S

-

81


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

This general dilemma can also be described as a tension between core and periphery. Every company has its core business which it needs to strengthen and develop to stay competitive. As a company moves further away from its core business, the novelty of its innovations increase but also the risk of failure and of losing track of the company mission. So especially radical innovations often take place at the periphery of the business and not necessarily near the core. A radical innovation is the development of completely new lines of products or business fields based on new ideas, new technologies or substantial reductions in cost or increases in performance, whereas incremental innovations usually deal with cost reductions or performance improvements of existing products or services (Leifer et al., 2010, p. 4ff.). So companies need to develop what Nicholas, Ledwith & Bessant (2013, p. 34) call “a peripheral vision that allows them to see beyond their immediate focus” to explore new business fields. These new ventures can be adjacent to the traditional business or completely new with no or few connections to the core business. Based on Ansoff’s classical matrix containing product and market Nagji & Tuff (2012, p. 66ff.) propose an Innovation Ambition Matrix and distinguish between core innovation activities which optimize existing products for existing customers, adjacent activities which expand the innovation efforts into new but related business fields and transformational activities which explore new products for new markets (see fig. 4). They found that companies which allocate on average 70% of their resources to core innovation activities, 20% to adjacent innovation activities and 10% to transformational innovation activities show a higher share price performance. Of course, these values fluctuate according to the specific industry a company operates in and the type of organization (e.g. established company or start-up company), but can be considered a good starting point for discussions. Many companies, however, find it hard to develop their business beyond their core business segments. Anthony (2012, p. 68) calls this tendency the “the sucking sound of the core business”. Figure 4: Innovation Ambition Matrix MARKET

TRANSFORMATIONAL Developing breakthroughs and inventing things for markets that don’t yet exist

Create new markets Target new customer needs

ADJACENT Expanding from existing business into „new to the company“ business

Enter adjacent markets Serve adjacent customers

Serve existing markets and customers

10% CORE Optimizing existing products for existing customers

20%

70%

Use existing products and assets

Add incremental products and assets

Develop new products and assets

PRODUCT

Resource allocation

Source: Nagji & Tuff 2012, p. 69

5. TENSIONS CONCERNING MANAGEMENT PRACTICES The factor challenging work of the component Management Practices can be described as “appropriately matching individuals to work assignments” (Amabile 1997, p. 54). It it usually achieved by a balance of skill and challenge which can be used as the value pair with skills representing the effectiveness side and challenges the originality side (see fig. 5). Csikszentmihalyi (1997, p. 110) calls this balance the flow in creativity and describes it as a “feeling when things were going well as an almost automatic, effortless, yet highly focused state of consciousness”. For this to happen the task should also have clear goals, provide immediate feedback, and can be done under exclusion of distractions. The flow in creativity leads to a merging of action and awareness, the forgetting of self, time and surroundings and is generally seen as an autotelic activity meaning an activity which provides joy for its own sake (Csikszentmihalyi 1997, p. 110ff.). If work is assigned with too much focus on existing skills then employees will be bored by the tasks. A task which is too demanding with regard to the skill level of the employee will result most likely in anxiety of the employee.

82

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 5: Tension Concerning Work Assignment Flow of Creativity Skills

Negative Exaggeration

Boredom

Positive Tension

Contrarian Opposites

Challenges

Negative Exaggeration

Anxiety

Overcompensation

Source: Deckert 2016a, p. 17 (based on Csikszentmihalyi 1997)

Managers in innovation management should assign tasks with the right challenge-to-skill-balance and need to constitute teams with a diversity of skills to tackle challenging tasks. Further approaches to enhance the flow in creativity are the setting of “stretch goals” for innovation activities which should be demanding yet achievable (Lafley & Charan 2008, p. 12), good planning and feedback in combination with clear communication (Amabile 1997, p. 54), a project veto of employees or a project tender with applications by employees for the project (Meyer 2011, p. 181). Another factor of the component Management Practices is related to work control and demands a “considerable degree of freedom and autonomy” (Amabile 1997, p. 54) for the employees. Work control for corporate creativity can be displayed as a positive tension between managerial control which represents the effectiveness side and managerial loss of control which represents originality (see fig. 6). Of course, managers want to make sure that only fruitful ideas are developed into products, that innovation budgets are kept, that projects get finished on time and that R&D-productivity is generally high. But too much control can hinder creativity and can lead to encrusted structures and processes where following the rules is more important than having a good idea. Robinson & Stern (1998, p. 124ff.) observe that selfinitiated and unofficial activities can lead to highly creative and unanticipated outputs. This happens when employees are given enough freedom and autonomy to follow their intrinsic motivation. This, of course implies that managerial control over the creative process is lost to a certain extent, and management is based on trust. The negative exaggeration of managing by loss of control is a lack of leadership and orientation which leaves employees with no guidance at all. This dilemma can be linked to the concept of wuwei in Chinese philosophy. Wuwei means inaction or non-action but in the sense of letting things happen or not interfering with the natural flow of events. This concept is usually contrasted with wei which means intentional or deliberate action (Deckert & Scherer 2013, p. 4). So the dilemma of work control for creativity can be described as a “controlled loss of control” (Deckert & Scherer 2013, p. 13) and “requires an almost Zen-like ability to control without controlling” (Sawyer 2013, p. 247) by the manager. Figure 6: Tension Concerning Work Control

Management by Control

wei

Negative Exaggeration

Encrusted Structures and Processes

Positive Tension

Contrarian Opposites

Overcompensation

Management by Loss of Control

Negative Exaggeration

wuwei

Lack of Leadership and Orientation

Source: Deckert & Scherer 2013, p. 14

2016 - M SPHERE

B O O K O F PA P E R S

-

83


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Some of the guidelines on how to influence the tension concerning work control have already been transformed into practical approaches by companies. Examples are discretionary time where developers can spend a certain percentage of their working hours on projects of their own choice (20% rule at Google or 15% rule at 3M) (Pillkahn 2011, p. 266ff., 3M 2002, p. 22), projects outside the usual control framework of a company called “stealth innovation”, “submarine projects” or “skunkwork projects” (Miller & Wedell-Wedellsborg 2013, Pillkahn 2011, p. 266ff.), the concept of intrapreneuring (i.e. intracorporate entrepreneurs) (Pinchot & Pellman 1999) and certain leadership approaches such as “Managing by Getting out of the Way” by Sutton (2007, p. 134), “catalytic leadership” by Meyer (2011, p. 173, own translation) or more communication than control efforts during innovation activities as proposed by Lafley & Charan (2008, p. 251).

6. TENSION CONCERNING RESOURCES The resources named by Amabile (1997, p. 53-54) necessary for corporate creativity can be interpreted as a kind of organizational slack. Organizational slack can be defined as “resources that are in excess of what the organization actually needs to fulfill its operations” (Leitner 2009, p. 1). It can be viewed as dysfunctional (i.e. slack is a kind of waste to be reduced through efficient resource reallocation) or functional (i.e. slack opens up new entrepreneurial possibilities and broadens the scope of action through experimentation) (Krcal 2009, p. 14ff.). Overviews on the relation between organizational slack and creativity/innovation can be found in Anderson, Potocnik & Zhou (2014, p. 1313), Damanpour & Aravind (2012, p. 502) and Leitner (2009, p. 118ff.). The results are inconclusive because the analyzed studies use different definitions of slack resources, different ways of operationalization to measure slack resources and sometimes don’t sufficiently distinguish between innovation and other dependent variables (e.g. performance) (Leitner 2009, p. 122). But in general a positive effect for short-term unabsorbed resources is recognized. Nohria & Gulati (1996) find an inverse U-shaped relation between unabsorbed slack and innovation in a company caused by a tension between discipline and experimentation, and Krcal (2010, p. 8ff.) concludes that efficiency and slack are complementary with regard to innovation management. So the tension concerning resources can be constructed as a positive tension between organizational efficiency and organizational slack (see fig. 7). When companies identify a surplus in resources they usually try to reduce this perceived waste, e.g. through programs of lean management and downsizing. But focussing on efficiency too much can lead to an undersized slack which limits the scope for action concerning creativity. Hamel & Prahalad (1996, p. 12) call downsizing the “equivalent of corporate anorexia” because in itself downsizing does not set a company back on a path to competitiveness. On the other side too much slack can lead to undisciplined spending and a reduction in creativity, since constraints often focus creative problem-solving (Boden 1992, p. 82). This negatively exaggerated state can be termed “corporate obesity”. Figure 7: Tension Concerning Resources

Organizational Efficiency

Negative Exaggeration

Positive Tension

Contrarian Opposites

Corporate Anorexia

Overcompensation

Organizational Slack

Negative Exaggeration

Corporate Obesity

Source: Deckert 2016a, p. 22

As already described organizational slack can be given in the form of discretionary time where researchers are allowed to spend a certain percentage of their working hours on projects of their own choice. Other forms of organizational slack already in use at various companies are innovation labs to experiment in, limited research budgets without application restrictions for notable employees (Pillkahn 2011, p. 266ff.) and “patient money” which is spent over a long period of time without expectations of short-term returns (3M 2002, p. 77ff.).

84

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

CONCLUSION In the paper at hand the value square is used to display, describe and analyze the qualities of the components of corporate creativity. Starting from the tension of originality and effectiveness in the standard definition of creativity the author identifies related tensions underlying the components of corporate creativity. For the three components of the componential theory according to Amabile (1997, p. 53) he proposes the following tensions: •

Organizational Motivation: Corporate Tradition and Corporate Change

Management Practices: Skills and Challenges (Work Assignment) as well as Management by Control and Management by Loss of Control (Work Control)

Resources: Organizational Efficiency and Organizational Slack

The results of this paper are limited to the main factors of the work environment of a company. Other factors of the work environment such as leadership style (see e.g. Friedrich et al. 2010) or organizational structure (see e.g. Baer 2012, Damanpour & Aravind 2012) may also have impacts on corporate creativity. Furthermore the paper is limited to the organizational level of analysis and does not include additional impacts of the team level as e.g. described by the model of team climate by West (1990). A major limitation of the value square is that the research is qualitative, thus, indicating only aggregated directions for improvement for companies. So a next possible step for research is to operationalize the tensions of corporate creativity and assign measurements to each tension. In this way the balance point for the most successful performance could be detected. Furthermore a distinction could be made with regard to aspects affecting innovation activities such as type of product, type of industry or type of company. Doing so could lead to a more finegrained picture of the balance points of corporate creativity and to more fine-tuned recommendations for companies.

LITERATURE 1. 3M = 3M Company (2002). A Century of Innovation. The 3M Story. o.O.: 3M Company. 2. Amabile, T.M. (1996). Creativity in Context. Boulder: Westview Press. 3. Amabile, T.M. (1997). Motivating Creativity in Organizations: On Doing what You Love to Do and Loving what You Do. California Management Review. 40 (1), 39-58. 4. Amabile, T.M. (2010). A Model of Creativity and Innovation in Organizations. In N. Anderson, A.C. Costa (eds.). Innovation and Knowledge Management. Volume One: Individual Creativity and Innovation (123-167). Thousand Oaks: SAGE Publications. 5. Amabile, T.M., Conti, R., Coon, H., Lazenby, J., Herron, M. (1996). Assessing the Work Environment for Creativity. Academy of Management Journal. 39 (5), 1154-1184. 6. Anderson, N., Potocnik, K., Zhou, J. (2014). Innovation and Creativity in Organizations: A State-of-the-Science Review, Prospective Commentary, and Guiding Framework. Journal of Management. 40 (5), 1297-1333. 7. Anthony, S.D. (2012). The Little Black Book of Innovation. Boston: Harvard Business Review Press. 8. Baer, M. (2012). Putting Creativity to Work: The Implementation of Creative Ideas in Organizations. Academy of Management Journal. 55 (5), 1102-1119. 9. Boden, M. (1992). The Creative Mind. Myths and Mechanisms. London: Cardinal. 10. Csikszentmihalyi, M. (1997). Creativity: Flow and the Psychology of Discovery and Invention. New York: HarperPerennial. 11. Damanpour, F., Aravind, D. (2012). Organizational Structure and Innovation Revisited: From Organic to Ambidextrous Structure. In M.D. Mumford (ed.). Handbook of Organizational Creativity (483-513). London: Academic Press. 12. Deckert, C. (2015). Tensions in Creativity. Using the Value Square to Model Individual Creativity. Working Paper No. 2/2015. CBS Working Paper Series (ISSN 2195-6618). Köln: CBS. 13. Deckert, C. (2016a). Tensions in Corporate Creativity. Using the Value Square to Model Organizational Creativity. Working Paper No. 1/2016. CBS Working Paper Series (ISSN 2195-6618). Köln: CBS. 14. Deckert, C. (2016b). On the Originality-Effectiveness Duality of Creativity: Tensions Concerning the Components of Creativity. Business Creativity and the Creative Economy. 2 (1), 70-82. 15. Deckert, C., Scherer, A. (2013). The Dao of Innovation. What European innovators can learn from philosophical Daoism. Proceeding of the 30th annual conference of EAMSA (Euro-Asia Management Studies Association). Duisburg: EAMSA. 16. Friedrich, T.L., Mumford, M.D., Vessey, B., Beeler, C.K., Eubanks, D.L. (2010). Leading for Innovation. Reevaluating Leader Influences on Innovation with Regard to Innovation Type and Complexity. International Studies of Management & Organization. 40 (2), 6–29. 17. Hamel, G., Prahalad, C.K. (1996). Competing for the Future. Boston: Harvard Business School Press. 18. Helwig, P. (1967). Charakterologie [Characterology]. Freiburg im Breisgau: Herder. 19. Hunter, S.T., Bedell, K.E., Mumford, M.D. (2007). Climate for Creativity: A Quantitative Review. Creativity Research Journal. 19 (1), 69-90. 20. Krcal, H.-C. (2009). Das Management des (un)erwünschten Ressourcenüberschusses. Teil I. Funktionen, Zustände und Entstehung des organisational slack [The Management of (Un)desirable Resource Surplus. Part I. Functions, Conditions and Genesis of Organizational Slack]. Discussion Paper Series No. 482. University of Heidelberg. Retrieved 15.01.2016 from http://www.uni-heidelberg.de/md/awi/forschung/ dp482.pdf

2016 - M SPHERE

B O O K O F PA P E R S

-

85


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

21. Krcal, H.-C. (2010). Das Management des (un)erwünschten Ressourcenüberschusses. Teil III. Das optimale Slack-Niveau – Die Bewertung des organizational slack [The Management of (Un)desirable Resource Surplus. Part III. The Optimum Slack Level – The Evaluation of Organizational Slack]. Discussion Paper Series No. 502. University of Heidelberg. Retrieved 15.01.2016 from http://www.uni-heidelberg.de/md/awi/ forschung/dp502.pdf 22. Lafley, A.G., Charan, R. (2008). The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation. New York: Crown Business. 23. Leifer, R., McDermott, C.M., O’Connor, G.C., Peters, L.S., Rice, M.P., Veryzer, R.W. (2000). Radical Innovation. How Mature Companies Can Outsmart Upstarts. Boston: HBS Press. 24. Leitner, J.S. (2009). Organizational slack and its impact on innovation in non-profit organizations. A theoratical [sic!] and empirical approach. Doctoral thesis. WU Vienna University of Economics and Business. 25. Mathisen, G.E., Einarsen, S. (2004). A Review of Instruments Assessing Creative and Innovative Environments within Organizations. Creativity Research Journal. 16 (4), 119-140. 26. Meyer, J.-U. (2011). Kreativ trotz Krawatte: Vom Manager zum Katalysator [Creative despite the Tie: From Manager to Catalyst]. Göttingen: Business Village. 27. Miller, P., Wedell-Wedellsborg, T. (2013). The Case for Stealth Innovation. When it’s Better to Ask for Forgiveness than Seek Permission. Harvard Business Review. 91 (3), 91-97. 28. Mumford, M.D., Hester, K.S., Robledo, I.C. (2012). Creativity in Organizations: Importance and Approaches. In M.D. Mumford (ed.). Handbook of Organizational Creativity (3-16). London: Academic Press. 29. Nagji, B., Tuff, G. (2012). Managing Your Innovation Portfolio. Harvard Business Review. 90 (5), 66-74. 30. Nicholas, J., Ledwith, A., Bessant, J. (2013). Reframing the Search Space for Radical Innovation. Research-Technology Management. 56 (2), 2735. 31. Nohria, N., Gulati, R. (1996). Is Slack Good or Bad for Innovation? Academy of Management Journal. 39 (5), 1245-1264. 32. Patterson, M.G., West, M.A., Shackleton, V.J., Dawson, J.F., Lawthom, R., Maitlis, S., Robinson, D.L., Wallace, A.M. (2005). Validating the Organizational Climate Measure: Links to Managerial Practices, Productivity and Innovation. Journal of Organizational Behavior. 26, 379–408. 33. Pierce, J.R., Aguinis, H. (2013). The Too-Much-of-a-Good-Thing Effect in Management. Journal of Management. 39 (2), 313-338. 34. Pillkahn, U. (2011). Innovationen zwischen Planung und Zufall: Bausteine einer Theorie der bewussten Irritation [Innovations between Planning and Coincidence: Components of a Theory of Deliberate Irritation]. Norderstedt: BoD. 35. Pinchot, G., Pellman, R. (1999). Intrapreneuring in Action. A Handbook for Business Innovation. San Francisco: Berret-Koehler. 36. Puccio, G.J., Cabra, J.F. (2010). Organizational Creativity. A Systems Approach. In J.C. Kaufman, R.J. Sternberg (eds.). The Cambridge Handbook of Creativity (145-173). New York: Cambridge University Press. 37. Robinson, A.G., Stern, S. (1998). Corporate Creativity. How Innovation and Improvement Actually Happen. San Francisco: Berret-Koehler. 38. Runco, M.A., Jaeger, G.J. (2012). The Standard Definition of Creativity. Creativity Research Journal. 24 (1), 92-96. 39. Sawyer, R.K. (2013). Zig Zag. The Surprising Path to Greater Creativity. San Francisco: John Wiley & Sons. 40. Schulz von Thun, F. (1998). Miteinander reden, Teil 2: Stile, Werte und Persönlichkeitsentwicklung [Being on Speaking Terms, Part 2: Styles, Values and Personality Development]. Reinbek bei Hamburg: Rowohlt. 41. Sutton, R.I. (2007). Weird Ideas That Work: How to Build a Creative Company. New York: Free Press. 42. West, M.A. (1990). The Social Psychology of Innovation in Groups. In M.A. West & J.L. Farr (Eds.). Innovation and Creativity at Work: Psychological and Organizational Strategies (309–333). Chichester: Wiley. 43. West, M.A., Sacramento. C.A. (2012). Creativity and Innovation: The Role of Team and Organizational Climate. In M.D. Mumford (ed.). Handbook of Organizational Creativity (359-383). London: Academic Press. 44. Woodman, R.W., Sawyer, J.E., Griffin, R.W. (1993). Toward a Theory of Organizational Creativity. The Academy of Management Review. 18 (2), 293-321.

DETAILS ABOUT AUTHOR: CARSTEN DECKERT PROFESSOR OF LOGISTICS AND SUPPLY CHAIN MANAGEMENT COLOGNE BUSINESS SCHOOL COLOGNE, GERMANY c.deckert@cbs.de

86

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

THE IMPACT OF EMOTIONAL BRANDING ON CONSUMERS IN CROATIAN NORTHERN REGION KRISTIAN STANČIN IVA GREGUREC

ABSTRACT Nowadays, brands are perceived at the level of feelings and identity, which are one of the most important features by which they differ from each other. According to this, today’s companies are working on increasing the emotional connection between consumers and brands, which is known as a term emotional branding. The main purpose of emotional branding is the systematic integration of all senses in order to cause a certain emotion and induce the consumer to purchase products or to use services. Therefore, the aim of this paper is to describe the role of emotions in creating a brand and discover the extent to which consumers are emotionally attached to a particular brand. The paper is created as a result of a research study established for writing a master’s thesis. KEY WORDS: brand, emotions, emotional branding, consumers.

1. INTRODUCTION For a long time, product manufacturing was the core of industrial economy. But with more and more manufacturers entering the market comes oversaturation, but also recession and some of the world’s strongest manufacturers are beginning to weaken. At the time, a new type of corporation started to emerge, which understood that manufacturing isn’t the only strategic action, so their products were manufactured by contract manufacturers in different countries, while the corporation itself worked on manufacturing the brand image. When that turned out to be a very lucrative business strategy, more and more corporations started to incorporate this kind of business style, while they also had to know what is important to the customers in order to create a good image. Marketing was born in that time period, and it was assigned to research consumers’ wants and needs in order to create an image that will be suitable for consumers. In this article we talk about emotional branding and everything that is needed to create a brand to which consumers will have an emotional attachment to. Results of the research conducted on consumers and their emotional attachment to a brand are at the end of the article.

2. BRAND IDENTITY A prerequisite to building a strong and successful brand, besides assumed quality, is a brand identity that has to show the value of the brand to consumers in a realistic and reliable way (Kapferer, 2008, p. 183). The brand’s identity is realized through elements of the identity and that is everything that is used for identification of the brand and differentiating it from other brands, for example, name, web address, logo, character or a person, jingle, slogan or packaging (Keller, 2013, p. 142). Distinguishing between certain products is possible only because of the brand, that is, associations that consumers use to connect to them. For example, a certain brand (and because of it, the product itself) can be classified as “masculine”, “feminine”, “children’s” or “young adult” even though one cannot say that about the product. Choosing the elements of the brand is a condition for achieving its visibility through unique and desirable perception and feeling toward it (Vranešević, 2007, p. 41). Most common elements of a brand’s identity on which companies put their focus on are: name, logo, characters, slogans, jingles, packaging and color. Brand name. The brand name is the central brand element, one that can be spoken (Vranešević, 2007, p. 4344). Assigning a name is a key stage of defining verbal elements for creation of the brand’s identity because it represents the first signal of recognizing and knowing the brand which is never neutral, but which has to have an emotional and/or rational meaning, depending on the goals of its choice (Chevalier, Mazzalovo, 2004, p. 29). Logo. Brand signs enable faster and easier understanding of the culture and personality of the brand, so companies can, only through name and logo (sign, symbol), elicit positive associations, liking and desired perceptions in the consumer who doesn’t have experience with what the brand is representing (Vranešević, 2007, p. 51-52).

2016 - M SPHERE

B O O K O F PA P E R S

-

87


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Characters. Characters as brand elements are also frequently used, mainly by being added to the brand so they can additionally influence the creation of wanted perception of the brand and they are the basis around which campaigns for achieving recognition and remembering the brand revolve (Vranešević, 2007, p. 53). Slogans. Slogans are sayings that are tied to the brands and they have informative and persuasive meaning. Their main advantage is offering possibilities of larger experimentation and more creative expression. When big recognition of the slogan is achieved, it gains meaning as an efficient reminder of the brand, even in atypical situations where the product is used (Vranešević, 2007, p. 53-54). Jingles. Jingles are usually written by professional lyricists and they are usually easy to remember and stay in our thoughts even if we do not want them to. They represent musical messages which are tied to the brand. They can be seen as a way of warning, informing and reminding people about the brand in an indirect way by inducing associations which can be transmitted through sound (Keller, 2013, p. 164). Packaging. A number of brands became so powerful exactly because of the special packaging, for example, Toblerone, Ritter Sport, After Eight, Ferrero Rocher and the like. Packaging, but also the appearance of the final product as a touchable element of the brand identity, has to be harmonious in order to achieve adequate visual brand expression. Packaging elements encompass shape, size, material, sign, text, proportions, visibility and graphic design (Ellwood, 2002, p. 89). Color. Some packaging designers believe that consumers have a “color dictionary” and that they expect that certain products have a predetermined appearance and color. For example, it would be more difficult to sell milk if it were not packaged in a white or blue carton or bottle (Keller, 2013, p. 166).

3. WHAT IS EMOTIONAL BRANDING? The concept of emotional branding is complex and hard to define because the limits are not clearly established. The concept of emotions is complex because people behave differently under the influence of emotions. Also, to this day there is still no definitive scientific answer to the question of what emotions are. Nevertheless, one definition says that they are “experiences of our evaluation and subjective relationship toward objects, people, events and our own actions” (Andrilović, Čudina-Obradović, 1994, p. 82). From the aforementioned definition one can see that emotions actually represent the experience of an individual divided in four main groups: objects, people, events and actions of the individual. All four groups are of great importance for marketing and individuals are being influenced through all of them lately. Objects represent the product itself or a service that is sold to the consumer; people represent consumer’s environment, referable groups or even a famous person who is a role model; events are referring to various marketing campaigns that are trying to awaken certain feelings, while actions of the individual represent the product purchase itself. Definition of emotional branding from the aforementioned is self-evident: directing and managing the brand which is focused on consumer engagement on the emotional and sensory levels (Pavlek, 2008, p. 166). In today’s world, it is not enough to only offer a good service or product to the consumer, but it is necessary to establish a good relationship and interaction with them in order to elicit emotions, attitudes and desires so they can share them with other people. Lindstrom (2009, p. 94) says that product marking always relied on establishing emotional connections between the consumer and the brand and emotions are based upon information which is acquired through the senses. Marketing experts used exactly this fact in order to create sensory branding which tries to initiate consumer’s relationship with the brand, optimize consumer’s impulsive behavior, initiate interest and enable emotional reaction to overcome rational behavior. Because of this, it can be said that emotional branding and sensory or auditory branding are actually synonyms because a sensory stimulus is needed for initiating emotions. Many authors are talking lately about experiential marketing. While traditional marketing focuses on expected benefit as the carrier of the brand’s value, a new approach advocates that consumers should expect that the product, communication and marketing campaign should touch them deeply and trigger their senses, heart and stimulate their brain (Lenderman, 2005, p. 18). This means it is necessary to include the consumer in the process of creating the experience itself because experiences create emotional values that substitute functional ones. Experiences actually emerge when individuals are being exposed to a real situation through which they are going through, which also has a wider social meaning, because the brand connects the company and consumer’s lifestyle (Schmitt, 1999, p. 57-59). Emotional link with the consumers is the main generator of additional value of the brand. We can say that a brand is more valued and appreciated when it has, beside the awareness about it, pronounced differentiation, uniqueness, relevancy, loyalty but also emotional connectivity which doesn’t have to affect only the individual but also the culture of the group or an entire nation. Modern brands became part of the culture of society, close to the individual and they are identified more and more by the brand personality that the creators imposed on them (Pavlek, 2008, p. 166).

88

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

According to Lindstrom (2009, p. 97-98), emotional branding adds four important dimensions to the brand: •

emotional connection which is closely connected with consumer’s loyalty and which will be described in detail in next chapter,

optimal harmonization between perception and reality where the aim is for reality to surpass perception,

creating a platform for the brand which enables the spread of the product, which means it is necessary to establish an emotional connection between various products through sensory tactile areas that are consistently repeated in each new category of products of the same brand,

signature sign which means that every aspect of the sensory attraction of the brand can be protected – shape, smell, sound, texture, taste and so on.

4. FIVE-DIMENSIONAL MODEL Until recently, company’s communication with consumers through products or the brand was limited to a two-dimensional model, which consisted of sight and hearing with occasional ability to test a certain perfume with smell. However, if the company wants to reach the consumer better, it needs a transition from a two-dimensional model to a five-dimensional one that encompasses all five senses – sight, hearing, smell, taste and smell, which is not an easy assignment because it is necessary to research each sensory possibility with the goal of improving the product, and establishing a stronger and more solid connection between the consumer and the brand (Lindstrom, 2009, p. 54). Experiencing the brand through the sense of sight. Maven (2009, p. 54) says how sight is actually “the most powerful sense which has an influence that prevails in the entirety of an experience”, through which we receive images and create ideas in our head, based on which we make or add to estimations and choices of action. Sight has an advantage in branding because of the realization that shapes and colors affect attraction and recognizability. Information received through sight can be transferred and processed quickly which allows the consumer to react promptly, even faster than when thinking consciously. That is why visual information has an advantage and why color, besides name, is added into the signature sign (Pavlek, 2008, p. 179). Brand experience through the sense of hearing. Sound is used for creating mood and atmosphere that can elicit positive and negative reactions. Concepts of hearing and listening are clearly distinct in communication. Sound can be heard, but listening represents a gift through which understanding for people is gained and where loyal and respectful relationships are created. Sound can be heard, but it can also be ignored (for example, traffic noise when we are inside). Listening is actually discerning what is important and what is not, which is of great importance in marketing where we strive to reach into the soul, into the basis of motives and decisions that are not always clear, that are not only based on the rational and conscious but also on the emotional, which comes from the subconscious (Pavlek, 2008, p. 186-188). Brand experience through touch. The best known example that illustrates creating a brand’s identity through touch is advertisement of the Coca Cola Company. The design of the Coca Cola bottle came into existence in 1915 when campaign president A. Candler said the famous sentence: “we need a bottle that will be instantly recognizable, even by touching it in the dark”. Touching the brand or the product is largely connected to perceivable quality that consumers assign to certain products. Consumers are in general inclined to touch the merchandise in all stores. They like to touch leather purses, fabric, suits, cosmetics, food, furniture and everything else. Nobody likes to shop blindly because most consumers try to justify their purchase and convince themselves that they chose a good product. Brand experience through taste. A well-known example is IKEA where they offer meals alongside their varied assortment, while a chain of American bookstores Barnes and Noble also offers coffee, hot-dogs and similar products. These companies realized that if the customer spends a greater deal of time in the store, he deserves to sit down and relax with a meal, coffee or cake. This way, consumers are staying in the store longer and they are being persuaded to come back. Most of the companies, besides those that produce food and drinks, have a hard time including taste in their brands. Besides the aforementioned non-food companies, Colgate is one of the companies that uses taste by patenting a characteristic taste for their toothpastes, but unfortunately, they did not transfer that taste to their other products, like their dental floss, and with that, they did not maintain right coherence of the company (Lindstrom, 2009, p. 34). Brand experience through smell. Smell is also a very important characteristic of a product, it can induce a pleasant or an unpleasant feeling. M. Gobe (Pavlek, 2008, p. 193) claims that according to the results of research, smell elicits our emotions stronger than all the other senses. If we go from the assumption that most decisions

2016 - M SPHERE

B O O K O F PA P E R S

-

89


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

are taken emotionally, then it is understandable why an atmosphere is attempted to be created in stores where a particular aroma dominates, because it creates a pleasant feeling, elicits positive associations and encourages shopping. Smell is one of the powerful drivers of human action because certain smells awaken strong associative processes. Perceptions of smell are stored in long term memory and they represent a filter for decoding new situations and help in recognizing serious or everyday situations (Maven, 2009, p. 42-43). Hence, smell is a sense that we cannot avoid. We can close our eyes, plug our ears, but we cannot not breathe. In a world where visual effects are becoming more pronounced and aggressive, companies see the escape from consumers’ ignoring of the visual because of overstimulation in smell, which is used more and more. Ideal example of this are almost all store chains that are introducing their own bakeries inside their stores lately, in order to influence consumers to buy bread, but also so they can feel more comfortable during shopping and while being in the store. Sensory integration. Emotional connection of the brands gives value by which it differentiates from products that have the same physical quality and structure. That is why, possibilities that senses give have to be used in order to create that connection and a positive relationship between the consumer and the brand. When we take synergy into account, in other words, provoking one sense on the perception of the other, it is good to have in mind that it is necessary to go toward optimal structure that leads to stronger actions (Pavlek, 2008, p. 194-195).

5. BRAND AS A LIFESTYLE Cult brands and icon brands that represent a lifestyle of an individual can be sorted under the experiential branding framework. We have for example, Gucci, Gillette, Mercedes, Barbie, Starbucks and even Oprah Winfrey and Madonna. Since we are discussing social phenomena here, movements of entire groups, the phenomenon can be observed as a sociologic occurrence that represents a new dimension where it is a key of communication between consumers and the brand. In contrast to classical brands that build their emotional connections inside a framework of predetermined processes, essence, category and their identity on associations they invoke, cult brands and icon brands have an even stronger reliance on emotional lives of people and communities. Aforementioned connections are not based on a rational or analytical approach, but on self-confirmation, identity and beliefs. Pavlek (2008, p. 207) states that the basic distinction between an icon brand and a cult brand is the degree of exclusivity because the cult expects adherence to strict rules of the brotherhood, military organization or personalities who are asking for submission in the name of an idea or their own cult. Brand as a cult has its own smaller niche of impassioned fans who are exclusively focused on that brand and are very emotionally connected to it. On the other hand, icon brand offers the consumers value and in the center of attention puts ideas with which a certain group feels unity with and in which they find themselves. Icon brand has mass recognition, is led by unique emotional connections and belief, and the consumer identifies with it because the brand “gets” him. This kind of brand tells a story which becomes a part of consumer’s identity, but it also creates new experiences.

6. BRAND AS A RELIGION For some consumers, a certain brand represents passion toward which they feel trust and loyalty, to the extent where that passion can be equated with religious fanaticism, that is above all, based on deep seated beliefs. To a large percentage of people, religion offers support in a world that changes with unthinkable speed. It shows how to live, which way to take toward the future and even promises security after death. Brand creators are constantly trying to reach authenticity and create a connection with their consumers that will last from birth to death. By its own longevity, religion brings about an authentic, loyal and lifelong connection with its followers, and similarly, companies are trying to create brands that will last “forever” (Lindstrom, 2009, p. 145-148). Brand as a religion actually becomes a collection of ideas and values, which certain groups in the society believe are important to them, through which they are trying to express themselves and affirm their identity with it. In so doing, the brand that strives to become a religion has its own story that is a powerful weapon in communication (Pavlek, 2008, p. 209-216). People are always in search for emotional fulfilment, and given that rational evidence and thinking, but also measurable outcomes are distinctly emphasized in today’s world, the need for an emotional connection grows even stronger. Lately, we can see an ever increasing chasm between rational assumptions of modern brands and the need for products, services and beliefs to offer emotional satisfaction. This necessity fulfills religion in the right way and so the brands should strive to establish stronger and not overly intrusive emotional connections with consumers (Lindstrom, 2009, p. 149).

90

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

7. RESEARCH The main problem of this study is to research the emotional connection between consumer and a brand. This problem is recognized due to an assumption that the appearance of the current economic crisis caused its fall. Consumers more often choose products within a lower price range, regardless of the brand or quality and that is why it is important to research if (and to what extent) consumers get attached to a certain brand. With this we arrive at the goals of the study, and they are: to discover the level of emotional attachment between the consumer and the brand and to detect potential reasons for emotional connection. For the purposes of the paper a descriptive quantitative survey was conducted on an adequate sample which results were shown collectively. Based on collected secondary data, a survey questionnaire was created that served as an instrument of primary data collection. In it there were, besides demographic questions, 28 claims in which the participant’s decided to what degree they agree with given claims through a Likert-type scale from 1 to 5 where 1 represented complete disagreement and 5 complete agreement with the claim. Besides the claims tied to testing emotional connections of the consumer with the brand, questions were asked about reasons for preferring a certain brand, which brand comes to the participant’s mind first and to which one does he feel most emotionally attached to. At the question that tests preference of a certain brand, the participant could choose one or more offered reasons, mark that he doesn’t prefer a certain brand or refer to his own reason of preference. In questions where concrete brands are supposed to be written, the consumer received no suggestions and he independently wrote an answer in the appropriate box. The survey questionnaire was created in the survey system Lime Survey Software (available at http://limesurvey.srce.hr) to which access is enabled at the Faculty of Organization and Informatics of University of Zagreb. A pre-study was conducted for the purpose of testing the survey questionnaire as a measuring instrument. Its main goal was to find any vagueness in the survey, ambiguous questions and defining necessary time for filling out the survey. Data analysis gathered through primary research was conducted in the statistical tool IBM SPSS Statistics version 24. The survey was conducted through internet by sending it to e-mail and through a social network post. The survey was sent on two occasions. Given that the population of the research encompassed all consumers of the region without exception, number of population units could not be determined and so the method of intentional sampling was applied for data acquiring on an adequate sample of 208 participants. That way, research was conducted on those participants who were available to the authors in certain time which makes an intentional, adequate sample. Out of the total number of participants, 58% are female and 42% are male. Given that participants who were available to the authors were mostly of younger ages, most of the participants, namely 43% are participants ranging from 15 to 24 years of age, 29% of the participants are between 25 to 34 years of age, 15% between ages 35 and 44, 12% between ages 45 and 54 and 1% are between 55 and 64 years of age. Investigating reasons for preferring a certain brand, participants (81% of them) gave as the main reason for preference quality of the product or service, in other words, the brand. Right behind the brand quality 54% of participants said that the brand fulfills their expectations while the third reason for preference is the price of the brand (45% participants). Furthermore, reasons for which more than 20% of participants says are important are a reliable and safe brand, brand on sale and brand that offers a wide assortment. Overview of all the reasons for preferring a certain brand are on figure 1. Figure 1. Reasons for preferring certain brands

Source: Authors

2016 - M SPHERE

B O O K O F PA P E R S

-

91


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Also, from figure 1 it can be seen how company’s business transparency, including consumers into business, but also preferring a brand from a famous personality have a weak influence on consumer’s brand preference. Two hypotheses were set up within the research, one of them being: H1: Consumers are emotionally attached to a certain brand. With the claim “I have a brand that I connect to emotionally” through which the proposed hypothesis was observed, 31% of participants agree or completely agree that they have a brand that they connect to emotionally, 30% are undecided while 39% of participants disagree or completely disagree, which means that the hypothesis H1 cannot be accepted. Same can be seen if the mean value for this claim is observed, which is 2,83 based on which it can be established that the participants are on average undecided. Detailed percentages can be found on figure 2. Figure 2. Participants’ answers to the claim “I have a brand that I connect to emotionally”

Source: Authors

Even though the hypothesis cannot be confirmed, it does not mean that consumers do not get emotionally attached to a certain brand, but only that they do not admit it explicitly. Namely, according to other survey questions 69% of the participants claims they have a brand they trust, 72% of them feel good when they buy a brand they trust, 75% of them are linked to the brand by some positive experience and 70% of participants believe that a certain brand gives them satisfaction when they consume it, wear it or have it near them. According to theory analysis and research results, it can be concluded that the participants attach emotionally to certain brands anyway, just that this connection is not very pronounced nor is it overly strong which the results of the research themselves show. 22% of participants can express themselves well through a certain brand while 31% of them feel good after buying a brand product that has a good status in society. Only 8% of participants feel as if they are betraying their preferred brand when they are buying a brand they do not usually buy, and 12% of them claim that a certain brand represents an integral part of their lives. Previously mentioned suggests that to participants, a brand does not represent a lifestyle nor do they think it is a religion, but they have certain preferences toward certain brands they trust anyway. Second hypothesis in the paper was: H2: Consumers always buy/consume brands with which they have had positive experiences. According to answers to the claim “I always buy brands with which I have had positive experiences” it can be seen that 75% of participants always buy brands with which they have had positive experiences, 18% of participants are undecided about the abovementioned claim and only 7% disagree with the claim (figure 3). Given that the mean value is 3, 87, hypothesis H3 can be accepted as true. Therefore, most of the consumers will buy a product again if they had a positive experience with it. This is exactly on what emotional branding is based – on evoking pleasure and excitement in the consumer. Pleasure can be created by stimulating all those senses which will prompt the consumers for a repeat purchase, and with time, the repeat purchase will bring loyalty.

92

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 3. Participants’ answers to the claim “I always buy brands with which I have had positive experiences”

Source: Authors

Most common answer to the survey question “which brand can you think of first” was Nike, which 53 participants provided, followed by Adidas on the second place with 31 vote. Furthermore, to the question “I feel the most connected with” 28 participants finished the sentence with Nike brand, 19 of them with Adidas brand while 23 of them said they do not feel attached to any brand.

8. STUDY LIMITATIONS As in most research studies, it is necessary to point out certain limitations of this study. Seeing that this study, like most marketing studies, has been conducted in a given moment and sample, testing the consumers during longer time period and on a bigger sample group would contribute to a better reliability of results. It is also important to mention the narrow regional characteristic of the study because it was conducted on participants of north-east Croatia and larger geographic area could give different results. Beside that, over 43% of participants are in the age group 15 to 24 years of age and only 1% in the 55 to 64 age group because of (un)availability of participants to the authors which makes the sample predominantly homogeneous. The application of a rating scale (a Likert-type scale) can be considered as a factor of limitation while conducting this study because rating scales can influence the results of the study to a certain degree in the beginning. As it was mentioned before, one of the main limitations of this quantitative study is that while conducting the study over the Internet, an adequate sample was used, in other words, a sample of a chain reaction as a type of intentional sample where participants “choose themselves” into the sample. Since a single place where a list of consumers is published does not exist, that was the most suitable method for getting to the desired number of participants. But because of the intentional sample which is not based on knowing the probability that members of the population would be chosen into the sample, it is necessary to limit the possibility of generalizing and it cannot be claimed that the study results are representative of the entire population of consumers.

CONCLUSION Modern companies understand the importance of creating brands which will excite the consumer on all levels and recently, the focus has been more and more on the emotional level. Creating an emotional connection with consumers is a long-term process that demands a lot of engagement from companies and marketing experts in order to enter the philosophy and psychology of consumers and to discover their hidden needs through various studies. Studies that are based on testing the consumers are very thankless because the consumers give subjective answers and can say untruths even though the studies are conducted anonymously. And so it happened that in this study, the hypothesis that consumers get emotionally attached to a certain brand cannot be confirmed. From these results it can be seen that the consumers themselves are often not even aware of their emotional attachment with a certain brand or they deny it. That is why a whole sequence of claims was set up in the survey questionnaire, based on which various levels of emotional attachment were tested and from these claims, it was possible to conclude that consumers do get emotionally attached to a certain brand, even though they do not claim this explicitly. In fact, the study has shown that 72% of participants feel good when they buy a brand they trust and 70% believe that a certain brand provides them satisfaction when they consume it, wear it or have it near them. Providing satisfaction while consuming

2016 - M SPHERE

B O O K O F PA P E R S

-

93


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

or wearing a certain brand means that the consumers experienced a certain experience with the brand by gathering information from their surroundings through their five senses from which emotions like appreciation, love and attraction resulted. Emotionally charged experiences create an experience that is stored in the memory and which they want to invoke through repeat purchase. This is exactly the main purpose of emotional branding which is what we wanted to demonstrate with this paper.

LITERATURE 1. Andrilović, V., Čudina-Obradović, M. (1994). Osnove opće i razvojne psihologije. Zagreb: Školska knjiga 2. Ellwood, I. (2002). The Essential Brand Book – over 100 techniques to increase brand value. London: Kogan Page 3. Kapferer, J. N. (2008). Strategic Brand Management – creating and sustaining brand equity long term. London and Philadelphia: Kogan page 4. Keller, L. K. (2013). Strategic Brand Management – building, measuring, and managing brand equity. Harlow: Prentice Hall 5. Lindstrom, M. (2009). Brand Sense – revolucija osjetilnog brandinga. Zagreb: M.E.P. 6. Maven, E. (2009). Brandiranje i samopromocija, prilog: Emocionalni marketing: mala enciklopedija najvažnijih stvari koje trebate znati o uspješnom brandiranju i osobnoj promociji. Zadar: Naklada d.o.o. 7. Pavlek, Z. (2008). Branding – kako izgraditi najbolju marku. Zagreb: M.E.P. 8. Schmitt, B. (1999). Experimental marketing. Journal of Marketing Management, 15, 53-67. Available https://jungkirbalik.files.wordpress. com/2008/06/experiential-marketing.pdf, May 31, 2016 9. Vranešević, T. (2007). Upravljanje markama. Zagreb: Accent DETAILS ABOUT AUTHORS: KRISTIAN STANČIN STUDENT kstancin@foi.hr kristian.stancin@yahoo.com IVA GREGUREC PhD, SENIOR TEACHING ASSISTANT iva.gregurec@foi.hr FOR BOTH AUTHORS: FACULTY OF ORGANIZATION AND INFORMATICS UNIVERSITY OF ZAGREB VARAŽDIN, CROATIA

94

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

ENTERPRISE RISK MANAGEMENT SOFTWARE – SUPPORT TO BUSINESS DECISION MAKING DRAŽENA GAŠPAR IVICA ĆORIĆ

ABSTRACT This paper analyses how managers can use enterprise risk management software as a powerful tool for the enhancement of decision making process. In global and digital economy, understanding and incorporation of risk management as a key part of the business decisions is crucial for further progress and sustainable development of enterprise. Enterprise risk management software enables managers to take an innovative, risk-based approach to governance and compliance, to gain a holistic, enterprise wide view of risk exposure and near-real-time risk management and monitoring. Software support for risk management enables managers efficient risk evaluation and assessment, continuous monitoring, reporting and easier improvement of the process. But, if managers want to fully benefit from enterprise risk management software and generate ongoing value, they need to identify risk management needs within the organization and then match those needs with existing or new risk management techniques and information. Enterprise risk management software should not be understood only as a tool for risk management, because risk management process is integral part of any business activities. The purpose of the enterprise risk management software is to enable smoothly run of risk management activities and to help organizations effectively apply risk management techniques in their business activities and decisions. The paper presents the main features of enterprise risk management software that enable efficient support to business decision making. KEY WORDS: Risk management, Risk management software, Business decision making.

1. INTRODUCTION Financial institutions, such as banks and insurance companies, have recognised the necessity of risk management long ago, primarily because their core business is highly risky. However, in today’s globalised world that is exceptionally rapidly and unpredictably changing and that is becoming increasingly complex from day to day, all organizations, regardless of industry, face a various number of risks nearly every day and are forced to seek ways to manage and counteract the risks. Therefore it is not surprising that the identification, management and analysis of risk is becoming one of the key factors of success and long-term survival of any organization. The norm ISO 31000 was issued in 2009 with the primary objective of providing support for a new, more managementfriendly way of considering and managing risks, and providing a framework to address many contradictions and ambiguities that existed in different approaches and definitions. Risk is defined as the “effect of uncertainty on objectives” (AS/NZS, 2010). The definition of risk in the norm ISO 31000 represents a significant shift from the earlier emphasis on an event and dealing with it, now to the possibility of an effect, in particular an effect of risk on organization’s objectives. So, risk in itself is neither positive nor negative, but its consequences for the organization (effect) may vary from loss and damage to profit. Such an approach to risk definition clearly indicates that risk management is a process that needs to make the achievement of organization’s objectives as likely as possible (Purdy, 2010). The norm ISO 31000 contains a vocabulary, a set of performance criteria, a combined process of risk identification, analysis, evaluation and treatment, as well as guidance on how this process should be integrated into the decisionmaking process of any organization (Purdy, 2010). The norm ISO 31000 starts from the global risk management process (Figure 1) where “establish the context” is the first step intended to include the fundamental objectives of the organization, the environment in which the organization operates, and in which it aims to achieve its objectives, shareholders or basic participants, as well as possible special risk criteria in order to facilitate subsequent assessment of characteristics and complexity of the organization’s risks.

2016 - M SPHERE

B O O K O F PA P E R S

-

95


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 1. ISO 31000:2009 risk management process

Source: Adapted according to „A structured approach to Enterprise Risk Management (ERM) and the requirements of ISO 31000“, AIRMIC, Alarm and IRM

The norm ISO 31000 provides basic principles and generic guidelines for risk management, and offers a clear framework to facilitate development and implementation of risk management plans, while taking account of specific needs of a particular organization, their variability, of specific objectives of the organization, its organizational structure, processes, products or services, the existing practices of employees etc. Risk assessment according to the norm ISO 31000 includes three basic steps: identification, analysis and evaluation of risk. Risk identification requires the application of a systematic approach in order to understand what could happen, how, when and why. Risk analysis is related to improvement of understanding of each risk, its consequences and probabilities of these consequences. Risk evaluation is concerned with making a decision on the level of risk and priority for attention. Risk processing is a process by which the existing controls are improved or new controls are developed and applied. This includes evaluation and selection of appropriate options, cost-benefit analysis, assessment of new risks that can be generated by selection of a particular option, as well as establishment of priorities and application of the selected risk treatment within a well-planned process. There is a large number of iterations between risk evaluation and treatment since every set of risk treatment options is tested until a preferred set, one that yields the highest benefit with least expenses, is found (Purdy, 2010). From all the above it is clear that successful risk management, due to its complexity, requires teamwork of a large number of persons of different knowledge and experiences, as well as their constant interaction. To ensure such a method of work without quality software support becomes an exceptionally demanding, if not impossible, task. However, in order for that software support to provide the desired results, it is essential for the software to ensure that the risks are connected with all business activities, but also with strategic objectives of the organization. It is only in this way that it is possible to make sure that risk management software enables efficient support to business decision making.

2. RISK ISSUES IN BUSINESS DECISION MAKING Nowadays, organizations face global challenges in terms of competition, resources (human and physical), business safety (especially digital data protection), exposure to terrorist attacks etc. Generally, the world is becoming less benign, with more discontinuity and volatility and with long-term charts no longer looking like smooth upward curves, long-held assumptions giving way, and seemingly powerful business models becoming upended (Dobbs et al., 2014). Viability and success of organizations in this increasingly volatile world heavily depend on the extent to which their decision-makers are aware of the environment in which they operate, on the extent to which they keep up with the changes and how fast and how successfully they can respond to them. This means that decision-makers need to keep monitoring trends, performing scenario-planning exercises, war-gaming the effects of potential disruptions, and be prepared to respond rapidly when competitive conditions shift. Also, strategist decision makers have to think in multiple time frames, i.e. work on immediate tactics and counteract to new threats (competition, market changes, etc.) and in the longest term work on selection and development of new long-lived capabilities. The key risks facing decision-makers in implementation of their objectives are indicated by research conducted in the last quarter of 2015 by the company Protiviti and North Carolina State University’s ERM Initiative. Participants in their survey were 535 board members and executives across a number of industries, of which 250 respondents were from

96

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

the USA and 285 from other parts of the world. Respondents were asked to give their opinion on possible effects of 27 selected risks on their organization in 2016. The risks were observed through three dimensions (Protiviti, 2016): •

Macroeconomic – specifically those that are highly likely to influence the organization’s growth

Strategic – those facing the organization and which may affect the validity of the strategy and achievement of the organization’s growth

Operational - which may affect performance of the key operations essential for implementing the strategy of the organization.

Table 1 shows the top 10 risks with the percentage responses for the three risk classifications (significant impact, potential impact and less significant impact) and type of risk (macroeconomic, strategic and operational). Table 1. Top 10 risks for 2016 Risk description

% of “significant impact” responses

Type of risk

Regulatory changes and scrutiny

60%

Strategic

Economic conditions

60%

Macroeconomic

Cyber threats

57%

Operational

Privacy/identity management and information security

53%

Operational

Succession challenges and ability to attract and retain top talent

52%

Operational

Rapid speed of disruptive innovations and new technologies

51%

Strategic

Volatility in global financial markets and currencies

50%

Macroeconomic

Resistance to change operations

49%

Operational

Sustaining customer loyalty and retention

46%

Strategic

Organization’s culture may not encourage timely identification and escalation of risk issues

45%

Operational

Source: Adapted according to https://erm.ncsu.edu/library/article/executive-perspectives-on-top-risks-for-2016-report

In order to be able to cope with these risks successfully, decision-makers need adequate software support. Namely, technology is no longer just an operational issue, but it is the enabler of virtually every strategy. Today’s decision makers have to think about how specific technologies are likely to affect every aspect of the business and be fluent about how to use data and technology. Risk management is what heads of successful companies have always given a certain degree of priority when handling daily business, but they have usually dealt with individual risks one by one as they occur instead of having an integrated and proactive approach with the entire organization in mind. This is called a silo approach. A silo approach is when individuals or departments within an organization deal with a risk facing their own unit without considering that the entire organization (and in particular its overall “reputation”) is exposed to the same risk. This requires a solution that deals with the problem by taking an integrated approach and treating an organization faced with a risk as a whole. Such a solution is Enterprise Risk Management (ERM), which has appeared recently with the aim to improve the situation.

3. BASIC CHARACTERISTICS OF SOFTWARE SUPPORT IN RISK MANAGEMENT In the world market today there are many risk management software solutions that differ in features and maturity. That is why most organizations are faced with the problem of how to choose the appropriate software solution for the risk management process. To find software that will suit the needs of the organization is not always easy, but to adjust the organization to requirements of the software is even more demanding. Therefore the software solutions that offer adaptability to user requirements can significantly shorten the implementation time. A major challenge in selecting and implementing a risk management software is in the fact that there are many variations in practical implementation of risk management, especially at the detailed level.

2016 - M SPHERE

B O O K O F PA P E R S

-

97


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

In recent years, research has been conducted on software producers and primary features of their products as well as user expectations (Tweedy, 2013), (Osborn&Chambers, 2014), (Aon, 2014). Research on users’ views on what features a risk management software should have was conducted in the Republic of Croatia and Bosnia and Herzegovina in May 2015 (Gašpar et al., 2015). Although this survey separated technical and functional characteristics, and it was only users and not software producers that were interviewed, the results do not differ significantly from similar studies in the world. Table 2 gives an overview of 11 out of the offered 20 basic technical characteristics of risk management software for which over 80% of respondents indicated that the software “must have” or “it is desirable to have” (Gašpar et al., 2015). Table 3 gives an overview of 13, out of the offered 30, obligatory (“must have” or “it is desirable to have”) functional characteristics of the software (Gašpar et al., 2015). Table 2. Obligatory set of technical software characteristics Code

A software for risk management should

TZ1

... enable data acquisition from different external sources

TZ2

... be installed on the local user’s equipment

TZ3

… be web oriented

TZ5

... have a context for help (help)

TZ6

... enable exporting reports in MS Word

TZ7

... enable exporting reports in PDF

TZ8

... enable exporting reports in MS Excel

TZ14

... have technical support or help desk 24/7/365

TZ16

… enable displaying the risks on the map

TZ18

… contain dashboards

TZ19

… enable the adjustment of dashboards

Source: Gašpar, D., Mabić, M., Ćorić, I., “Risk Management Software – Standpoints of Users”, The 2015 ENTerprise REsearch InNOVAtion Conference (ENTRENOVA 2015), Kotor, Montenegro, 10-11.09.2015.

Table 3. Obligatory set of functional software characteristics Code

A software for risk management should

FZ1

... enable integration of standard Key Performance Indicators (KPI) and Risk Indicators

FZ10

... enable definition of criteria for risk assessment

FZ11

… enable definition of risk matrix

FZ12

… enable definition of structure for all activities in process or project

FZ18

… enable risk analysis

FZ19

… enable follow-up of history of events connected with activities and risk being assessed

FZ20

… enable automatic evaluation and risk ranking

FZ22

… enable definition of reporting and responsibilities

FZ24

… support the process of risk approval ( i.e. risk acceptance....)

FZ25

… enable risk quantification

FZ26

… enable qualitative risk assessment

FZ28

… enable definition of treat indicators

FZ29

… enable connection (treatment)of risk (control and action) that is definition of measures to be taken in the process of risk treatment

Source: Gašpar, D., Mabić, M., Ćorić, I., “Risk Management Software – Standpoints of Users”, The 2015 ENTerprise REsearch InNOVAtion Conference (ENTRENOVA 2015), Kotor, Montenegro, 10-11.09.2015.

98

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The results of the research (Gašpar et al., 2015), and especially Table 2 and Table 3, show that the survey respondents are aware of the need for integration of the ERF software with the decision making process. That is particularly evident in Table 3 (functional characteristics of software) which inter alia indicates that software should provide integration of standard Key Performance Indicators and Risk Indicators, or enable linking of organization’s strategic objectives with risk management. Further, the software should allow monitoring of the history of events related to activities and risks that are evaluated, or based on previous responses to risks and consequences caused to the organization, it should enable the organization to acquire knowledge on what was good and what was not, thus constantly improving its responses to risks. The technical possibility (Table 2) of showing risks on the map in order to make the risk location visible is also important for users, especially if the organization is scattered across multiple locations. The availability of dashboards in which decision-makers can see all key risk information at a single place is also one of the primary requirements (Table 2).

4. RISK MANAGEMENT AND DECISION MAKING SOFTWARE If the process of decision making is defined as the cognitive process leading to the selection of a course of action among variations, then it produces a final choice. The decision making process is composed of the basic interdependent and consequential activities that can be divided into following phases (Riplova, 2007): •

definition and setting of objectives,

analysis of information and documents,

finding the variants,

criteria determination,

determining the variant outcomes,

variant rating and selection,

realization and control of chosen variant.

Each of these phases has its risks. Some of the most common risks are presented in Table 4.

Table 4. Risks related to decision process phases Decision process phase

Risks

Definition and setting of objectives

Use of unverified data, delayed problem identification, high data collection and processing costs

Analysis of information and documents

Essential information left out or not recognised as such

Finding the variants

Selection of wrong variants, subjective assessment based selections, inadequate variants

Criteria determination

Defining too many criteria, which increases the complexity of decision-making, high level of subjectiveness

Determining the variant outcomes

Criteria duplication or overlapping

Variant rating and selection

Incorrect evaluation of variants, failure to take all aspects into consideration, in particular risks, selecting a wrong variant, subjectivity in selection

Realization and control of chosen variant

Poor communication between management and employees may lead to incorrect implementation and ineffectiveness, lack of feedback on real problems in implementation of management's requirements.

Source: Riplova, K. (2007). Risk And Decision Making Process. Journal of Information, Control and Management Systems, Vol. 5, No. 2.

2016 - M SPHERE

B O O K O F PA P E R S

-

99


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

A risk management software should provide support to decision-makers in all the specified phases of a decision-making process. The extent to which this is possible to achieve is shown in an analysis of what a specific risk management software offers. That is the ERM Venture software, which is designed to provide computer support to customers in all phases of risk management process (Figure 1). ERM Venture software was developed as a result of cooperation between the company “Hera” d.o.o from Mostar, Bosnia and Herzegovina and “Oskar” d.o.o. from Zagreb, Croatia. The software is based on the methodology Multidimensional Risk Assessment - MRA which is developed by the company “Oscar” and which is a result of years of experience of this company in training and consulting in the field of modern systems for management, primarily the management of quality, environment, safety and risks. The MRA methodology is used for identification, assessment and treatment of risks on the basis of internationally recognised and recommended standards and norms. The MRA methodology allows analysing, evaluating, ranking, processing, monitoring and control of risks in all aspects of exposure with the aim of increasing stability of the organization and its stakeholders. The MRA methodology is applicable to projects, business processes, safety at work and to critical infrastructures. To use the software, it is enough to have access to the Internet and a web browser. ERM Venture software can be used as a web service (Software as a Service) or as a product, installed and implemented in its own environment. Since the MRA methodology is based on international standards and norms, it follows that ERM Venture software supports these standards (ISO 9001:2015, ISO 31000:2009, ISO 31010:2010). ERM Venture provides decision-makers with the following: •

Tracing of risk history

Defining reporting and responsibility

Monitoring of all taken measures over critical risks

Re-evaluation in order to define the efficiency of taken measures

Showing risks on maps

Dashboards.

Tracing of risk history (Figure 2) means that the software stores in its database the data on what risks the organization identified at a certain time, how it decided to respond to them, as well as what the final result, or the consequence of that response, for the organization was (positive or negative). The longer the organization uses the software, the more historical information it has available. Based on this information, decision-makers gain an insight into the success or failure of their responses to the risks and the consequences for the organization. Such an insight allows learning based on one’s own decisions, consideration of good and bad decisions, and provides a basis for better decision making based on facts (data), rather than on subjective assessments. The option Defining reporting and responsibility (Figure 3) allows managers to clearly define their reporting needs, reporting time, as well as persons responsible for reporting. If for any reason a report is not prepared or sent in time, in this way it is possible to know at any time who is responsible for that. Monitoring of all taken measures over critical risks enables the management constant control of critical risks and rapid response to possible changes. Re-evaluation (Figure 4) in order to define the efficiency of taken measures is especially important in the analysis of different risk response variants and in the selection of the right one, i.e. the one that will bring the highest benefit to the organization with minimal risk. Showing risks on maps (Figure 5) is especially important for organizations operating across multiple locations. At all times, the map shows which risks are identified at which location, what is their current status and what actions are taken as a response to these risks.

100

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 2. Tracing of risk history

Source: www.erm-venture.com, Property of Hera, 2016. Reproduced by courtesy of the Hera company.

Figure 3. Defining reporting and responsibility

Source: Source: www.erm-venture.com, Property of Hera, 2016. Reproduced by courtesy of the Hera company.

2016 - M SPHERE

B O O K O F PA P E R S

-

101


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 4. Risk re-evaluation

Source: www.erm-venture.com, Property of Hera, 2016. Reproduced by courtesy of the Hera company.

Figure 5. Showing risks on maps

Source: www.erm-venture.com, Property of Hera, 2016. Reproduced by courtesy of the Hera company.

102

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 6. Dashboard

Source: www.erm-venture.com, Property of Hera, 2016. Reproduced by courtesy of the Hera company.

Dashboards (Figure 6) provide an aggregated and visually well-organised view of basic information on risks. They are exceptionally important for decision-makers because they have basic information at a single place and can get detailed information from this place if they need it. From all the above it is clear that this software provides essential support in the decision-making process, primarily by providing high-quality data basis and by allowing decision making based on facts rather than on subjective assessments. Also, it enables faster and more detailed analysis of a larger number of variants, learning based on previously made decisions (history), and facilitates selection of better variant and ultimately better decision making. ERM Venture is one of many similar software solutions that can be found in the market, and in this paper it is used to present the basic features that ERM software can offer in the decision making process. Certainly, despite the said advantages that the use of such software brings to organization and decision-makers, there are still certain open issues, especially when it comes to support to strategic decision-making. Some of the key open issues that both software producers and decision-makers should address to are: •

Constant change - business challenges cause strategic priorities to constantly change in response. It is essential to keep risk management information, such as risk appetite and tolerances, up to date on a regular basis, otherwise it can become improperly aligned and out of date, and not reflect the present and future business environment.

•

Organization and risk ownership - who is the owner of risks, who reviews risk plans and what forum should address strategies to mitigate risks - these are the questions that may arise due to strategy-aligned risks and complex governance, as well as organizational issues. Strategies and risk management are frequently discussed by separate groups and initiatives are also presented in these different forums. Integration between these groups is limited. Risks and risk mitigation need to be crucial elements in strategy discussions.

2016 - M SPHERE

B O O K O F PA P E R S

-

103


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

This requires a structured approach that results from strategy alignment based on risk. The purpose of the focus on alignment is to cut down on superfluous activities on strategy and risk management, as well as to ensure adjustment of strategic initiatives, objectives, risks and risk management plans without gaps between them. •

Risk complexity - ERM software often uses tactical methodologies focused on a single risk, owner, or approach, while strategic issues generally seem too complicated to be handled by such solutions. Many internal and external risks and complex interrelations between them inherent to strategic issues are often the driver of their structural complexity. A simple risk assessment is what the above complexities may evade, requiring comprehensive analytics that include detailed risk driver analysis, capabilities assessment, risk scenarios and simulations, as well as risk measurement for individual and aggregate risks.

CONCLUSION Fundamental to high-quality and successful risk management is to understand it and integrate it in the organization’s business strategy. However, to implement risk management successfully, decision makers and managers should be aware of the risks to which they are exposed on a daily basis in the decision making process, but also of the ways in which their risk management software can help them to identify these risks, to analyse them and adequately to respond to them. A risk management software should provide support to decision-makers in all the specified phases of a decision-making process. The extent to which that is possible is illustrated in this paper by the example of a specific risk management software. It is shown how ERM Venture software provides strong support to customers in the risk management process. Namely, through the use of this software, organizational objectives and key risks to achieving these objectives become clearly visible to management, and risk response plans can be systematically approved and continuously monitored. Since most of risk management processes change over time, it is important to stress that the ERM Venture software is developed to provide users with flexibility and adaptability to these changes. So, it is clear that the risk management software can be a powerful catalyst for better decision-making, but it is necessary to increase knowledge within business areas of existing ERM program features or planned development of risk management capabilities.

LITERATURE 1. AIRMIC (2010).A structured approach to Enterprise Risk Management (ERM) and the requirements of ISO 31000, AIRMIC, Alarm and IRM. https://www.theirm.org/media/886062/ISO3100_doc.pdf (accessed 23.02.2015.) 2. Aon (2014). RiskConsole UX, Aon Risk Solutions-eSolutions https://www.theirm.org/media/1163669/software_survey.pdf (accessed 27.02.2015.) 3. AS/NZS (2010). Risk Management – Principles and Guidelines, AS/NZS ISO 31000:2009, Australian Government Comcover, http://www.finance. gov.au/sites/default/files/COV216905_Risk_Management_Fact_Sheet_FA3_23082010_0.pdf (accessed 05.01.2015.) 4. Dobbs, R., Ramaswamy, S., Stephenson,E., Viguerie, S.P. (2014). Management intuition for the next 50 years. McKinsey Quartely, September 2014. http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/management-intuition-for-the-next-50-years (accessed 12.09.2016.) 5. Gašpar,D, Mabić, M., Ćorić, I. (2015). Risk Management Software – Standpoints Of Users, Enterprise Research Innovation Conference – Entrenova’15, September 2015, Kotor, Montenegro. 6. Osborn,T., Chambers,M. (2014).Risk Software Survey 2014: Risk, Compliance And Capacity, Risk Magazine, December 2014. http://www.risk. net/risk-magazine/analysis/2385869/risk-software-survey-2014-risk-compliance-and-capacity (accessed 03.04.2015.) 7. Protiviti (2016). Executive Perspectives on Top Risks for 2016. Research Conducted by North Carolina State University’s ERM Initiative and Protiviti. https://erm.ncsu.edu/library /article /executive-perspectives-on-top-risks-for-2016-report (accessed 15.10.2016.) 8. Purdy, G. (2010). ISO 31000:2009—Setting a New Standard for Risk Management, Risk Analysis, Vol 30, No.6, http://broadleaf.com.au/wpcontent/uploads/2010/06/Art_RiskAnalysis_ ISO31000.p df (accessed 18.12.2014.) 9. Riplova, K. (2007). Risk And Decision Making Process. Journal of Information, Control and Management Systems, Vol. 5, No. 2. 10. Tweedy,D. (2013). 2013 RMIS Review, Advisen Insurance Intelligence http://pdf32.keenbooks.org/pdf/for-now-7_5p6pp.pdf (accessed 17.03.2015.) DETAILS ABOUT AUTHORS: DRAŽENA GAŠPAR PROFESSOR UNIVERSITY OF MOSTAR FACULTY OF ECONOMICS MOSTAR, BOSNIA AND HERZEGOVINA drazena.gaspar@sve-mo.ba

104

-

B O O K O F PA P E R S

IVICA ĆORIĆ CEO HERA SOFTWARE COMPANY MOSTAR, BOSNIA AND HERZEGOVINA ivica.coric@hera.ba

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

ROUTING CHARACTER ENCODING FOR POSTAL SECTOR JURAJ VACULÍK ONDREJ MASLÁK

ABSTRACT Deployment of new technologies into the larger organization is not an easy task. This is particularly true, for the introduction of relatively complex processes into the business, such as RFID technology. We can talk about from economic issues, through technological, information problems as to the people and organization of work processes in the company. At this work, we have discussed mainly issues of labeling items using technology RFID solutions and information. This contribution analyses make a suggestion for encoding information about routing of postal parcel with use of RFID technology. It defines internal structure of EPC standard, which may be used for postal sector. KEY WORDS: RFID technology, postal sector, transport system, EPC standard.

1. INTRODUCTION Financial institutions, such as banks and insurance companies, have recognised the necessity of risk management long Automation, as the trend in management, data collection and information systems, is a key factor in all modern systems from the fifties of 19 Century until now. Radio frequency identification (RFID) belongs among the ways of automatic identification of goods, properties or objects. RFID technology itself had been known since 1973, but its massive use and applications for everyday life has appeared relatively recently. Developments in the field of materials and constant progress in the production and design of batteries, have updated the possibilities of this technology further then what we could have imagined when patenting it, four decades ago. RFID technology is not the successor to the bar code technology. There will be applications for which, barcodes will be always a better solution than RFID. Nevertheless, this technology has found its place in the world where it is becoming more and more important to be able to recognize the origin, the path and time trail of transported products and goods. Proper optimization of the supply chain can bring financial resources in the form of saving costs, reduce loss rates, and increase the visibility of the item. It also will bring better oversight of the entire chain and easier identification of bottlenecks. Each technology has its limits and weaknesses. It is necessary to consider the benefits and negatives of introduction of a new good technology into business processes. That more and more companies and enterprises implement RFID technology in order to achieve a competitive advantage over others.

2. DESIGN OF THE STRUCTURE OF THE EPC STANDARD FOR POSTAL SECTOR One way to improve the processes of postal enterprises is the transition from the current bar codes to smart tags in the labeling of consignments. The value added comes from the very definition of RFID technology and without optical scanning the contents of the label. By using RFID, it is possible to achieve more than just a simple reading of the EPC content Currently RFID tag could be included much more information than one-dimensional bar code 128 containing 13 characters. If we use the EPC code, it would be possible to uniquely identify a known package within a central database, or we can use the structure of the EPC code and write the data as needed. In the framework of the authority for the allocation of the EPC, there are no header codes defined by GS1 for “packages” or “postal businesses”. Therefore, we would have to go through an arduous process of approval and creation of a standard for postal companies. This process would need a broader agreement of the participating entities. A more promising way would be to use the already existing EPC standards and save them into the structure as needed.

2016 - M SPHERE

B O O K O F PA P E R S

-

105


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2.1. EPC memory We have 96 bits of available memory, which allows us to write the 12 alphanumeric characters. At present, the whole of the consignment number is composed of 13 alpha-numeric characters. While the specific consignment number, without the type of service and the country code is an 8-digit integer and ninth place is reserved for the check digit in the barcode. If we would like to rewrite the consignment number into ASCII as we do not have space for last character (13 * 8 = 104 bits and there is 96 bits only). The checksum might be carried out by a machine; this would save space for single character, and can write any existing consignment number into the memory of the EPC. There is more solution, of course. We can use the EPC tag with a larger memory or replace any of the mandatory attributes of the whole consignment number by code. For example, the country code SK entered in ASCII form would require 8-bit for each character. The allocation of the numeric representation of the country is once again reduction by one alphanumeric character (only ten combinations, so this method is suitable for national labeling). Our solution is implemented by dividing the whole consignment number on the three strings, each of which will be encoded with a different method. The first 2 characters we will encode by function string to hex shape. In this way, also the third part of the chain (the country code) will be transferred. This method is suitable if it is necessary to encode alphanumeric characters, with each character reserved for 8 bits. If this method was also used on the second part of the chain (file number) and a control digit, each character would have been represented by one byte, and therefore we would need 9 * 8 = 72 bits. In the 96-bit EPC memory would have remained only available to us and we should not place the classic 24bit representation of the service code (16 bits) and country code (16 bits), which would have required an additional 32 bits in 8-bit ACSII together. Whereas the file number is an integer, we used the method of encoding decimal number to a hexadecimal system. In this case, it takes any combination of the nine local numbers up to 32 bits. It is always preferable to encode a long sequence of consecutive numbers as a decimal number to a hexadecimal number (fig. 1). Figure 1. Draft transcript of the current state of labeling into a form suitable for entry into the RFID identifier

Source: Authors

Transcript of consignment number from the shape to the lowest level of the binary example: column (075bcd15)16 = (00000 0111 0101 1011 1100 1101 0001 0101)2.

Figure 2: Draft transcript of the current state of the marking into a form suitable for entry into the RFID tag

Source: Authors

The sizes of each segment in this case are fixed and therefore would have been automatically given, on which local service code, file number and country code begins (16 bits, 32 bits, 16 bits). In the variable $HEXEPC, there will be hexadecimal number stored in the shape suitable for entry into the RFID media. When reading a string from the RFID tag, we would be able to clearly decompose to the three fields, convert each of them with relevant method back to alphanumeric characters and combine the result with the original string (see table 1 and 2).

106

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 1. A code table for EPC memory label Scheme

EPC memory eharok+

Total size

used 64 z 96

Name

stringPC

Logical scheme

Service code

File number

Country code

16

32

16

b63-b48

b47-b16

b15-b0

Sring as hexadecimal (ASCII 8bit)

Decinal number as hexa string

String as hexadecimal (ASCII 8bit)

size og bits PozĂ­cia bitov Encoded methotd

Table 2. A coding table for the user portion of the memory - string1 Scheme

User memory eharok+

Total size

136/512

Name Logical scheme Size of segments Bit positions Encoded method

string1 Type of parcel

postal code

wieght

Save up .... ensurance days

4

20

16

8

b336-b332

b331-b312

b311-b296

b295-b288

Time stamp1

Time stamp2

*

16

32

32

8

b287-b272

b271-b240

b239-b208

b207-b200

Decimal number to hexadecimal number

2.2. User memory User memory space is about the size of 512 bits, what provides us with a label which has enough space to record additional information about the shipment. We can write data by the software solution in the hexadecimal form or in the form of alphanumeric characters, which are transferred into hexadecimal shape software automatically at a later time. 512 bits constitutes a representation of 64 alphanumeric characters in eight bit ASCII (512/8 = 64). In the proposal, we will work directly with a hexadecimal representation of data written to RFID label. The value in this format will be read from the label by using middleware onID/AMP and then sentto the database. This is a technical solution that will be more convenient for our particular model. Therefore, in this part we try to generate this particular shape suitable for writing.

2.3 Formatting and saving the data from the system to the RFID tag We saved the data obtained from the XML file into the variables. Next, we unify variables to strings according to the format in which we will encode them. Consequently, we transfer these strings by a variety of methods into hexadecimal shape and connect the resulting sections into the final form which will be written to RFID label. Figure 1. Chart showing data stored in the user’s part of the memory

Source: Authors

2016 - M SPHERE

B O O K O F PA P E R S

-

107


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

In the variable $HEXTAG (a diagram above), there is hexadecimal data stored in the final shape, which are ready to be entered in the user memory RFID carrier. This variable is made up of three strings with a different way of coding. Each string consists of factual information about the shipment. The first string contains only numeric values, and therefore is the encoding method decimal number to hexadecimal shape used with the exception of the last separator character that is encoded as ASCII character (*), and occupies 8 bits. In the string 1, there is 64 bits reserved for the two timestamps. It is possible to enter time off-line, or update time during shipment. Timestamp is in the format of the YY.(DD).MM.HH. MM (year, month, day, hour, minute) without a separator characters. Coding table is following (table 3): Table 3. Supplementary tables of coding data to the user part of memory Logical scheme

content

Type of parcels

1-parce on the post 2-parcel on address 3 to 7 – reserv for future

ZIP code

5-digits withouth space

Weight

4-digits - fisrt two before and last two aftre decimal pints xx,xx

Save up … days

2-digits integer number

Ensurance

4-digits value of €)

Time stamp

RRDDMMHHMM

*

Separated/control char

The second string consists of three items: class, ID and note. At the end of the string, there is a separator asterisk. This string is variable in size, but is limited by 176 bits. The entry “Note” will be variable. The coding method for string2 will be - string to hexadecimal form (ASCII 8 bit). Coding table (table 4) and specification of class (table. 5) is following: Table 4. A coding table for the user part of memory – string2 Scheme

User memory eharok+

Total size [bit]

176/512

Name

string2

Logical scheme Size of segments Bit position Encoded methotd

class

Remark

ID

*

8

80

80

8

b199-b192

b191-b112

b111-b32

b31-b24

String to hexadecimal shape (ASCII 8 bits)

Table 5. Supplementary tables of coding data to the user part of memory Logical scheme

content

class

1 – first calss 2 – second class

Remark

10 chars alfanumerics string

ID

10 chard for mark of consigments

*

Separated/control char

The last part of the variable $HEXTAG is string3 that contains encoded services applied to the shipment. We have a total of 21 complementary services available (for packages and for items of correspondence). The work deals with shipments

108

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

of packages but the solution will include all services comprehensively. Services are referred to by the letters, such as F for fragile, “NEV� for not to return, and so on (complete list of services and their possible combinations can be found in the manual of the Slovak post, refer to technical parameters to create the XML file). To encode all as the characters would be challenging due to memory capacity, for example, for the DO1M-acknowledgement of receipt within an hour outside the city, we would need 4 of 8 bits in 8-bit ASCII encoding. In the proposal, we decided that the services would have reserved position in the user memory and will occupy only 24 bits. In order to do this, - to encode any combination of 21 services only to 24 bits - we have used bit switcher (the remaining 3 bits can serve as a buffer in case of new services added). Sample algorithm for 4 services: Figure 4. An algorithm for bit switcher

Source: Authors

Table 6. An example of a service using the bit encoding switcher Shortage

Name of service

Binary position

Example of use

OD

repeated request for service

0000 000x

0000 0001

F

Fragile

0000 00x0

0000 0010

NSK

unwieldy

0000 0x00

0000 0000

VR

into own hands

0000 x000

0000 0000

SV

mandate excluded

000x 0000

0001 0000

DSO

delivery on Saturday too

00x0 0000

0000 0000

PR

not deliver

0x00 0000

0000 0000

IOD

Information on delivery

x000 0000

0000 0000

Total mask

0001 0011

2016 - M SPHERE

B O O K O F PA P E R S

-

109


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

As we can see from the example (table 6.), it is sufficient to have eight bits in order to encode eight services, assuming that each service corresponds to given bit. If the service is used, the switcher is set to position one. If the service is not used, the switcher will remain set to 0. A combination of some services shall be excluded. Consequently, the sum of services (from the example) 0001 0011 is transferred to a whole number (0001 0011)2 = (19)10. This integer will encode method of decimal number to hexadecimal shape (19)10 = (13)16. This will occupy 8 bits only by hexadecimal number 13. Similarly, we proceeded to the final version of the module for RFID as well, except that the positions of services differed and we covered all 21 services.

CONCLUSION When introducing new technologies in large companies - such as the Slovak Post Office - the problems arise. The main problem is the financial demand of such projects. Therefore, we would recommend for the future - if RFID tag is not a negligible part of the package - to run pilot projects. This way, Slovak post does not lose contact with modern technology such as the RFID. From the past we know many cases of unprofitable sectors and ideas, that has become a common part of everyday lives (3D printers, electric cars). From the results of the work, it is visible that the labeling of consignments with passive RFID tags would be a functional alternative to or an addition to the current status of labeling with the added functionality. Overall, the concept of applicability of RFID technology incorporates multiple perspectives on the issue. The article was an attempt to show one possible solution. The focus was mainly on the technical and physical aspects of the implementation of technology in postal processes. From the results it appears that this technology has the potential of functioning, which can improve certain processes at the post office. On the other hand, the selection of projects very often takes into account the return on investment. From this perspective, at the current state of technology and its nationwide deployment, the investments would be obviously high. This situation could change in the future with a price drop of technical components. We see the space for the introduction of this technology in the labeling of transport and handling units which could improve the management of containers, increase visibility, and we also would be able to implement the control of bulk of content and container (the possible basis for a new application).

LITERATURE 1. GLOVER, B., BHATT, H. RFID Essentials, O’Reilly Media, USA, 2006. ISBN 978-0596009441. 2. Genesis of the Versatile RFID Tag. [online]. [cit.2012-03-03]. Dostupné na internete: <http://www.rfidjournal.com/article/ articleview/392/1/2/>. 3. FINKENZELLER, K.: Fundamentals and Applications in Contactless Smart Cards and Identification. In: RFID Handbook. John Wiley & Sons, 2006. ISBN 0-470-84402-7. 4. EPC [online]. [Cit. 2012-01-09]. Dostupné na internete: <http://www.gs1sk.org/ elktronicky-produktovy-kod> 5. Definícia EPC štandardov.[online]. [Cit. 2012-01-05]. Dostupné na internete: <http://www.gs1sk.org/down/prehlad_standardov.pdf>. 6. GS1 Identification Key Series - GIAI (Global Individual Asset Identifier). 2008. [online]. [Cit. 2012-01-12]. Dostupné na internete: <http://www. gs1.org/sites/ default/files/docs/idkeys/GS1_GIAI_Executive_Summary.pdf>. 7. Slovenská pošta a.s. [online]. 2013. [Cit. 2013-25-08]. Dostupné na internete: <http://www.posta.sk/informacie/profil-spolocnosti>. 8. ROBEEL HAQ. 2013. [Cit. 2013-25-08]. Dostupné na internete: <http://www.arabiansupplychain.com/article-2619-rfid-technology-in-thepostal-sector/1/#.UfJwCax4eM8>. 9. SWEDBERG, C.: Post Danmark Boosts Mail-Collection Efficiency. 2013. [Cit. 2013-25-08]. Dostupné na internete: <http://www.rfidjournal.com/ articles/ view?9257/2>. 10. ROBERTI, M.: The History of RFID Technology. 2005. [online]. RFID journal. [cit. 2015-03-04]. Dostupné na internete: <http://www.rfidjournal. com/ articles/view?1338>. DETAILS ABOUT AUTHORS: JURAJ VACULÍK, PROF. ING, PHD., juraj.vaculik@fpedas.uniza.sk ONDREJ MASLÁK maslak@fpedas.uniza.sk

110

-

B O O K O F PA P E R S

FOR BOTH AUTHORS: FACULTY OF OPERATION AND ECONOMICS OF TRANSPORT AND COMMUNICATIONS AIDC LABORATORY UNIVERSITY OF ŽILINA ŽILINA, SLOVAKIA

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

IDENTITY AND BRANDING OF CITIES IN ASIA – INVESTIGATING ATTITUDES OF CROATIAN STUDENTS LUKŠA LULIĆ GORAN LUBURIĆ FILIP SUBAŠIĆ

ABSTRACT In the process of branding, cities promote themselves as places good for living and as desirable tourist destinations, attracting investments at the same time. While some cities already acquired positive brand image, others are not recognizable. The main goal of this Paper is to investigate the image of city brands in Asia and their mental association impact on Croatian students from all Croatian university regions as a targeted group. In order to find out their preferences, quantitative research has been conducted. Authors also compared research results with the research on the similar topic, concerning European city brands targeted on the same group. KEY WORDS: city brands, Croatian students, research, image, Asia.

1. INTRODUCTION AND LITERATURE OVERVIEW Brands represent a set of tangible and intangible values of products for their users. In terms of cities, regions and states the brand acts as a certain label, which summarizes all of our expectations, thoughts, beliefs, knowledge, feelings and associations that we already have in our minds (adapted from Paliaga, 2008). A strong positive image can lead to a powerful and distinctive competitive advantage for a place. The emphasis in brand communication should not be on what the brand physically does, but on what the brand stands for to the customer. (Kotler et al., 1999; Rainisto, 2003; Hankinson, 2001). A place needs to be differentiated through unique brand identity if it wants to be perceived of as superior in the minds of place customers (e.g. Trueman et al., 2001; Nasar, 1998; Killingbeck & Trueman, 2002). Places can be branded the same way as products and services, but the creating of added value for “place customers” is a real challenge. This process requires good development system for the place product so that place-oriented added value can be made “visible”. From the standpoint of branding, the identity of a city is created out of values, expectations, cultural heritage, natural features, a totality of elements that make a city distinctive and unique, different from the competitors, whether in a positive or negative way. Each city has its own identity, regardless of the branding process (adapted from Pol, 2002). Poor perceptions of a city can devalue its image and have far reaching consequences for its future prosperity. These negative associations may reduce the likelihood of inward investment, undermine business community activities and have a detrimental effect on the number of visitors, thereby exacerbating urban decline. By contrast, an improved brand perception can reverse the downward trend and sow the seeds for urban renewal (Trueman et al., 2001, 4). While some cities already have strong and recognizable brands, many take actions in their branding, in order to increase their competitiveness in the global market. They try to present their cities and states in a powerful, attractive and different way, and this activity is very similar to the marketing of products and services. Cities and even countries take efforts in branding primarily to attract high-tech companies, venture capital, tourists and skilled workforce. Therefore, the governments of many countries, and now even leadership of large cities deal with the reputation, image and identity of the country, struggling to attract investment, tourists, an increase in exports and the like (Paliaga, 2008, 10). According to Anholt (2003), countries, cities and regions that are lucky or virtuous enough to have acquired a positive reputation find that everything they or their citizens wish to do on the global stage is easier: their nation brand goes before them like a calling card, opening doors, creating trust, generating respect and raising the expectation of quality, competence and integrity. Places with a reputation for being poor, uncultured, backward, dangerous or corrupt will find that everything they or their citizens try to achieve outside their own neighborhood is harder, and the burden is always on them to prove that, as individuals or as organizations, they do not conform to the national stereotype. City branding provides, on the one hand, the basis for developing policy to pursue economic development and, at the same time, it serves as a conduit for city residents to identify with their city (Kavaratzis, 2004, 58). Measuring brand value is an important task and it enables brand managers to plan their strategic decisions. Keller (2003) introduced a Brand Tracking model, which provides a practitioner approach to brand building. This model consists of a brand pyramid which starts with “salience” at the base (to define awareness and identity), and moves through “performance”, “imagery”, “judgements” and “feelings”, towards “resonance”, denoting the relationship with

2016 - M SPHERE

B O O K O F PA P E R S

-

111


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

the brand. Anholt (2006) on the other hand, developed both a destination brand hexagon and a city brand hexagon, comprising six Ps: Presence (familiarity and contribution to world culture), Place (physical aspects), Potential (economic and educational opportunities), Pulse (vibrancy), People (and cultural alignment) and Prerequisites (living standards and amenities). Nation Brands Perception Index - NBPI - developed as a tool to quantify international perceptions of nations’’ claims that every country ‘‘makes a unique contribution to the world and has a compelling story to tell’’. Basically, NBPI employs a proprietary system to evaluate news articles that are connected to a given country as positive or negative. Based on the volume and tone of coverage, countries are given a perception index score and ranked accordingly (EastWest Communications, 2012). The concept is vaguely constructed. The measurement process of NBPI solely focuses on the perception portrayed by the English language mass media. But, according to Sevin (2014), encapsulating a nation’s reputation as positive or negative is neither possible nor desirable. Moreover, NBPI’s reporting deduces the unique stories of countries into scores and rankings thus is inconsistent with its definition. Simon Anholt, a practitioner who is often credited in coining the term ‘nation branding’, started the Nation Brands Index in 2005 and partnered up with GfK in 2008 (Anholt, 2011). Following the commercial success of Nation Brands Index, Anholt started the Anholt-Global Marketing Institute (GMI) City Brands Index. The reputation of cities has been driven by their governments throughout history. Anholt believes that in addition to its economic strength, wealth and development, the city brand should also be developed in directions such as creativity, music, philosophy, confidence, wisdom, challenge and safety. Brand building models seek to identify (and assess) the various dimensions of brands and whilst the fact that brands are multidimensional is not in question, according to Vandewalle (2008), which facets are assessed remains an issue, because whichever facets of the brand are evaluated, other components will have been omitted. So he comes to a conclusion that the holistic nature of the brand will never be fully captured by these techniques. Furthermore, he proposes instead an attempt to identify and emphasize the key components in the brand building process. Awareness is in the first place, Brand Judgement is a second key component as the sum of brand performance, image, feelings, gaining an emotional bond with the brand. This then, leads to a third key facet, Brand Resonance, which determines to what extent we take the brand with us. Competition among cities led to the rapid implementation of projects that would allow differentiation between them. This encouraged planning and opening of technological parks, organizing spectacular cultural and entertainment events, modern solutions of public transport and competing for large events and manifestations, from architectural monuments and attractions, to organization of world-famous concerts, or art exhibitions, all in order to differentiate and create recognition. And this actually means creating your own brand, because the basis of branding is to be distinctive, unique and different. However, it is necessary to know that the efforts of the local community do not stop by building the city brand, they are faced with increased pressure of all stakeholders, from tourists to businessmen (adapted from Paliaga, 2008). Brand position, part of brand identity and value proposition, is communicated to target groups to show its advantage over competing brands. Value added place brands offer more benefits than the competitors´ more anonymous and vague brands in other locations. The image of the place is also the outcome of the systematic marketing communication process. The image is always “true”, being the real experience of the target group (Rainisto, 2003, 75). According to Cromwell (2008), branding is ultimately all about communications: how you articulate and present yourself to the world.

2. METHODOLOGY The aim of this Paper was to investigate the image of city brands in Asia and their association impact on Croatian students from all university regions as a target group. This Paper’s findings are based on primary research of branded Asian cities, or city brands, that have the highest brand awareness among Croatian students (faculty level). Anonymous research was conducted using the sample of 356 students that attend one of 4 major Croatian universities (University of Zagreb, Osijek, Rijeka and Split), during the time frame of approximately one month, between March and April 2016. The questionnaire consisted of the questions below: 1. Which Asian city first comes to your mind? 2. Which 3 associations of that city first come to your mind? 3. Have you already visited that city? Demographic questions: age, sex.

112

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2.1. Research questions and hypothesis Based on the research questions, authors will confirm or reject 4 research hypothesis below: 1. (H1) Main hypothesis: More than 90% of students surveyed have not been to the Asian city that first came to their mind. 2. (H2) The cities that mostly come to students’ minds (top 5) have mostly the same, repeated associations, with variance less than 25% in average. 3. (H3) More than 25% of students surveyed mentioned the same Asian city that first came to their mind. 4. (H4) More than 50% of students surveyed mentioned the top 5 cities in this research.

Using main hypothesis authors will confirm or reject the statement that the strongest city brands (highly branded cities) in most cases have just a few extremely branded associations that are widespread among students’ minds. Authors are aware of the potential seasonality of the results, since the survey time frame was relatively short (2 months). Some of research results in this Paper will be compared to research results of the prior study that has addressed this topic, branded European cities (Lulic, Rocco, Bartulovic, 2016).

3. RESEARCH RESULTS Primary research was conducted between March and April 2016, using the sample of 356 faculty students among all major universities in Croatia. The sample can be considered as representative. Sampled demographics are shown in chart 1 (sex) and chart 2 (age). Chart 1. Sample demographics – sex

Chart 2. Sample demographics - age

Source: Authors’ primary research results

There were altogether 29 major Asian cites mentioned, with the frequency dispersion of the top 10 cities mentioned, show below (Chart 3). Authors can confirm that, without a doubt, Tokyo is the most branded city of Asia when it comes to Croatian students’ opinion. Tokyo itself was mentioned among almost 40% of all surveyed students. Qualitatively, 29 Asian cities were mentioned in total, with cumulative frequency of 356.

2016 - M SPHERE

B O O K O F PA P E R S

-

113


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Chart 3: frequency dispersion of the top 10 Asian cities

Source: Authors’ primary research results

3.1. Research Hypothesis results H1: More than 90% of students surveyed have not been to the Asian city that first came to their mind. Research conclusion: H1 is accepted. Out of all surveyed students, 98% of them have not been to an Asian city that first came to their mind. In comparison, the results gained from the research (Lulic et al., 2016) showed a tie between visited and not visited European cities for the same target group. This supports authors’ presumption that, the branding element of the city has an increased awareness (or possibly emotional) influence if a person had visited that city before. This means that the effect of branding a city that one had not visited before has even more of an awareness impact value, like e.g. Tokyo in this research.

H2: Asian cities that mostly come to students’ minds (top 5) have mostly the same, repeated associations, with association variation coefficient less than 25% in average, meaning that ¾ of all associations mentioned are roughly the same. Research conclusion: H2 is rejected. The average variation coefficient between top 5 mentioned cities is 86,8%, which is basically the opposite of H2 (variation is more than ¾ instead of ¼). Table 1. Association variation coefficient (in %) for 5 most branded Asian cities among Croatian students (cities with highest awareness) Tokyo

Beijing

Hong Kong

Bangkok

Dubai

111%

97%

79%

69%

78%

Source: Authors’ primary research results

Interestingly, in comparison to Lulic et al. (2016), out of the most branded European cities, Paris, as the most branded city of Europe (among same target research group) has variation coefficient of only 26%, meaning ¾ of mental associations to that city are the same. Tokyo, on the other hand, as the most branded city of Asia (the same research target group) has extreme association variation (out of 465 associations quantitatively, 244 of them are qualitatively different and grouped), with association variation coefficient of more than 100%. But, when all top 5 European and Asian cities are taken into consideration, the average association variation coefficient is between 60-90%, or moderately high. This means that H2 most definitely is a hypothesis based on the wrong presumption. The most branded cities (high awareness ones) are not the most branded cities just because of a few extremely branded associations to those cities.

114

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

H3: More than 25% of students surveyed mentioned the same Asian city that first came to their mind. Research conclusion: H3 is accepted. With the share of 39%, Tokyo is by far the most mentioned Asian city among Croatian students. The second most mentioned city, Beijing, was mentioned among 18% of surveyed students, while the third most mentioned city, Hong Kong, was mentioned among 10% of surveyed students. In total, the three most mentioned cities add up to 67% of all mentioned Asian cities.

H4: More than 50% of students surveyed mentioned the top 5 Asian cities in this research. Research conclusion: H4 is accepted. The top 3 Asian cities already add up to 67% in total, while the top 5 Asian cities extend the cumulative to 76%. All other 24 cities mentioned represent the minor 24%.

Out of all mental associations to Asian cities among Croatian students, here is the curated list of the ones that have been mentioned the most (no. of mentions): Tokyo: Technology(34); Sushi(23); Traffic jam(22); Japan(18); Anime(13); Overpopulation(12); Skyscrapers(11); Lights(10); Cherry blossom(10); A lot of people(8); Food(8); Japanese (8); Culture(7); Tokyo Drift;(6); Rice(6); Cars(5); Far away(5); Geisha(4); Earthquake(4); Island(3); Job(3); Smog(3); Fashion(3); Tea(3); Temple(3); Kimono(2); Food sticks(2); Tradition(2); Urban(2); Size(2); Large(2); Large city(2); Huge(2); Railroad(2). Beijing: Olympic Games(16); China(10); Rice(9); Chinese(6); Traffic jam(6); Overpopulation(6); Food(6); Smog(6); Chinese Wall(5); Overpopulation(4); Congestion(4); Forbidden city(4); Skyscrapers(3); Duck(3); Culture(3); People(3); Dirty(3). Hong Kong: China(6); Skyscrapers(6); Food(4); Overpopulation(3); Jackie Chan(3); Job(3); A lot of people(3); Rice(2); Chinese(2); People(2); Hurry(2); Smog(2); Work(2); Traffic jam(2); Bruce Lee(2); Tourism(2); Technology(2); Cheap(2); Culture(2). Bangkok: Traffic jam(3); Food(3); Exotic(2); Beaches(2). Dubai: Wealth(6); Luxury(3); Hotels(2); Tourism(2).

CONCLUSION This research was aimed to investigate the image of city brands in Asia and their association impact on Croatian students from all Croatian university regions as a target group. In order to find out their preferences, quantitative research survey was conducted between March and April 2016, using the sample of 356 faculty students. Authors can confirm that, without a doubt, Tokyo is the most branded city of Asia when it comes to Croatian students’ opinion. Tokyo itself was mentioned among 39% of all surveyed students. Qualitatively, 29 Asian cities were mentioned in total, with cumulative frequency of 356. Main Hypothesis [H1: more than 90% of students surveyed have not been to the Asian city that first came to their mind] was accepted: out of all surveyed students, 98% of them have not been to an Asian city that first came to their mind. In addition, with the survey share of 39%, Tokyo is by far the most mentioned city among Croatian students. The second most mentioned city, Beijing, was mentioned among 18% of surveyed students, while the third most mentioned city, Hong Kong, was mentioned among 10% of surveyed students. The second hypothesis [H2: Asian cities that mostly come to students’ minds (top 5) have mostly the same, repeated associations, with association variation coefficient less than 25% in average, meaning that ¾ of all associations mentioned are roughly the same] was rejected: The average variation coefficient between top 5 mentioned cities is 86,8%, which is basically the opposite of H2. Along with that, Tokyo, as the most branded city of Asia (survey results) has extreme association variation coefficient of more than 100%. This means that H2 most definitely is a hypothesis based on the wrong presumption. The most branded cities (high awareness ones) are not the most branded cities just because of a few extremely branded mental associations to those cities. For future research, authors plan to investigate how well cities on other continents are branded among Croatian students.

2016 - M SPHERE

B O O K O F PA P E R S

-

115


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

LITERATURE 1. Anholt S. (2003). Branding places and nations, The Economist, Bloomberg Press, Princeton, New Jersey 2. Anholt, S. (2006). The Anholt-GMI city brands index: How the world sees the world’s cities. Place Branding, 2(1), 18–31. 3. Anholt, S. (2011). Beyond the nation brand: The role of image and identity in international relations. In A. Pike (Ed.), Brands and branding geographies (pp. 289–304). Northampton, MA: Edward Elgar Publishing. 4. Cromwell, E. (2008). Branding Korea, Koreatimes, article. Posted : 2008-08-31 17:46, approached 12042016 at: http://www.koreatimes.co.kr/ www/news/opinon/2008/08/137_30311.html 5. Hankinson, G. (2004). Repertory grid analysis: An application to the measurement of destination images. International Journal of Nonprofit and Voluntary Sector Marketing, 9(2), 145–153. 6. Kavaratzis M. (2004). From city marketing to city branding: Towards a theoretical framework for developing city brands, Place Branding Vol. 1, 58–73, Henry Stewart Publications 7. Killingbeck, A.J. & Trueman, M.M. (2002). Redrawing the Perceptual Map of a City. 8. Working Paper No 02/08. Bradford University School of Management, Bradford. 9. Keller, K. L. (2003). Strategic Brand Management: Building, Measuring and Managing Brand Equity. Prentice Hall 10. Kotler, P. & Asplund, C. & Rein, I. & Haider, D. (1999). Marketing Places Europe. Pearson 11. Education Ltd, London. 12. Lulic, L., Rocco, S., Bartulovic, K. (2016). Identity and branding of EU cities – investigating attitudes of Croatian students, Proceedings of the 14th International Scientific Conference on Economic and Social Development. Belgrade, ESD 13. Nasar, J. L. (1998). The Evaluative Image of the City. Sage Publications, London. 14. Paliaga M. (2008). Branding i konkurentnost gradova, [Branding and city competitiveness], Croatian, ed. Marko Paliaga. Rovinj. 15. Enric Pol, E. (2002). “The theoretical backgound of the city identity-sustainbility network”, Environment and behavior, vol. 34., No1, January 16. Rainsto, S. K. (2003). “Sucess factors of place marketing: a study of place marketing practices in northern Europe and United states”, Helsinky University of Technology, doctoral dissertation 2003/2004. 17. Sevin, E. H. (2014.): Understanding cities through city brands: City branding as a social and semantic network, American University, School of International Service, Washington DC 18. Trueman, M. M., Klemm, M., Giroud, A. and Lindley, T. (2001) ‘Bradford in the premier league? A multidisciplinary approach to branding and repositioning a city’, Working Paper 01/04, Bradford University, School of Management, Bradford, UK. 19. Vandewalle I. (2008). Critical points in City Branding, Kavala, Greece, source: author. DETAILS ABOUT AUTHORS: LUKŠA LULIĆ PHD, DEAN luksa.lulic@vpsz.hr GORAN LUBURIĆ MSC, VICE DEAN goran.luburic@vpsz.hr FILIP SUBAŠIĆ STUDENT filip.subasic@optinet.hr FOR ALL AUTHORS: ZAGREB SCHOOL OF BUSINESS ZAGREB, CROATIA

116

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

FISCAL DECENTRALIZATION IN POLAND – LOCAL GOVERNMENT FINANCE IN THE PERIOD BETWEEN 1991 AND 2015 MARIA JASTRZĘBSKA

ABSTRACT The aim of this paper is to discuss the essence of decentralization, especially fiscal decentralization and financial independence of territorial self-government (local government) in Poland in the period between 1991 and 2015. To estimate the share of local finance (local government finance) in public finance system (general government finance) in Poland, there were used some variables like revenue, expenditure, deficit/surplus and debt of local government to GDP in %. There were also study share of revenue, expenditure and debt of local government in structure of revenue, expenditure and debt of general government. Moreover there were estimate the revenue structure of territorial self-government entities. KEY WORDS: fiscal decentralization, local government, Poland.

1. POLITICAL AND ADMINISTRATIVE DECENTRALIZATION IN POLAND – SHORT DESCRIPTION Decentralization can be defined as the transfer of powers and resources from higher to lower levels in a political system. There are three main types of decentralization: deconcentration, delegation and devaluation. Deconcentration is perceived as a process of administrative decentralization. Delegation refers to the transfer of managerial responsibility for special functions to other organizations outside central government control including local and regional government. Devolution appears when resources, powers and tasks are transferred to lower level government authorities, which are mainly independent from higher authorities, and are in turn democratically empowered1. The essential issue in that research area is to examine the impact of fiscal decentralization on fiscal and economic issues. First of all there are economic and fiscal consequences of fiscal decentralization, that mean the impact on: service delivery, sustainability, income inequality and poverty, geographical and interregional disparities. Moreover there are political and policy consequences, as the impact on: government size and public policies, governance, accountability, corruption, social capital and tax morale, voter turnout, party system nationalization, national unity2. The political and legal position of territorial self – government in Poland is the result of its historical development, the outcome of the peculiarity how its institutions function and the effect of political, social and economic transition. Before 1990 year, in Poland were two levels of public administration (communes and voivodships), but they were controlled by the state. This system was very centralized, not efficient and not very creative for local and regional initiative. The existence of 49 voivodships resulted in overgrowth of bureaucracy and high costs of public administration. Despite that there was really very high level of centralization of public finance (more than 90% of public money was distributed by the state budget and state purposeful funds). The transformation of political and economic system was a great challenge for the rebirth of local autonomy. The reactivation of territorial self – government in Poland in 1990 was one of indispensable conditions to realize transformation process from socialist economy to market economy. In May 1990 was the first election to municipality councils. During the period between 1990 and 1998 in Poland functioned the one – tier territorial self – government model. That means that the basic and the only one level of territorial self - government was municipality. The municipalities were (and are) diverse according to size (big, medium, small) and location (developed and undeveloped, rich and poor in infrastructure etc.). During the period between 1993 and 1995 the next step in the territorial self - government reform was made, because that time was started the categorization process of municipalities; 46 big towns (especially more than 100.000 inhabitants) put into practice so called pilotage program. This program was treated like an experiment before introduction a new territorial self- government entities – counties (town districts). The big towns had to take over some tasks (some public services) which used to be carry out by central government. These tasks were charged by central government and financed from the state budget in the form of budget grants. Some big towns withdrawn from the pilotage program, because they received too little money for executing theirs tasks (they had to add their own money). These charged tasks were connected with such domains as, e.g.: education, healthcare, social welfare, culture, administration, road maintenance, fire protection, environment protection. 1 2

Sevic Z., (2005.) Decentralisation: Issues of Inter-governmental Grant Transfers and Fiscal Co-operation, in: Fiscal Decentralization and Grant Transfers in Transition Countries: Critical Perspective edited by Zeljko Sevic, NISPAcee, Bratislava 2005, p. 12. J. Martinez-Vazques, S. Lago-Penas, A. Sacchi, The impact of fiscal decentralization: a survey, GEN (Governance and Economic Research Network), GEN Working Paper A 2015-5 websuvigo.es/infogen/WP (accessed 10.10.2016).

2016 - M SPHERE

B O O K O F PA P E R S

-

117


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

During the period between 1996 and 1998 the process of decentralization public administration was continued. This time tasks of big towns were defined in the act (not like before in the decree of central government) and they were obligatory own tasks (not like before optional charged tasks). The change of law character of these tasks was very important considering autonomy of big towns. In this period of time there was a possibility to form so called city public service zone. The tasks of this special formation were tasks charged by central government. They were financed from the state budget in the subsidy form, which was not sufficient, so the urban public service zones were in debt. In 1999 year the three tier territorial self – government model was introduced in Poland as the result of second step of territorial self – government reform. The main aims of this reform are included in the Constitution’s guaranties as following: the principle of unity of the state, the principle of decentralization of the public authorities, the principle of subsidiary. There are three types of territorial self – government entities – municipality (gmina) – the basic level, county (powiat) – the intermediate level and region (województwo) - the highest level of territorial self – government. Municipalities and counties are the entities of local government and regions are the entities of regional government. These entities are also units of the territorial division in Poland. There are 2413 municipalities, 373 counties (314 land and 66 urban) and 16 regions. The territorial self – government in Poland is the obligatory social corporation of inhabitants in municipalities, counties and regions. This association is formed to realize tasks and for social and economic development of local and regional entities. Each inhabitant in Poland is simultaneously a member of self - governing municipality, county and region. The entity of territorial self – government make up a particular social – economic system which consists of four elements: territory, inhabitants, democratically elected authorities, organizational entities e.g.: budgetary units, budgetary institutes, municipal company3. The division of territorial self – government units in Poland took place according to the range of their tasks, but not according to the subordination (e.g. municipality is not subordinate to district or to region). The municipalities play the basic role in the three – tier territorial self – government model in Poland. The distinction between the municipalities, counties and regions tasks cause that territorial self – government entities acting independently, but they may cooperate formulating different types of agreements on entrusting each other tasks or they may establish unions between municipalities or counties for more efficient realization of local and regional tasks. Especially big regions are more powerful and should be able to create conditions for regional investments. It is very important for applying by them financial support from EU. According to that Polish regions may and should cooperate with regions in UE countries and with so called Euroregions. There were expecting concrete results of second step of territorial self – government reform in Poland4: 1. decentralization reform of management in public sector, 2. modernization of public administration on central, regional and local level - ordering competencies system in public administration system, 3. development of mechanisms of democracy and public control over government, 4. increase of effectiveness of institutions providing public services (education, healthcare, social welfare) in country, regions, counties and municipalities, 5. decentralization of public finance system (including budget system) by increase in participation of territorial self – government entities in public revenue and expenditure, 6. improvement in flows information between governmental and self – governmental institutions, 7. rationalization of public spending and obeying principles of public finance discipline and limitations of getting into public debt, 8. creation of instruments of regional politics, 9. opportunity for political elite to be promoted beginning from municipal, through county and region level, finishing on central level, 10. adaptation of Polish administrative division to European Union standards.

3 4

Jastrzębska, M. (2012.) Finanse jednostek samorządu terytorialnego, LEX a Wolters Kluwer business, Warszawa, p. 15-16. Dib, (2007.) F. Fiscal Decentralization and Government Size: Reconciling Competing Views with a special Emphasis on Poland, Journal of Development and Social Transformation, Volume 4, November 2007, p. 24-25.

118

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2. THE SPHERES OF TERRITORIAL SELF – GOVERNMENT AUTONOMY According to Polish Constitution from 1997 year and the law regulations (e.g. passed on the 8th of March 1990 act on municipality self-government and passed on the 5th of June 1998 act on county and regions self-government), there are several spheres of territorial self – government autonomy5: 1. property – it is essential for carrying out local and regional tasks; the property of territorial self – government entities come from the treasury, 2. making law – the local and regional authorities (the legislature and the executive) make law regulations commonly and currently in force on the municipality, county, region territory; making law by local and regional authorities is possible only on the basis of authorization by central law, 3. legal personality – municipality, county and region executing their own tasks on behalf of themselves and own responsibility; the autonomous entity which is given rights and duties defined by law; legal personality means the autonomy of territorial self – government entities from the state, 4. legal protection of certain autonomy given by low regulations and it is protected by law, 5. right to undertake own actions in the confines of objects and territory - right to come to public and right to law claim in the front of law organs, 6. entrenched revenue sources – own revenue (they create financial independence of territorial selfgovernment entity), grants and subvention, 7. formal and content – related separation of local and regional budgets from the state budget is the basis of leading by territorial self-government entities autonomous financial economy within law regulations and it is also the result of decentralization of budgetary system, 8. competencies to manage own business by local and regional authorities elected in democratic way; they have right to make local and regional law, 9. limited supervision of territorial self – government – the supervision cannot violate autonomy of territorial self-government entities defined by law; the supervision’s settlements contrary to the regulations can be sue by territorial self-government entities to administrative court, 10. public administration on local and regional level appointed to carry out local and regional tasks.

3. LOCAL FINANCE IN PUBLIC FINANCE SYSTEM The dualism of public administration (central and local) cause the dualism of public finance on state, local and regional level. There may be enumerated several reasons for division of public finance, e.g.: political reasons (decentralization, democratization), historical reasons (evolutionary development of territorial self – government), economic reasons (growth of rationality of activity in public administration; strengthening responsibility of territorial self – government authorities; possibility of establishing public hierarchy of public needs; stimulation local and regional initiative)6. Local finance are decentralized and we may analyze changes in amount of local revenue, expenditure and debt share in public revenue, expenditure and debt structure. The decentralization process does not only means the transfer of tasks and competencies from central to local and regional authorities, but also creation of material and financial basis for theirs activities. The reform of public administration was supposed to give more responsibility and autonomy to local and regional authorities. More territorial self-government tiers usually foster the growth of local government share in structure of public revenue and expenditure. But not always increasing share of local government expenditure in structure of public expenditure does not always go hand in hand with increasing share of local government revenue in structure of public revenue. Fiscal decentralization occurs when higher levels of government transfer influence over budgets and fiscal decisionmaking to lower levels. It covers two interrelated issues. The first is the division of spending responsibilities and revenue sources between levels of government (central, regional, local). The second is the amount of discretion given to regional and local government to determine their expenditure and revenue. How much power and responsibility regional and local governments exercise depends on: what range of public service they finance, whether their revenue are commensurate with their responsibilities, how much real choice they have in allocating their budget to individual services, whether they can determine the rates of their taxes and charges7. 5 6 7

Jastrzębska, M., Janowicz-Lomott, M., Łyskawa, K. (2014.) Zarządzanie ryzykiem w działalności jednostek samorządu terytorialnego ze szczególnym uwzględnieniem ryzyka katastroficznego, LEX a Wolters Kluwer business, Warszawa, p. 20-22. Jastrzębska, M. (2005.) Polityka budżetowa jednostek samorządu terytorialnego, Wydawnictwo Uniwersytetu Gdańskiego, Gdańsk, p. 39. Davey, K. (2002.), Fiscal Autonomy and Efficiency in: Fiscal Autonomy and Efficiency. Reforms in the Former Soviet Union edited by Kenneth Davey, Local Government and public service Reform Initiative, open Society Institute, Budapest, p. 11.

2016 - M SPHERE

B O O K O F PA P E R S

-

119


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The distribution of public revenue between central and local government is vertical and horizontal and the most important for local government financial independence is the vertical distribution. First of all it refers to taxes and quasi-tax charges and governs their allocation to the state and other public entities (including local and regional governments). According to the regulations of the European Charter of Local Government and the European Charter of Regional Government (Poland ratified first one Charter in 1993 year) - local and regional authorities, should be supplied with financial means allowing them to complete all their tasks. They should also influence the shape of at least a part of income, because financial independence means independence in shaping sources of income, too. The share of local finance in public finance system depends on: decentralization process of public authorities and public administration; economic and social development in country, structure of public finance system, including structure of local government system (authorities, competences, tasks, property, finance). The local and state government revenue, expenditure, deficit/surplus and debt ratios to GDP in percentage are the most popular measurement of decentralization of public finance and the role of local and state governments in the delivery of public goods (there are used by such international institution as Eurostat, OECD, IMF, World Bank). In the period between 1991 and 1998 (exemption 1998 year) local government revenue in percentage of GDP was about 10 and in the period of 1999 and 2015 was over 12-13. However, local government expenditure in the first period was about 11percentage of GDP and in the second period about 13-15 percentage of GDP. So the introduction of two new territorial self-government entities (counties and regions) influenced increase of local finance in public fiancĂŠ system, but it was not the significant growth, only about 2-4 percentage of GDP (table 1). We may also observe the tendency of deficit or surplus of local government to GDP in percentage. During the period between 1995-2015, we my noticed that surplus was rather rare phenomenon comparing to deficit and it was only in 2004, 2007 and 2015 year. In 2004 it was the result of better financial situation influenced by the changes in local revenue system; in 2007 it was the result of the good financial situation of local government mainly connected with good economic situation in our country, in 2015 year it was mainly caused by law regulations in local debt and its service. We may noticed continued growth of local debt as percentage of GDP in the period between 1999 and 2014 (exception 2007 and 2015 year when was surplus). The scale of growth was not very high from 1,1 percentage of GDP in 1999 to 4,3 percentage of GDP in 2014 (comparing to general government it was at least 10 times lower considering last five years). Table 1. Local government revenue, expenditure, debt to GDP in the period between 1995 and 2015 in % Year

Revenue

Expenditure

Deficit/Surplus

Debt

1995

8,6

10,8

-2,2

-

1996

13,9

15,6

-1,7

-

1997

8,7

10,2

-1,6

-

1998

8,4

9,7

-1,3

-

1999

13,6

14,4

-0,8

-

2000

12,9

13,3

-0,4

1,1

2001

14,0

14,1

-0,1

1,3

2002

13,2

13,5

-0,3

1,7

2003

12,6

12,9

-0,4

1,8

2004

13,0

12,8

0,2

1,9

2005

13,1

13,2

-0,1

2,1

2006

13,3

13,6

-0,3

2,4

2007

13,3

13,3

0,0

2,2

2008

13,9

14,1

-0,2

2,3

2009

13,5

14,6

-1,1

3,0

2010

13,7

14,9

-1,2

3,8

2011

13,2

13,9

-0,7

4,2

2012

12,9

13,2

-0,3

4,2

2013

13,0

13,2

-0,2

4,3

2014

13,3

13,5

-0,2

4,3

2015

12,7

12,7

0,0

4,2

2015

12,7

12,7

0,0

4,2

Source: Eurostat â&#x20AC;&#x201C; Government statistics- http://ec.europa.eu/eurostat (accessed 10.10.2016.).

120

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The basic measurement of fiscal decentralization is subnational revenue, expenditure and debt as a share of total public revenue, expenditure and debt (general government total revenue, expenditure and debt)8. Considering the share of local revenue in general government revenue in the period of functioning tree-tier territorial self-government. We may notice that the worse situation was between 2003 and 2015. The reform of local revenue system lead to improve financial situation of local and regional governments and the share of their revenue increased from 14% in 2003 till 16,5% in 2004, and to 18% in 2008 (in the period between 2009 and 2015 it was not so high). On the contrary we my noticed much more higher increase in share of local expenditure in the structure of public expenditure from more than 20% in 1998 to 26% in 1999, but in the period of decline financial situation of local government in the period between 2000 and 2003, we also my observe the decline of discussing share form 26% to 24%. The reform of territorial self-government entities revenue system changed this situation and the share of local revenue in the public expenditure structure increased to over 32% in 2009. We must notice that in the period between 2010 and 2015 this share was lower â&#x20AC;&#x201C; over 31-28%. In fact in 2015 the share of local government revenue and expenditure in public revenue and expenditure structure were near the same like in 2005. We may noticed systematic increase share of local debt in the structure public debt from 2,3% in 1999 to 8,7 % in 2014 (exemption 2015 year). This situation inform as that local government financial resources are not efficient to finance local investments, and local authorities have to use financing resources outside the budget revenue So, territorial self-government in our country needs the next changes especially in local and revenue system (table 2). In Poland, the share of local revenue in public revenue structure is lower than the share of local expenditure in public expenditure structure. The difference between these indicators is caused by the range of local and regional tasks and of course by the local government revenue system focused on revenue from the state budget. The range of local and regional tasks depends on the division of public tasks between central, regional and local authorities and on social, economic and political system functioning in our country. The range of local and regional tasks also depends on economic situation, social politics and public needs on local and regional level. But in fact local and regional spending depend on economic and financial possibilities of municipality, county and region. Table 2. Share of local government revenue, expenditure, debt in the structure of general government total revenue, expenditure, debt in Poland during in period between 1991 and 2015 in % Year

Revenue

Expenditure

Debt

1991

12,7

12,7

-

1992

12,4

13,2

-

1993

13,1

14,4

-

1994

12,7

15,3

-

1995

13,0

15,4

-

1996

14,7

18,3

-

1997

15,8

19,7

-

1998

15,8

20,2

-

1999

15,9

26,0

2,3

2000

15,5

26,5

3,3

2001

14,8

25,4

3,6

2002

15,1

23,3

4,0

2003

13,8

24,1

4,0

2004

16,5

24,0

4,3

2005

16,0

29,8

4,3

2006

17,4

29,8

4,6

2007

17,8

30,6

4,6

2008

18,0

31,1

5,6

2009

16,5

32,6

5,9

2010

15,3

30,6

7,2

2011

15,3

31,0

7,9

2012

15,4

29,7

8,0

2013

15,5

28,5

7,8

2014

15,8

29,4

8,7

2015

16,1

28,8

8,2

Source: Annual State Budget Reports in the period between 1999 and 2015 - Ministry of Finance â&#x20AC;&#x201C; http://www.mf.gov.pl (accessed 10.10.2016.). 8

Abdelhak, F., Chung, J., Du, J., Stevens, V. (2012), Measuring Decentralization and the Local Public Sector: A Survey of Current Methodologies, Urban Institute on International Development and Governance, IDG Working Paper No. 2012-01, March, p. 3.

2016 - M SPHERE

B O O K O F PA P E R S

-

121


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The revenue sources of territorial self – government entities are divided into three main groups: own revenues (locally allocated income), grants (purposeful grants) and subvention from the state budget. There is important deference between subvention and grant and it is mainly connected with the range of autonomy given to territorial self – government entities how to spend received public money. The subvention is given for generally described purposes, however it can be used for other purposes, which in option of local and regional authorities are more important at the certain time. On the contrary, grants cannot be used for other purposes, that they have been originally given for. This tape of financial source is not efficient for territorial self-government entities according to theirs financial independence. The realization of transfers from the state budget in the form of subvention is better than in the form of grant, because the local and regional authorities have proper and wider competencies to spend received sum of money and they do not have to return them to the state budget. In spite of that, there is some defined criterion of subvention objectivity. That means that subvention is fairer tool of division of public sources and for compensating some differences between territorial self-government entities in conditions of economic development and revenue potential. The higher level of share of grants and subvention from the state budget in the territorial self-government revenue structure means limitation in self – government financial independence. So that, only own revenues and subvention leave scope for local and regional initiatives. The structure of revenue in local and regional budgets, especially relationship between locally allocated and state allocated income, are important indicators of the real amount of freedom given to local and regional authorities9. The own revenues are very sensitive to economy changes and when economic situation is good, the territorial selfgovernment entities have more money especially for investments and to service their debt, and vice verso. Moreover, the share of own revenues in local revenue structure depends on the type of territorial self-government entities (municipality, county, region) and the highest level of financial independence among them in Poland have municipalities, and among them especially big cities. The structure of local and regional revenue is very important for realizing local and regional tasks and spending needed sum of money. The division of territorial self-government in Poland into three tiers gives an impression of a wild range of financial decentralization. In fact the system of financing local government in Poland is based on revenue from the state budget (intergovernmental transfers) and little fiscal independence and autonomy of local and regional governments. In practice we may notice a decrease of own revenue and increase of subvention and grants from the state budget. The territorial self – government units have not enough money to realize all legal tasks and in fact there is not enough money for local and regional investments and development. Moreover in counties and regions there is a tendency to finance their activity mainly from grants. In the period between 1992 and 1998 the most important revenue source was own revenues (revenue from taxes – share in income from central taxes (PIT and CIT), local taxes and local fees, property revenue, other own revenue. The share of own revenue in the structure of total revenue of territorial self-government entities together was the highest in the period of 1991-2015, it was about 60-70% (table 3). Table 3. Structure of revenue of territorial self-government entities together in the period between 1991 and 2015 in % S

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

OR

48,0

68,8

71,9

63,5

63,0

59,3

59,5

58,1

43,8

41,7

40,8

41,9

43,5

S

12,0

12,5

11,5

14,9

15,0

25,5

24,0

25,6

34,2

35,6

37,0

37,1

40,1

G

14,0

18,8

16,7

21,6

20,5

13,9

14,2

14,1

22,2

22,7

22,2

21,0

16,4

O

16,0

0,0

0,0

0,0

1,5

1,3

2,3

2,2

-

-

-

-

-

S

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

OR

51,5

53,4

53,7

56,4

54,9

48,6

48,3

48,8

49,0

50,0

50,7

52,0

S

34,2

31,5

29,5

28,0

28,4

29,3

29,0

28,2

28,6

28,0

26,4

25,8

G

14,3

15,1

16,8

15,6

16,7

22,1

22,7

23,0

22,4

22,0

22,9

22,2

O

-

-

-

-

-

-

-

-

-

-

-

-

Notice: OR – own revenues, S – subvention, G grants, O – other revenue Source: Annual Local and Regional Budgets Reports in the period between 1999 and 2015 - Ministry of Finance – http://www.mf.gov.pl (accessed 10.10.2016).

9

Guziejewska, B. (2016), Theoretical Dimensions of Fiscal Illusions in Local Government Finance, Journal of Economics, Business and Management, Vol. 4, No. 3. March 2016, p. 217-218.

122

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

In the period between 1999 and 2003 and between 2009 and 2012 there are dominated the transfer revenue (grants and subvention from the state budget), it was about 52-56% of total revenue of all together territorial self-government entities. As the result of changes in the territorial self-government entities revenue system, the share of own revenue increased from 51,5% in 2004 to 56,4% in 2007, but in 2008 decreased to 54,9%. In the period between 2009-2012, similar to the period between 1999 and 2003, the most important role played transfer revenue, it was about 48-49% of total revenue of all territorial self-government entities together (in the period between 2013 and 2015 about increase to 50-52%). The situation was mainly caused by deterioration of economic situation in our country and less money from the share in central taxes revenue (PIT and CIT). These taxes are very sensitive to changes in economic situation. Moreover is to worth to emphasise that revenue from that source of local revenue of all together territorial self-government entities plays the major role in the own revenue structure, it is about 40% (table 4). In the structure of transfer revenue in the period between 1991 and 1995 was the higher share of grants compare to subvention. This situation started to change in 1996 year and the most important role plays subvention and the highest share of this source of revenue was in the period between 1999 and 2003. In 2015 year this share was near the same like in the period between 1996 and 1998 – about 25-26%. We my noticed rather high share of grants in the structure of local revenue of territorial self-government entities together in the period between 2009 and 2015 – about 22-23% (table 3). Table 4. Structure of own revenue of territorial self-government units together during the period between 1999 and 2015 in % Specification

2010

2011

2012

2013

2014

2015

1997

Share in central taxes revenue (PIT and CIT)

42,0

43,4

43,2

42,3

42,1

43,6

59,5

Local taxes and local fees

25,9

25,7

26,5

26,6

26,1

25,2

24,0

Property revenue

8,1

7,7

8,0

8,2

8,1

7,2

14,2

Other own revenue

24,0

23,2

22,3

22,9

23,7

24,0

2,3

Source: Annual Local and Regional Budgets Reports in the period between 1999 and 2015 - Ministry of Finance – http://www.mf.gov.pl (accessed 10.10.2016).

CONCLUSION Local governments and their financial structures have been subjected to heavy strains by the rapid population growth, urbanization, industrialization, and centralization of the past century. The most common argument explaining the relative decline of local government is a financial one. It is asserted that the most tax-productive bases are preempted by central government and that it is not feasible for local government to raise its taxes, since industry and persons will respond by moving to other locations. The retreat of government administration from direct management of so many areas of public life has been a radical change in the way Poland is governed. The quality of that reform is evaluated in longer period of time. Hopefully the first steps towards real decentralization create good conditions for the growth of the civic societies in different regions of Poland made. The most important result would be probably to make people understand that the condition of municipalities, counties, regions where they live, and therefore the quality of their lives, depends on their performance. It is a great challenge and responsibility for inhabitants to be aware of the importance of the role they are supposed to play in the future. The main criticism of the territorial self-government reform is connected with the way it has been implemented. The territorial self – government reform connected with public administration reform is profitable for government administration, because lots of tasks before realized by central government, now are realized by territorial self – government units. There was introduced into practice decentralization of public tasks and competencies, but not public money. In the nearest future this fact should be changed, because poor municipalities, counties and regions cannot complete their tasks in the wild range and in effective and efficient way. So, inhabitants might be disappointed with the results of activity of local and regional authorities.

2016 - M SPHERE

B O O K O F PA P E R S

-

123


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

LITERATURE 1. Abdelhak, F., Chung, J., Du, J., Stevens, V. (2012.), Measuring Decentralization and the Local Public Sector: A Survey of Current Methodologies, Urban Institute on International Development and Governance, IDG Working Paper No. 2012-01, March. 2. Annual State Budget Reports in the period between 1999 and 2015 - Ministry of Finance – http://www.mf.gov.pl (accessed 10.10.2016). 3. Annual Local and Regional Budgets Reports in the period between 1999 and 2015 - Ministry of Finance – http://www.mf.gov.pl (accessed 10.10.2016). 4. Davey, K. (2002.), Fiscal Autonomy and Efficiency in: Fiscal Autonomy and Efficiency. Reforms in the Former Soviet Union edited by Kenneth Davey, Local Government and public service Reform Initiative, open Society Institute, Budapest. 5. Dib, (2007.) F. Fiscal Decentralization and Government Size: Reconciling Competing Views with a special Emphasis on Poland, Jurnal of Development and Social Transformation, Volume 4, November. 6. Eurostat – Government statistics - http://ec.europa.eu/eurostat (accessed 10.10.2016.). 7. Guziejewska, B. (2016.), Theoretical Dimensions of Fiscal Illusions in Local Government Finance, Journal of Economics, Business and Management, Vol. 4, No. 3. March 2016. 8. Jastrzębska, M. (2005.) Polityka budżetowa jednostek samorządu terytorialnego, Wydawnictwo Uniwersytetu Gdańskiego, Gdańsk. 9. Jastrzębska, M. (2012.) Finanse jednostek samorządu terytorialnego, LEX a Wolters Kluwer business, Warszawa, pp. 15-16. 10. Jastrzębska, M., Janowicz-Lomott, M., Łyskawa, K. (2014.) Zarządzanie ryzykiem w działalności jednostek samorządu terytorialnego ze szczególnym uwzględnieniem ryzyka katastroficznego, LEX a Wolters Kluwer business, Warszawa. 11. Martinez-Vazques J., Lago-Penas S., Sacchi A., The impact of fiscal decentralization: a survey, GEN (Governance and Economic Research Network), GEN Working Paper A 2015-5 websuvigo.es/infogen/WP (accessed 10.10.2016). 12. Sevic Z., (2005.) Decentralisation: Issues of Inter-governmental Grant Transfers and Fiscal Co-operation, in: Fiscal Decentralization and Grant Transfers in Transition Countries: Critical Perspective edited by Zeljko Sevic, NISPAcee, Bratislava. DETAILS ABOUT AUTHOR: MARIA JASTRZĘBSKA PROFESSOR UNIVERSITY OF GDANSK FACULTY OF MANAGEMENT DEPARTMENT OF FINANCE AND FINANCIAL RISK SOPOT, POLAND maria.jastrzebska@ug.edu.pl.

124

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

THE FISCAL LIABILITIES AND THE QUANTITATIVE EFFECTS OF THE FINANCIAL VARIABLES IN OECD COUNTRIES A. NIYAZI ÖZKER

ABSTRACT In this study, we aim to analyze the total government debt change levels via the contribution level of total central government tax revenues in the scope of Gross Domestic Product in OECD countries. And also, the levels of effective exchange rate were included in the reality growth process to determine the debt levels of government total including the total tax and non-tax receipts under these countries especially within the last years. Moreover, it has been understood that the total central debts of central governments have been affected via the other internal gross financial liabilities, and this structural fact has put forth the worked total hours related to the labor tax burdens have a important role on the production levels of OECD countries in order to establish the financial means of the government total debts. The empirical results have supported to our determined resulting this consideration method related to the government debt formations in the scope of the criteria effect levels of the independent variable. The political policies of governments were not included in this study by reason of the formation effects relevant to the government political behaviors may result in the different financial liabilities. In this respect, it appear that the effect levels of total central government debts have been more affected via exchange rates concerning the developing countries that need much more financial debts from foreign. In other words, the increasing debt burden, as a per cent GDP, has been directly influenced via the changeable effects of exchange rates as a most important variable in the developing countries which have the lower economic growth rates in opposition to the developed countries in the scope of OECD in the same period. KEY WORDS: Economic Growth; Gross Domestic Product; Government Debts; Tax Burden; Tax Revenues. JEL Code: E24; H61; H71; H81.

1. INTRODUCTION The financial liabilities that have roles on the product levels express the financial liability fact is affected directly via the tax revenue levels as a per cent GDP in touch with the exchange rates. In other words, this financial fact is not only connected with the concerned tax revenues, but this is related to the net debt payments that state the government primary balances. Financial liability concept states the discriminations within the financial values that include profits and loss in which related to the other macro structural economics balances. In other words, this means the differences of financial worthies are revealed in the suitable reality worthies1. This structural fact come to mean the real fiscal worthies in which the Financial Liabilities related to the changes of total tax revenues throughout years in the different financial framework. In addition to, it appear that financial liabilities constitute an important effect on the total government debts pertaining to directly fiscal variables2. These financial worthies that are hold in the time deposit are not only aimed at the macroeconomics balances, but it can aim at the concerned production levels related to GDP in each country. Therefore, OECD’ countries need to direct the fiscal accounts for balancing fiscal crisis and this fiscal balances have directly effects on the financial liabilities in order to analyze the government debt process with the net debt interest payments3. In this fact being talked of financial liability process which have to be revealed related to the exchange rates the government debt levels are taken shape by the tax revenues of government that have an important role on the formation of total government actives4. In this scope, some OECD countries need to contribute in the frame of developing countries which aim to bring to successful conclusions the determined goals in order to catch the aimed economic growth levels in the world. Also, on the other hand, this fact exposes the different results related to the government debt levels in which the economic growth meaningful structure. in some academic investigations it appear that the other approach especially is the tax obligation in which the national tax burden that state as a financial liability in order to give meaning to structural changes related to exchange rates5. Therefore, the financial liabilities as an important financial variety tool constitute the variation effects directly on 1 2 3 4 5

Anto Bajo and Jelena Petrusic (2014), “Government Guarantees and Financial Liabilities of State Owned Road Transport Companies in Croatia”, Newsletter, No: 92, Zagreb: Institute of Public Finance, (Nowember 2014), p. 2. Timothy C. Irwin (2015), “Defining the Government’s Debt and Deficit”, IMF Working Paper, WP/15/238, Washington D.C.: IMF (International Monetary Fund), Fiscal Affairs Department, (November, 2015), p. 14. Noriaki Kinoshita (2006), “Government Debt and Long-Term Interest Rates”, IMF Working Paper, WP/06/63, Washington D.C.: IMF (International Monetary Fund) Working Paper, Fiscal Affairs Department, (March 2006), p. 3. Irwin, p. 7. Eurostat (2014), Measuring Net Government Debt: Theory and Practice, Luxemburg: Eurostat Statistical Working Paper, Publications Office of the European Union, 2014, p. 16.

2016 - M SPHERE

B O O K O F PA P E R S

-

125


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

the total government debts, as a per cent GDP especially in the developing countries in OECD. However, it is seen that net interest payments have affected directly on the gross financial liabilities together with government primary deficits in spite of the desired tax revenues as a proportion of GDP, which mean total government debts6. Generally the objective of fiscal liability analyses is to establish principles for presenting financial instruments as liabilities or budget balances with offsetting financial assets and financial liabilities that is government debt based on exchange rates. Namely, these financial liabilities express also the financial institutions’ operations activity limits that come to mean the structural different dynamics from developed countries to developing countries for each one in OECD member countries.

2. THE FISCAL LIABILITIES’ LOCATION AND THEIR STRUCTURAL CHANGEABLE ATTRIBUTES First of all, the financial liabilities are financial responsible item formations that are directly affected by total government debt limits together with government’s primary budget balances in the ground of total tax revenues as a per cent of Gross Domestic Product (GDP). However, also that should not be forgotten that effectively exchange rates’ effect levels increase financial liabilities including net interest payments in the scope of financial gross values, which mean a negative economic growth process as the financial effect values7. As the simply expression, a financial liability can be either of these two items: A contractual obligation to deliver cash or its similar to another entity or a potentially unfavorable exchange of financial assets that conclude other liabilities with financial budget items. In this framework, examples of financial liabilities are accounts payable with loans issued by an entity, and derivative financial liabilities8. At the formation process of the central budget, government decides on remaining points of difference that have not been solved in bilateral contacts which consider these liabilities’ contents expenditure targets for the central government aimed at increasing public saves. In this point, financial liabilities shed light on the structural features that mean with total government debt as the proportion of tax revenues in the currently occurred GDP process, which state also the relations of exchange rates and interest burden in budget balances9. However, it must be known which financial liabilities have more speedy changeable financial attributes than the others that should be analyzed in the budget process related to determine the other financial values’ effect criteria10. These financial components have meaningful fragility effects on the financial liabilities that seem as different changeable values in each one of OECD countries due to the different financial structural of each country. In other words, Gross Financial Liabilities (GFL) are directly related to Total Government Debts, and Tax Revenues as a proportion of GDP (TxRvGDP) together with Total Tax Amounts (TTAX) that express the finance values collected from persons who are obligated to pay taxes in OECD countries. Gross Financial Liabilities’ discriminations, as a gross value, decompose from Net financial Liabilities because of being considered amortization that is included via Financial Liabilities11. But yet it should not be forgotten that each country’s net financial liabilities are difference from the other countries in OECD in the scope of total government debt with total tax revenues that are connected with tax revenues as a proportion of GDP, which express financial regulations’ objectives connected with budget balances12. Therefore, the process express the structural changeable attributes and this fact state the financial location of financial liabilities together with their effect levels in their criteria values’ financial structural.

3. FINANCIAL LIABILITIES’ STRUCTURAL WELDED BASIS AND THE PUBLIC’S RELATED CONTINGENT LIABILITIES In public formations that are related to financial liability items in the scope of government budget the structural liabilities’ origin is firstly based on public’s contingent liabilities and this financial fact constitute public balances to carry out the concerned liabilities as periodical liabilities. As risk component financial liabilities can be expressed in two terms, this is firstly considered in explicit applications with sharply net amount values, and secondly it is implicit values that are hidden value added. Therefore, all public guaranties with political or moral obligations in the scope of finance insurances, namely as contingent financial liabilities, that have important externality are directly related to public revenue sources. Figure 1 point to the public’s related contingent liabilities that are connected with their structural welded, below13: Rebecca M. Nelson (2013), Sovereign Debt in Advanced Economies: Overview and Issues for Congress, CRS Report for Congress Congressional Research Service 7-5700, R41838, (October 2013), p. 5. 7 Doron Dissim and Stephan H. Penman (2003), “Financial Statement Analysis of Leverage and How It Informs About Profitability and Price-to-Book Ratios”, Review of Accounting Studies, No. 8, (2003), p. 532. 531–560, 2003 8 Dissim and Penman, p. 533. 9 Colin Lawson (1988), “Exchange Rates, Tax-Subsidy Schemes, and The Revenue from Foreign Trade in a Centrally Planned Economy”, Economic of Planning, Vol. 22, No: 1, (January 1988), p. 74. 10 FAS-Financial Accounting Series (2007), Statement of Financial Accounting Standards No. 159: The Fair Value Option for Financial Assets and Financial Liabilities, No. 289-A, Norwalk: Order Department, Financial Accounting Standards Board of The Financial Accounting Foundation, (2007), p. 38. 11 IFRS (2013), Guide to Annual Financial Statements- Annual 2013, UK: KPMG-IFRS Limited a UK Company, (September 2013), p. 13-14. 12 Allen Shick (2005), “Sustainable Budget Policy: Concepts and Approaches”, OECD Journal on Budgeting, Vol. 3, No: 1, (OECD 2005), p. 112. 13 http://www.slideshare.net/icgfmconference/thursday-1045-ricardo-velloso, 18.05.2016. 6

126

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 1. Financial Liabilities’ Structural Origins That Are Related to The Institutional Frame

Figure 1 shows the financial liability formations’ background that is related to the basic of contingent financial dynamics. Public liabilities are largely public financial guaranties liabilities with debt policy commitment as rates of return guaranties in the scope of extra loan rates. From the data contained in financial statements it can be seen that the financial liabilities (largely public’s loans and their interests) of publicly own loan guaranties with financial institutional strategies that include public enterprises and subventions. It should be considered that the largest portion of the financial liabilities is long-term, and also this means that financial strategic variations that are generally associated with new borrowings with shorter maturities which increase more liabilities burden adding on public financial obligations in OECD countries14. In this point the two common problems related to the structural features of financial liabilities are attracted attention to express the contingent financial obligation researches. First, whether non-financial liabilities should be considered as a debt burden although public sanction express financial obligations. Second, whether the components of financial liabilities have the role of cash in measuring compose ratios as the balance sheet of large publicly, and this fact means moral and political approaches as implicit financial effect values in public applications that include public subventions15. Therefore, the analysis of government guarantees based on financial values indirectly provides an insight into the structure of the financial liabilities of public both obligated to pay based on financial contracts supported via laws within debt obligations or political or moral obligations16.

4. THE ESTABLISHMENT OF FINANCIAL LIABILITIES’ MODEL IN THE SCOPE OF COMPONENTS’ EFFECT CRITERIA First of all, as to analysis the financial components’ effect criteria that are aimed at the financial liabilities’ changes in the value of variable levels, we need to determine independent variables in the concerned process. In the model net financial liabilities, total government debts, tax revenues as a the proportion of GDP and total tax values are accepted important financial values that have meaningful effect on financial liabilities as a gross value like all macro models17. Also model establishment has regressive features to analysis as a regression model including multidimensional independent macro components, which mean residual econometrical values. Surely, now that the changes in the financial sector have greater impact on economic activity than previously assumed, the model was established in the scope of linear principles especially as a proportion of GDP according to which financial an important role in financial cycles18.

OECD (2002), OECD Best Practices for Budget Transparency”, OECD Journal on Budgeting, Vol. 1, No: 3, (OECD-Paris 2002), pp. 9-10. Gilles Mourre (2014), “Lessons from the 2013 report “Tax reforms in EU Member States” in European Economy: The Use of Tax Expenditures in Times of Fiscal Consolidation, Lovise Bauger (ed.), Economic Papers 523, Brussel: European Commission Directorate-General for Economic and Financial Affairs Unit Communication and Inter-Institutional Relations, (July 2014), p.11. 16 Dan Crippen (2003), “Countering Uncertainty in Budget Forecasts”, OECD Journal on Budgeting, Vol. 3, No. 2, (OECD-Paris 2003), p. 142. 17 Mario I. Blejer and Adrienne Cheasty (1991), “The Measurement of Fiscal Deficits: Analytical and Methodical Issues”, Journal of Economic Literature, Vol. 29, No: 4, (December 1991), p. 1649. 18 Blejer and Cheasty, p. 1656. 14 15

2016 - M SPHERE

B O O K O F PA P E R S

-

127


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

4.1. Model’s Theoretical Establishment with Structural Attributed In this context financial liabilities are considered by reason of the values as gross values that are related to results should include amortization values as wear out from the process Before all else, financial liabilities are more meaningful by reason of these approaches that comprise the other macro variables as gross nominally values that are constructed by gross financial expressing the model in the process19. Secondly, the net financial liabilities’ addition criterion values have variation effects for analyzing these financial values which are meaningful towards directly this dependent variable on the gross financial liabilities20. The meaningful model is that the total of independent variables’ criterion effect on gross financial liabilities as additive values, but each one’s additive criterion are being different in the heteroskedasticity model of constant effects. In this context, linear structural model can be expressed like below:

This model is also a linear panel data model that is used as an estimation method and the incline of parametric values is constant in both parametric unit and time as period. Equation (1) can be written via the came open formation that is related to this same period. Panel data analysis requires determining each one component’s criterion effect on the dependent values that mean Gross Financial Liability (GFL). In other words, the dependent variables, the independent variables related to financial structure measures, and control independent variables in the regressions are shown in panel data analysis:

In our model to determine, whether the relationship between financial structures and financial liabilities differs should be stabilized depending on different levels of economic development that is related tax revenues and government debts as the proportion of GDP, and then the analysis has been also conducted separately for each one group of economies of OECD countries. As to Gross Financial Liabilities (NFL), it is possible establishing on the panel data model for measuring financial criterion effects, and certainly Net Financial Liabilities are important as the items’ directly effects on the measuring NFL before all else. In this context, also we take into considerations “Total Tax and Non-Tax Receipt” that are formed financial sanctions having directly effects on all the governments financial levels as total revenues values:

The concerned discussion approach in the model states the variables where the estimated coefficients remain statistically significant a proportion of GDP (or remain insignificant of the same sign) across various specifications that have been used as well as across countries within OECD countries. In other words, as relating to our relatively small period, we aim to use variation both across countries and over the length of our sample in the scope of the constant coefficient value that affect directly all the independent items21. To determine whether the relationship between financial liability values with tax revenues as proportion of GDP outcomes differs depending on different levels of economic development, the analysis is also conducted separately for total group of countries’ economies22.

19

Macro Le Duca and Tuomas A. Peltonen (2011), Macro-Financial Vulnerabilities and Future Financial Stress Assessing Systemıc Risks and Predicting Systemic Event, Working Paper Series, No: 1311, Frankfurt: European Central Bank, Macro Prudential Research Network, March 2011, p. 18. 20 Luca and Peltonen, p. 19. 21 Luca and Peltonen, pp. 17-19. 22 Kwabena Asomanin Anaman and Charity Osei-Amponsah (2007), “Analysis of the causality links between the growth of the construction industry and the growth of the macroeconomy in Ghana”, Construction Management and Economics, Vol. 25, (September 2007), p. 955.

128

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

4.2. Meaningful Test of The Empirical Model To determine Gross Financial Liabilities (NFL) the model should be producing meaningful component effects that are related to these independent component items. Also, to control for the level of development the GDP per capita level was introduced in the touched with macro tax values in order to establish testing whether meaningful criteria effects were in the period23. Our aim is to understand that stationary whether these independent component data on the financial structures are only consistently available across a large enough sample of countries towards to perform meaningful empirical work since 1998. Besides, they are accompanied by relatively limited in the set of macroeconomic circumstances like the determined tax revenues via different comment on tax values, but in particular the period under study has not been included a very severe financial crisis as a shadow variable to define whether the meaningful test of the empirical model. Table (1) point at the meaningful of our empirical model below: Table 1. The Meaningful Coefficient Variable Related to the Model as Pooled The Least Squares Method and Primary Discriminations (BF)

Table (1) expresses the estimated meaningful variables as the least square method in independently pooled panel regression via comparing with probably variable as especially P<0.05; P<0.01 and P<0.001 in the being scattered of b(%7.3g) . R-square, as 0.887, supports all the independent components’ criterion values that are intrinsic to the formation of Gross Financial Liabilities (GFL), which are meaningful structural values along within as probably values. And also these series are stable location in each other. The criterion effects of tax revenues a proportion of percent GDP (TxRvGDP) on GFL, as negative value, are meaningful related to the empirical model, because of the tax revenues’ increasing have opposite location of the relations with the gross financial liabilities as structural relations. These variables capture important elements of gross financial liabilities (GFL). but only imperfectly as they are only measuring certain aspects of tax index from the perspective of the taxable obligations structurally in OECD countries towards to capture the criterion effects meaningfully even if these financial values are different in countries for each one24. The coefficients on the average tax revenues variables are essentially the same as in the regression process, and they remain statistically significant on GFL. The variability terms in the stability process have the criterion effects, which the coefficients fact can’t be refused.

4.3. Empirical Findings As empirical findings, the criterion effects on GFL are meaningful in the model that expresses independent components’ the contribution levels in this period being of the time series. The empirical criterion effects have been related in the model as the coefficients contribution values, which mean the empirical contribution facts on the formation of GFL. In other words, these coefficients values over independents components has been found effecting financial macro items, which are considered in the time period as the last squares method that are pooled. Also, to control for the level of financial changeable related to the GDP per tax rate level was introduced, but it did ensure significance, as the fixed effect likely captured this concept in the cross-section of countries as member OECD. However, these concerned variables capture important elements of financial components that effect on gross financial liabilities, but as they only measure the certain aspects of financial transparency from the perspective of the macro variables’ perfectly criteria effect. But, it mean that is pretty meaningful our empirically approach as R-Squared is ”0.8860”, and this analysis showed this most clearly for emerging financial liabilities directly related to the other financial components in macro economies, 23 24

OECD (2007), Tax Effects on Foreign Direct Investment-No: 17, Recent Evidence and Policy Analysis, OECD, 2007, p.12. As seen on: Alfons J. Weıchenrıeder (2007), Survey on The Taxation of Small and Medium-Sized Enterprises Draft Report on Responses to The Questionnaire, OECD (September 2007), pp. 9-10.

2016 - M SPHERE

B O O K O F PA P E R S

-

129


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

which effect on Gross Financial Liabilities that have significant for advanced economies in OECD member countries. As seen on table 3 the financial relationships that across several panel data specifications mean that the coefficients are statistically significant. These components’ empirical relations can be observed in table (2) below: Table 2. The Estimates in the Interior Group with Coefficients

As seen on table 3, the reporting put forth independent components’ relationships for meaning the coefficients were statistically significant using panel data of the techniques and did not change sign in the other techniques that have directly positive effecting on GFL, but except for the tax revenues percent of GDP in OECD member countries. This fact mean is that more tax revenues a proportion of GDP effects negative on the gross financial liabilities; α=0.05 or prob<0.05values is the error interval or error portion in % 95 the confidence interval, unconstrainedness level is that express “1.96” as table “t” value. This empirical fact, as “thes > ttable”, means that empirical results are meaningful in the model’s approaches. In other words, there are conditions as P > ǀtǀ and Prob > F, and Net Financial Liabilities (NFL),Total Government Debts as percent of GDP, Tax Revenues as a percent of GDP and Total Tax and Non-Tax Receipts have meaningful effects on Gross Financial Liabilities (GFL) in our approaching empirical frame. GFL can be written with coefficients’ additive values in the framework of the concerned model:

This mean is that if Net Financial Liabilities (NFL) increase 1 %, Gross Financial Liabilities will be approximately increasing 0.152 %; if Total Government Debts, as a proportion of GDP, increase 1 %, Gross Financial Liabilities will be increasing approximately 0.845 %; if Tax Revenues, as a proportion of GDP, increase 1 %, Gross Financial Liabilities will be decreasing 0.967 % and if Total Tax and Non-Tax Receipts increase 1 %, Gross Financial Liabilities will be approximately increasing 0.957. It appears that data on the financial structures of OECD member countries are only consistently available across a large enough sample of countries to perform meaningful empirical work since 1998. The results can be summarized in that way: in regressions that relate real GDP per tax variability and changes on financial liability to measures of financial structure have some statistical significance along the full period 1998–2015

CONCLUSION Gross Financial Liabilities (GFL), as an important macroeconomic financial indicator, has been remarkably affected by some debt options and tax revenues formations that can be determined Tax Revenues as a proportion of GDP or Government Debts percent of GDP together with Tax Receipt-Non Tax Receipts since 1998. In addition, this fact expresses the developed levels of OECD member countries and especially if there are the increased tax revenues, Gross Financial Liabilities’ level increase will increase, which is in being talked of liability consideration. But, it appear that if tax revenues increase, as a proportion of GDP, gross financial liabilities decrease in the same period, which mean the theoretical and empirical evidences suggest that larger and deeper financial applications help diversify risk and reduce the vulnerability of the economy to external shocks financial structures and economic outcomes in the scope of financial formations. This empirical approach put forth the relationship between financial liability and financial stability related to producing results in the effective meaningful financial systems towards global financial crises to include buffer measures on the ground of taxability effecting. In this context, it appear that if there is aim at decreasing financial liability as a financial

130

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

burden to attain the desired level of gross financial liabilities, and this financial fact needs inevitably increasing total tax revenues as a proportion of GDP. Specially, developing countries, as countries that have much more financial liabilities, should revise their financial systems themselves, but in the base of tax systems especially. In other words, it put forth that should reach the aimed tax revenues that have been an important matter for reaching highly economic growth levels which mean less financial liabilities’ macro burden since for a long time. Besides, tax and non-tax receipts are important financial burdens that can increase gross financial liability including the redemption of taxes, and they express net financial liabilities that effect directly on the gross financial liabilities as a the conclusion effect that should be considered in the same period. In this context, before all else it is being understood the greatest effects on the gross financial liabilities have been originating from the tax and non-tax receipts together with total debts as a proportional of GDP. Therefore, developing countries that are OECD member, first of all, have to improve financial effecting in scope of the financial institutions related to provide the aimed financial macro formation, which mean to express the collected higher tax levels. Also, this approach shed light on the financial reforms’ orbits that have been frequently discussed aimed at international financial integrations, especially in the basis of directed towards developing countries in OECD. On the other hand, measures to promote financial liability and good governance can help build tax resources’ confidence and lower risks in the short term, and that promote the renewed structural reforms will be critical for growth in the balanced government debts as a percent of GDP.

LITERATURE 1. Anaman, Kwabena Asomanin and Charity Osei-Amponsah (2007), “Analysis of the causality links between the growth of the construction industry and the growth of the macroeconomy in Ghana”, Construction Management and Economics, Vol. 25, (September 2007), pp. 951-961. 2. Bajo, Anto and Jelena Petrusic (2014), “Government Guarantees and Financial Liabilities of State Owned Road Transport Companies in Croatia”, Newsletter, No: 92, Zagreb: Institute of Public Finance, (November 2014). 3. Blejer, Mario I. and Adrienne Cheasty (1991), “The Measurement of Fiscal Deficits: Analytical and Methodical Issues”, Journal of Economic Literature, Vol. 29, No: 4, (December 1991), pp. 1644-1678. 4. Crippen, Dan (2003), “Countering Uncertainty in Budget Forecasts”, OECD Journal on Budgeting, Vol. 3, No. 2, (OECD-Paris 2003), pp. 139-151. 5. Duca, Macro Le and Tuomas A. Peltonen (2011), Macro-Financial Vulnerabilities and Future Financial Stress Assessing Systemıc Risks and Predicting Systemic Event, Working Paper Series, No: 1311, Frankfurt: European Central Bank, Macro Prudential Research Network, March 2011. 6. Dissim, Doron and Stephan H. Penman (2003), “Financial Statement Analysis of Leverage and How It Informs About Profitability and Price-toBook Ratios”, Review of Accounting Studies, No. 8, (2003), pp. 531–560. 7. Eurostat (2014), Measuring Net Government Debt: Theory and Practice, Luxemburg: Eurostat Statistical Working Paper, Publications Office of the European Union, 2014, p. 16. 8. FAS-Financial Accounting Series (2007), Statement of Financial Accounting Standards No. 159: The Fair Value Option for Financial Assets and Financial Liabilities, No. 289-A, Norwalk: Order Department, Financial Accounting Standards Board of The Financial Accounting Foundation, 2007. 9. http://www.slideshare.net/icgfmconference/thursday-1045-ricardo-velloso, 18.05.2016. 10. IFRS (2013), Guide to Annual Financial Statements- Annual 2013, UK: KPMG-IFRS Limited a UK Company, (September 2013). 11. Irwin, Timothy C. (2015), “Defining the Government’s Debt and Deficit”, IMF Working Paper, WP/15/238, Washington D.C.: IMF (International Monetary Fund), Fiscal Affairs Department, (November, 2015). 12. Kinoshita, Noriaki (2006), “Government Debt and Long-Term Interest Rates”, IMF Working Paper, WP/06/63, Washington D.C.: IMF (International Monetary Fund) Working Paper, Fiscal Affairs Department, (March 2006). 13. Lawson, Colin (1988), “Exchange Rates, Tax-Subsidy Schemes, and The Revenue from Foreign Trade in a Centrally Planned Economy”, Economic of Planning, Vol. 22, No: 1, (January 1988), pp. 72-76. 14. Mourre, Gilles (2014), “Lessons from the 2013 report “Tax reforms in EU Member States” in European Economy: The Use of Tax Expenditures in Times of Fiscal Consolidation, Lovise Bauger (ed.), Economic Papers 523, Brussel: European Commission Directorate-General for Economic and Financial Affairs Unit Communication and Inter-Institutional Relations, (July 2014). 15. Nelson, Rebecca M. (2013), Sovereign Debt in Advanced Economies: Overview and Issues for Congress, CRS Report for Congress Congressional Research Service 7-5700, R41838, (October 2013), p. 5. 16. Shick, Allen (2005), “Sustainable Budget Policy: Concepts and Approaches”, OECD Journal on Budgeting, Vol. 3, No: 1, (OECD 2005), pp. 107-126. 17. OECD (2002), OECD Best Practices for Budget Transparency”, OECD Journal on Budgeting, Vol. 1, No: 3, (OECD-Paris 2002), pp. 7-14. 18. OECD (2007), Tax Effects on Foreign Direct Investment-No: 17, Recent Evidence and Policy Analysis, OECD, 2007. 19. Weichenrieder, Alfons J. (2007), Survey on The Taxation of Small and Medium-Sized Enterprises Draft Report on Responses to The Questionnaire, OECD (September 2007). DETAILS ABOUT AUTHOR: A. NIYAZI ÖZKER ASSOC. PROF. DR. PUBLIC FINANCE DEPARTMENT FACULTY OF ECONOMIC AND BUSINESS ADMINISTRATION BANDIRMA ONYEDI EYLUL UNIVERSITY – 10200 \ TURKEY niyaziozker@yahoo.com

2016 - M SPHERE

B O O K O F PA P E R S

-

131


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

FISCAL RULES FOR SUB-NATIONAL GOVERNMENTS: THE POLISH EXPERIENCE MARZANNA PONIATOWICZ

ABSTRACT Financial crises tend to have this positive aspect that they often become the impulse for taking up specific reform measures. After 2008 most European Union member states launched the process of reforms aimed at strengthening the sustainability of public finances and building a new financial architecture understood as specific system of institutions, principles and procedures associated with crisis situations prevention and resolution. One of the key components of the said architecture are fiscal rules. They are associated with institutional issues effecting public finance and defined as special fiscal limits related both to the budget balance and the size of public debt, as well as governmental spending and revenue. This article examines effectiveness of fiscal rules applied on local level of governmental finance. The intention of the author is to assess the effectiveness of these sustainable fiscal policy instruments, especially in the context of improving financial situation of Polish local government units (LGUs). Case of Poland is a good example of legal and organizational solutions implemented on the central and local government level. The existing fiscal framework in this country is based on several fiscal rules. Some of them are national (e.g. the debt rule, the stabilizing spending rule), and some of them are local (e.g. the rule of at least balanced current budget outturn – the golden rule; Individual Debt Ratios - calculated individually for each local government unit depending on the amount of earned operating surplus). The effectiveness of these instruments is assessed through the angle of changes in the overall budget balance and the amount of debt of the analyzed sub-sector in relation to GDP in comparison with other EU Member States between 2008-2015. The conducted comparative analysis also uses a comprehensive fiscal rule assessment tool proposed by the European Commission services, i.e. Fiscal Rule Index (FRI). KEY WORDS: Sub-national governments, Fiscal rules, Fiscal Rule Index, Poland.

1. INTRODUCTION Financial crises have this positive aspect that they often become the impetus for taking up specific reform measures. This was also a case during current crisis. After 2008 most EU member states launched the process of reforms aimed at strengthening the sustainability of public finances and building a new financial architecture understood as specific system of institutions, principles and procedures associated with crisis situations prevention and resolution. One of the key components of the said architecture are fiscal rules constituting a specific mechanism of shaping certain institutional and legal order within the public finance system. Their function is to have disciplinary impact on fiscal authorities and their essence is a permanent limiting of discretionary decisions of politicians within the field of fiscal policy pursued by them.1 Most scientific papers covering this issue focus on the functioning of the said rules on a national or transnational level. There are significantly less works dealing with the issue of using these instruments to limit possible effects of discretionary financial policy of local authorities. Yet the fact is that the negative effects of such actions can undermine or nullify the effects of even the most disciplined fiscal policy conducted at the central level.2 The aim of this article is to show premises and legal and economic specificity of the use of fiscal rules in SNG sub-sector. Polish local government sub-sector served as an example for analyzes. The author’s intention is to assess the operation and effects of the aforementioned instruments of balanced fiscal policy, in particular in the context of increasing the stability and quality of local finance system in Poland.

1 2

Kantorowicz, J. (2012.), Reguły fiskalne – co się sprawdza? Analiza FOR, No. 3, p. 4. Ter-Minassian, T. (2007.) Fiscal Rules for Subnational Governments: Can They Promote Fiscal Discipline? OECD Journal on Budgeting, Volume 6, No. 3, p. 2.

132

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2. THE ESSENCE AND TYPOLOGY OF FISCAL RULES AND THEIR USE IN THE PUBLIC FINANCE SYSTEM Fiscal rules are associated with the institutional issues of public finance. They are defined as permanent fiscal policy restrictions.3 George Kopits and Steven A. Symansky specify them as restrictions of qualitative or quantitative nature introduced permanently, i.e. irrespectively of the changing political and legal circumstances, expressed in the form of synthetic measure determining the permissible size of basic budgetary parameters.4 Such a definition does not preclude the possibility to adopt the said rules in the field of local finances, especially when we take into account that the local government sub-sector is an integral component of the entire public finance sector.5 The effectiveness of the use of fiscal rules requires defining specific postulates relating to their structure.6 In literature on the subject, fiscal rules are often defined from an angle of their specific, model properties (“ideal fiscal rule” concept). These include, among others: exact definition, transparency, simplicity, flexibility, relevance to the public finance sector situation and phase of economic situation, enforceability, coherence and efficiency.7 Fiscal rules can be divided into two core categories. These are quantitative rules, also called as numerical fiscal rules and qualitative fiscal rules. The first of these two are realized in the form of specified fiscal limits relating both to the budget balance and the size of public debt, as well as government spending and revenue. On the other hand, qualitative rules are specific fiscal rules specifying, among others, the methods of allocating government spending and financing budget deficits as well as permissible objectives of incurring liabilities by the public authorities, as well as detailing legislative procedures associated with budget processes. Another, proposed in the literature on the subject breakdown is associated with the legal specificity of fiscal rules. The legal basis sanctioning this rule allows for the separation of: constitutional rules, legislative rules and rules stemming from e.g. different strategies ¬or programs adopted by executive authorities.8 On the other hand, taking into account the time frames that fiscal rules pertain to, one can distinguish short-term rules (most often one financial year) and long-term rules. It seems, however, that the most important breakdown of fiscal rules is associated with an economic category being the subject of impact of the analyzed regulation. In this context, four types of rules are usually distinguished, i.e. rules of debt, budget balance, budgetary spending and revenue. This breakdown has been presented in Table 1, which at the same time indicates the defined, differentiated properties of these types of rules. Table 1. Properties of different types of fiscal rules Type of rule

Debt rule (DR)

Budget balance rule (BBR)

3 4 5

6

7

8

Pros

Cons

• Direct link to debt sustainability • Easy to communicate and monitor

• No clear operational guidance in the short run as policy impact on debt ratio is not immediate and limited • No economic stabilization feature (can be pro-cyclical) • Rule could be met via temporary measures (e.g., below-the-line transactions) • Debt could be affected by developments outside the control of the government

• Clear operational guidance • Close link to debt sustainability • Easy to communicate and monitor

• No economic stabilization feature (can be pro-cyclical) • Headline balance could be affected by developments outside the control of the government (e.g., a major economic downturn)

Paluszak, G. (2010.) Reguły fiskalne rządów na poszczególnych poziomach władzy w państwach członkowskich Unii Europejskiej. Acta Universitetatis Loziensis. Folia Oeconomica, No. 238, p. 185. Kopits, G., Symansky, S. (1998.) Fiscal Policy Rules, IMF Occasional Paper. Vol. 1198, No. 162, p. 3. In line with the National and Regional Accounts System ESA 2010 applicable in the EU member states (introduced by Regulation (EU) of the European Parliament and Council No. 549/2013), the public finance sector (general government) is divided into the following listed components: central government sub-sector, local government sub-sector, social security funds sub-sector and state government sub-sector present only in federal states. In international statistics, local government and state government sub-sector are treated jointly as sub-national government subsector. Ayuso-i-Casals, J., González Hernández, D., Moulin, L., Turrini, A. (2009.) Beyond the SGP: features and effects of EU national-level fiscal rules, Ayuso-i-Casals J., Deroose S., Flores E., Moulin L. (eds.): Policy instruments for sound fiscal policies. Fiscal rules and institution, Palgrave Macmillan 2009, pp. 204-220. Kopits, G., Symansky, S. (1998.) Fiscal Policy Rules, IMF Occasional Paper. Vol. 1198, No. 162, p. 18-20; Creel, J. (2003.) Ranking Fiscal Policy Rules: the Golden Rule of Public Finance vs. the Stability and Growth Pact. Observatoire Français des Conjonctures Économiques, No. 04, pp. 4-5; Buti, M., Eijffinger, S., Franco, D. (2003.) Revisiting the Stability and Growth Pact: grand design or internal adjustment. Economic Papers, No. 180, Brussels: European Commission, Directorate-General for Economic and Financial Affairs, pp. 4-7; Guichard, S., Kennedy, M., Wurzel, E., André, C. (2007.) What Promotes Fiscal Consolidation. OECD Economic Department Working Paper, No. 553, p. 28. Wójtowicz, K. (2011.) Problem konstrukcji optymalnej reguły fiskalnej w warunkach kryzysu finansowego. Zeszyty Naukowe Polskiego Towarzystwa Ekonomicznego, No. 10, p. 139.

2016 - M SPHERE

B O O K O F PA P E R S

-

133


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Expenditure rule (ER)

• Clear operational guidance • Allows for economic stabilization • Steers the size of government • Relatively easy to communicate and monitor

• Not directly linked to debt sustainability since no constraint on revenue side • Could lead to unwanted changes in the distribution of spending if, to meet the ceiling, shift to spending categories occurs that are not covered by the rule

Revenue rule (RR)

• Steers the size of government • Can improve revenue policy and administration • Can prevent pro-cyclical spending (rules constraining use of windfall revenue)

• Not directly linked to debt sustainability since no constraint on expenditure side (except rules constraining use of windfall revenue) • No economic stabilization feature (can be pro-cyclical)

Source: Budina, N., Schaechter, A., Weber, A., Kinda, T. (2012.) Fiscal Rules in Response to the Crisis: Toward the “Next-Generation” Rules: A New Dataset. International Monetary Fund Working Paper, No. 187, p. 8.

Another breakdown present in the literature on the subject is the breakdown of fiscal rules associated with the scope of their impact. In this aspect we can distinguish: (a) supranational fiscal rules9 - as examples thereof one can indicate legal restrictions for budget policy in the European Union stemming from such documents as Treaty of Maastricht, Stability and Growth Pact, Sixpack, Fiscal Pact10; (b) national fiscal rules - as Polish examples within this scope one can deem among others the permissible public debt limit of 3/5 of the value of annual GDP specified in the Constitution of the Republic of Poland11; the socalled prudential thresholds stemming from the Public Finance Bill12, requiring the government to take up specified remedial actions after exceeding the so-called prudential thresholds relating to the levels of public debt-to-GDP ratio (currently there are two prudential thresholds applicable in Poland, i.e. 55% and 60%); (c) sub-national fiscal rules - these are the regulations governing in particular the local/regional government sub-sector budget balance, indebtedness and spending. From the point of view of the issue of this paper, the last one of the aforementioned categories is of key importance. The detailed analysis and assessment of fiscal rules governing the functioning of Polish local government sub-sector will be discussed more widely hereinafter.

3. PREMISES FOR THE USE OF FISACL RULES IN SUB-NATIONAL GOVERNMENT SUB-SECTOR Taking into account the fact that the local government sub-sector is an important component of the entire public finance sector, and its finance imbalance and indebtedness has an impact on the condition of this sector, the observed in all EU member states, including Poland, process of intensification of the use of fiscal rules at a local level has become a somewhat natural consequence. Douglas Sutherland, Robert W. Price and Isabelle Joumard distinguish the following listed purposes of using them: fiscal sustainability - the rules help maintain the stability of SNG and constitute instruments for supporting its fiscal consolidation; limiting the overall size of the public sector; promoting allocative efficiency.13 Analyzing the premises for the adoption of fiscal rules in the local government finance system, other circumstances should also be noted.14 One of them is the existence of natural tendency of public local authorities to violate the rules of a responsible fiscal policy. This is explained in various ways. In the context of characteristic tendency for public authorities to “obfuscate” the purpose 9

The main feature of supranational rules is the fact that they impose joint limits on the larger group of states. Their basic drawback is undoubtedly their excessive unification - these rules usually do not take into account the differences which may exist between individual countries relating to among others: the macroeconomic situation, public finance situation, etc. See: Wójtowicz, K. (2011.) Problem konstrukcji optymalnej reguły fiskalnej w warunkach kryzysu finansowego. Zeszyty Naukowe Polskiego Towarzystwa Ekonomicznego, No. 10, p. 148. 10 The Treaty of Maastricht (1992) defined first numerical fiscal rules for the EU member states, i.e. public debt limit of 60 percent of GDP and the public finance deficit of 3 percent of GDP. The aim of the Stability and Growth Pact (1997) was to increase the discipline in the eurozone states. The so-called Six-pack (2011) is in turn the set of six legislative acts reforming the Stability and Growth Pact. The youngest instrument is the Fiscal Pact (2012). It is an agreement between EU member states imposing the rule of balanced budget with the structural deficit limit of 0.5 percent of GDP. It was signed by all the member states except the Czech Republic and the United Kingdom. 11 Konstytucja Rzeczypospolitej Polskiej z dnia 2 kwietnia 1997 r. (Constitution of the Republic of Poland), Journal of Laws of 1997, No. 78, item 483. 12 Ustawa z dnia 27 sierpnia 2009 r. o finansach publicznych (The Public Finance Bill dated 27 August, 2009), Journal of Laws No. 157, item 1240 as amended. 13 Sutherland, D., Price, R. W., Joumard, I. (2006.) Fiscal Rules for Sub-Central Governments: Design and Impact. OECD Network on Fiscal Relations Across Levels of Government, No. 1, pp. 7-12. 14 Poniatowicz, M. (2013.) Ocena mechanizmów kontroli i reglamentacji deficytu oraz długu podsektora samorządowego w Polsce. Finanse Komunalne, No. 1-2, pp. 106-107.

134

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

and shape of the actual fiscal measures, as well as generating excessive public deficit and debt, an argument of the so-called fiscal illusion is often evoked.15 The said illusions stem from the conflict of the objectives of public authorities and taxpayers. Fiscal policymakers (including local government) deliberately overestimate their role in the financing of public goods and services by exposing the share of government spending in this field, while underestimating the role of spending from private sources. In this way they try to hide the real, individual participation of individuals in the total cost of financing government spending, and thus contribute to artificial increase in the demand for public goods and services by unwary taxpayers who do not realize what is the actual cost of such goods and services. According to E. Wagner, voters clearly favor profligate governments, and public policymakers are fully aware of this. The natural tendency of voters (including local voters) is overestimation of the running expenses and underestimation of future tax burdens that are obvious consequence of the earlier increase in these expenses.16 In the situation of insufficient own revenues of local government, the implementation of the exorbitant demands of the voters/taxpayers contribute in turn to economically unjustified increase in government spending and, consequently to the generation of deficit bias and the escalation of local public debt. According to William D. Nordhaus, this process can be explained by the theory of political budget cycle, according to which politicians “buy” voters by increasing spending or cutting taxes while increasing public debt.17 Another interesting view on the causes of excessively loss-making budget policy of public authorities is shown by Nouriel Rubini and Jeffrey D. Sachs in their paper. According to them, deficit budget policy is a result of strategic and deliberate use debt by public authorities who, being uncertain of their re-election, deliberately over-loosen their fiscal policy. As a result, they leave to their successors something like a “hot potato”, thereby limiting the leeway of future ruling team and the ability to operate effectively.18 All the phenomena described above constitute classic examples of the previously mentioned manifestations of government failure. The function of fiscal rules is to limit, and thus repair public finance.19 Another argument justifying the adoption of fiscal rules in local government sub-section is the necessity to treat the entire public finance sector as an integrated system whose individual components interact with each other. In this aspect, the effects of fiscal consolidation should be distributed proportionally (adequately) between all levels of public authority, i.e. not only to the government sub-sector, but also to the local government sub-sector. Another argument is the moral hazard effect widely present in the local government sub-sector. In this case the stimulus weakening responsible fiscal policy of local authorities are not only the mechanisms of taking over in some cases their obligations by the national budget, but also legally conditioned circumstance of bankruptcy capacity and the possibility to announce bankruptcy by local government units in Poland. The final argument is associated with the need to meet the conditions of the aforementioned fiscal convergence stemming from the planned entry of Poland into the Eurozone. Poland, as the country subject to an excessive deficit procedure in the years 2009-201520 undertook, in line with the Ecofin Council recommendation, to correct the deficit of general and local government institutions sector (taken together) to below 3% of GDP. Therefore limitation solely to the reduction of operation of fiscal rules to the central government sector is impossible, since the local government subsector has a significant impact on what is happening in this area in the entire public sector.

4. NATIONAL FISCAL FRAMEWORK IN THE POLISH PUBLIC FINANCE SECTOR The existing fiscal framework in Poland is based on several fiscal rules. Some of them are of national, and some of them of local nature. From the legal point of view, the most important rule in the set of national fiscal rules is undoubtedly the debt rule, included in two acts - The Polish Constitution and the Public Finance Bill. Its main aim is to prevent exceeding by the public debt (calculated using Polish methodology, slightly different from the method of calculating public debt used by Eurostat) of specific prudential thresholds (55 and 60 percent of GDP).21 15

Buchanan, J. M. (1960.) Fiscal theory and Political Economy, The University of North Carolina Press 1960, Chapel Hill, pp. 9-64; Buchanan, J. M. (1997.) Finanse publiczne w warunkach demokracji, PWN 1997, Warsaw, p. 160. 16 Wagner, R. E. (1976.) Revenue structure, fiscal illusion, and budgetary choice. Public Choice,Vol. 25, No. 1, pp. 45-61. 17 Nordhaus, W. (1975.) The Political Business Cycle. The Review of Economic Studies,Vol. 42, No. 2, pp. 169-190. 18 Roubini, N., Sachs, J. (1989.) Political and Economic Determinants of Budget Deficits in the Industrial Democracies. European Economic Review, No. 33, pp. 903-938. 19 Sowiński, R. (2011.) Reguły fiskalne jako narzędzie naprawy finansów publicznych, Szołno-Koguc, J., Pomorska, A. (eds.): Ekonomiczno-prawne uwarunkowania i bariery redukcji deficytu i długu publicznego, Lex a Wolters Kluwer business 2011, Warsaw, pp. 207-216. 20 Poland has already been subject to excessive deficit procedure twice: in the years 2004-2008 and in the years 2009-2015. 21 There used to be three prudential thresholds applicable in Poland: 50, 55 and 60 percent, but in July 2013 the parliament suspended the first threshold, i.e. 50 percent, only in order to be able to increase the state budget deficit (the applicable threshold and the associated procedures prevented them from doing so - debt-to-GDP ratio was higher than 50%, therefore the deficit-to-state revenue ratio could not have been higher than in 2012). Such an interference in fiscal safeguards, i.e. prudential thresholds stands in complete contradiction to the model property of fiscal rules postulated in the doctrine, namely their constancy and thus independence of the changing current political and legal situation. What is symptomatic, the aforementioned threshold has never been restored in Poland afterwards, although it was originally assumed that its suspension will be temporary.

2016 - M SPHERE

B O O K O F PA P E R S

-

135


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

From the practical point of view, a stabilizing spending rule plays more important role. Contrary to the debt rule, it imposes restrictions on public finances on an annual basis, and not only after exceeding certain threshold.22 This rule was established in Poland in 201323 and was adopted in a binding way for the first time in the budget bill for 2015.24 The amount of spending calculated on the basis thereof covers with its scope the sector of general and local government institutions, with two exceptions. Firstly, excluded will be EU funds budget spending and this part of spending which is financed by non-repayable EU and EFTA aid funds. Secondly, excluded will also be spending of the units that do not have the ability to generate high deficits. As a result, the spending amount will cover two groups of Polish units of general and local government institutions sector: (a) state budget, Social Security Fund, Labor Fund, Pension Fund, Bridging Pension Fund and the funds established, entrusted or transferred to the Bank Gospodarstwa Krajowego (including the National Road Fund); (b) The National Health Fund, local government units (municipalities, counties and provinces) and associations thereof, as well as a number of other units.25 Total spending of these groups account for about 90 percent of spending of central and local government institution sector in Poland, while spending of group 1) account for about 2/3 of total spending of public finance sector. As part of the analyzed rule, for the purposes of determining the limit of government spending, average GDP increase within the period of 8 years and envisaged inflation of consumers is taken into account. In calculating the spending limit a corrective mechanism is also used, which is dependent on prudential thresholds of GDP-to-debt ratio (43 % and 48 % of GDP). The formula determining the amount of expenditure for the year n takes into account six factors: (a) the amount of expenditure from the year n-1 (WYDn-1); (b) adjustment related to updating of CPI inflation forecasts for the year n-2 (CPIn-2 / En-1(CPIn-2)) i n-1 (En(CPIn-1) / En-1(CPIn-1)); (c) envisaged CPI inflation for the year n (En(CPIn)); (d) eight-year average real GDP growth rate for the period from n-7 to n (WPKBn); (e) correction component (Kn); (f) envisaged value of discretionary revenue and contribution measures En(ΔDDn). The formula of stabilizing spending rule has been defined in the formula:26

(1)

where: WYDn – the amount of expenditure specified in the budget bill draft for the year n; * WYDn−1 – the amount of expenditure specified in the budget bill draft for the year n-1, corrected in accordance with the update of annual average price index of consumer goods and service forecasts;

En(xn) – the variable x in the year n envisaged in the budget bill draft for the year n; CPIn – annual average price index of consumer goods and service in the year n;

22

Convergence Programme (2015.), Republic of Poland 2015, Warsaw, p. 57. Its implementation was part of implementation of the Directive on requirements for budgetary frameworks of Member States: Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States, Official Journal of the European Union L 306/41. Poland was obliged to implement this directive by the end of 2013. 24 The stabilizing rule replaced the so-called disciplinary spending rule applicable in Poland in the years 2011-2013. While the disciplinary rule was of temporary nature and covered with its scope of impact merely 10% of General Government sector finances, the new stabilizing rule is of permanent nature and covers as much as 98% of finances of the aforementioned sector. 25 Examples include: Chancellery of the Sejm, Senate Chancellery, the Chancellery of the Polish President, the Constitutional Court, the Supreme Chamber of Control, the Supreme Court, the Supreme Administrative Court, etc. 26 Ustawa z dnia 27 sierpnia 2009 r. o finansach publicznych (The Public Finance Bill dated 27 August, 2009), Journal of Laws No. 157, item 1240 as amended, art. 112aa, sec. 1. 23

136

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

WPKBn – medium-term rate of growth of gross domestic product in fixed prices for the period of the last 8 years to the year n inclusive; Kn – the size of correction of the amount of expenditure for the year n stemming from the corrective mechanism, expressed in percentage points; ΔDDn – envisaged total value for discretionary measures in the field of taxes and social security contributions planned for the year n; n – the year that the amount of expenditure is calculated for. In December of 2015 new government in Poland made an unfavorable modification of stabilizing spending rule. Some financiers have claimed that this process dismantles this rule, at the same pointing out that the weakness of fiscal rules lies in the fact that they are political acts. As Witold Gadomski points out: “They are introduced by politicians who expect a positive response from investors, but who often do not have enough will to hold on to newly introduced rules, especially if they collide with social moods”.27 This happened in Poland in the case of stabilizing spending rule. In fact, only one from the aforementioned structural elements was changed, namely the one relating to consumers inflation. According to the new rules, for the purposes of calculating spending limit taken will be, instead of inflation indicator forecasts, the so-called inflation target determined by the Monetary Policy Council (MPC)28, which currently amounts to 2.5% in Poland. Although at first glance the modification seems to be cosmetic and unimportant, in effect it can result in a clear loosening of fiscal policy, especially in the context of envisaged inflation indicators in Poland for the coming years at a rate below the inflation target. According to the previous formula, the amount of expenditure for 2016 would be multiplied by a lower value than after the introduced modification changes. In other words, modification of the rule in the conditions of extremely low actual inflation will allow the evident increase in the government spending limit in Poland. All indications are that if low price increases will persist over the next few years in Poland, the modified spending rule would not guarantee lowering public debt and government spending limit will be constantly inflated. The modification of fiscal rule made is another example (in addition to the previously described liquidation of one prudential threshold) of undermining the credibility of rules that define the fiscal policy framework in Poland. Furthermore, it is stressed out that due to arithmetic complexity of a new, stabilizing spending rule, it is doubtful that „public opinion would see how the government manipulates it and express criticism towards the ones who do so”.29 Let us now proceed to fiscal rules closely linked to the Polish local government sub-sector (the rules discussed above are also associated with this sector, but somehow indirectly). The changes occurring in Poland in this field have been presented in Table 2. Table 2. Fiscal rules pertaining to local government units in the current state of the law in Poland Category of fiscal rule Debt amount rule Debt servicing costs rule The rule of at least balanced current budget outturn (“golden rule”)

Year 2009

2010

2011

2012

2013

2014

2015

2016

60 percent of LGU’s realized budgetary revenue - debt ceiling in terms of debt/LGU revenues ratio

None

15 percent (12 percent)* of LGU’s planned revenue in the given financial year

Individual Debt Ratio (IDR) - debt servicing costs ceiling in terms of operating surplus

None

Yes - LGU’s current account result must be balanced

*12 percent limit applied to a hypothetical situation of exceeding by public debt second prudential threshold, i.e. 55 percent of GDP. Source: own development.

The most important solutions currently securing local government units in Poland (municipalities, counties and provinces) against loss of liquidity and excessive indebtedness may include the so-called golden rule, i.e. the rule of at least balanced current budget outturn and the Individual Debt Ratios, which in 2014 superseded previously applicable debt and debt 27

Gadomski, W. (2015.) Nowa reguła. Trzy zagrożenia. Obserwator Finansowy, https://www.obserwatorfinansowy.pl/forma/rotator/nowa-regulatrzy-zagrozenia/ (accessed 10.09.2016.), p. 3-4. 28 The Monetary Policy Council is a decision-making body of the central bank in Poland, i.e. The Polish National Bank. Its task is the annual setting of objectives and implementation of monetary policy, including the determination of interest rates. 29 Gadomski, W. (2013.) Nowa reguła wydatkowa to matematyka dla zaawansowanych. Obserwator Finansowy, https://www.obserwatorfinansowy. pl/almanach/nowa-regula-wydatkowa-czyli-matematyka-dla-zaawansowanych/ (accessed 10.09.2016.), p. 2.

2016 - M SPHERE

B O O K O F PA P E R S

-

137


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

servicing costs limits, i.e. 60% and 15% limits. Both the aforementioned solutions were included in the Public Finance Bill.30 As the table shows, the first of these rules has been in force in the Polish legal system for a relatively short period of time, only since 2011. According to it, local government units cannot adopt the budget in which running expenses are not covered by current revenue plus the budget surplus from previous and available funds stemming from settlement of issued securities, land and credits from previous years. This means the prohibition of operating (current) deficit of the budget of local government unit (Art. 242 Sec. 1 of the Public Finance Bill). In this way, in 2011 somewhat very reasonable and desirable delimitation of the local government budget into the current and capital section was sanctioned in Poland by introducing the rule of financing through budget deficits only capital (investment) spending, and not running expenditures. Individual Debt Ratios, on the other hand, entered in force in the Polish local finance system in 2014 (Art. 243 of the Public Finance Bill). Their structure is based on the size of operating surplus of individual local government units, calculated for the three years preceding given financial year in which debt obligations will be incurred31. In accordance with the fiscal rule in question, the ratio of debt servicing costs in a given year to revenues in the same year cannot exceed the average operational surplus calculated for the three previous years (plus revenues from the sale of assets). The rule formula can generally be presented according to the following formula:

(2) where: R - planned for the given year total amount from payment of installments of LGU’s loans and credits; O - interest on loans and credits planned for a given financial year, D – LGU’s total revenue in a given financial year that the fiscal rule relate to; Db – LGU’s current revenue; Sm- LGU’s revenue from the sale assets; Wb – LGU’s running expenses; n - financial year for which the ratio is determined; n-1 - the year preceding financial year for which the Individual Debt Ratio is determined; n-2 - the year two years before the financial year; n-3 - the year three years before the financial year.

While the idea of individualized for each local government unit limit of debt servicing costs, referring to the idea of the amount of earned operating surplus, seems right and much more reasonable than the idea of the pre-existing, universal for all the units debt servicing costs limit of 15 percent of budget revenues, the fact remains that the analyzed fiscal rule has some structural flaws. First of all, the rule is based on “historical” data, and thus contains harmful mechanism of “transferring to the future” results from the period of economic slowdown. Secondly, the rule has defective structure consisting in double counting of debt servicing (both on the left side of the formula and on the right side - in the running expenses), which in turn distorts and reduces the real creditworthiness of local government unit. Thirdly, the rule through its specific structure puts the local government policymakers under pressure to sell municipal assets (component Sm in the formula), and thus to the short-term improvement in the local government unit’s ability to service the debt. In the long term it can be a harmful and even dangerous trend from the point of view of local government’s financial stability. Fourthly, the proposed structure of the rule encourages local government to make specific planning manipulations in multiannual financial forecasts, i.e. in the documents that Polish local government units must obligatorily attach to the budget each year. Experience shows that many units in order to increase the operating surplus either artificially inflate budget revenue projected therein or lowers the estimated spending. 30

Ustawa z dnia 27 sierpnia 2009 r. o finansach publicznych (The Public Finance Bill dated 27 August, 2009), Journal of Laws No. 157, item 1240 as amended. 31 In this context, the rule in question, although it entered into force in 2014, have had a significant impact on operating results of the local government units in Poland practically from 2011.

138

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

5. THE EFFECTS OF INTRODUCING NEW FISCAL RULES IN THE LIGHT OF EMPIRICAL DATA LOCAL GOVERNMENT SUB-SECTOR IN POLAND COMPARED TO OTHER EU MEMBER STATES Introduction, after 2010, of new fiscal rules governing local government sub-sector has clearly improved the financial situation of the analyzed sub-sector in Poland, and what is characteristic mainly in the context of limiting the scope of fiscal imbalance (see Table 3). On the other hand, the fiscal rules in question had definitively smaller impact on the changes regarding the indebtedness of the analyzed sub-sector (see Table 4). Since 2011, despite relatively low economic growth, the collective budget deficit of local government sub-sector has been decreasing systematically. While in the years 2009 and 2010 Poland with the deficit of the analyzed sub-sector exceeding 1 percent was among the top countries with the largest range of fiscal imbalance, the fact is that since 2011 the situation in this regard has began to improve significantly (2011 - deficit at the level of 0.7 percent of GDP, 2012 - 0.3 percent; 2013; 2014 - 0.2 percent; 2015 â&#x20AC;&#x201C; 0.0 percent). This fact should be mainly linked to the introduction to the Polish local finance system of two aforementioned rules, i.e. the golden rule introducing the prohibition of operating (current) deficit of local budget and the Individual Debt Ratios - conditioning the ability of local government units to incur debt upon their ability to generate surplus in the running part of the budget. Table 3. General budgetary performance of local government sub-sector in Poland compared to other EU-28 member states in the years 2008-2015 (expressed as % of GDP; data according to the ESA 2010) Country

2008

2009

2010

2011

2012

2013

2014

2015

1. Austria

0.0

-0.4

-0.4

-0.1

0,0

0.0

0.0

0.0

2. Belgium

0.2

0.0

-0.1

-0.2

-0.5

-0.2

-0.2

0.0

3. Bulgaria

-0.4

-0.8

0.0

0.0

0.2

0.4

0,0

-1.0

4. Croatia

-0.1

-0.7

0.1

-0.1

0.1

0.0

0.1

0.2

5. Cyprus

0,0

-0.1

0,0

-0.1

0,0

0.1

0,0

0.0

6. Czech Republic

-0.1

-0.6

-0.4

-0.3

-0.1

0.3

0.2

0.5

7. Denmark

-0.2

-0.5

-0.1

0.1

0.0

0.2

0.2

0.1

8. Estonia

-0.6

-0.5

0.2

0.1

-0.2

-0.5

0,0

0.2

9. Finland

-0.4

-0.6

-0.2

-0.5

-1.1

-0.7

-0.8

-0.7

10. France

-0.5

-0.3

-0.1

0,0

-0.2

-0.4

-0.2

0.0

11. Germany

0.3

-0.2

-0.3

0,0

0.1

0.1

-0.1

0.1

12. Greece

0.0

0.0

-0.3

0.2

0.3

0.4

0.3

0.3

13. Hungary

0.1

-0.4

-0.9

0.6

0.5

2.5

1.4

0.0

14. Ireland

-0.4

0.0

0.0

-0.1

-0.1

0,0

0,0

0.3

15. Italy

-0.2

-0.4

-0.4

-0.2

0.2

0,0

0.1

0.1

16. Latvia

-1.2

-1.7

-0.3

-0.5

-0.2

-0.4

-0.2

0.4

17. Lithuania

-0.2

-0.4

0.1

-0.4

-0.2

-0.3

0.1

0.3

18. Luxembourg

0.5

-0.1

0.2

0.3

0.5

0.4

0.3

0.2

19. Malta

0.0

0.0

0.1

0.0

0.0

0.0

0.0

0.0

20. Netherlands

-0.7

-0.8

-1.1

-0.7

-0.4

-0.4

-0.3

-0.3

21. Poland

-0.2

-1.1

-1.2

-0.7

-0.3

-0.2

-0.2

0.0

22. Portugal

-0.6

-0.8

-0.9

-0.1

0.5

0.2

0.3

0.4

23. Romania

-1.0

-0.7

-0.1

-0.6

-0.5

0.1

0.5

0.7

24. Slovakia

-0.1

-0.7

-0.9

-0.1

0.1

0.2

-0.1

0.2

25. Slovenia

-0.7

-0.5

-0.3

0.1

0.1

-0.1

-0.1

0.3

26. Spain

-0.5

-0.5

-0.7

-0.8

0.3

0.6

0.6

0.4

27. Sweden

-0.1

-0.2

0.2

-0.3

-0.1

-0.1

-0.4

-0.1

28. United Kingdom

-0.4

-0.5

-0.2

-0.3

-0.5

-0.2

-0.1

-0.2

-0.2

-0.4

-0.3

-0.2

-0.1

0.0

0.0

0.1

EU-28

Source: Statistics Database, Eurostat.

2016 - M SPHERE

B O O K O F PA P E R S

-

139


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 4. Indebtedness of local government sub-sector in Poland compared to other EU-28 member states in the years 2008-2015 (debt after consolidation; expressed as % of GDP) Country

2008

2009

2010

2011

2012

2013

2014

2015

1. Austria

1.9

2.2

2.8

3.9

3.8

3.9

3.9

4.0

2. Belgium

4.7

4.8

5.0

5.2

5.6

5.8

6.1

5.7

3. Bulgaria

0.6

1.0

1.2

1.2

1.2

1.1

1.2

1.4

4. Croatia

:

0.8

1.2

1.3

1.3

1.6

1.7

1.6

5. Cyprus

1.9

2.0

2.0

1.7

1.6

1.6

1.6

1.5

6. Czech Republic

2.4

2.7

2.6

2.6

2.8

2.9

2.7

2.5

7. Denmark

6.6

7.3

7.1

7.1

7.1

7.4

7.4

7.3

8. Estonia

3.1

4.0

3.8

3.2

3.1

3.6

3.8

3.6

9. Finland

5.4

6.6

6.5

6.5

7.2

8.0

8.6

8.9

10. France

7.6

8.3

8.3

8.3

8.5

8.7

8.8

9.0

11. Germany

5.1

5.5

5.4

5.4

5.5

5.4

5.3

5.1

12. Greece

0.8

0.9

0.9

0.9

0.9

1.0

1.0

0.9

13. Hungary

3.9

4.2

4.7

4.3

3.7

1.5

0.1

0.2

14. Ireland

3.0

3.5

3.6

3.1

3.1

2.8

2.5

1.9

15. Italy

8.3

8.8

8.6

8.2

8.1

8.5

8.6

8.4

16. Latvia

4.2

5.8

6.4

6.2

5.8

6.0

6.0

6.0

17. Lithuania

1.2

1.6

1.6

1.8

1.9

2.0

2.1

2.0

18. Luxembourg

2.3

2.4

2.4

2.3

2.3

2.1

2.1

2.1

19. Malta

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.0

20. Netherlands

7.3

7.8

8.3

8.7

9.0

8.9

8.8

8.6

21. Poland

2.3

3.0

3.9

4.2

4.2

4.3

4.3

4.2

22. Portugal

4.5

5.1

5.5

6.2

6.1

6.3

6.2

5.9

23. Romania

1.9

2.3

2.5

2.5

2.6

2.5

2.5

2.5

24. Slovakia

1.9

2.4

2.7

2.4

2.3

2.2

2.2

2.4

25. Slovenia

0.9

1.5

1.8

1.9

2.0

2.0

2.1

2.0

26. Spain

2.9

3.3

3.4

3.4

4.2

4.1

3.7

3.3

27. Sweden

5.5

5.5

5.6

6.7

7.5

8.0

8.8

9.3

28. United Kingdom

4.7

4.7

4.8

4.6

5.1

5.0

4.8

4.7

:

5.8

5.9

5.9

6.1

6.2

6.1

5.9

EU-28

*data for the years 2008-2010 – according to the ESA 95; data for the years 2011-2015 –according to the ESA 2010 : data not available Source: Statistics Database, Eurostat.

As regards the local debt level-to-GDP ratio, Poland with the ratio exceeding 4 percent since 2011 (Table 4), relatively lower than EU-28 average, still remains among the top countries of the region having the highest debt level. In 2015 higher level of local debt was observed only in the Latvian local government sub-sector (6 percent of GDP), whilst lower one - in the Czech Republic, Slovakia, Slovenia, Romania, Estonia, Lithuania and Hungary. An important comparative instrument in identifying the effects of fiscal rules application in the entire public finance system is a Fiscal Rule Index (FRI). The said index is a synthetic measure of the assessment of fiscal rules proposed by the European Commission. The value of FRI in individual countries is influenced by such parameters as: the number of the rules applied, the scope of public finance sector covered by the fiscal rules, the impact of individual rules.32 32

Franek, S. (2010.) Reguły fiskalne w przemianach instytucjonalnych finansów publicznych. Zeszyty Naukowe Uniwersytetu Szczecińskiego, No. 646, Finanse. Rynki Finansowe. Ubezpieczenia, No. 39, pp. 72-73.

140

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

FRI is calculated by the European Commission services on the basis of information collected in a special survey. First the Fiscal Rule Strength Index (FRSI) of each rule is calculated, which is a measure of the ability of each fiscal rule to be adhered to (or not). The strength of each rule is related to the institutional framework in a given country.33 Calculating the FRSI for each rule, the European Commission services consider five criteria proposed by S. Deroose, L. Moulin & P. Wierts34 and score them. The aforementioned criteria include: the legal basis of the rule (constitution, bill, coalition agreement, political commitment); the ability to change the target size set by the fiscal rule; the empowerment of the institution responsible for monitoring whether the rule is adhered to; the empowerment of the institution responsible for enforcement of the provisions set out in the rule (automatism of sanctions imposition if the rule is not adhered to); transparency in the use of the fiscal rule (role of the media and the public opinion).35 Table 5 contains a summary list of fiscal rules applicable in the local government sub-sector in Poland, taking into account scoring of the European Commission services under the aforementioned five criteria of FRSI. On the basis of the FRSI a time-varying fiscal rule index is calculated. The construction of the FRI for each respective EU country includes a sum of all fiscal rule strength indices in force in an analyzed country, weighted by the coverage of general government finances of the respective rule.36 Figure 1 illustrates changes of FRI in the years 2008-2014 (the latest data update was made in 2014). Figure 1: Fiscal Rule Index in the EU-28 in years 2008 and 2014

Source: Fiscal rules database, The European Commission.

33 34 35 36

Szymańska. A. (2015.) Impact of Fiscal Constraints on Budgetary Balance in the European Union Member States. The Macrotheme Review, No. 4(3), pp. 31-43. Deroose, S., Moulin, L., Wierts, P. (2006.) National Expenditure Rules and Expenditure Outcomes: Empirical Evidence for EU Member States. Wirschaftspolitische Blätter, Vol. 53, No. 1, pp. 27-42. Franek, S. (2010.) Reguły fiskalne w przemianach instytucjonalnych finansów publicznych. Zeszyty Naukowe Uniwersytetu Szczecińskiego, No. 646, Finanse. Rynki Finansowe. Ubezpieczenia, No. 39, p. 73. Szymańska. A. (2015.) Impact of Fiscal Constraints on Budgetary Balance in the European Union Member States. The Macrotheme Review, No. 4(3), p. 36.

2016 - M SPHERE

B O O K O F PA P E R S

-

141


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The presented summary list shows that in the analyzed period FRI in Poland increased by approx. 0.9 percentage point (from 0.91 in 2008 to 1.76 in 2014). However, ranking position of Poland within the group of 28 EU member states in this field worsened. While in 2008 Poland was ranked relatively high, at eighth place (higher FRIs were observed only in such countries as: Sweden, United Kingdom, Luxembourg, Netherlands, Denmark, Spain and Bulgaria), in 2014 it fell to 14th place (it was overtaken by such countries as: Bulgaria, France, Spain, Netherlands, Slovakia, Italy, Latvia, Germany, Ireland, Luxembourg, Romania, Sweden, Denmark). This may indicate relatively lower, compared to other countries, intensity of measures to increase the quality and sustainability of public finance sector. It should also be emphasized that among the EU member states there are such countries that use fiscal rules in a very limited scope or do not use them at all. In the latter case the value of FRI amounts to -1. In 2008 year this applies to ten member states (Malta, Hungary, Greece, Cyprus, Ireland, Romania, Italy, Portugal, Latvia, Belgium), in 2014 â&#x20AC;&#x201C; only to two countries (Slovenia and Czech Republic).

Type of rule

Target/constraint

In force since

In force until

Coverage of GG finances

C1 - Statutory base

C2 - Adjustment margin

C3a - Monitoring body

C3b - Alert mechanism

C3c - Enforcement body

C4a - Non-compliance actions

C4b - Escape clauses

C5 - Media visibility

In force (2016)

Fiscal Rule

Table 5. Fiscal Rule Strength Index of LG sub-sector in Poland

Debt rule

Debt ceiling in terms of debt/LG revenues ratio

2009

2014

25.8%

3

3

3

1

3

1

0

1

N

6.58

Budget balance rule

The current account result must be balance

2011

2014+

24.1%

3

3

3

1

3

1

0

1

Y

6.58

Debt rule

Individual Debt Ratio (IDR) - debt servicing costs ceiling in terms of operating surplus

2014

2014+

26.1%

3

3

3

1

3

3

0

1

Y

7.38

Source: Fiscal rules database, The European Commission.

CONCLUSION The current financial crisis has contributed to the intensification of the use of fiscal rules in the EU member statesâ&#x20AC;&#x2122; public finance systems. This applies also to sub-national governments sub-sectors, where the most widely used are the rules relating to budget balance and local debt, while expenditure rules are much less frequently used and revenue rules are scarcely ever used. From the point of view of fiscal sustainability of the Polish local finance system, crucial was the rule of at least balanced budget outturn (golden rule), which was introduced in 2011 and sanctioned the distinction between local government budgets into the current and capital section and introduced the rule of financing through budget deficits only capital (investment) spending, and not running expenditures. Practice confirmed the effectiveness of this rule. Introduction of this rule clearly slowed down the deepening in the years 2011-2015 imbalance of local government sub-sector in Poland. The second, new rule introduced to local finance system in Poland, namely Individual Debt Ratios calculated individually for each local government unit depending on the amount of earned operating surplus, proved to be less effective. In the opinion of the author of this study, this is primarily the result of the previously described structural flaws of this indicator. It should also be added that recent cases of interference by politicians in fiscal safeguards, i.e. the fiscal rules, poses a serious threat not only to the local finance system, but also to the entire public finance system in Poland. Polish examples of such actions include liquidation of the first prudential threshold (2013) and adjustment of stabilizing spending rule (2015). Such actions stand in complete contradiction to the model property of fiscal rules postulated in the doctrine, namely their constancy and thus independence of the changing current political and legal situation.

142

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

LITERATURE 1. Ayuso-i-Casals, J., González Hernández, D., Moulin, L., Turrini, A. (2009.) Beyond the SGP:  features and effects of EU national-level fiscal rules, Ayuso-i-Casals J., Deroose S., Flores E., Moulin L. (eds.): Policy instruments for sound fiscal policies. Fiscal rules and institution, Palgrave Macmillan 2009. 2. Buchanan, J. M. (1960.) Fiscal theory and Political Economy, The University of North Carolina Press 1960, Chapel Hill. 3. Buchanan, J. M. (1997.) Finanse publiczne w warunkach demokracji, PWN 1997, Warsaw. 4. Budina, N., Schaechter, A., Weber, A., Kinda, T. (2012.) Fiscal Rules in Response to the Crisis:Toward the “Next-Generation” Rules: A New Dataset. International Monetary Fund Working Paper, No. 187, pp. 1-49. 5. Buti, M., Eijffinger, S., Franco, D. (2003.) Revisiting the Stability and Growth Pact: grand design or internal adjustment. Economic Papers, No. 180, Brussels: European Commission, Directorate-General for Economic and Financial Affairs, pp. 1-39. 6. Convergence Programme (2015.), Republic of Poland 2015, Warsaw. 7. Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States, Official Journal of the European Union L 306/41. 8. Creel, J. (2003.) Ranking Fiscal Policy Rules: the Golden Rule of Public Finance vs. the Stability and Growth Pact. Observatoire Français des Conjonctures Économiques, No. 04, pp. 1-28. 9. Deroose, S., Moulin, L., Wierts, P. (2006.) National Expenditure Rules and Expenditure Outcomes: Empirical Evidence for EU Member States. Wirschaftspolitische Blätter, Vol. 53, No. 1, pp. 27-42. 10. Franek, S. (2010.) Reguły fiskalne w przemianach instytucjonalnych finansów publicznych. Zeszyty Naukowe Uniwersytetu Szczecińskiego, No. 646, Finanse. Rynki Finansowe. Ubezpieczenia, No. 39, pp. 65-77. 11. Gadomski, W. (2013.) Nowa reguła wydatkowa to matematyka dla zaawansowanych. Obserwator Finansowy, https://www. obserwatorfinansowy.pl/almanach/nowa-regula-wydatkowa-czyli-matematyka-dla-zaawansowanych/ (accessed 10.09.2016.). 12. Gadomski,W. (2015.) Nowa reguła. Trzy zagrożenia. Obserwator Finansowy, https://www.obserwatorfinansowy.pl/forma/rotator/nowa-regulatrzy-zagrozenia/ (accessed 10.09.2016.). 13. Guichard, S., Kennedy, M., Wurzel, E., André, C. (2007.) What Promotes Fiscal Consolidation. OECD Economic Department Working Paper, No. 553, pp. 1-37. 14. Kantorowicz, J. (2012.), Reguły fiskalne – co się sprawdza? Analiza FOR, No. 3, pp. 1-20. 15. Konstytucja Rzeczypospolitej Polskiej z dnia 2 kwietnia 1997 r. (Constitution of the Republic of Poland), Journal of Laws of 1997, No. 78, item 483. 16. Kopits, G., Symansky, S. (1998.) Fiscal Policy Rules, IMF Occasional Paper. Vol. 1198, No. 162. 17. Nordhaus, W. (1975.) The Political Business Cycle. The Review of Economic Studies, Vol. 42, No. 2, pp. 169-190. 18. Paluszak, G. (2010.) Reguły fiskalne rządów na poszczególnych poziomach władzy w państwach członkowskich Unii Europejskiej. Acta Universitetatis Loziensis. Folia Oeconomica, No. 238, pp. 185-193. 19. Poniatowicz, M. (2013.) Ocena mechanizmów kontroli i reglamentacji deficytu oraz długu podsektora samorządowego w Polsce. Finanse Komunalne, No. 1-2, pp. 104-110. 20. Roubini, N., Sachs, J. (1989.) Political and Economic Determinants of Budget Deficits in the Industrial Democracies. European Economic Review, No. 33, pp. 903-938. 21. Sowiński, R. (2011.) Reguły fiskalne jako narzędzie naprawy finansów publicznych, Szołno-Koguc, J., Pomorska, A. (eds.): Ekonomiczno-prawne uwarunkowania i bariery redukcji deficytu i długu publicznego, Lex a Wolters Kluwer business 2011, Warsaw, pp. 207-2016. 22. Statistics Database, Eurostat, http://ec.europa.eu/eurostat/data/database (accessed 10.09.2016.). 23. Sutherland, D., Price, R. W.,  Joumard, I. (2006.) Fiscal Rules for Sub-Central Governments: Design and Impact. OECD Network on Fiscal Relations Across Levels of Government, No. 1, pp. 1-76. 24. Szymańska. A. (2015.) Impact of Fiscal Constraints on Budgetary Balance in the European Union Member States. The Macrotheme Review, No. 4(3), pp. 31-43. 25. Ter-Minassian, T. (2007.) Fiscal Rules for Subnational Governments: Can They Promote Fiscal Discipline? OECD Journal on Budgeting, Vol. 6, No. 3, pp. 1-11. 26. The Fiscal rules database, The European Commission, http://ec.europa.eu/economy_finance/db_indicators/fiscal_governance/fiscal_rules/ index_en.htm (accessed 10.09.2016.). 27. Ustawa z dnia 27 sierpnia 2009 r. o finansach publicznych (The Public Finance Bill dated 27 August, 2009), Journal of Laws No. 157, item 1240 as amended. 28. Wagner, R. E. (1976.) Revenue structure, fiscal illusion, and budgetary choice. Public Choice, Vol. 25, No. 1, pp. 45-61. 29. Wójtowicz, K. (2011.) Problem konstrukcji optymalnej reguły fiskalnej w warunkach kryzysu finansowego. Zeszyty Naukowe Polskiego Towarzystwa Ekonomicznego, No. 10, pp. 137-152.

DETAILS ABOUT AUTHOR: MARZANNA PONIATOWICZ ASSOCIATE PROFESSOR FACULTY OF ECONOMICS AND MANAGAEMENT UNIVERSITY OF BIALYSTOK BIALYSTOK, POLAND m.poniatowicz@uwb.edu.pl

2016 - M SPHERE

B O O K O F PA P E R S

-

143


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

CORRELATION BETWEEN THE TOOLS AND DEVELOPMENT PROCESS AND THE PRODUCTION PROCESS IN SMEs MATEJA KARNIČAR ŠENK MATJAŽ ROBLEK

ABSTRACT In the course of this study, we focused on validating assumptions on the correlation between the tools and development process and the production process in SMEs (small and medium-sized enterprises). The correlation of both processes is determined using select indicators. On the basis of work experience in the field of quality assurance, we notice that outputs from the tools and development process often do not generate satisfactory results in the production process. This phenomenon is first observed in the production process and later in customer satisfaction feedback. The consequences of failing to achieve satisfactory results may ultimately cost an enterprise the loss of a customer and/or loss of income. During the course of this research, we have also determined that investing effort and knowledge into the tools and development process signifies valuable reimbursement for the enterprise. The correlation between both processes was determined using statistical methods. The result of the research confirms assumptions on there being a strong correlation between both processes and provides a list of suggestions for improvements that either directly or indirectly affect the select indicators. KEY WORDS: process, production process, tools and development process.

1. INTRODUCTION Markets demand excellent products at an affordable price in addition to good functionality, durability and attractive design. Existing literature emphasizes the importance of introducing new products on the market for the purpose of achieving business success, contributing to company growth and impacting on profit and its role as the key factor in the development and expansion of enterprises (Booz, Allen and Hamilton, 1982; Urban and Hauser, 1993; Cooper, 2001; Ulrich and Eppinger, 2011). For small and medium sized enterprises (SMEs), the procedure for the tools and development process is in practice poorly described, while available resources fail to provide sufficient guidance on how development processes within these companies should even be formulated. There is also limited information on how SMEs can successfully strategize and market new products. SMEs are limited in their expertise, abilities and resources (Van Zyl, 2008, Roblek, 2012). The significance of conducting research in this area is supported by Eurostat data on structural business statistics, which indicates that SMEs account for 99.8% of all companies registered in the EU, with new product development being a key process within these companies. Several problems related to the evaluation of NPD projects may be identified such as there being a wide variety of theoretical methods for evaluating these types of projects (Mankin, 2007; Thamhain, 2014). In carrying out this research, we have selected a quantitative method that we were unable to detect in any previous research. The output of the tools and development process represents direct input for the production process, or in our case, for the serial production of thermoplastics processing. Output of the tools and development process includes: developed and manufactured tools, established production, technological and control documentation and qualified personnel. In addition to these results, the tools and development process also produces other output such as: an established list of required criteria and measuring devices, a selection of appropriate material suppliers, manufactured sample pieces and machinery, preparations and devices that shape the technologically complete whole. Together, both processes form the entire course of activities which, on the basis of inputs into the tools and development process and through the thermoplastics processing production process, lead to output that has final value for the customer. During this course of this study, we have focused on determining the correlation of both processes using indicators for the tools and development process and indicators for the thermoplastics processing production process. We have analysed the current state of operations and proposed measures for improving both processes. The indicator we selected to measure the effectiveness of process development is OEE (Overall Equipment Effectiveness) of the zero series, which is the product of three variables: utilization of facilities/equipment, utilization of time and quality of products

144

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

manufactured in the zero series. This indicator determines the degree of effectiveness of the tools and development process and is hereafter referred to as OEERP . The indicators selected for the production process are the following: OEE of the serial production of thermoplastics processing. The conceptual design of the study is schematically depicted in Figure 1. The outline is illustrated by four elements. The first element represents the procedural step â&#x20AC;&#x201C; tools and process development according to APQP methodology (Advanced Product Quality Planning). The second element represents the results obtained from the development indicators â&#x20AC;&#x201C; for the purpose of this study, OEERP. The third element represents the process of the production of thermoplastic injection moulding. The fourth element presents indicators of the production process of thermoplastics injection moulding. Using indicators presented in the second and fourth elements, we measured the correlation between the development process and production process indicators, or the indirect correlation of both processes. The correlation of variables specified in elements two and four were calculated.

Figure 1. Research Concept

On the basis of the problem observed in a real environment and upon reviewing the findings of previous studies, we formulated the following research question: How strong is the correlation between the selected indicators of the development process and the selected indicators of the production process in small and medium- sized enterprises? Indicators of the production process were monitored on the basis of internal monitoring using the production information system.

2. METHODOLOGY The following statistical methods were used in the course of this study: The normalcy of data distribution was verified using the Kolmogorov-Smirnov test. On the basis of the normalcy of data distribution, the Pearson and Spearman coefficient correlations were calculated. We also provided the coefficients and constants of the regression equation. In the first step, we identified the research problem and hypothesis, or formulated the research question. This was followed by a study of domestic and foreign literature related to the field in question. We then studied appropriate methods to either confirm or reject the hypothesis of research question. On the basis of the selected methodology, we prepared the research plan and collected and prepared data for carrying out statistical analyses. This was followed by processing and evaluating data and finally, by an analysis of results, inference and explaining phenomena and a study of correlations. We then provided an evaluation on whether the research question, or hypothesis, may be confirmed. Finally, an attempt was made to provide explanations as well as a summary of the research with recommendations for further study.

3. RESULTS 154 completed projects that had already been transferred to regular serial production were examined in the course of this study. This analysis was carried out using statistical tool SPSS 20. The range of the selected indicators is listed in the following table.

2016 - M SPHERE

B O O K O F PA P E R S

-

145


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 1. Range of the selected indicators of the population Indicator

Type of Variable

Range

OEERP

Independent

0-50%; poor project 50-80%; moderately good project 80-200% very good project

OEEPP

Dependent

0-50%; poor project 50-80%; moderatley good project 80-200% very good project

Availability

Dependent

0-50%; poor project 50-80%; moderately good project 80-200% very good project

Quality

Dependent

0-50%; poor project 50-80%; moderately good project 80-200% very good project

Productivity

Dependent

0-50%; poor project 50-80%; moderately good project 80-200% very good project

Projects whose data deviated by over 200% from the mean were then excluded from the total population of 154 completed projects. The projects were divided into four groups. These groups differ from one another by a different “degree of success” of individual projects. Group 1 includes projects that differ least by range (up to 50%) between the overall efficiency of the development and production phases. Of a group of 71 completed projects, 15 fit this criteria, so that approximately 21% of the projects are of this type. Statistical data is provided in the table below: Table 2. Statistical data of selected sample Group 1 OEERP

OEEPP

Valid

15

15

Missing

0

0

Mean value

99.3333

121.1453

Std. deviation

35.10325

39.45340

Minimum

17.00

22.42

Maximum

142.00

172.00

Total size

From the table, it is evident that results reached an average of 99.33% in OEERP and an average of 121.15% in OEEPP. An analysis of the correlation was then carried out. Table 3. Spearman’s correlation coefficient for selected sample Group 1

OEERP Spearman's rho OEEPP

146

-

B O O K O F PA P E R S

OEERP

OEEPP

Correlation coefficient

1.000

.786**

Sig. (2-tailed)

.

.001

N

15

15

Correlation coefficient

.786**

1.000

Sig. (2-tailed)

.001

.

N

15

15

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Because this sample included only 15 projects, the Spearman correlation coefficient was used to verify the correlation. The results indicate that there is a statistically significant (p < 0.05) high positive correlation between the OEERP and OEEPP variables. This means that by increasing the overall efficiency of the development processes using OEERP, the overall efficiency of the OEEPP regular series production process rises. Group 2 consisted of 29 cases. The difference between OEERP and OEEPP ranged between 50-100%. These projects represent the greatest number of cases. It is typical of these projects to have achieved poorer results in the development phase, so that overall efficiency is lower than that of Group 1 but overall efficiency in the production phase is higher. Statistical data is provided in the table below. Table 4. Statistical data of selected sample Group 2

Total size

OEERP

OEEPP

Valid

29

29

Missing

0

0

Mean value

145.6324

Std. deviation

18.98529

Minimum

91.00

Maximum

183.34

From the table, it is evident that values reached an average of 68.97% in OEERP and an average of 145.63% in OEEPP. Table 5. Spearmanâ&#x20AC;&#x2122;s correlation coefficient for selected sample Group 2

OEERP Spearman's rho OEEPP

OEERP

OEEPP

Correlation coefficient

1.000

.718**

Sig. (2-tailed)

.

.000

N

29

29

Correlation coefficient

.718**

1.000

Sig. (2-tailed)

.000

.

N

29

29

Because only 29 projects were included in this sample, the Spearman correlation coefficient was used to verify the correlation. Results indicate that there is a statistically significant (p < 0.05) high positive correlation between the OEERP and OEEPP variables. This means that increasing the efficiency of development processes through OEERP raises the efficiency of the OEEPP regular serial production process. Group 3 includes projects where the difference among them is even greater than among those in the first two groups. These types of development projects are even less successful in the development phase but demonstrate good results in the regular serial production phase. The table below depicts the following statistical data: Table 6. Spearmanâ&#x20AC;&#x2122;s correlation coefficient for selected sample Group 3

OEERP Spearman's rho OEEPP

2016 - M SPHERE

OEERP

OEEPP

Correlation coefficient

1.000

.276

Sig. (2-tailed)

.

.226

N

21

21

Correlation coefficient

.276

1.000

Sig. (2-tailed)

.226

.

N

21

21

B O O K O F PA P E R S

-

147


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

From the table, it is evident that projects reached an average of 33.10% in OEERP and an average of 153.00% in OEEPP. The results of the correlation analysis are as follows: Table 7. Spearmanâ&#x20AC;&#x2122;s correlation coefficient for selected sample Group 3

OEERP Spearman's rho OEEPP

OEERP

OEEPP

Correlation coefficient

1.000

.276

Sig. (2-tailed)

.

.226

N

21

21

Correlation coefficient

.276

1.000

Sig. (2-tailed)

.226

.

N

21

21

Because this sample included only 21 projects, the Spearman correlation coefficient was used to verify the correlation. The results indicate that there is a statistically insignificant (p > 0.05) medium-high positive correlation between the OEERP and OEEPP variables. This means that increasing the efficiency of OEERP raises the efficiency of OEEPP but because the correlation is not statistically significant, it is not necessarily true that the same correlation would be observed in another group. These projects represent the worst possible types of projects because they indicate that the process has been developed very poorly and that it was optimized only during the serial production phase. Runs that achieve a value of less than 50% OEERP in the development phase require many upgrades and development measures in the production phase in order to achieve an adequate level of development. Group 4 includes projects that demonstrated the best results in the development phase but achieved worse results in serial production. These projects are fewest in number. Table 8. Statistical data for selected sample Group 4 OEERP

OEEPP

Valid

6

6

Missing

0

0

Mean value

114.8333

104.1667

Std. deviation

37.08054

33.25908

Minimum

60.00

59.00

Maximum

159.00

137.00

Total size

From the table, it is evident that projects reached an average of 114.83 in OEERP and an average of 104.17 in OEEPP. Table 9. Spearman correlation coefficient for selected sample Group 4

OEERP Spearman's rho OEEPP

OEERP

OEEPP

Correlation coefficient

1.000

.928**

Sig. (2-tailed)

.

.008

N

6

6

Correlation coefficient

.928**

1.000

Sig. (2-tailed)

.008

.

N

6

6

Because the sample included only 6 projects, the Spearman correlation coefficient was used to verify the correlation. The results indicate that there is a statistically significant (p < 0.05) high positive correlation between the OEERP and OEEPP variables.

148

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Comparative Study The purpose of the comparative study was to determine the correlation between the select indicators of the Phase RP development process and the indicators of the Phase PP production process. According to our estimates, the development process should significantly affect the efficiency of the regular serial production process. The development process in this case comprises measuring the shape of the workpiece, analysing optimal utilization and associated calculations and preparing the method of processing. The production phase comprises preparation, sawing logs into various assortments of wood, stacking and packaging. According to empirical estimates, the development process should significantly affect the efficiency of the entire regular series production and should, in particular, increase yield and reduce the amount of waste. To perform the analysis, we selected an accuracy rating on a scale of up to 100% for the development process. The proportion of the accuracy of the estimates of the listed activities in the development phase is considered as an independent variable. For the production process, we selected the yield of a cubic metre of a certain type of wood assortment. Yield means the amount of the product as depending on the entire volume of the work piece. Efficiency (yield) is measured in percentage. 152 completed projects were analysed. These represent the entire population. The analysis was carried out using statistical tool SPSS 20. The range of the selected indicators are listed in the table below. Table 10. Range of selected indicators of the comparative study Indicator

Type of Variable

Range

Phase RP

Independent

100-50% poor grade 51-80% moderate 81-100% excellent

Phase PP

Dependent

1-50% poor efficiency 51-80% moderate efficiency 81-100% excellent efficiency

A representative sample was prepared on the basis of assessing actual efficiency and computational efficiency. From the population we thus selected 32 projects. Following is some statistical data of the selected sample. Table 11. Statistical data of the comparative research study sampling N

Minimum

Maximum

Middle range

Std.deviation

PhaseRP

32

72.00

83.00

77.5000

3.81846

PhasePP

32

78.00

83.00

80.6875

1.71215

N

32

We then carried out verification of the normalcy of the data distribution. On the basis of the obtained results, it may be concluded that the distribution of both variables is normal. The table below lists statistical data on verification of the normalcy of the distribution. Table 12. Verification of the normalcy of the distribution of the selected sample Kolmogorov-Smirnova

Shapiro-Wilk

df

Sig.

df

Sig.

PhaseRP

.181

32

.009

.891

32

.004

PhasePP

.157

32

.045

.888

32

.003

The correlation analysis was carried out using the Pearson correlation coefficient. The results indicate that the correlation between the estimates derived in the development phase and the final efficiency is very strong. The results are listed in the table below.

2016 - M SPHERE

B O O K O F PA P E R S

-

149


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 13. Pearson correlation coefficient of the comparative study

Pearson corr. coeff. Phase RP

Phase RP

Phase PP

1

.893**

Sig. (2-tailed)

Phase PP

.000

N

32

32

Pearson corr. coeff.

.893**

1

Sig. (2-tailed)

.000

N

32

32

The regression model is good. The regression relationship explains 79.8% of the variance in the production process (the coefficient of determination is therefore 0.798). Table 14. Regression model of the comparative study Model

R

R squared

Adj. R squared

1

.893a

.798

.791

Standard deviation .78305

If noting the regression line equation: Phase PP = 49.653 + 0.400â&#x2C6;&#x2122;Phase RP From the data, we evaluate that if the assessment of efficiency in the development process, therefore, the indicator Phase RP, increases by 1, then the overall efficiency of the production process increases by 0.400. Table 15. Coefficients and constant regression model of the comparative study Unstd. Coefficient

Std. coefficient

B

Std. error

Beta

(Constant)

49.653

2.858

PhaseRP

.400

.037

Model

t

Sig.

17.375

.000

10.872

.000

1 .893

On the basis of the obtained results, we have confirmed the hypothesis that the quality of execution of the development phase impacts on the output of the production process.

4. DISCUSSION Using statistical analysis, we have determined that there is a statistically high positive correlation between the OEERP and OEEPP variables within the select group of projects. The partial correlation among variables was statistically insignificant only in the group that displays very poor results in the development phase but even this correlation was mediumhigh positive. The results therefore indicate that an effective development process expressed through OEERP raises the selected indicator OEEPP of the regular serial production process. We performed a comparative analysis of companies that are in no way associated with branch 22.290 and determined that the results are similar, so it may be concluded that there is a strong statistical correlation of success between the development and production phases. We are determining that there are currently no studies available which examine the direct impact of the tools and development process on the production process using an indicator such as OEE. Most frequently used are financial methods that are popular when project evaluation requires economic justification. By generating numeric measurements, their results are easily comparable and thus enable the ranking of projects (Thamhain, 2014). However, this is not the only method of measurement. Akhilesh (2014) groups a number of general factors for evaluating research project proposals into seven categories: (1) technical factors, (2) research direction and balance, (3) marketability factors, (4) production factors; (5) financial factors; (6) timing of research and (7) other factors.

150

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Further studies could extend this research to a greater number of enterprises. We anticipate that there are limitations in the types and methods of measuring the success of an individual process. Given that enterprises determine different criteria, it is not feasible to anticipate a singular method of measurement. Research could also be expanded to encompass different activities. It is also possible to study what types of indicators enterprises use in order to measure the effectiveness of a particular process and how they measure the impact between processes. We also recommend conducting research on the ways in which such assessments and measurements are carried out in large enterprises.

LITERATURE 1. Booz, Allen, & Hamilton (1982). New product management for the 1980’s. New York: Booz, Allen & Hamilton, Inc 2. Cooper, R. (2001).Winning at New Products. Massechussets. 3. Mankin, E., 2007. Measuring Innovation Performance. Research-Technology Management, 50(6), pp. 5-7. 4. ROBLEK, Matjaž, KERN, Tomaž, ZAJEC, Maja. Knowledge management of the new product development process with process-knowledge allocation model. V: The 6th IEEE International Conference on Management of Innovation and Technology, 11-13 June 2012, Sanur Bali, Indonesia. ICMIT 2012 : proceedings of. [S. l.: s. n.], cop. 2012, pp. 214-219. 5. Urban, G. L. and J. R. Hauser (1993). Design and Marketing of New Products, Prentice-Hall. 6. Ulrich, K.T. and S.D. Eppinger (2011). Product design and development. Boston: McGraw-Hill Higher Education 7. Van Zyl, W. (2008) The new product development process : small firm success by studying larger firms. University of Stellenbosch 8. Thamhain, H. J., 2014. Assessing the Effectiveness of Quantitative and Qualitative Methods for R&D Project Proposal Evaluations. Engineering Management Journal, 26(3), pp. 3-12. 9. Thamhain, H. J., 2005. Management of Technology. Hoboken, New Jersey: John Wiley & Sons Inc. . DETAILS ABOUT AUTHORS: MATEJA KARNIČAR ŠENK DEPUTY DIRECTOR POLYCOM ŠKOFJA LOKA D.O.O. POLJANE NAD ŠKOFJO LOKO, SLOVENIA mateja.senk@polycom.si MATJAŽ ROBLEK DOC. DR., PROFESSOR UNIVERSITY OF MARIBOR FACULTY OF ORGANIZATIONAL SCIENCES KRANJ, SLOVENIA matjaz.roblek@um.si

2016 - M SPHERE

B O O K O F PA P E R S

-

151


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

CORRECTION OF PERCEPTION OF ECONOMIC GROWTH IN THE CONTEXT OF THE NEW ECONOMIC REALITY DARIA ROZBORILOVĂ

ABSTRACT The new economic reality leads to the intensification of discussions about the possibility of generating of economic growth in the framework of countries, regions and globally, not only in the long term but also in real time. The aim of contribution is on the basis of generalization of findings from ongoing discussions at campus as well as within the various international institutions to identify the main issues related to the long-term glorification of economic growth and of the rates of economic growth, as well as the problems related to the underestimation of the limits of economic growth. The subject of our interest is to identify the urgency of the change in approach to economic growth in the context of the new economic reality, as well as the need of the correction of the existing stereotypes that are the necessary prerequisites of the intergenerational equity. Identification of the context and understanding of possible solutions on the basis of applications of multidimensional and multidisciplinary approach represents an important first step. Next step is linked with real enforcement of solutions in national, regional but also in a global context. Downplaying of problems can have fatal consequences. KEY WORDS: New economic reality, Economic growth, Inequality, Prosperity, Intergenerational equity. NOTE: The paper was elaborated within the project VEGA 1/0014/16 International migration of highâ&#x20AC;&#x201C;skilled workers in the context of globalization process and creation of knowledge economy.

1. INTRODUCTION There are a number of questions which are the subject of heated discussions. Not only on campus or within the various national, regional and global institutions, but also in informal discussions taking place between the different actors and at different levels. It can be stated that the main discussions are realized at the official level because there are not only created conditions for identification and generalization of particular problems, but also for their empirical verification. A realistic assumption for a major shift from previously the globally accepted perception of the economic growth exists at the official level. There is not realistic to capture a wide range of questions that are a subject of discussions. In our opinion, the most frequent questions are: We can say that economic growth is necessary? If so, what economic growth is necessary? On what criteria can be argued that some economic growth is necessary? It is sufficient the determinants of economic growth to change or change their combinations in order to solve the problems related to economic growth? Are there limits to economic growth? If so, it is an irreversible fact, or these limits are surmountable? It must change the perception of economic growth? If so, can we logically expect that theorists, politicians, as also representatives of practice or the ordinary citizens are able to change the customary stereotypes in the perception of economic growth? Is it realistic to overcome myths about economic growth? A correction of perception of economic growth is possible or necessary? Seriousness of the questions suggests the need to find answers especially in the context of the new economic reality.

2. SOME PROBLEMS RELATED TO PERCEPTION OF ECONOMIC GROWTH IN THE CONTEXT OF THE NEW ECONOMIC REALITY The necessity of correction perception of economic growth as well as a rate of economic growth results from the existence of several problems. From our point of view, these problems is desirable to identify and then to define the possible options for solving these problems. We can identify a number of problems but it is not realistic to identify all problems. In our opinion, the most important problems are: the problem of the definition of economic growth; the problem of the perception of economic growth as the goal of economic activities; the problem of revaluation myths about economic growth; the problem of the perception of economic growth as a condition for the growth of prosperity; the problem of the perception of economic growth as a condition for reducing economic inequality; the problem of modifying the types of economic growth; the problem of revaluation or underestimation of the importance of the limits of economic growth; the problem of underestimation of intergenerational equity.

152

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2.1. Materials And Methods Authors who deal with the issues of economic growth pay attention mainly to the factors which influence the economic growth and its rate or to the identification of the share of different factors on the growth of production. Variety of opinions has led to the formation a wide spectrum of theories and models of economic growth. Classical, neoclassical, Keynesian, endogenous (new) or institutional theories and models of economic growth undoubtedly belong to the most famous theories or models. The economists as Adam Smith, David Ricardo, Thomas R. Malthus, Paul H. Douglas1, Robert M. Solow, Trevor W. Swan, Roy F. Harrod, Ewsey D. Domar, Alvin H. Hansen, Nicolas Kaldor, Joseph A. Schumpeter, Simon Kuznets, Robert B. Barro, Paul M. Romer, Robert E. Lucas, and Walt W. Rostow are fundamentally connected with the given topic and their contribution is generally accepted.2 But also other authors like Frank. P. Ramsey, Klaus Schmidt - Hebbel, Luis ServĂŠn, Olivier de La Grandville or Angus Deaton contributed significantly to the development of the theory of economic growth. These authors devote primary attention to the savings that determine the feasibility of investment and thus economic growth. They use statistics and econometrics methods that make it possible to identify common or different characteristics of economic growth in each country. Benefits should also be seen in the possibility to process several hypotheses about the possibilities of further economic growth. Detailed analysis of their works and specification of their views on the determinants that affect economic growth not is the subject of our interest. The long-term priority of focus on economic growth and one-sided concentration on achieving the highest possible rates of economic growth reflected a perception of economic growth as the goal of economic activities. The purpose of economic activities should be a human well - being. Of course, if a happy and satisfying life is available for the biggest possible part of society. After the World War II and formation of two different socio-economic systems, the effort to prove the advantages of the system came to the foreground. The individual countries were trying to achieve the highest economic growth rate and to create a welfare state. Paradoxically, the extensive economic growth in combination with growing government interventions into economy which were manifested in the significant increase of the share of government expenditures on GDP, or in the increase of deficits and public debt did not lead to the increase of welfare but to an ineffective allocation of limited resources, to excessive consumption of the minority part of population in the national, regional as well as global context at concurrent increase of that part of population which was on the poverty line or in its close proximity. Intellectuals from different countries founded the Club of Rome at the end of the 60s of the 20th century.3 Particular attention should be drawn to the reports of the Club of Rome, in which the authors of these reports declared the seriousness of the problems related to long-term focus on economic growth. The issue of economic growth has been the subject of discussions at various international for a on the end 20th century and early 21st century. Identification and solution of the consequences glorification of economic growth assumes the application of multidimensional and multidisciplinary approach. This approach can lead to the new perception of economic growth. A solution assumes an application of several methods. In the first phase, attention was drawn to a comprehensive and detailed analysis of approaches of theoreticians from different sciences on the issue of economic growth as well as to the different macroeconomic context. Achievement of defined objectives assumed using a method of scientific abstraction, scientific analysis and scientific synthesis. Identifying genesis assumes the application of logic - historical approach. Causal analysis creates a space for identifying macro-economic implications and consequences glorification of economic growth. Comparison creates a space for identifying the specifics of the different theoretical approaches.

2.2. Results And Discussion â&#x20AC;˘ The problem of the definition of economic growth. Although the concept of economic growth is very frequented concept there is no unambiguous definition. Economic growth refers to real GDP, GDP/per capita or to the potential product. The subject of discussion is the question whether GDP can be an exact measure of economic growth. During debates also appears the claim that there is an overestimation of GDP but an underestimation of human and environmental welfare. 1

2

3

Douglas cooperated with the mathematician Charles Cobb on the verification its production function using specific statistical material. The basis was data from years 1899 â&#x20AC;&#x201C; 1922. They analysed the connection between the volume of output and size of involved factors of production, namely labour and capital. The classic theory of economic growth did not take into account technological changes, whereas in the Solow - Swan model of economic growth, the role of technological change is crucial. Schumpeter explains growth by innovation as a process of creative destruction. New models of economic growth are characterized by a new perception of capital. It is a unity of physical and human capital. The new models of economic growth analyzed the new possibilities of combinations of production factors in ensuring the long-term steady economic growth. Contribution of institutional theory of economic growth lies inter alia in highlighting the endogenous factors of economic growth. For example, population growth is often seen as exogenously given, but in reality is conditioned by the economic situation in each country. In the year 1968 was formed the association of theorists as well as professionals from practise, later known as the Club of Rome the aim of which was specification of reasons and consequences of global problems of mankind.

2016 - M SPHERE

B O O K O F PA P E R S

-

153


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Jackson argues that the concept of growth has essentially two different meanings: expansion and development. The expansion means to create more products and the development means to create a higher quality, which may or may not be linked to the expansion (Jackson, 2009). In context of the desirable rate of economic growth or in the context of dominant determinants of economic growth underway the sharper discussions. Romer shows, on the basis of concrete examples how current rate of economic growth will affect the size of the production, as well as at what time it leads to a doubling of production. Romer argues that it is desirable to pay attention to the rate of economic growth. How long it takes income to double by dividing the growth rate into number 72. Income/per capita is doubled every x years, if the annual rate is y% (Romer, 1991). Governments, international organizations, the private sector and academia have come up with a wide range of innovations in the measurement of economic growth, with regards to the limitations of GDP. These innovations can be divided to three categories: inclusiveness of growth, sustainability of growth and multiple dimensions of human well-being. If in a growing economy occurs the growth of economic inequality as well as the economic and political instability, it is desirable to find the new concepts for pro-poor growth. Attention should also be paid to income distribution. The World Bank Group´s wants to achieve “shared prosperity”, as indicator uses the growth of income of the bottom 40% of the population in every country. It measures the convergence of the income per capita for the bottom 40% with the average income per capita of the society. A question is whether the focus should be on reducing inequality of outcomes or inequality of opportunity. Both disparities are significant and therefore need to pay attention to them. The World Bank has developed the adjusted net savings or genuine savings indicators based on standard national accounts, the gross national savings to monitor the changing wealth of nations. Natural capital accounting (NCA) is a measure that can integrate the value of natural resources in the system of national accounts. The Ecological Footprint compares consumption levels to the planet´s carrying capacity. There are also composite indices that aggregating a number of economic, social and environmental indicators (The Environmental Performance Index, The Sustainability Index and other indexes). Human well-being depends on many other aspects, such as health, education, employment, political freedom, social relationships, and environmental quality and security (the UN´s Human Development Index or the OECD´s Better life).

• The problem of the perception of economic growth as the objective of economic activity. Economic growth has so far been perceived primarily as an objective of economic activities. Economic growth was seen as a priority without taking into account direct, secondary and cumulative effects of economic growth. The report of the World Economic Forum in Davos, entitled The Global Economic Prospects. Global Growth Falling beneath the Threshold states that the economic and financial crisis at the end of the first decade of the 21st century drew attention to long – standing problem of glorification of economic growth. It is desirable to revise the approach to economic growth in the sense that economic growth was seen as a means of ensuring the conditions for a happy life as the present generation as future generations in a healthy environment, in a free and safe world.

• The problem of the perception of economic growth as a condition for the growth of prosperity. Prosperity is perceived as a state of joy, happiness and successful social status (Seligman, 2002). Prosperity is a status that connected with eliminating hunger and homelessness, the elimination of poverty and injustice (Jackson, 2011). Legatum Prosperity Institute defines prosperity as unity of wealth and welfare. Prosperity is not just about money but also about quality of life. The countries which are rated as the countries with the highest prosperity necessarily not belong to countries with the highest GDP, but those where live happy, healthy and free people. The problem may be the existence different views of whether economic growth creates or does not create conditions for the growth of prosperity, respectively prosperity requires economic growth. Jackson notes that economic growth leads to the growth of disparity but does not lead necessarily to the growth of prosperity. The idea that prosperity requires economic growth leads to the conviction that economic problems should be solved through economic growth. In fact, the problems may be just the result of glorification of economic growth. Jackson identifies the dilemma of economic growth. On the one hand there is a danger that the decline in economic growth will lead to a reduction in effective demand, leading to a decline in employment as well as to the recession. On the other hand, economic growth is unsustainable in the current form because economic growth impinges on the environmental limits. Jackson believes that the answer in the dilemma means a retreat from the consumer society and the reassessment of the objectives of economic activities. The solution to this dilemma is extremely difficult. Transformation assumes the application of a holistic approach what is essential for ensuring the future prosperity (Jackson, 2011).

154

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Some authors state that sustainable economic growth, security and stability are essential for prosperity. Mitchell notes that in this rapidly interconnecting the world is not an interest in instability, which would not allow for development. At the same time Mitchell emphasizes the fact that a situation is different in less developed countries. In these countries economic growth is essential for a real chance to escape out of poverty. Similar views are also included in the works of others authors (Mitchell, 2013, Kinsley, 1997, Seligman, 2002). Four conditions must be met in order to ensure sustainable development. They are the following conditions: the use of own resources, the participation of citizens in addressing the fundamental problems (the emphasis should be placed on the participation of young people) as well as the elimination of environmental pressures and respect for the demographic changes (HDR, 2013). Identification of problems related to the revaluation of importance of economic growth and the undervaluation of prosperity as well as the specification of their interdependence and conditionality create the conditions for reversing the negative impacts of glorification of economic growth. Inclusive and sustainable prosperity should be the objective of economic growth that is not being fully realized. Inclusiveness refers to the distribution of outcomes between citizens. Citizens should be able to get an income but should also have equal access to public goods as health, education or security. Citizens should not be discriminated against but should be guaranteed them equality of opportunities. Sustainability refers to the environmental protection but also to ensuring of sources not only for the present generation, but also for future generations.

â&#x20AC;˘ The problem of the perception of economic growth as a condition for reducing inequality. The correlation between the rate of economic growth and the economic inequality is subject of interest of several economists. The well â&#x20AC;&#x201C; known Kuznets hypothesis projected an inverted relationship between income inequality and income per capita. Income inequality grows during the early phase of economic development, then stabilises and declines at a high stage of economic development. The early empirical tests support the hypothesis of Kuznets. The studies that use the longitudinal data did not find an evidence of an inverted relationship between inequality and the income level. Hoeller states that the effect of inequality on growth is ambiguous. Different countervailing mechanisms would be to modify their relationship. Inequality can affect economic growth through a higher saving rate of rich people. If the investment rate depends on the saving rate then the countries with higher income inequality will show a faster growth. Similarly, the concentration of wealth favours the creation of new activities. Also, work incentives are generally higher in countries with higher income inequality. On the other hand, we can see the opposite effects. A negative relationship between inequality and growth exists from various causes: more unequal societies redistribute more what creates distortions and causes lower growth; social-political instability engages more people in activities which deter investments; imperfections of credit market can result in an under-investment in human capital (Hoeller et al., 2012). There is no consensus on whether the low rate of economic growth contributes to the growth of inequality or to a reduction in inequality. Jackson argues that inequality does not necessarily to grow when decreasing the rate of economic growth. There is no mutual conditionality that declining the rate of economic growth will lead to an increase or even a massive increase in inequality. In fact under certain conditions, income inequality may decrease. This is conditional by government measures that may eliminate the consequences of the decline in the rate of economic growth (Jackson, 2014). The impact of increasing income inequality on economic growth is different depending on the degree of economic development of each country. In a relatively wealthy countries, the impact of increasing income inequality on economic growth is negative, whereas in poor countries is positive (Hoeller, 2012, Global Risks Report, 2015). In a wide range of countries a domestic income inequality increases even if the gap between average incomes in advanced and developing countries declines. The upper end of the income distribution is developing a fatter and fatter tail, while the median income remains stuck in low-growth mode. Post crisis, the lower tail of the income distribution is also fattening as poverty increases. This pattern has emerged in the past 30 years. It undermines social cohesion, political stability and causes a declining support for an open global economic and financial system (WEF, p.4). Piketty added a significant contribution to the issue of interconnectedness of economic growth and economic inequality. Piketty, based on its extensive research came to the conclusion that economic growth leads now to a huge range of inequalities (Piketty, 2014). The OECD report states that the rise of inequality observed between 1985 and 2005 in 19 OECD countries knocked 4.7 percentage points off cumulative growth between 1990 and 2010. The enormous growth of inequality within a relatively short period, but most people do not benefit from economic growth. To reduce inequality it can be provided that will be achieved inclusive growth. It states that the objective can be achieved if we succeed implement the measures in the following areas: overcome gender inequalities; the labour market policies should focus on working conditions as well as wages and their distribution; a focus on education in early years is essential to give all children the best start in life; governments should not hesitate to use taxes and transfers to moderate differences in income and wealth (Keeley, 2015). The others authors was finalized a similar conclusion. Based on empirical studies have found that the growth of income inequality has led to a reduction in GDP /per capita by 1.1% per year (BrĂźckner, Lederman 2015).

2016 - M SPHERE

B O O K O F PA P E R S

-

155


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

• The problem of modifying the types of economic growth. Modification of the types of economic growth is not accompanied by more realistic approach to economic growth. Regardless of which an adjective the authors assigned to the economic growth does not change the perception of economic growth as the objective of economic activities. It is possible by analysing the works and the documents of various authors identify a wide range of modifications of the types of economic growth. The authors speak about the need to ensure exponential growth, conventional growth, zero growth, organic growth, optimal growth, sustainable growth, inclusive growth, innovative growth, balanced growth, global growth, green growth, forced growth. Economic growth is undoubtedly important, but should be seen as a means to achieve human well-being and life satisfaction irrespective of nationality, race, gender or religion. Club of Rome4 pointed out the unsustainability of long-term orientation on high rates of economic growth at the end sixties years. Club of Rome by means of its reports drew attention to possible consequences of global problems of mankind. The work The Limits to Growth was published in the year 1972. Authors were looking for the answer to the question if the limits of economic growth exist. According to the report´s authors the limits of growth would be reached before the year 2100 in case of exponential growth. The solution is based in elimination of a tendency of increasing the rate of economic growth and achieving ecological and economic balance. Requirements of the change of orientation on zero growth and later organic growth are also connected with the Club of Rome. Particularly, in the second report of the Club of Rome was stated that the problem is not the growth itself, but cancerous, undifferentiated economic growth which must be changed on the organic growth. The organic growth represents the growth in the system in which the individual parts of the system are interconnected and interdependent. In the further period we encounter the requirements for ensuring the long-term sustainable economic growth respecting ecological limitations or with the requirements for ensuring the intelligent growth (based on knowledge and innovation), sustainable growth (support of more efficient resources, competitiveness), or inclusive growth (based on ensuring the full employment, social and territorial cohesion). (EUROPE 2020). In the report of The World Economic Forum we can see the requirements for ensuring the sustainable global economic growth, global and balanced economic growth or green growth. Two quotations from the given report confirm these requirements: “We can start by dispelling the myth that economic growth and low-carbon, environmentally-sensitive development are competing objectives. A growth model that improves resource efficiency and mitigates climate change also generates a number of mutually reinforcing benefits, including accelerated job creation, healthier populations, expanded access to secure energy supplies and sustained global economic growth” (p.3) “The concept of green growth began to take hold in 2008 at the Pittsburgh G20 Summit, where leaders launched the Framework for Strong, Sustainable and Balanced Growth. The Framework was again referenced in 2009 at the G20 Summit in Korea, where leaders put a high global priority on green growth, while also starting a new innovation at the Summit, creating the Business 20 – or “B20” – as an invitation to leading businesses to provide formal input. The 2010 B20 Working Group IX published a comprehensive report: Creating Green Jobs, which made several recommendations about the business and social opportunities of a smarter approach to green investment” (p.5). Figure 1. Modification of types´ economic growth

1 conventional 2 exponentional 3 zero 4 organic 5 cancerous 6 inclusive 7 intensive 8 intelligent 9 green 10 equitable 11 sustainable 12 balanced 13 optimal 14 global 15 multidimensional 16 pro-poor growth

Source: Own processing. Exact characteristics of individual types of economic growth are contained in the works that are listed at the end of this contribution. 4

Meadows, D, Meadows D., Randers, J., Behrens, W.W. (1972.): The Limits to Growth. Universe Book, New York 1972. This study was translated into 30 languages.

156

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Regardless of what attribute we assign to the economic growth, we do not change the perception of economic growth as a target of economic activities in the society. Economic growth is undoubtedly important, however, it should be perceived as the means to achieving the national and individual prosperity.

• The problem of revaluation or underestimation of the importance of the limits of economic growth. Some economists argued that sustained economic growth is needed and can be achieved. However, economists were confronted by a number of problems that they have reached such dimensions that they could not be ignored. Heinberg in his work: End of Growth. Adapting to Our New Economic Reality writes about the end of conventional economic growth and specifies three primary factors: depletion of scarce resources, the financial shocks and crushing debt levels and negative environmental impacts due to the increasing production and consumption. Among the other factors which may be mentioned belong to: bursting real estate bubble and the threat of bursting financial bubbles, rising costs for elimination of negative environmental impacts of production but also the growth of population and the growth of inequality. In the work The Limits to Growth states that if the present trends in world continue unchanged, the limits to growth on this planet will be reached sometime within the next one hundred years. It is possible to alter these growth trends and to establish a condition of ecological and economic stability that is sustainable far into the future (Meadows, 1972, pp. 23-24). There are arguments against the claim that is not real further economic growth due to the limits of economic growth, but also to counter arguments that they consider the end of economic growth as realistic. Critics of the idea of the end of economic growth argue that technological progress can increase efficiency and to overcome the limits of economic growth. Critics also noted that the economy may be dematerialized, which means that it is possible to achieve growth without the need for more resources. Growth can be endless. Opponents of this view argue that the increase in efficiency does not lead to a decline in consumption and production, on the contrary, leads to their further increase. It reflected the rebound effect. Romer also highlights the fact that each generation must be aware that there are limits of economic growth and undesirable side-effects of the use of resources. Romer is not recommended enforcement of any economic growth and to focus on economic growth, which has less negative side effects and leads to the higher recovery of resources (Romer, 1991). Similar recommendations can be found in various reports of the Rome Club (Club of Rome, 2012).

• The problem of revaluation myths about economic growth. Despite the many changing conditions is hard abandoned the concept of infinite economic growth as well as the idea that growth makes it possible to solve the problems of the current global inter-connected world. Live - Impact Living Initiative (LILI) is a non-profit organization that creates a space to an alternative view on the current problems. LILI presents 12 myths: As a country´s economy grows, its environment becomes cleaner; growth offers us more choice; energy efficiency, renewables and new energy sources will allow growth forever; human ingenuity is the ultimate resource, and can grow forever; new technology, and especially miniaturization, will allow us to grow forever; we need economic growth for better weaponry and security; economic growth can continue forever because of recycling; we need growth to eradicate poverty; we need growth to generate the money to solve environmental problems; an economy of service can grow forever; sustaining economic growth is possible as it can colonize other planets; economic growth can only be ensured by increasing the amount of money adding zeros on a computer without any real economic activity. At the same time LILI confronts these myths economic growth with the economic reality (LILI, 2014). Among other myths may be mentioned the myths that the economic growth creates conditions for economic progress or economic growth is important for to maintain consumption. It is a myth or the real economic growth makes it possible to solve the problems in national, regional and global context as well as promote the elimination of stereotypes of economic growth. Under these assumptions, it is possible to consider the adoption of new innovative solutions.

• Disregard problem of intergenerational equity. Growth in the tradable sector of the economy has contributed relatively little to employment growth in the past two decades. In many countries, an environmental degradation significantly diminishing the health of citizens and the quality of life even when the incomes grow. Ecosystems´ biodiversity is under pressure. The existing growth models will not work because the global economy triples in size. The destruction of natural capital slows or stops further economic growth and prosperity. There is hardly speaks about intergenerational equity (WEF, 2014).

2016 - M SPHERE

B O O K O F PA P E R S

-

157


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The present generation may not be able to ensure an equivalent stock of environmental goods to the next generation. There are several reasons. One from a causes is the existence of a wider range of limits an economic growth. Limits of economic growth can eliminate a possibility of securing consumer habits also for future generations. It should be appreciated that the current generation has an obligation to leave similar conditions for future generations, not only for the next generation.

â&#x20AC;˘ The new economic reality and its impact on solving different problems connected with glorification of economic growth An ignorance of global risks is symptomatic for new economic reality. It is not realistic to fully capture all global risks in this contribution but significant global risks include the following risks: underestimating consequences of various bubbles and downplaying the possibility of new bubbles and their subsequent risk of rupture; enormous accretion of income and wealth inequalities, as well as the income and wealth polarization, which is specific strengthening of positions the richest and forfeiture of a growing number of households at risk of poverty; high unemployment in general and particularly high youth unemployment; strengthening of pessimistic expectations regarding the possibility of overcoming of the consequences of the financial and economic crisis that broke out in 2008 in the relatively short term; high government deficits and high government debt; threat of collapse of the credit system and the subsequent increases in bankruptcies; cumulation of unsolved problems in the context of long-term orientation for economic growth - the depletion of nonreproducible resources, ignorance or underestimation of environmental impact of long-term orientation on economic growth, lax approach to the warnings that concern of the consequences of long-term orientation for economic growth; escalation of crime and terrorism; amplifying tendency to resolve conflicts by military means; political instability in many countries and regions; climate changes. An ignorance of the problems that exist in todayâ&#x20AC;&#x2122;s globalized world is no longer permissible. However, economists and politicians are willing and able to realistically assess the seriousness of the situation and to accept the decisions that lead to real change? At the same time, economists and politicians should not succumb to catastrophic scenarios and disillusionments about the possibility of real chance to reverse the current development so as in the future was respect the principle of intergenerational equity. The perception of a new economic reality is not identical. However, the passionate discussions in search of answers are a prerequisite for a shift in the perception of the seriousness and complexity of the current problems.

CONCLUSION The new economic reality plays a major role in the direction of intensifying interest about the economic growth and the rate of economic growth, as well as about the primary determinants of economic growth and the identification of the principal macroeconomic contexts. An overestimation of economic growth and a perception of economic growth as a goal can cause many problems which are of a global nature, especially if economic growth becomes a priority. Not infrequently it leads to ignoring direct, incidental or cumulative effects of economic growth. The substitution of resources and increasing the efficiency of their use may lead to the elimination of limits to economic growth. However, the substitution of the resources as well as increasing the efficiency of their use has its limitations. Some sources have no substitutes, some substitutes are very expensive and other substitutes are not equally suitable or cannot be obtained quickly enough. Generalization of acquired theoretical and empirical knowledge of scientists from different disciplines can accurately identify the nature of the problems as well as possible solutions. It also creates a space for obtaining complete picture of the real situation and about the possibilities of positive shift towards a happier society now and in the future. Identification of context and knowledge of possible solutions on the basis of an application of multidimensional and multidisciplinary approach represents only the first step, which is indeed important, but insufficient. Very important is the next step which will be linked to the promotion of real solutions in national, regional as well as global context. The current problems are not solvable through the isolated activities of individual countries. A ridicule of skeptics as well as an underestimation of the problems can have fatal consequences. For the global economy is symptomatic an unbalanced, unstable and unsustainable growth and that is why appear new challenges are related to the need to develop new growth models. An application of existing growth theories and models of economic growth already is not acceptable. The search of the new growth models is underway in multiple dimensions.

158

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

In many ways it is the comprehensive capture of issues. The new growth models will require shifts and innovations in policies, a change in values and a formation of new coalitions. The new growth models will contain essential ingredients of the old models as: an open global economy, specialization, innovation and competition, and high level of investment. The new elements: natural resources will have prices that rise with scarcity of resources as well as with a rising demand. The economic activities that are connected with negative externalities will be priced or will be constrained through the efficient regulatory policies. The intertemporal choices will have a more central position. It is desired to emphasize that the various aspects of inclusiveness and sustainability need to move closer to the centre of the policy. Growth should be seen in the context of employment, creation of conditions for the full life of all citizens not only of minority elite.

LITERATURE 1. Brückner, M., Lederman, D. (2015.) How does inequality affect economic growth? https://agenda.weforumorg.2015/07/how..(accessed 9. 07. 2015) 2. Club of Rome reports and Bifurcations, a 40-Years Overview. (2012.) pp. 21. https://www.lactusinpraesens.org/links/clubrome.php (accessed 15.10.2013) 3. Deaton, A. (2015.) Consumption, Poverty and Welfare. The Committee for the Prize in Economic Sciences in Memory of Alfred Nobel. The Royal Swedish Academy of Sciences. 4. Grandville, O. (2009.) Economic growth. A unified approach. (Ed.): Cambridge University press, The Edinburgh Building, Cambridge CB2 8RU, UK, pp. 8 – 356. 5. Heinberg, R. (2012.) The End of Growth. Adapting to Our New Economic Reality. (Ed.): Post carbon Institute. Clair View Books. 6. Hoeller, P. (et al.). (2012.) Less Income Inequality and More Growth – Are they Compatible? OECD Economic Department Working Papers, No. 924, OECD Publishing. ECO/WKP/2012/1, pp. 44. http://dx.doi.org/10.1787/5k9h297wxbnr-en (accessed 11.10.2013.) 7. Jackson, T. (2011.) Prosperity without Growth. Economics for a Finite Planet. (Ed.): Routledge, London, pp.288 8. Jackson, T., Victor, A. P. (2014.) Does slow growth increase inequality? Some reflection on Piketty´ s fundamental´ laws of capitalism. E.S.R.C. PASSAGET: Working Paper Series 14-01, pp. 24. 9. Keeley, B. (2016) Income inequality: Is inequality good or bad for growth? OECD, http://www.keepek.com/Digital-asset-Management/oecd/ social-issues (accessed: 17.02. 2016.) 10. Kinsley, M. J. (1997.) Sustainable Development: Prosperity without Growth. (Ed.): Rocky Mountain Institute. Colorado. 11. Low – Impact Living Initiative (2014.) 12 myths about economic growth. Redfield Community, Winslow. www.lowimpact.org. (accessed 17.10.2016.) 12. Meyer, B. D., Sullivan, J. X. (2013.) Consumption and income inequality and the Great Recession. Economic Review. Papers and Proceedings, may 2013, s. 1-11. 13. Meadows, D. H., Meadows D. L., Randers, J., Behrens, W.W. (1972.). The Limits to Growth. (Ed.): A POTOMAC ASSOCIATES Book, University Book, New York. 14. Mitchell, A. (2013.) A safer and More Prosperous World. Why Aid Really Matters in an Age of Austerity. Legatum Institute 2020 Conservatives, London, pp. 1 – 28. 15. Piketty, T. (2014.) Capital in the Twenty – First Century. (Ed.): The Belknap Press, 2014, pp. 640. 16. Romer, P. (1991.) Increasing Returns and New Developments in the Theory of Growth. In: Equilibrium Theory and Applications: Proceedings of the 6th International Symposium in Economic Theory and Econometrics. (Ed.): William Barnett et al. 17. Seligman, M. (2002.) Authentic Happiness: Using the New Positive Psychology to Realize Your Potential for Lasting Fulfilment. (Ed.):N. Y. Free Press. 18. Schmidt - Hebbel, K., Servén, L. (1999.) The Economics of Saving &Growth. Theory, Evidence, and Implications for Policy. pp. 33 – 70. (Ed.): Cambridge University Press, UK. 19. World Economic Forum. Global Risks Report 2015. (2015.) 10th Edition, pp.63, Geneva, Switzerland. 20. World Economic Forum. New Growth Models: Challenges and steps to achieving patterns of more equitable, inclusive and sustainable growth. (2014.) World Economic Forum, Global Agenda Council on New Growths Model, January 2014, REF 231213 21. The Europe 2020 Strategy. Europa 2020 (2010). A European Strategy for Smart, Sustainable and Inclusive Growth. EU Facts, http:www. eurounion.org/eufacts 22. The Happy Planet Index. (2014.) A global Index of Sustainable Well-Being. New Economic Foundation. www.happyplanetindex.org

DETAILS ABOUT AUTHOR: DARIA ROZBORILOVÁ ASSOCIATE PROFESSOR UNIVERSITY OF ECONOMICS DEPARTMENT OF NATIONAL ECONOMY BRATISLAVA, SLOVAK REPUBLIC daria.rozborilova@euba.sk

2016 - M SPHERE

B O O K O F PA P E R S

-

159


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

PUBLIC OPINION ON THE METHODS OF FINANCING ENVIRONMENTAL IMPACT STUDIES MERICA PLETIKOSIĆ

ABSTRACT Public trust in environmental impact studies is a growing issue in assessment procedures for planned projects. The public is concerned about the influence of contractors on the outcome of the procedures and the objectivity of the study makers themselves. As an unplanned and unwanted process that takes time, but can only be acted upon in a limited manner and with varying results, the issue ultimately presents a management crisis. The parties involved in environmental protection proceedings are often unprepared and cannot recognise the initial signs of a potential crisis, significantly hindering the achievement of set goals. This paper presents the results of an empirical study of public awareness and opinions in Croatia on the arrangement in which the contractor commissions the study. In-depth interviewing and participant observation were used to carry out the qualitative study on a purposive sample. Grounded theory was used to analyse the empirical data, while the quantification of qualitatively processed data was performed using the Statistica software suite (ver. 11.00). Respondents were divided in their opinions. The majority believes that the contractor should pay for the study, thus solving the issue of financing, but still allowing for potential manipulation. The accepted solution is that the concerned authorities should be the ones commissioning the study via public tender, while the contractor would cover the cost. The public and civil sectors mostly have a negative view of the existing system, while respondents from the economic sector disagree. They claim that a faulty or unprofessional study presents a risk for the contractor and that other institutions should determine whether the procedure was done professionally. KEY WORDS: crisis management, public opinion, study financing.

1. INTRODUCTION Today, the public is concerned more than ever with the existence of problems associated with environmental protection, while the problem of public risk perception in issues related to environmental protection can only be solved through better communication between all of the stakeholders (Malbaša and Jelavić, 2013). By European standards, the interested public is consulted in the conceptual phase of the project, as well as continuously throughout the procedure. European rules provide for early public participation in environmental impact assessment. The goal is early involvement, as well as continuous public participation in the process, creating the preconditions that allow the public to significantly affect the outcome of the environmental impact assessment (Cox, 2013). This is governed by various regulations, which have experienced several amendments from design to date. Following the adoption of the Aarhus Convention, in 2003 the EU adopted the Directive on Public Participation in the Process of Preparing Plans and Programmes Relating to the Environment and changes to the Directive on Environmental Impact Assessment in order to harmonise them with the principles of the Aarhus Convention. The Aarhus Convention is based on the concept of environmental democracy. Environmental democracy postulates that solving environmental issues should include all those affected by a certain decision, not just the relevant government bodies and economic sector (Ofak, 2009). In this process, all participants must be given equal status in order to prevent the decision-makers from taking only one side’s arguments into account. Availability of information is therefore a central part of environmental democracy as it encourages concerned members of the public to become active participants in the decision-making processes related to environmental issues. Public administration is tasked with identifying and implementing public interest. In time, we have come to the conclusion that state administrative bodies are not the sources of objective identifying and decision making in the best interest of the public, but are rather arbitrators between the various interests that exist, and the practice has shown that economic and political interests are always stronger than the declarative and non-binding right to a healthy environment. That is why public participation is a challenge to the traditional management/decisionmaking model implemented by experts or public administration bodies. It serves not only as a means to control public administration, but as a way to, above all, determine what the public interest is in the first place (Ofak, 2009). Public trust in environmental impact studies is a growing issue in assessment procedures for planned projects. The public is concerned about the influence of contractors on the outcome of the procedures and the objectivity of the study makers themselves. As an unplanned and unwanted process that takes time, but can only be acted upon in a limited manner and with varying results, the issue ultimately presents a management crisis. The parties involved in environmental protection proceedings are often unprepared and cannot recognise the initial signs of a potential crisis, significantly hindering the achievement of set goals.

160

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The goal of this research is to determine the awareness and attitudes of the public and the interested public in the Republic of Croatia about the solution that the contractor commissions an environmental impact study. Based on the set goal of the research a hypothesis has been made: (H) There are significant differences between the attitudes of entities of target groups and sector groups about the solution that the contractor commissions an environmental impact study.

2. MATERIAL AND METHODS The focus of qualitative research is multi-methodical and includes an interpretative, naturalist approach to the subject of the study. This means that researchers involved in qualitative studies approach the subject in its natural environment and try to understand or interpret phenomena in light of the meanings people associate with them. A qualitative approach implies the learned use and knowledge of a set of various empirical materials – case studies, personal experience, introspection, life stories, interviews, observational, historical, interactive, and visual texts – that describe the routine, problematic moments, and meanings in the lives of individuals. Researchers that employ a qualitative approach have accordingly introduced a wide range of unrelated methods, in the hope that every new method will help better understand the subject of the study (Denzin and Lincoln, 1994). Sequential approaches to the qualitative method imply detailed research in which the data collected from study participants is integrated with the observations and interpretations of the researcher. By integrating simultaneous information in the data collection process, so that the results of one method can be further processed and expanded with the results of another method, as well as the convergence of qualitative and quantitative data, an all-encompassing view of the study problem can be gained (Creswell, 2003). The inclusion of quantitative methods in a qualitative study has for its goal the integration of differing research methodologies within a single study plan, thus allowing for a more complete grasp in certain areas of the study and the binding of all study stages within a methodological triangulation. In a qualitative study, this triangulation would imply the use of several different methods at the same time in order to collect more accurate and complete information on the subject (Mejovšek, 2013). The qualitative study was carried out using a purposive sample and the methods of indepth interview and participant observation. The method of grounded theory was used in the analysis of the empirical material. Three basic types of coding were applied: open or initial coding, axial coding, selective coding. The initial coding included the first rearranging and sorting of the data, noting similarities and forming response groups. Final analysis and categorisation of the key concepts created the conceptual matrix with the content of qualitative empirical material in the integrated theoretical framework (Holton, 2007; Charmaz, 1990). Inductive and deductive methods were used on the data, as well as the method of analysis and synthesis, comparison method, classification method, and the descriptive method (Silverman, 2006). The study was conducted in 2014. Respondent selection was done according to previously set criteria: a target sample of participants in the empirical study who are involved in the procedures relevant to the research either professionally or voluntarily (Pletikosić, 2012). The sample was defined with 100 entities, 46 males and 54 females. The average respondent age was 52.1 years. Respondents were divided into 10 sub-samples (target groups) which were qualitatively defined with 10 entities: 1. STUDY MAKERS – persons authorised by the Ministry of Environmental and Nature Protection; 2. DEVELOPERS – investors; 3. MINISTRY OF ENVIRONMENT/COMMITTEE – representatives of the governing body conducting the process, and members of committees for study evaluation; 4. CITIES – representatives of the employees of the city administration for environmental protection responsible for conducting public debates, and spatial planning representatives; 5. COUNTIES – representatives of the employees of the county administration for environmental protection responsible for conducting public debates, and spatial planning representatives; 6. ASSOCIATIONS – representatives of non-governmental environmental associations; 7. CIVIL INITIATIVES – representatives of NGOs and civil society who are involved in the process, but are not environmentally oriented; 8. ECONOMIC ASSOCIATIONS – representatives of the Croatian Employers’ Association, Croatian Chamber of Commerce, and other economic interest associations; 9. POLITICAL PARTIES – representatives of political structures which are included in the process; 10. SCIENTISTS/JOURNALISTS – representatives of academic institutions and journalists who are involved in the process.

2016 - M SPHERE

B O O K O F PA P E R S

-

161


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Three new qualitatively defined control groups (clusters) were classified based on the above sub-samples: 1. PUBLIC SECTOR – 40 respondents from target groups: MIN. OF ENVIRONMENT/COMMITTEE, CITY, COUNTY, SCIENTISTS/JOURNALISTS; 2. CIVIL SECTOR – 30 respondents from target groups: ASSOCIATIONS, CIVIC INITIATIVES, POLITICAL PARTIES; 3. ECONOMIC SECTOR – 30 respondents from target groups: STUDY MAKERS, DEVELOPERS, ECONOMIC ASSOCIATIONS. Research material consisted of two dependent (grouping) variables according to the criteria of the target group, the criteria of the control group, and one independent variable. Participants were asked to give their opinion on whether local administration is sufficiently represented in the work of expert committees working on assessing environment impact studies and whether the local community should invest more effort in presenting their own development plans in order to avoid possible future public discontent. We calculated the following descriptive parameters: frequency and cumulative relative values of the responses in the whole sample, and in the predetermined focus and control groups. Processing was carried out using the Statistica Ver.11.00 software suite (Petz et al., 2012).

3. RESULTS Quantitative processing of the matrix of entities of a set variable is based on the obtained answers qualitatively defined by the interview question which is: Do you believe it to be a good solution that the contractor commissions the environmental impact study? Participants expressed their attitude about whether it is a good solution that the contractor commissions the environmental impact study. The participants’ answers are defined at three levels:

The first group was classified according to the negative response, and represents those entities who answered: In this way financing is solved, but it leaves room for possible influence on the outcome of the process. No, I believe that the study should be commissioned by the competent authorities through a public tender and the contractor should only pay for the environmental impact study. Quantitatively, these negative responses were coded as zero (0), for the upcoming statistical data processing.

The second group said that it does not have enough information, does not know or is not sure how to respond, is undecided, and stands by the following positions: Honestly, I do not know what the right or correct answer would be. I am not sure, I guess no. I think so, but I do not know for sure. It can be commissioned by anyone, it is more important who and how evaluates it. I am not sure about the answer. Quantitatively, these undecided responses were coded as one (1) for later statistical processing.

The third group of entities responded affirmatively, and argued its views as follows: Yes, the same situation is present everywhere in the world and that makes sense, the investor has to pay for the study and the ministry decides about everything else. The person paying for a certain service has the right to choose the associate with whom he or she can achieve the best cooperation. There are other institutions which will check if it is done professionally. Quantitatively, these undecided responses were coded as two (2) for later statistical processing. In statistical analysis the title of the answer to the question is defined by the variable with the code name contractor_ commissioner of the study.

162

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

In table 1 the results of frequency of all entities and the variable contractor_commissioner of the study can be seen. Table 1. Absolute and cumulative relative frequencies of the variable contractor_commissioner of the study, N=100 Responses

Frequency

Cumulative relative frequency

0

50

50.00

1

4

54.00

2

46

100.00

Legend: 0 – no; 1– I don’t know, I’m not sure; 2 – yes.

By analysing table 1 it is seen that the participants are again bipolar so 50% of entities believe that in any case the contractor has to pay only for the environmental impact study, which solves the financing, but leaves room for possible influence on the outcome of the process. That is why they believe that the study should be commissioned by competent authorities through public biding and should be paid by the investor. On the other hand, 46% of entities argue that the person paying for a certain service has the right to choose the associate with whom they can achieve the best cooperation. There are other institutions which will check if the procedure was performed professionally.

In table 2 frequencies of the variable contractor_commissioner of the study are shown within 10 predetermined target groups. Table 2. Frequencies of the variable contractor_commissioner of the study according to the target group, N=100 Responses

SM

DE

ME

CI

CO

AS

CI

EA

PP

S/J

Total

0

0

0

3

9

8

10

10

0

4

6

50

1

0

2

0

0

0

0

0

0

2

0

4

2

10

8

7

1

2

0

0

10

4

4

46

Legend: 0 – no; 1– I don’t know, I’m not sure; 2 – yes. SM– STUDY MAKERS – persons authorised by the Ministry of Environmental and Nature Protection; PH– DEVELOPERS – investors; ME– MINISTRY OF ENVIRONMENT/COMMITTEE – representatives of the governing body conducting the process, and members of committees for study evaluation; CI – CITIES – representatives of the employees of the city administration for environmental protection responsible for conducting public debates and spatial planning representatives; CO– COUNTIES – representatives of the employees of the county administration for environmental protection responsible for conducting public debates and spatial planning representatives; AS – ASSOCIATIONS – representatives of non-governmental environmental associations; CI– CIVIL INITIATIVES – representatives of NGOs and civil society who are involved in the process, but are not environmentally oriented; EA– ECONOMIC ASSOCIATIONS – representatives of the Croatian Employers’ Association, Croatian Chamber of Commerce, and other economic interest associations; PP– POLITICAL PARTIES – representatives of political structures which are included in the process; S/J– SCIENTISTS/JOURNALISTS – representatives of academic institutions and journalists who are involved in the process.

2016 - M SPHERE

B O O K O F PA P E R S

-

163


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

In table 2 the difference in the frequency of the variable contractor_commissioner of the study is again seen in the dependence on belonging to the target group so some sub-patterns are completely different according to the defined answers. On the one hand representatives of target groups CIVIL INITATIVES, ASSOCIATIONS, CITIES and COUNTIES believe that in any case contractors should pay only for the environmental impact study, by doing which greater independence as well as financing can be achieved, but there is room for the possible influence on the outcome of the process. That is why they believe that the study should be commissioned by competent authorities through public biding and should be paid by the investor. They received majority support with the representatives of the target group SCIENTISTS/JOURNALISTS as well. However, representatives of target groups STUDY MAKERS and ECONOMIC ASSOCIATIONS with quantitative share of 100% of their participants do not agree with this attitude and they offered all positive answers and argued that the person paying for a certain service has the right to choose the associate with whom he or she can achieve the best cooperation. There are other institutions which will check if the procedure was performed professionally. Quantitative analysis of the frequency of the variable dependor_commissioner of the study according to the sector group is shown in Table 3. Table 3. Frequencies of the variable contractor_commissioner of the study according to the sector group, N=100 Responses

PUBLIC SECTOR

CIVIL SECTOR

ECONOMIC SECTOR

Total

0

26

24

0

61

1

0

2

2

19

2

14

4

28

21

total

40

30

30

100

Legend: 0 – no; 1– I don’t know, I’m not sure; 2 – yes. Public sector – MINISTRY OF THE ENVIRONMENT/COMMITTEE, CITY, COUNTY, SCIENTISTS/JOURNALISTS; Civil sector – ASSOCIATIONS, CIVIC INITIATIVES, POLITICAL PARTIES; Economic sector – STUDY MAKERS, DEVELOPERS, ECONOMIC ASSOCIATIONS. 65% of representatives of the public sector express a negative attitude as well as 80% of representatives of the civil sector, considering that the study should be commissioned by competent authorities through a public tender and paid by the investor. Participants included in the economic sector with their relative share of 93% emphasize that the contractor bears the risk of responsibility for possible omissions if the “ordered” study is not processed professionally and with good quality. The person paying for a certain service has the right to choose the associate with whom he or she can achieve the best cooperation. There are other institutions which will check if the procedure was performed professionally. In table 4 the results of the post hoc analysis contractor_commissioner of the study among target groups are shown. Table 4. The results of the post-hoc analysis contractor_commissioner of the study among target groups, N=100 SM SM

DE

ME

CI

CO

AS

CI

EA

PP

S/J

1.00

0.55

0.00

0.00

0.00

0.00

1.00

0.03

0.00

0.93

0.00

0.00

0.00

0.00

1.00

0.16

0.03

0.00

0.03

0.00

0.00

0.55

0.93

0.55

1.00

1.00

1.00

0.00

0.16

0.55

0.93

0.93

0.00

0.55

0.93

1.00

0.00

0.03

0.16

0.00

0.03

0.16

0.03

0.00

DE

1.00

ME

0.55

0.93

CI

0.00

0.00

0.00

CO

0.00

0.00

0.03

1.00

AS

0.00

0.00

0.00

1.00

0.93

CI

0.00

0.00

0.00

1.00

0.93

1.00

EA

1.00

1.00

0.55

0.00

0.00

0.00

0.00

PP

0.03

0.16

0.93

0.16

0.55

0.03

0.03

0.03

S/J

0.00

0.03

0.55

0.55

0.93

0.16

0.16

0.00

164

-

B O O K O F PA P E R S

1.00 1.00

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Legend: SM – STUDY MAKERS – persons authorised by the Ministry of Environmental and Nature Protection; PH– DEVELOPERS – investors; ME– MINISTRY OF ENVIRONMENT/COMMITTEE – representatives of the governing body conducting the process, and members of committees for study evaluation; CI – CITIES – representatives of the employees of the city administration for environmental protection responsible for conducting public debates and spatial planning representatives; CO– COUNTIES – representatives of the employees of the county administration for environmental protection responsible for conducting public debates and spatial planning representatives; AS – ASSOCIATIONS – representatives of non-governmental environmental associations; CI– CIVIL INITIATIVES – representatives of NGOs and civil society who are involved in the process, but are not environmentally oriented; EA– ECONOMIC ASSOCIATIONS – representatives of the Croatian Employers’ Association, Croatian Chamber of Commerce, and other economic interest associations; PP– POLITICAL PARTIES – representatives of political structures which are included in the process; S/J– SCIENTISTS/JOURNALISTS – representatives of academic institutions and journalists who are involved in the process.

By analysing the results of post hoc analysis of the Tukey HSD test for the variable contractor_commissioner of the study among target groups it is visible that a statistically significant difference between all ten target groups is present, which can be explained with the fact that on this matter, besides the statistically meaningful difference between all ten target groups, post hoc analysis of the Tukey HSD test determined that representatives of all target groups are informed enough about whether they consider the contractor to order the environmental impact study to be a good solution. Based on the obtained results of the research a hypothesis has been made: (H)There are significant differences between the attitudes of entities of target groups and sector groups about the solution that the contractor commissions an environmental impact study. It is completely confirmed and accepted.

CONCLUSION Participants are divided in their views, most entities believe that in any case the contractor has to only pay for the environmental impact study, which solves financing, but leaves room for possible influence on the outcome of the process. That is why they believe that the study should be commissioned by competent authorities through public biding and should be paid by the investor. 50% of entities believe that the contractor should just pay for the environmental impact study in any case. On the other hand, 46% of entities argue that the person paying for a certain service has the right to choose the associate with whom they can achieve the best cooperation. There are other institutions which will check if the procedure was performed professionally. 65% of representatives of the public sector express a negative attitude as well as 80% of representatives of the civil sector, considering that the study should be commissioned by competent authorities through a public tender and paid by the investor. Respondents included in the economic sector with their relative share of 93% emphasize that the contractor bears the risk of responsibility for possible omissions if the “ordered” study is not processed professionally and with good quality.

REFERENCES 1. Charmaz, K. (1990). Discovering Chronic Illness. Using Grounded Theory, Soc. Sci. Med., 30 (11), pp. 1161-1172. 2. Cox, R. (2013). Environmental communication and the public sphere. Third Edition (pp. 83-105). The University of North Carolina at Chapel Hill: Sage Publications.

2016 - M SPHERE

B O O K O F PA P E R S

-

165


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

3. Creswell, J. W. (2003). Research Design: Qualitative, Quantitative and Mixed Methods Approaches. Second edition (pp. 15-18). University of Nebraska, Lincoln: Sage Publications. 4. Denzin, N. K., & Lincoln Y. S. (1994). Handbook of Qualitative Research (p. 2.). London: Sage Publications. 5. Directive 2003/35/EC of the European Parliament and of the Council providing for public participation in respect of the drawing up of certain plans and programmes relating to the environment and amending with regard to public participation and access to justice Council Directives 85/337/EEC and 96/61/EC. (EIA, 2011/92/EC); Aarhus Convention (NN – MU 1/07). 6. Holton, J. A. (2007). The Coding Process and Its Challenges. In A. Bryant, & K. Charmaz (Eds.), Grounded Theory: the Sage Handbook. London: Thousand Oaks. New Delhi, Singapore: Sage Publications 7. Malbaša, N., & Jelavić, V. (2013). Proceedings: Prva regionalna konferencija o procjeni utjecaja na okoliš. In M. Brkić, & N. Mikulić (Eds.), Povijesni pregled i aktualni problemi procjene utjecaja na okoliš u Republici Hrvatskoj (pp. 31-43). Zagreb: Hrvatska udruga stručnjaka zaštite prirode i okoliša. 8. Mejovšek, M. (2013). Metode znanstvenog istraživanja u društvenim i humanističkim znanostima. Second edition (p. 161). Jastrebarsko: Naklada Slap. 9. Ofak, L. (2009). Public participation in environmental decision-making. In M. Kaštelan Mrak (Ed.), Economics and Public Sector Management (pp. 114150. (115-117)). Rijeka: University of Rijeka, Faculty of Economics 10. Petz B., Kolesarić V., & Ivanec D. (2012). Petzova statistika: osnovne statističke metode za nematematičare. Jastrebarsko: Naklada Slap 11. Pletikosić M. (2012). Odnos javnosti prema korištenju zamjenskog goriva u industriji cementa. (Public attitudes towards the use of alternative fuel in cement industry). Master thesis. Zadar; University of Zadar 12. Silverman, D. (2006). Interpreting Qualitative Data: Methods for Analyzing Talk, Text and Interaction. Third edition. London: Thousand Oaks, New Delhi: Sage Publications

DETAILS ABOUT AUTHOR: MERICA PLETIKOSIĆ Ph.D., ENVIRONMENTAL MANAGER CEMEX CROATIA KAŠTEL SUĆURAC, CROATIA merica.pletikosic@cemex.com

166

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

PROGRAM „CROATIA 365“ IN A FUNCTION OF BETTER MARKET POSITIONING OF THE TOURIST DESTINATIONS DURING THE PRE-AND POST-SEASON BILJANA LONČARIĆ

ABSTRACT The primary objective of the program „Croatia 365“ started by the Ministry of Tourism in September 2014 was a better use of resources during the pre- and post-season and showing Croatia as a destination with tourist opportunities throughout the year. In July and August 2015, it was conducted primary research among the six continental Tourist Boards participating in the pilot project from 2014. The results of this study showed that in Croatia there was still no legal framework for the effective operation of the PPS destinations, especially those continental, tourist undeveloped. It has also been found out that in the area of one-third of the surveyed destinations there was an increase in tourist traffic, but not as a result of the activities carried out in the framework of the project, and also that the Croatian Tourist Board gave financial support to the activities of only one of the surveyed destinations. Today there are 40 PPS destinations in Croatia, 16 of them in the continental part. The aim of the primary research in the form of an online questionnaire, among the directors of the Tourist Boards of those tourist cities and municipalities in which are the PPS destinations seats, and this in June and July 2016, was to determine how the PPS project during the observed period worked on each area; which activities were undertaken through the project; to what extent they were sponsored by the Croatian Tourist Board and what were effects of the undertaken activities. The results of the research will be presented and analyzed, while in the concluding remarks, measures for effective functioning of the PPS concept will be suggested. The goal of the work is to analyze and to synthetize results of the primary research, meaning finding out if the directors of the Tourist Boards, by which are the PPS destinations seats, are satisfied with the application of the program „Croatia 365“ in their areas, as well as finding out if Croatia created an adequate legal and institutional frameworks for the effective operation of the PPS destinations. In the context of applied methodology it was given a review of the scientific literature dealing with the concept of „tourist destination“ and „management of tourist destination“; the process of connecting tourist destinations within the concept „Croatia 365“ was discussed and the primary research, in the form of a web questionnaire, was conducted among the directors of the Tourist Boards in charge of PPS destinations, with the response of 21 from 40 of them (52,5%). KEYWORDS: Croatia 365; PPS destination; pre and post season.

1. INTRODUCTION The pilot project of the program „Croatia 365“, started by the Ministry of Tourism in September 2014, included 22 destinations, of which 7 continental. As its main goal was a better use of resources during the pre- and post-season, it is questionable if and to which extent this program has yielded adequate results in the continental part of Croatia, in which, in accordance with the positive legislation, tourist season lasts the whole year, and not just during the summer months. For this reason, during July and August 2015, there was the research conducted among the directors of the continental Tourist Boards by which were the seats of the PPS destinations. The goal of the research was to find out, on the basis of the analysis and synthesis, to which extent these destinations were satisfied with the application of the program „Croatia 365“ at their areas; then, if these measures had any results in the sense of increasing of tourist traffic as well as if Croatia created an adequate legal and institutional frameworks for the effective operation of the PPS destinations. Conclusions which derived from this research were that the PPS concept, at least when it comes to the continental Croatia, was not coordinated with the provisions of the applicable Rules on the periods of season, preseason, postseason and after season in tourist municipalities and cities (NN 92/09, NN 146/ 13; NN 35/14), according to which in most of the continental Croatia tourist season lasted all year round. That was the reason why the program „Croatia 365“ did not achieve good results in any of field of activities in particular PPS destinations concerning the number of meetings of the PPS bodies; sources of financing joint activities; tourist traffic etc. (Loncaric, B., Ruzic, D., 2015, 290).

2016 - M SPHERE

B O O K O F PA P E R S

-

167


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

To see if there have been any changes in relation to the efficiency of the PPS concept, during June and July 2016, there was new research conducted, this time among the representatives of all the Croatian PPS destinations. The goal of the research was to find out, on the basis of the analysis and synthesis, to which extent the PPS destinations at all were satisfied with the application of the program „Croatia 365“ at their areas; then, if these measures had any results in the sense of increasing of tourist traffic, and if Croatia created an adequate legal and institutional frameworks for the effective operation of the PPS destinations.

2. LITERATURE REVIEW In the scientific and professional literature authors have not encountered the term „PPS destination“, in which expression the term „PPS“ actually means an abbreviation for the term „pre- and postseason“. In the literature dealing with tourism issues are defined and explained only the terms as „a tourist city“ and „a tourist destination“. In the tourist destination visitors remain temporarily in order to participate in the interaction and the tourism related attractiveness, while passengers must not be observed in the manner established by the administrative division of a given area. That destination can be part of a particular administrative area, or include all the administrative area or even exceed its limit (Pike, 2008, 26). Most of the empirical studies do not burden the definition of tourist destinations, but merely deals with the sites where there is the traffic of visitors or where it might take place. In this context, these sites are analyzed and measured in terms of the degree of attractiveness, guest satisfaction, the success of managing the flow of guests and management of destinations, but most often, however, in the context of the possibility of taking a good position in the tourism market (Hitrec, T., 1995, 43 -51). So a tourist destination may be smaller or larger spatial unit, all depending on how the certain area is perceived by tourist demand. In addition to enough attractive power, equipment for the arrival and stay of tourists in tourist destinations is also very important. Destination area must have an offer that will meet the demands of visitors, generally very heterogeneous in terms of age, ethnicity, social and professional status and another (Travis, A. S., 1989). A tourist destination has several components such as attractiveness, special service activities, access, availability, activities and supplementary service activities (Djurica, M., Djurica, N., 2010, 890). It is no longer considered „a package of tourist services and content“ (Hu, Y., Ritchie, JRB., 1993, 25-34), but a whole made by a variety of tourist offer and different travel experiences (Buhalis, D., 2000, 97). As all previous definitions show that tourist destinations should include a comprehensive tourism product, the concept of destination varies from case to case, so, the term „destination“ sometimes means just a specific tourist site or zone, but sometimes the region, country, group of countries or even a continent. Regardless of this, in terms of increasing globalization tourists are becoming more demanding, while their needs for experiences have been growing, so it is necessary to create more complex tourist products and manage them well. As numerous factors have an impact on tourists“ perception of a destination and on their satisfaction, there is a need for strategic and integrated planning of the destination, which relies heavily on the coherent cooperation and communications amongst its participants (Shtonova, I., 123).Therefore, the role of management of tourist destinations is primarily to create a balance between profitable business in the tourism industry, competitive position in the market, an attractive environment, the positive experience of visitors and satisfied local population that supports the development of tourism (Pike, S., Destination Marketing, 113), provided that the destination management organization needs to become a leader of destination development strategy (Magas, D., 2010, 1047). Destination marketing is trying to improve the image of the destination and its perception in the public (Avraham, E., Ketter, E., 2015), while successful managing implies close cooperation between public and private sector, which includes the creation of joint projects through public-private partnership (Bagaric, L., 2010).

3. THE PROGRAM “CROATIA 365” When talking about the Croatian tourism, it is evident that one of the characteristic features of the tourism demand is time concentration (Ruzic, D., 2007, 99), and a pronounced seasonality. The statistics data show that in 2015from a total of 71,6 million realized nights, in July and August were recorded them almost 62% (Ministry of Tourism, 2016, 18). Seasonality of tourism in Croatia is primarily caused by geographical features, in particular climatic factors, without neglecting any influence of other factors such as consistent trend in the use of vacations from certain European countries

168

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

from which there is a largest generation of the tourist demand for the Croatian tourism; changes in trends in the behavior of the tourist consumers; influences of travel agents to select the destination and type of travel; economic growth in major tourist source markets; transformation of mass tourism market to the specific forms of tourism; specialization of the tourist offer, etc. (Čavlek, N. et al., 2010, 145). Seasonality in tourist traffic flowing has resulted in many problems such as uneven implementation of economic and other effects; distortion of the image on the economic potentials of tourism; underestimation and misunderstanding of the importance of tourism in the financial and institutional support for its development; excessive use of individual tourism resources excessively evaluated over several months of the tourist season etc. (idem, 146), which could be reduced by the even distribution of tourist traffic by months. The pilot project of the Ministry of Tourism „Croatia 365“ has launched in September 2014, precisely with the primary goal of better use of resources during the pre-and postseason and of showing Croatia not just as „a sun and sea“ destination, but also as a destination with tourism opportunities throughout the year. Through projects such as the project above mentioned, the state intends to influence the raising standards and improves quality of life; educate population; develop rural areas through infrastructure and getting medical care; develop a middle class; strengthen local cultural values and customs (Bramwell, B., Rawding, L., 1996, 201-221), and put tourism in overall economic growth and the inflow of foreign direct investment, as well as stabilizes the balance of payments relations and national labor market power (Loncaric, B., 2012, 156).In small economies such as the Croatian, foreign tourism is a significant source of foreign currency earnings and a generator of exports and employment (Gatti, P., 2013, 53). Plan of pre- and postseason (PPS Plan) of Croatian tourism as a component of the marketing plan for Croatian tourism for 2014- 2020 is carried out in two phases, the first from 2014 to 2016, focusing on the increase of arrivals in June and September, and the other from 2017 to 2020, dedicated to the May and October, in order to increase Croatian guests bases. To this purpose, three strategies focused on the expansion of the Croatian proposal values ​​and offers in this period (Croatian National Tourist Board, 2014, 167) were proposed, with the decisive role of tourist boards in developing PPS concept, which should be capable of acting on the principle of destination management organizations (DMOs), and of stimulating and integrating the interests of different subjects in the tourist value chain in the destination (idem, 76). In the pilot project “Croatia 365 “, which was organized in the postseason in 2014 and with a total value of 4.8 million HRK, were included 22 destinations, of which 7 continental, with the main activities carried out through offline and online advertising in key tourism markets, and through a web site of the Croatian National Tourist Board with the content based on 6 key tourism products (Croatian National Tourist Board, 2014, 100). In 2015 the label „PPS“ was granted to 40 destinations, of which 16 continental, while the Croatian Tourist Board conducted the marketing campaign mostly on the major tourist generating markets. As part of the campaign on which was spent about 8,95 million HRK, it were produced promotional tools and materials, it was realized online and offline advertising, while the PPS website was developed. The Croatian Tourist Board also awarded grants for PPS products development in the tourism undeveloped areas as well as the events; maintained presentations and business workshops, organized study visits of journalists and agents and realized the project EDEN in cooperation with the European Commission (Croatian National Tourist Board, 2015, 103).

4. METHODS AND RESULTS OF PRIMARY RESEARCH All of the continental PPS destinations except the PPS destination „Plitvička jezera“, according to the Regulations on the periods of season, preseason, postseason and after season in tourist municipalities and cities (NN 92/09, NN 146/13, NN 35/14), are classified in the category of the cities or municipalities where the main tourist season lasts the whole year. The first research was conducted among the representatives of the continental PPS destinations by which are the seats of PPS destinations, that during the second half of July and early August 2015, in order to establish the actual effects of measures undertaken within the project “Croatia 365” in the continental Croatian PPS destinations and to explore if possible increase in tourist traffic in those destinations during the period from 1 October 2014 to 31 March 2015 was a result of actions of the PPS destination management or of activities that have been undertaken at the level of individual tourist municipalities and cities networked in the PPS destinations (Loncaric, B., Ruzic, D., 2015, 284). The results of that research had shown, among other things, that the meetings of the bodies in the PPS destinations had not been held regularly; then that there had been a lack of sources for financing activities, especially from the national level, and that eventual increase in tourist traffic in some of the researched destinations had been the result, first of all, of the activities undertaken at local level, but not as a result of activities undertaken in the framework of the project „Croatia 365“ (idem, 285).

2016 - M SPHERE

B O O K O F PA P E R S

-

169


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

This time the research was conducted among all the PPS destinations, during the summer 2016, via a web survey, and the answers to the questions were given by the representatives from 23 PPS destinations (57,5%), including following destinations: My beautiful Slavonia by the river Sava; Dubrovnik Riviera; Rovinj, Bale, Kanfanar, St. Vincente; Central Istria; Labin-Rabac-Kršan-Raša; Southern Istria; Green Heart of Croatia; Center of the Emerald Rocky Ground of Croatia; Green Riviera; Lika; Međimurje; Wine Tour of Slavonia and Baranja; Aurea Panonia; Gorski kotar – experience you need; Archipelago of Cres and Lošinj; the Island of Krk; Green Blue Oasis; Split Riviera; Biokovo; Šibenik-Vodice-Tribunj; Podravina; Srijem and Slavonija; Zagreb and around the Green Surroundings, 56,5% of them from the continental part of Croatia. Analyzing responses to survey questions it was found that most of the representatives of the surveyed PPS destinations (60,9%) stated „culture“ as the key tourism product, followed by „active vacations“, „bicycling“, „eno-gastronomy“, and that in all specified destinations western and central European tourist markets were signed as the key markets. Onwards, the results of the research showed that the largest number of the members in the area, 749 of them, were registered in the PPS destination “Southern Istria“, followed by the PPS destination “Rovinj, Bale, Kanfanar, St. Vincente“ with 680 networked members, both from the coastal part of Croatia. When talking about the continental part of Croatia, the PPS destination „Wine Tour of Slavonia and Baranja“ was considered the biggest one. Interesting are also the data related to the number of meetings held by the bodies of PPS clubs. According to the Rules for the establishment and operation of the PPS destination clubs, a destination forum should be called at least once a year, and meetings of coordination committees as well as production teams at least once in three months a year. In the PPS destination “Archipelago of Cres and Lošinj“, with the seat at the Tourist Office of Mali Lošinj, from the time of constitution till the time of survey, there were 3 Destination Forums (with the main task to accept reports on the activities of the PPS club bodies and to discuss issues related to the development and improvement of the destinations offer). In 5 of the Destinations there were 2 Destination forums; in 4 of them just one Forum, but in majority of them (56,5%), there was no destination forum at all. The largest number of the meetings of the Coordination Committee as the governing body of PPS clubs, 10 of them, was held in the PPS destination “The Southern Istria“, with the seat at the Tourist Office of Pula; 7 in the PPS destination „Biokovo“, with the seat at The Tourist Office of Baška Voda and 6 in the PPS destination „The Green Heart of Croatia“, with the seat at the Tourist Office of Karlovac. Most of the PPS destinations (43,5%) from the time of constitution till the time of survey held just 1 or 2 meetings of the Coordination Committee, while 3 of them held no meetings from the constitution. Meetings of production teams as bodies with the base task to develop and improve destinations tourist offer were mostly held in the PPS destination “The Green Heart of Croatia“ (15 meetings), followed by the PPS destination „Međimurje“, while the majority of the surveyed PPS destinations (34,8%) had just 1 or 2 mentioned meetings, or did not have meetings of production teams at all (34,8%). When talking about the regular activities of the PPS destinations, most of them (87,0%) organized study trips and/ or reception of journalists; prepared texts and pictures of tourist potentials of the PPS destinations for the web site of the Croatian National Tourist Board (82,6%); organized study trips and/or reception of travel agencies (78,3%); organized manifestations (65,2%); informed the public about the work and activities of the PPS clubs (60,9%). Just 3 of the PPS destinations (17,4%) developed a common web portal (Biokovo, The Island of Krk, My beautiful Slavonia by the river Sava), while just 2 of them (13%) made a visual of the PPS destination (Šibenik-Vodice-Tribunj, Gorski kotar). When it comes to sources of financing activities, almost all of the PPS destinations (95,7%) as one of the sources of activities financing stated direct revenue of the Tourist Board at which is the seat of the PPS destination; 18 of them (78,3%) funds of the networked tourist boards and the cities and municipalities - signatories of the agreement on cooperation in the project of the PPS concept “Croatia 365”; 9 of them (39,1%) the Croatian Tourist Board and 4 of them (17,4%) support provided by the members of the PPS club. In undertaking activities, 3 of the PPS destinations (13,0%) were supported by the Ministry of Tourism, while the PPS destination „The Green Heart of Croatia“ got resources from donors. When it comes to cooperation with the Department of the PPS destinations in the Head office, research revealed that 87.0 % of the surveyed PPS destinations sometimes contacted the competent department (Figure 1), whereas, when it comes to the success of the project “Croatia 365” in the field of the PPS particular destination, almost half of the respondents (47,8%) gave the project a grade “good”; 6 of them (26,1%) an “sufficient”, while two of them grated cooperation with the Croatian Tourist Board with the mark “insufficient” (Figure 2). The Croatian Tourist Board was given a grade „very good“ by 4 of the PPS destinations, while a grade „excellent“ did not get from any PPS destination. Regarding the tourist traffic in the area of ​​the PPS destination during 2015, the results of the study showed that at the area of 20 PPS (87,0%) destinations, there was an increase in tourist traffic (Figure 3), but, according to most of the PPS destinations with an increase in tourist traffic (60,9%), that increase was not result of the activities that had been

170

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

undertaken in the framework of the project “Croatia 365”, while 34,8% of them said that the Croatian Tourist Board just partly helped in achieving good results (Figure 4). The increase in tourist traffic in the period from 1 January to 31 March 2016 was recorded in 15 (65,2%) PPS destinations (Figure 5), with only 2 (9,5%) PPS destination considering that the number of overnight stays in the area of destination was result of activities undertaken in the framework of the project “Croatia 365” (Figure 6). The results of the research also showed that 9 respondents (39,1%) assessed the support of the Croatian Tourist Board to project implementation in the area of ​the ​individual PPS destinations with a grade “good”, 2 PPS destinations (30,4%) with a grade „sufficient“ and one (17,4%) with a grade “insufficient” ( Figure 7). Minority of the PPS destinations (13,0%) gave the Croatian Tourist Board for its support a grade „very good“. The concept of the project “Croatia 365” according to which destinations in the continental Croatia where, in accordance with applicable legislation, the tourist season lasts all year round, also take part, was assessed with a grade „good“ by half of respondents (47,8%); two destinations (8,7 %) evaluated the concept as “sufficient” and 4 (17,4%) as “insufficient“. The concept was given a grade „very good“ or „excellent“ by 26,1% respondents. (Figure 8). Figure 1. Advisory cooperation with the Department for the PPS destinations in the Head office of the Croatian Tourist Board

Source: Self conducted research, Slavonski Brod, July and August 2016

Figure 2. Efficiency of the project “Croatia 365” in the PPS destinations

Source: Self conducted research, Slavonski Brod, July and August 2016

2016 - M SPHERE

B O O K O F PA P E R S

-

171


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 3. Tourist traffic in the area of the PPS destinations in the period from January, 1, to December, 31, 2015

Source: Self conducted research, Slavonski Brod, July and August 2016

Figure 4. Results of activities within the project â&#x20AC;&#x153;Croatia 365â&#x20AC;? in the PPS destinations in the period from January, 1, to December, 31, 2015

Source: Self conducted research, Slavonski Brod, July and August 2016

Figure 5. Tourist traffic in the area of the PPS destinations in the period from January, 1, to March, 31, 2016

Source: Self conducted research, Slavonski Brod, July and August 2016

172

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 6. Results of activities within the project „Croatia 365“ in the PPS destinations in the period from January, 1, to March, 31, 2016

Source: Self conducted research, Slavonski Brod, July and August 2016

Figure 7. Support of the Croatian Tourist Board to implementation of the project “Croatia 365” in the PPS destinations

Source: Self conducted research, Slavonski Brod, July and August 2016

Figure 8. Application of the concept “Croatia 365” in the PPS destinations of the continental Croatia

Source: Self conducted research, Slavonski Brod, July and August 2016

2016 - M SPHERE

B O O K O F PA P E R S

-

173


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

5. DISCUSSION AND CONCLUSIONS Since the scientific and professional literature dealing with the tourism does not know the term „PPS destination“, it is questionable to which extent is acceptable to use this term in the context of the program „Croatia 365“, especially when talking of its application in the continental part of Croatia. Namely, the goal of this program is to get as better as possible tourist results in pre- and postseason, although at the continent of Croatia, with exception of Plitivička jezera, tourist season lasts the whole year, so there is no pre- or postseason. Although the commitment of the competent Ministry of Tourism and the Croatian Tourist Board for the implementation of PPS concept “Croatia 365” in the networked tourist destinations in the area of ​​the coastal and continental Croatia can be evaluated as the extremely positive initiative, what is at stake is whether Croatia created an adequate legal and institutional frameworks for the effective operation of the PPS destinations, especially those inland, which are, in terms of tourism, largely undeveloped. The Strategy for the Development of Tourism in 2020 as a development principle referred to the partnership, and the creation of conducive and transparent institutional framework tailored to measure companies (Ministry of Tourism, 2013, 28-29), while in the Strategic Marketing Plan for Croatian Tourism for the period from 2014 to 2020 PPS strategies have been discussed in details (Croatian National Tourist Board, 2014, 167-192). Problem arises from the fact that in the currently valid Law on Tourism Boards and Promotion of Croatian Tourism (NN 152/08) there are no provisions relating to the PPS concept and method of its application. For the implementation of a plan to increase tourist traffic in the period of pre- and postseason, the Croatian Tourist Board, through the Work program and financial plan for 2016, planned funds in the amount of 14.250.000,00 HRK, doubly more than for 2015, with the largest share (77,19%) of funds intended for communication campaign. Data from the primary research conducted in July and August 2016, as well as the data from the previous primary research conducted in July and August 2015, show that the majority of the representatives of the researched PPS destinations shares the view that the activities undertaken within the PPS concept did not give specific results, and that they did not aim at increasing tourist traffic in certain PPS areas. Disturbing is also the fact that none of the surveyed PPS destination, to the concept of “Croatia 365”, when it comes to applying the same on its territory, gave a rate „excellent”, while just 26,1% of them rated the concept with “very good”, and that at more than a half (56,5%) of the researched PPS destinations, there have been no destination forums held from the constitution. Results of this study should help tourist boards all over the Croatia to make the Ministry of Tourism as well as the Croatian Tourist Board call attention to inefficiency of the program „Croatia 365“ and to propose the measures which will improve and enhance this program, aiming at getting better tourist results.

REFERENCES 1. Avraham, E.; Ketter, E. (2015.) Vrijedi li isto mjerilo za sve? Diferencijacija ciljeva destinacijskog marketinga i strategije za njihovo postizanje. Turizam, 63(3), pp. 337-349. (References from Journals) 2. Bagaric, I. (2010.) Tourism Destination Management and public-private partnership (Ed.): Tourism and Hospitality Management Industry 2010, New Trend in Tourism and Hospitality Management, Full Papers Proceeding, Faculty of Tourism and Hospitality Management, Opatija 2010,pp. 237-253. (References from proceedings and books) 3. Bramwell, B.; Rawding, L. (1996.)Tourism Marketing of Industrial Cities.Annals of Tourism Research, 23 (1), pp. 201-221. (References from Journals) 4. Buhalis, D. (2000.)Marketing the competitive destination of the future.Tourism Management, 21 (1), pp. 97 – 116. (References from Journals) 5. Čavlek, N. et al. (2010.)Prilog novim odrednicama turističke politike u Hrvatskoj.Acta Turistica, 22 (2), pp. 137- 160.(References from Journals) 6. Djurica, M.; Djurica, N. (2010.)Tourism Destination Marketing Management (Ed.): Tourism and Hospitality Management Industry 2010, New Trend in Tourism and Hospitality Management, Full Papers Proceeding, Faculty of Tourism and Hospitality Management, Opatija 2010,pp. 890901. (References from proceedings and books) 7. Gatti, P. (2013.) Turizam blagostanje i distribucija dohotka u Hrvatskoj. Međunarodni znanstveno-stručni časopis „Turizam“, 61 (1), pp. 53-70. (References from Journals) 8. Hitrec, T. (1995.) Turistička destinacija: pojam, razvitak, koncept. Turizam, 43 (3,4), pp. 287-301 (References from Journals) 9. Hrvatska turistička zajednica (2016.) Godišnje financijsko izvješće za 2015., Zagreb. (References from Other Literature) 10. Hrvatska turistička zajednica (2014.)Godišnji Program rada i financijski plan za 2015., Zagreb. (References from Other Literature) 11. Hrvatska turistička zajednica (2015.) Godišnji Program rada i financijski plan za 2016., Zagreb. (References from Other Literature) 12. Hrvatska turistička zajednica (2014.) Strateški marketinški plan hrvatskog turizma za razdoblje 2014.- 2020., Zagreb. (References from Other Literature)

174

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

13. Hu, Y., Ritchie, J.R.B. (1993.)Measuring destination attractiveness: A contextual approach.Journal of Travel Research, 32 (3), pp. 25-34. (References from Journals) 14. Lončarić, B. (2012.)Marketing u turizmu Slavonije i Baranje. Doktorska disertacija, Ekonomski fakultet u Osijeku, Osijek. (References from Other Literature) 15. Lončarić, B., Ružić, D. (2015.) Program „Croatia 365“ in a function of stronger market positioning of the continental part of Croatia on foreign tourism markets (Ed.): 4thM-Sphere Conference, Dubrovnik, Full Papers Proceedings, M-Sphere, Dubrovnik, 2015, pp. 290 (References from proceedings and books) 16. Magaš, D. (2010.)Why The Destination Management Organization?(Ed.): Tourism and Hospitality Management Industry 2010, New Trend in Tourism and Hospitality Management, Full Papers Proceeding, Faculty of Tourism and Hospitality Management Opatija, 2010, pp. 1041-1047. (References from proceedings and books) 17. Ministarstvo turizma (2009., 2013., 2014.) Pravilnik o razdobljima glavne sezone, predsezone, posezone i izvansezone u turističkim općinama i gradovima, Zagreb. (References from Other Literature) 18. Ministarstvo turizma (2013.) Strategija razvoja turizma RH do 2020., Zagreb. (References from Other Literature) 19.

Ministarstvo turizma (2016.) Turizam u brojkama 2015.,Zagreb. (References from Other Literature)

20. Pike, S.(2008.) Destination Marketing, Butterworth-Heinemann, Burlington. (References from proceedings and books) 21. Ružic, D. (2007.) Marketing u turističkom ugostiteljstvu, Ekonomski fakultet u Osijeku, Osijek. (References from proceedings and books) 22. Shtonova, I. (2011.) Managing inter-firm cooperation to improve tourism destinations: a cluster approach. Problems of management int he 21th century, 1, pp. 118-124 (References from Journals) 23. Zakon o turističkim zajednicama i promicanju hrvatskog turizma (2008.) N.N. 152/08, Zagreb. (References from Other Literature)

DETAILS ABOUT AUTHOR: BILJANA LONČARIĆ PH. D., DIRECTOR TOURIST BOARD SLAVONSKI BROD SLAVONSKI BROD, CROATIA info@tzgsb.hr

2016 - M SPHERE

B O O K O F PA P E R S

-

175


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

#INSTAFOOD – A FIRST INVESTIGATION OF THE “SOCIAL EATER” ON INSTAGRAM CHRISTOPH WILLERS SOPHIA SCHMIDT

ABSTRACT The user base of social network sites has grown largely within the last years. Due to the increasing utilization of smartphones and the mobile Internet, users are able to share details of their everyday life independent of time and place. Thereby visual communication becomes particularly popular, reflected by the remarkable growth in social networking platforms such as Instagram. It enables users to modify their mobile photos and videos and afterwards share them with a community. Whereas the Instagram content is mostly dominated by portrayals of users themselves or in company with other people, a considerable part of the shared content appears to be “food”-related. The current study investigates the extent and the underlying motives of the evolving “social eater”-phenomenon on Instagram as a popular social media platform. Due to the fact that impression management is referred to as one of the central motives of participating in social network sites, it is suggested that motives of “food”-sharing on Instagram are of a self-presentational nature as well. A quantitative survey of 1,847 German Instagram users has been conducted in order to examine the extent of the phenomenon and well as the self-presentational motives underlying the activity of “food”sharing on Instagram. The results show a considerable appearance of “food” as a social subject and the dominance of identity-related motives. Considering these motives, the research develops communication strategies on how companies in the “food”-sector could present themselves and interact with the “social eater” on Instagram in the best possible way. KEY WORDS: instagram, food, social eater, social media marketing, impression management.

1. INTRODUCTION: THE PHENOMENON OF THE “SOCIAL EATER” “Photos and videos have become key social currencies online”. That is what Rainie, Brenner and Purcell (2012, S. 1) conclude within their study about the formation and distribution of contents within the internet. The user base of social network sites has grown largely within the last years. Due to the increasing utilization of smartphones and the mobile Internet, users are able to share details of their everyday life independent of time and place. Thereby visual communication becomes particularly popular, reflected by the remarkable growth in social network platforms such as Instagram (Tippelt & Kupferschmitt, 2015, S. 443). The Photo-Sharing-App now comprises more than 500 million active users (Instagram, 2016). Instagram enables users to modify their mobile photos and videos and afterwards share them with a community. Whereas the Instagram content is mostly dominated by portrayals of users themselves or in company with other people, a considerable part of the shared content appears to be “food”-related. According to an analysis (n=50) of Hu, Manikonda and Kambhampati (2014), 10% of the analyzed Instagram photos show “food” content. Also Coary and Poor (2016, p. 1) speak of an emerging “foodtography mainstream” on Instagram. Nestlé Germany refers to people who share their “food” on Social Media Platforms as “social eaters”, stating that in Germany “almost every second person (46%) has already captured a photo of his “food” and shared it online […]” (2016, own translation). In consideration of the above-explained findings, the current study is conducted in order to investigate the phenomenon of the growing group of “social eaters” more deeply. Due to the fact that impression management is referred to as one of the central motives of participating in social network sites, it is suggested that motives of “food”-sharing on Instagram are of a self-presentational nature as well. A quantitative survey of German Instagram “food”-poster has been conducted in order to examine the extent of the phenomenon and the self-presentational motives underlying the activity of “food”-sharing on Instagram. During the course of this paper, the reader will be introduced to the social network site Instagram in chapter 1. In the first step, the evolution of the mobile photo application as well as its main functions will be described, which is followed by facts and numbers about the user community. Subsequently the theoretical approach of the three motives of impression management identified by Leary and Kowalski (1990) will be elaborated in chapter 2, based on Goffman’s (1959) Impression Management Theory and the Theory of Symbolic Self-completion (Wicklund & Gollwitzer, 1981). Chapter 3 presents the research question as well as the methodological approach and sample characteristics of the present study. Chapter 4 is dedicated to portray and discuss the first results of the research with regard to the research question. Based on the specific functions of Instagram introduced in chapter 2 and the theoretical framework elaborated in chapter 3, the last chapter illustrates chances and recommendations that result from the phenomenon for companies of the “food”-sector.

176

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2. INSTAGRAM Instagram is a mobile application, which enables its users to share photos and videos with their Instagram community, as well as other social network platforms, such as Facebook or Twitter. The photo sharing application was launched in October 2010 and initially only available within Apples store for iPhones. In April 2012, it became available for the Android operating system and within the same year, Facebook acquired it for $ 737 million (Heise online, 2012; Instagram, 2016; Pettauer, 2015). Photos and videos can either be captured directly within the application or retrieved from the data storage of the corresponding mobile devices. As opposed to other social network sites, Instagram users are able to modify their content with the help of image editing and filter functions, before sharing it online. Furthermore, users can add a location information to their posts as well as a picture caption, which frequently includes so-called “hashtags”. Hashtags initially became popular as a key function of the social network platform Twitter and can be defined as key words, sentences or abbreviations that are prefixed with a hash (#), e.g. #instafood. With the help of hashtags, users cannot only highlight certain information within their posts, but also retrieve an overview of all posts within the Instagram community that contain the same hashtag and therefore are likely to be related to a similar topic (Herwig et al., 2009, p. 5; Hu, Manikonda & Kambhampati, 2014, p. 1-2; Landsverk, 2014, p. 316). Instagram users can follow other users in order to see the contents they share and are therefore referred to as “followers”. The Instagram network functions in an asymmetric way. As Hu, Manikonda and Kmabhampati (2014, p. 2) explain: “[…] if a user A follows B, B need not follow A back”. Users either create a public profile, which can be accessed and followed by any Instagramer or a private profile, where permission to follow is given on request to another user. Users can see the contents shared by the accounts they follow listed within the “newsfeed”, the core site of Instagram. They have the possibility to react on a photo or video by marking it with a “like” or using the comments function to place a comment below the picture (Hu, Manikonda & Kambhampati, 2014, p. 2; Pettauer, 2015). Furthermore, Instagram is one of the most popular social networks for so-called “Influencer”. Influencer are characterized by a huge amount of follower and therefore impact a wide range of Instagrammer with their content. Although their impact is comparable to that of a celebrity, they are frequently perceived as more authentic, due to their independence and expertise within a certain area (Nguyen, 2016; tobesocial, 2016). The Instagram community recorded a rapid growth since 2010 and has been more than doubled within the past two years. Over 500 million monthly active users are currently taking 95 million posts and 4.2 billion likes per day (Instagram, 2016). The social network sites do not publish country-specific user data. According to Instagram Manager Levine at the Digital Life Design Internetkonferenz 2016, 9 million users are located in Germany (Beer, 2016). Studies show that over two thirds of German Instagram users are in the age between 14 and 29. With respect to this age group, Instagram is the most frequently used social network site after Facebook (Tippelt & Kupferschmitt, 2015, p. 444-446). Table 1. Worldwide monthly active users of Facebook, Instagram and Twitter Social network site

Monthly active users (mio.)

Facebook

1,719 (June 2016)

Instagram

500 + (September 2016)

Twitter

313 (September 2016)

Source: Facebook, 2016; Instagram, 2016; Twitter, 2016

3. THEORETICAL APPROACH: THE THREE MOTIVES OF IMPRESSION MANAGEMENT Researchers agree on the fact that the motives underlying participation in social network sites are mainly of selfpresentational nature. The term self-presentation originally refers to Goffman’s (1959) Impression Management Theory, which states that individuals targetedly control their interaction with the environment, in order to create a desired impression on an audience. Especially social network sites like Instagram enable a high level of control by offering various profile and interaction functions. While Goffman’s audience-centred approach focuses on interpersonal processes, it is also known that – in consciously creating impressions in the form of e.g. a detailed profile of oneself within a social network site – there is a self-reflexive process involved as well. This suggests to consider the Theory of Symbolic SelfCompletion by Wicklund and Gollwitzer (1981). According to them, individuals set themselves certain “identity goals” and express self-definitional symbols in order to realize them. Thereby it is required that these self-definitional symbols

2016 - M SPHERE

B O O K O F PA P E R S

-

177


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

are recognized by the environment in order to be realized. Instagram and similar network sites facilitate this process, because they enable participants to monitor the recognition by the audience providing their content with a “like” or a positive comment. Consequently, there is an audience-centered approach of managing impression on the one hand and the individualcentered approach of managing identity on the other hand, which can be related to taking actions on social network sites. Because of the self-reflexive process going along with self-presentation, more recent literature on impression management suggests that the traditional impression management approach should also include the above-explained individual-centered approach (Rüdiger & Schütz, 2016, p. 7). This leads to Leary and Kowalski (1990), who developed a model of impression management that attributes interpersonal and intrapersonal motives to the impression management process. Leary and Kowalski (1990) identify three motives underlying impression management: Social and material outcomes, self-esteem maintenance and the development of identity. The first motive is considered as interpersonal motive, reflecting the traditional approach of achieving a desired outcome by communicating the right impressions. Additionally, the authors elaborate self-esteem maintenance and the development of identity as further intrapersonal motives of impression management. Individuals can regulate their self-esteem in two ways: On the one hand, self-esteem can be strengthened or weakened by the reaction of an audience towards an individual’s self-presentational behavior. Therefore individuals usually are motivated to create a positive impression in order to receive a self-esteem strengthening reaction of their environment. Secondly, self-esteem is also affected by the individual’s own evaluation of the success of its selfpresentational behavior. The third motive refers to the process of developing towards identity goals by displaying selfdefinitional symbols as Wicklund and Gollwitzer (1981) describe it. Because of the abovementioned self-reflexive process that goes along with building impressions Leary and Kowalski (1990) state: “ […] people sometimes ‘self-symbolize’, that is, engage in public behaviors that indicate the possession of identity-relevant characteristics” (1990, p. 38). Furthermore the authors propose that one impression management action can serve two or all three motives at the same time: „For example, self-presentational behaviors that obtain rewards from others are often those that raise selfesteem and establish desired identities as well” (Leary und Kowalski, 1990, p. 38).

4. METHODOLOGICAL APPROACH With respect to the relevance of investigating the evolving social eater phenomenon on Instagram, the research question underlying this paper will be the following: How can the presence of “food”-related contents on Instagram be described and explained and which chances and courses of action result from the phenomenon for companies of the “food”sector? 1) How can it be described with regard to its extent? 2) Which motives underlie the activity of “food”-sharing on Instagram? 3) Which chances result from the phenomenon for companies of the “food”-sector with a view to Instagram presentation and interaction with the consumer? In order to build an appropriate data basis for answering the research question, a cross-sectional study design was selected. The data collection followed by a standardized survey in collaboration with Appinio – a German market research institute. Appinio enables mobile market research with the help of a mobile application. By querying various attributes of users within its panel, Appinio creates so called “consumer profiles”, so that specific target groups (e.g. with the attribute “Instagram user”) are available for research purposes. After the completion of the mobile survey, the raw data can be downloaded in various formats (Appinio, 2016). A mobile phone survey enables participation independent of time and location and directly goes in line with the trend of smartphone use in daily life. Collecting data about behavior and motives of Instagram users with the help of a smartphone application therefore was considered as most suitable. Out of a basic population of German Instagram users, 1,847 Appinio users with the attribute “Instagram user” have been surveyed. The gender distribution of the sample showed an almost equal amount of male (48.5%) and female (51.5%) participants. More than half of the sample was in the age groups of 14-17 years (29.2%) and 18-24 years (44.5%). With reference to data from the German Federal Statistical Office, the sample is characterized by geographic and demographic representativeness, except for the age distribution (approximately 74% are 14-24 years old), which can be explained due to the young user base of Instagram.

178

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 2. Sample overview: Age groups and gender n = 1,847 Age group/gender

total

female

male

total

100%

51.5%

48.5%

14-17

29.2%

15.5%

12.7%

18-24

44.5%

42.0%

20.5%

25-29

14.6%

5.9%

8.8%

30+

11.7%

5.2%

6.5%

Source: Own research

5. RESULTS, DISCUSSION AND RECOMMENDATIONS The following chapter presents the parts of the first findings of the abovementioned study and discusses them with respect to the research question and the theoretical approach outlined in chapter 3. In orientation on the sub questions, chapter 5.1 addresses the extent of the “social eater” phenomenon and the motives of the “social eater”. Chapter 5.2 elaborates chances and courses of action for companies of the “food”-sector with regard to the company’s own presentation and interaction with the “social eater” on Instagram.

5.1 The extent of the “social eater” phenomenon and motives of the “social eater” Of 1,847 participants, 22% spend time on “food”-related content. In comparison to the sample, where males and females were represented equally, a larger group of female “social eaters” (64%) becomes apparent (figure 1). Figure 1. Do you spend time on “food”-related postings on Instagram?

Source: Own research

Furthermore, the participants were asked if they share their “food”-content also on Facebook or within other platforms. But although there is the (technical) possibility to simultaneously share contents on other platforms while sharing them on Instagram, participants consider Instagram as the most suitable platform to share “food”-contents (figure 2).

2016 - M SPHERE

B O O K O F PA P E R S

-

179


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 2. Do you share your “food”-contents equally with your Facebook friends or within other platforms?

Source: Own research (results rounded)

Even though social eaters mainly use Instagram for sharing “food”-related content, another result regarding the extent of the phenomenon expose something else to consider: Within the scope of the study, participants were also asked how often they share “food”-related content and how often they share contents on topics that are not “food”-related. When comparing the frequency of “food”-posts and the frequency of posts on topics that are not “food”-related, it becomes apparent that posts concerning other topics are taken even more frequently (figure 3).

Figure 3. Frequency of “food”-posts in comparison to posts related to other topics

Source: Own research

Participants were also asked for the reason they share “food”-related content on Instagram. The most frequently chosen reasons were to express personal lifestyle and ideas, indicating that rather individual-centered motives underlie the food-posting activity (figure 4).

180

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 4. Why do you share “food”-related content on Instagram?

Source: Own research

With respect to the findings presented above, the sub-questions (1) and (2) of the research question introduced in chapter 4 can be answered in the following manner: The “social eater” phenomenon clearly becomes apparent on Instagram, which – according to the surveyed Instagramer, seems to be the preferred platform in comparison the other social network sites. With regard to the extent of the phenomenon it can be said that posts related to other topics are even taken more frequently, which leads to question the designation of Instagram as a platform for an evolving “foodtography mainstream” (chapter 1), indicating that there is a hype on “food”-related topics. At the first sight, “food”-posts rather seem to occur as a part of the overall posting activity of the Instagrammer. The investigation of the motives of “food”-sharing support these results: In sharing their “food”consumption, the majority of participants is not motivated by a social reward from the side of the Instagram community (Instagram as THE place to share “food”-related content), but rather by the intrapersonal motives if expressing lifestyle and personal ideas. This suggests that further research should be conducted in order to deep dive into what is happening in the offline context with regard to “food” consumption. Recent studies, for example from Nestlé Germany (Nestlé Zukunftsforum, 2015, p. 21-29) note that especially the younger generation is becoming more conscious of their consumption. A growing responsibility for “food” consumption regarding personal health, but also moral and ethical values is recognized, which leads to “food” consumption becoming more a statement of personal lifestyle. This suggests that “food” is increasingly becoming a part of the identity of a person and could also explain the findings of the present study.

5.2 Recommendations for company presentation and interaction with the “social eater” It is well known that nowadays’ omnipresence of advertisement results in an information overload, which leads to a lack of openness and attention towards advertising on the side of the consumer (Stöckl, 2010, p. 157-160). This also applies to the “food”-industry: With 5,800 businesses (> 20 employees) and 170,000 different products, the “food” sector is the third largest industry in Germany (BVE, 2016). Additionally, the out-of-house market comprises 180,000 businesses (Ingold & Minhoff, 2015). Further results of the present study show that 39% of “food”-interested participants already follow a company of the “food”-sector on Instagram. Only 13.4% stated not to be interested in company contents. Considering these results, Instagram reveals the opportunity for companies to present themselves where openness for company content still exists. Based upon the findings of the present study and the theoretical basis elaborated in chapter 3, the following text will outline the chances and recommendations resulting from the “food”-posting phenomenon for companies of the “food”-sector.

5.2.1 Visual communication Within the omnipresence of advertisement, pictures are superior, because they enable to scan information more selectively (Stöckl, 2010, p. 169). As previously illustrated in chapter 2, Instagram posts are “restricted” to a simple, uniform design, which facilitates information reception. The visual content is always in the center of the post, which meets the consumers’ tiredness of information reception. The more “strenuous”, textual information rather plays a subordinate role. Although posts frequently comprise extensive picture captions, consumers can quickly draw

2016 - M SPHERE

B O O K O F PA P E R S

-

181


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

conclusions regarding the topic of the post from hashtags, which are highlighted in blue. Thus, for companies of the “food”-sector it is recommended to consider the visual content as the central message. Textual information should have a complementary function and a limited number of thematically related hashtags should be used.

5.2.2 Added value instead of advertising The openness towards company contents on Instagram can further be explained and supported by considering the preferences of the “food”-interested Instagrammer. While only relatively few participants indicated to be interested in detailed product information or special actions and lotteries, ideas for using the product as well as contents that entertain and inspire appear to be preferred by the participants in terms of company contents (figure 5). Hence, it can be suggested that the interest of the Instagramer does not lie in particular product offerings, but rather in contents that go beyond product presentation and information and provide the consumer with an added value. Therewith parallels can be found between the reasons why the “food”-interested Instagramer share “food”-related topics (in order to express their personal lifestyle and share ideas; figure 4) and the kind of content they expect from companies of the “food”-sector. As it can be observed in case of the individual Instagrammer, companies should focus on contents that are related to the company identity and that are inspiring, thereby creating a benefit for the consumer. The communication should take on a “below-the-line”-character, that is a personal and unconventional character, in order to prevent the impression of advertisement on the consumer side and rather emphasize the uniqueness of the brand to facilitate brand loyalty (Carter, 2003, p. 87; Esch, Krieger & Strödter, 2009, p. 87). Figure 5. Which contents of “food”-companies on Instagram would you be interested in?

Source: Own research

5.2.3 Closeness and relevance to everyday life According to the results of the present study, nearly 80% of those participants, who are interested in ideas for using the product, indicate to try for themselves what they see on “food”-posts. It can be assumed that e.g. recipe suggestions from the side of a company of the “food”-sector are likely to have an impact on consumer behavior in the offlinecontext. Taking into consideration the findings regarding the first part of the research question, it can furthermore be concluded: Like the “food”-interested Instagrammer themselves share “food”-contents as part of their everyday life, companies should design their Instagram content in a way that consumers can easily integrate them into their daily life. Thereby organizations can not only meet the considerable interest of the Instagram user community in ideas for using their products, but also shape the contexts of usage.

5.2.4 Brand hashtags Results of the present study show, that 24% of the “food”-interested Instagrammer (n=404) use a brand hashtag when their “food”-posts shows a brand. Instagram’s search function enables businesses to selectively search for hashtags associated with their brand name and thereby observe usage types and contexts created by the customer. With respect to the theoretical findings in chapter 3, companies can also take the opportunity to react on “food”-posts, thereby

182

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

supporting the realization of self-definitional symbols: Considering the findings regarding the motives of the “food”interested Instagrammer, the identity development motive was strongly supported by the participants. It can be suggested that a positive reaction on a brand-related “food”-post, which then already is a part of the Instagrammer’s self-symbolizing action, will facilitate its social realization. By reacting e.g. with a positive comment on a brand-related post, companies can take part in the identity development of their young target group on Instagram and foster an early identification with the company brand. It is therefore particularly important to motivate consumers to brand-related posts. According to the survey results, 54.2% do not use a brand hashtag so far. Although it needs to be considered that participants were relatively uninterested in special actions and lotteries (figure 5), it can be recommended to occasionally work with incentives that motivate consumers to use brand hashtags, in order to take advantages from the abovementioned identity-related processes.

5.2.5 Influencer More than half of the participants (55.2%) state to follow a famous “food”-Instagrammer. Thus, it is recommended to identify and observe those influential Instagrammer that are relevant for the organization’s product or service. According to the theory of symbolic self-completion, individuals display symbols, which are defined and can be understood by their social environment. It can be suggested that famous “food”-Instagrammer, who influence a large amount of followers with their contents, have an impact on which identity symbols will be understood. Therefore, companies should consider a collaboration with influencers that possess a high impact on the appropriate contexts of usage. In the case of a collaboration, it is important to maintain the authenticity of the influencer, as it is one of their most important characteristics (tobesocial, 2016). The design of the communicated content and the integration of the company’s particular product should be left to the responsibility of the “food”-influencer.

6. CONCLUSION AND OUTLOOK Conclusively, the research question underlying the present paper can be answered in the following way: The phenomenon of the “social eater” on Instagram clearly becomes apparent as part of the overall self-presentation of the “food”interested Instagrammer. With respect to these findings, Instagram cannot be referred to as a platform for an evolving “foodtography mainstream”. “Food”-posting is rather driven by interpersonal motives (e.g. identity development), which can be related to the changing consciousness for consumption within the younger generation that also is reflected within the German Instagram community. In spite of nowadays’ information overload, the openness for company content on the side of the Instagram user reveals promising chances for companies of the “food”-sector. Organizations can use the knowledge and insights about the phenomenon gained within the scope of the present study in order to properly position themselves in Instagram in terms of the company’s presentation and interaction with the “social eater”. With regard to Instagram content, companies are recommended to create an added value for the consumer, by offering inspiring content that is characterized by relevance to everyday life consumption and that emphasizes the specific brand character of the organization. Furthermore, companies of the “food”-sector can use the present findings to improve their interaction with the “social eater”. By applying the specific functions of Instagram, such as hashtag and comment functions, they can take the opportunity to shape usage contexts of their products as well as the identity development of the consumer in relation to their brand. In the view of the strong presence of so-called influencers, organizations should identify relevant “food”influencer and consider a collaboration. Thereby they can take the chance to benefit from the impact influencers possess on a wide range of consumers and their authenticity in terms of the consumption of their products. The first results of the conducted study raise further questions with regard to the extent and motives underlying the “social eater” phenomenon. Of further interest is, for instance, if the collected data reveal a correlation between “food”posts and post related to other topics. Moreover, additional analysis by SPPS is planned in the area of type identification. It is of special interest for companies of the “food”-sector, if the group of “food”-interested Instagrammer can further be divided into specific user types. How these differ in terms of their motives, preferences and other variables queried within the scope of the present study is of particular importance, because this knowledge would enable companies to design their presentation and interaction with the “social eater” more specifically. Overall, the findings of the presented paper demonstrate a considerable progress of the current state of research around the “social eater”. This work achieved a first characterization of the phenomenon, in order to elaborate an orientation for companies of the “food”-sector in terms of their own presentation and interaction on Instagram. Thereby the present paper reveals linkages for further research regarding a more specific investigation of the “social eater” phenomenon.

2016 - M SPHERE

B O O K O F PA P E R S

-

183


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

LITERATURE 1. Appinio (2016). Mobile Marktforschung. Retrieved 01.11.2016 from http://appinio.de/unternehmen/. 2. Beer, K. (2016). Instagram hat in Deutschland neun Millionen Nutzer. Retrieved 01.05.2016 from http://www.heise.de/newsticker/meldung/ Instagram-hat-in-Deutschland-neun-Millionen-Nutzer-3074593.html. 3. BVE = Bundesvereinigung der Deutschen Ernährungsindustrie (2016). Jahresbericht 2015_2016. Berlin: Bundesvereinigung der Deutschen Ernährungsindustrie. Retrieved 30.10.2016 from http://www.bve-online.de/presse/infothek/publikationen-jahresbericht. 4. Carter, S. M. (2003). Going below the line. Creating transportable brands for Australia’s dark market. In Tobacco Control. 12 (3), 87-94. Retrieved 20.11.2016 from http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1766128/pdf/v012piii87.pdf. 5. Coary, S. & Poor, M. (2016). How consumer-generated images shape important consumption outcomes in the food domain. Journal of Consumer Marketing. 33 (1), 1-8. Retrieved 15.08.2016 from http://dx.doi.org/10.1108/JCM-02-2015-1337. 6. Esch, F.-R., Krieger, K. H. & Strödter, K. (2009). Durchbrechen des Gewohnten durch Below-the-line-Kommunikation. In M. Bruhn, F.-R. Esch & T. Langner (ed.), Handbuch Kommunikation (p. 85-106). Wiesbaden: Gabler. 7. Facebook (2016). Newsroom. Stats. Retrieved 29.09.2016 from http://newsroom.fb.com/company-info/. 8. Goffman, E. (1959). The presentation of self in everyday life. New York: Doubleday Anchor Books. 9. Heise online (2012). Facebook schließt Instagram-Kauf ab. Retrieved 03.11.2016 from https://www.heise.de/newsticker/meldung/Facebookschliesst-Instagram-Kauf-ab-1702270.html. 10. Herwig, J. et al. (2009). Microblogging und die Wissenschaft. Das Beispiel Twitter. Steckbrief IV im Rahmen des Projekts „Interactive Science“. Wien: Institut für Technikfolgen-Abschätzung (ITF). Retrieved 03.11.2016 from http://epub.oeaw.ac.at/ita/ita-projektberichte/d2-2a52-4.pdf. 11. Hu, Y., Manikonda, L. & Kambhampati, S. (2014). What We Instagram: A First Analysis of Instagram Photo Content and User Types. International Conference on web and social media papers (ICWSM). Retrieved 02.02.2016 from http://149.169.27.83/instagram-icwsm.pdf. 12. Ingold, W. & Minhoff, C. (2015). Ernährung im Wandel. In GfK Consumer Panels & Bundesvereinigung der Deutschen Ernährungsindustrie e.V., BVE (ed.) Consumers’ Choice ’15. Die Auflösung der Ernährungsriten – Folgen für das Ess- und Kochverhalten (p. 4-6). GfK Consumer Panels & Bundesvereinigung der Deutschen Ernährungsindustrie e.V., BVE. 13. Instagram (2016). Stats. Retrieved 03.11.2016 from https://www.instagram.com/press/. 14. Leary, M. & Kowalski, R. (1990). Impression Management. A Literature Review and Two-Component Model. Psychological Bulletin. 107 (1), p. 34-47. DOI: 10.1037/0033-2909.107.1.34. 15. Landsverk, K. H. (2014). The Instagram Handbook. 2014 Edition [E-Book]. London: Prime Head Limited. 16. Nestlé Deutschland (2016). Die „Social Eater“ kommen. Retrieved 15.02.2016 from http://www.nestle.de/themenwelten/news-storys/nestlestudie-2016. 17. Nestlé Zukunftsforum (2015). Nestlé Zukunftsstudie. Wie is[s]t Deutschland 2030. Frankfurt am Main: Nestlé Zukunftsforum & Deutscher Fachverlag GmbH. 18. Nguyen, T. (2016). Was Influencer-Marketing für etablierte Stars bedeutet. Horizont Online. Retrieved 10.11.2016 from http://www.horizont. net/agenturen/kommentare/Influencer-und-Longtailstars-Was-Influencer-Marketing-fuer-etablierte-Stars-bedeutet-139464. 19. Pettauer, R. (2015). Alles über Instagram. Funktionen, Fakten, Best Practices. Retrieved 03.11.2015 from http://blog.datenschmutz.net/2015-04/ instagram-marketing-guide/#ixzz47WNKya4A. 20. Rainie, L., Brenner, J. & Purcell, K. (2012). Photos and Videos as Social Currency Online. Washington: Pew Research Center. Retrieved 15.02.2016 from http://www.pewinternet.org/files/old-media//Files/Reports/2012/PIP_OnlineLifein Pic-tures _PDF.pdf. 21. Rüdiger, M. & Schütz, A. (2016). Selbstdarstellung. In D. Frey & Bierhoff, H.-W. (ed.), Enzyklopädie der Psychologie. Bereich Sozialpsychologie. Göttingen: Hogrefe Verlag. Retrieved 10.04.2016 from https://www.uni-bam-berg.de/fileadmin/uni/fakultaeten/ppp_lehrstuehle/ psychologie_4/pics/news/RuedigerSchuetzSDEnzykSozps_251013.pdf. 22. Stöckl, H. (2010). Textsortenentwicklung und Textverstehen als Metamorphosen. Am Beispiel der Werbung. In H. Stöckl (ed.), Mediale Transkodierungen. Metamorphosen zwischen Sprache, Bild und Ton (p. 145–172). Heidelberg: Winter. 23. Tippelt, F. & Kupferschmitt, T. (2015). Social Web: Ausdifferenzierung der Nutzung –Potenziale für Medienanbieter. Ergebnisse der ARD/ ZDF-Onlinestudie 2015. Media Perspektiven. 10, p. 442-452. Retrieved 23.04.2016 from http://www.ard-zdf-onlinestudie.de/fileadmin/ Onlinestudie_2015/10-15_Tippelt_Kupferschmitt.pdf. 24. tobesocial (2016). Die 5 größten Influencer Marketing Trends in 2016: Was müssen Unternehmen beachten? Retrieved 10.15.2016 from http:// tobesocial.de/blog/influencer-marketing-trends-2016-unternehmen-social-media-engagement-digitales-empfehlungsmarketing. 25. Twitter (2016). Company. Twitter Usage. Company Facts. Retrieved 29.09.2016 from https://about.twitter.com/company. 26. Wicklund, R. A. & Gollwitzer, P. M. (1981). Symbolic Self-Completion, Attempted Influence, and Self-Deprecation. Basic and Applied Social Psychology. 2 (2), p. 89-114. Retrieved 30.03.2016 from https://www.socmot.uni-konstanz.de/sites/default/files/81_Wicklund_Gollwitzer_ Symbolic_Self-Completion_Attempte.pdf.

DETAILS ABOUT AUTHORS: CHRISTOPH WILLERS PROF. DR., PROFESSOR c.willers@cbs.de SOPHIA SCHMIDT B.A., RESEARCH ASSISTANT s.schmidt@cbs.de

184

-

B O O K O F PA P E R S

FOR BOTH AUTHORS: COLOGNE BUSINESS SCHOOL FACULTY OF GENERAL MANAGEMENT DEPARTMENT OF STRATEGIC MANAGEMENT AND BUSINESS DEVELOPMENT COLOGNE, GERMANY

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

THE PERCEIVED BUSINESS VALUE OF SOCIAL MEDIA AT WORK LIANA RAZMERITA KATHRIN KIRCHNER PIA NIELSEN

ABSTRACT Social Media is a new phenomenon that impacts businesses, society and individuals. Social media has swept into the business world, disrupting businesses, bringing new opportunities and challenges. The use of social media in organizations has the potential to shape the “future of the work”. Both consultancy reports and scholarly articles highlight and discuss the new opportunities and organizational benefits provided by social media to change the current top-down (i.e. initiated by management) business model to a more collaborative and bottom-up (i.e. initiated by employees) approach. Such a model is customizable to specific user needs, empowering employees to design specific workflows thus helping them to work more effectively. Using social media, personal knowledge can be synergized into collective knowledge through social collaborative processes that may facilitate externalization of knowledge, fostering creativity and innovation. All these processes have the potential to lead to knowledge creation through interaction and collaborative processes and thereby increase companies’ competitiveness. However the successful deployment of social media for internal communication and facilitation of knowledge sharing and collaboration in organizations is difficult. Based on quantitative as well as qualitative data from 13 Danish organizations, we investigate the following research question: What is the business value of social media in organizations as perceived by the employees? Based on the data analysis, the paper derives a model of factors associated with the perceived business value of social media. KEY WORDS: social media, business value, knowledge sharing, internal communication.

1. INTRODUCTION Social Media is a new phenomenon that impacts businesses, society and individuals. It has swept into the business world, disrupting businesses, bringing new opportunities and challenges. ‘Social’ is slowly reshaping work processes and workflows in organizations. The change in workflows is potentially streamlining internal and external communication, collaboration, work culture, and thus reshaping organizations. It further gives companies an opportunity to decrease costs, become more productive and competitive (Bughin, Chui, & Harrysson, 2016). Social media at work encompass blogs, wikis, enterprise social networking platforms such as Chatter1 (Salesforce), Yammer2 (Microsoft), and Podio3 (Citrix) which provide new opportunities to manage interaction, communication and networking through teamwork and social-collaboration in order to drive productivity and innovation. Facebook, the largest social networking platform, has also recognized the business opportunity by bringing ‘social’ to the workplace with their new platform Facebook@Work4 whose goal is to change the way employees work (Facebook, 2016). Enterprise social media may change the current top-down (i.e. initiated by management) business model to a more collaborative and bottom-up (i.e. initiated by employees) approach, which Von Krogh (2012) argues is more targeted to user needs, makes it easier to find relevant expertise and solve tasks more effectively. Social media foster personal knowledge management through formal and informal communication, easy to use collaborative tools and social networking applications (Razmerita, Kirchner, & Sudzina, 2009). Personal knowledge can be synergized into collective knowledge through social collaborative processes that may foster informal learning, creativity and innovation (Popadiuk & Choo, 2006; Razmerita, 2013). Executives have recognized the potential enterprise social platforms have to strengthen company communication, collaboration and knowledge sharing with both internal and external stakeholders and improve strategic decisions. However, the “successful use of social platforms across the organization requires time to overcome cultural resistance, and to absorb the lessons of early successes and failures” (Harrysson, Schoder, & Tavakoli, 2016). There are considerable benefits to gain for organizations – if these platforms are adopted and used by the employees. Chui et al. (2012) argue that the use of these social platforms can raise the productivity of the employees by 20-25%. Despite all the potential benefits, many companies are cautious about deploying them and still question how to best use social media and whether the use of social media for work improve productivity or waste the employees’ time? 1 2 3 4

https://www.salesforce.com/products/chatter https://www.yammer.com/ https://podio.com/ https://workplace.fb.com/

2016 - M SPHERE

B O O K O F PA P E R S

-

185


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

While most of the consultancy reports discuss the business value of enterprise social media taking into account the top management perspective, this study aims to measure the perceived business value of social media considering both employees and managers’ perspectives. This study focuses on the internal usage of social media at work. Understanding the business value of enterprise social media would help to overcome the confusions and skepticism related to the value of adopting social media at work. Understanding the role and impact of enterprise social networks could be approached through different methods including the identification of key users using social network analysis (Berger, Klier, Klier, & Richter, 2014; Herzog, Richter, Steinhüser, Hoppe, & Koch, 2013). According to Nagle and Pope (2013)¤. what constitutes appropriate measures for technological value for social media is still an important academic endeavor. Organizations need valid, reliable measures to understand social media effects in order to align social media initiatives with organizational goals and ultimately create business value (Larson & Watson, 2011). Drawing on data collected from knowledge workers from Denmark, we focus on the following research question: What is the business value of social media? The article is organized in 4 sections. The literature review is presented in the next section with an overview of papers discussing the business value of social media, which is the basis of our research model. The research model is presented in the third section, while the fourth section illustrates the data collection and methodology. The findings are presented in the fifth section, and, finally, conclusions and future work are presented in the sixth section.

2. LITERATURE REVIEW ”Social media facilitate management and externalization of both personal and organizational knowledge’’ (Razmerita, Kirchner, & Nielsen, 2016). Social collaboration has the potential to lead to increased opportunities for “online communal knowledge sharing” (Majchrzak, Faraj, Kane, & Azad, 2013), communication, and “strategic self-presentation” (Leonardi & Treem, 2012). Social media has a multifaceted repertoire of uses (hedonic, cognitive and social use) that lead to increase employees‘ socialization, entertainment and job performance (Ali-Hassan, Nevo, & Wade, 2015). Social media impact companies’ competitiveness and digital transformation. However knowledge sharing can be a social dilemma (Cabrera & Cabrera, 2002; Kimmerle, Wodzicki, & Cress, 2008; Kollock, 1998; Mukamala & Razmerita, 2014) for employees because of various challenges at individual and organizational levels (Razmerita, Kirchner, & Nabeth, 2014). The challenge for the organizations and management is to overcome such dilemma through management support and an open culture that foster transparency, knowledge sharing or other barriers (lack of trust, resistance to change of behavior)(Razmerita, Kirchner, et al., 2016). The communication and knowledge sharing in such “social” information spaces seems still to be affected by the costs of participation (lack of time, lack of incentives and effort to select what to share) (Mukamala & Razmerita, 2014), the motivation to engage in information exchange (internal or external motivation of individuals), current work practice of employees, lack of participation of others’ employees as well as the appeal of such social media platforms with regard to the content (quality and quantity) (Pirkkalainen & Pawlowski, 2014; Razmerita, Kirchner, et al., 2016; Razmerita, PhillipsWren, & Jain, 2016; Razmerita, Wren, & Jain, 2016). As a result, the range of different barriers make it a challenge for organizations to engage employees to adopt and use these platforms (Denyer, Parry, & Flowers, 2011; Pirkkalainen & Pawlowski, 2014; Razmerita et al., 2014) and the implementation can be a difficult task (Lam & Lambermont-Ford, 2010). All companies strive to be better, faster and more innovative. According to both consultancy reports and academic studies, ‘social’ can be a powerful tool to reshape the organization and achieve a competitive edge. Both academic studies (Andriole, 2010; Huang, Baptista, & Galliers, 2013; Mukamala & Razmerita, 2014; Paroutis & Al Saleh, 2009; Von Krogh, 2012), consultancy reports (Chui et al., 2012; Harrysson et al., 2016; Kiron, Palmer, Phillips, & Berkman, 2013; MarketWatch, 2014), show that many companies are reaping significant business value from implementing enterprise social media. Other reports argue that social business is a complex digital disruption and the “key to social business success was not necessarily something related to social business directly but involved how companies used data and analytics to understand social business” (Kane, 2014). The key drivers for social business are sourcing and sharing expertise, followed by the breaking down of departmental and geographic barriers (Miles, 2011). Moving social business beyond marketing involves deploying social business into multiple functions across the enterprise: 87% use it to spur innovation, 83% turn to social to improve leadership performance and manage talent, 60% integrate social business into operations (Miles, 2011). Based on an overview of literature related to enterprise social media and business impact or business value of Web 2.0, we derived twelve important factors (see Table 1).

186

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 1. Business value of enterprise social media Business value factor

Reference

Faster communication

Faster and more efficient communication (Huang et al., 2013), reach more people faster (Andriole, 2010), reducing communication costs (Bughin et al., 2016).

Faster response

Increasing speed to access knowledge (Bughin et al, 2016)

Easier collaboration on projects

Improved collaboration (Kozanecka & Thompson, 2012); facilitate cross-department collaboration (Li, Webber, & Cifuentes, 2012; Razmerita, 2013).

Shorter timescales

Faster decision making (Li et al., 2012); deliver projects in less time (Cooper et al, 2010); resolve problems more quickly (Cooper, Martin, & Kiernan, 2010)

Increased knowledge sharing

Increased interaction and knowledge sharing (Razmerita et al., 2009), better access to knowledge (Kozanecka & Thompson, 2012); sharing of best practices (Li, 2012)

Improved innovation from ideas

Increased the number of innovation initiatives (Andriole, 2010), improved idea generation (Kozanecka & Thompson, 2012); bring innovations to market more quickly (Cooper et al, 2010), increased firm innovation capability (Lin, 2007)

Less emails

Decrease in internal email (Kozanecka & Thompson, 2012); reduce internal emails (Li et al., 2012)

Higher accuracy of collaborative documents

(Miles, 2011), reduces cycle times for documents, feedback loops (…) and failure rates (Calero Valdez et al., 2016)

Less travel time and cost

(Bughin et al, 2016), (Cooper et al, 2010)

Improved external communication

Communicate with customers more effectively (Andriole, 2010); Work more closely with customers and suppliers (Cooper et al, 2015)

Improved team building

Better connected departments (Kozanecka & Thompson, 2012); facilitate collaboration within a department or team (Li, 2012)

Easier to reach colleagues

Easier access to the expertise of others (Kozanecka & Thompson, 2012); improve employee collaboration (Li, 2012); identify expertise around the company (Li et al., 2012)

3. RESEARCH MODEL Based on the findings from the literature review presented above, the research model was constructed. The perceived business value of social media was measured by using 12 variables as shown in Figure 1. We argue that the value of social media perceived by the employees is influencing their use of social media for knowledge sharing. In order to investigate the influence of this perceived business value on the use of social media, we used „use social media for knowledge sharing“ as dependent variable. This variable is dichotomous (yes/no). Figure 1. Business value of social media research model

2016 - M SPHERE

B O O K O F PA P E R S

-

187


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

4. METHOD AND DATA COLECTION Quantitative data was collected using a questionnaire. The questionnaire covers knowledge sharing practices and tools (traditional and social media) and consists of 15 questions. We included a multiple-choice question regarding the perceived business value of social media for internal knowledge sharing. Furthermore, the questionnaire contains questions about knowledge sharing practices, factors that impact knowledge sharing including motivation for knowledge sharing (Razmerita, Kirchner & Nielsen, 2016), as well as demographic information. The survey was distributed through representatives to 13 Danish private businesses from different industry sectors (including SMEs and large organizations) that use social media for internal communication and knowledge sharing. The majority of the companies are from industry sectors like telecommunications, media and marketing, banking and financial services and shipping and logistics. In order to reduce social desirability bias, the survey did not include any personal identification of the individuals and the quantitative analysis of the data was restricted at an aggregated level. The survey was pretested in order to avoid interpretation errors and to increase the clarity of questions. A total of 114 responses were collected over a four-month period. Due to the dichotomous nature of the data, we used Chi² to find statistically significant influences, and Cramer’s V to describe the strength of the relationship. Values of Cramers’ V can be between 0 (no influence) till 1 (biggest influence). In addition to the quantitative data, semi-structured interviews were conducted with managers and knowledge workers in organizations providing most of the respondents for our questionnaire, operating in different industrial sectors. The interviews provide deeper insights into the business value of enterprise social media in organizations.

5. RESULTS The quantitative data sample comprises 114 respondents from employees from various industries. As shown in Table 2, most of the respondents were below 50 years of age, and more men (56.9%) than women (41.4%) responded. 46.6% of respondents consider themselves as specialists in their areas, while 20.7% were managers. The majority of respondents were young professionals who had a working experience of less than 5 years. Table 2. Descriptive statistics of respondents Age

Frequency (%)

Position

Frequency (%)

Younger than 30

25 (21.6%)

Manager

24 (20.7%)

30 – 39

48 (41.4%)

Specialist

54 (46.6%)

40 – 49

34 (29.3%)

Office Worker

24 (20.7%)

over 49

8 (6.9%)

Trainee

5 (4.3%)

Missing

1 (0.9%)

Other

9 (7.7%)

Gender

Frequency (%)

Working experience

Frequency (%)

Male

66 (56.9%)

< 1 year

2 (1.7%)

Female

48 (41.4%)

1 – 5 years

81 (69.8%)

Missing

2 (1.7%)

5 – 10 years

18 (15.5%)

10 – 15 years

9 (7.8%)

More than 15 years

3 (2.6%)

Missing

3 (2.6%)

Employees use different means and tools to share knowledge, as shown in Figure 2. They primarily share knowledge through traditional channels like email, face-to-face meetings, chat and intranet, whereas the adoption and use of social media including blogs, wikis, Google docs and enterprise social networks platforms (such as Yammer, Chatter, Podio, or other customized social platforms) is still limited.

188

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 2. Knowledge sharing means and tools in organizations

Evaluating the perceived business value of enterprise social media, “faster communication” (41.2%), “increased knowledge sharing” (36.6%) and “easier to reach colleagues” (35.1%) were the top three named points by the employees (Figure 3). Figure 3. Perceived Business Value of Social Media

From these 12 variables considered, 8 are significant factors (Figure 4). The factor “faster communication” (V=0,606), followed by less emails (V=0.436) and improved team building (V=0.380) have the biggest influence on the use of social media for knowledge sharing.

2016 - M SPHERE

B O O K O F PA P E R S

-

189


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 4. Significant factors for the use of social media for knowledge sharing research model

Qualitative interviews with managers were conducted to get a deeper insight into the business value from the managers’ perspective. The following questions regarding the business value were asked: •

What was the goal of introducing social media for knowledge sharing in the company?

What are the main benefits of using social media for knowledge sharing?

What were the main lessons learned?

How do you track and measure the impact of social media for knowledge sharing?

Table 3 summarizes our qualitative analysis results focusing on goal, main benefits, lessons learned and measurement of impact. Table 3. Results from qualitative interviews with managers Company

Goal

Main benefits

Lessons learned

Measure impact

Media company

Improvement of communication and collaboration.

• More effective (faster) communication and collaboration • Decreased number of emails • Easier to find information and documents (available in the specific groups / threads) • notification when new things are posted

“Information can be easier available and accessible through social media platforms, but many employees and managers do not know the value yet. It’s too early in the process.”

“You can track posts and comments, but so far we have not put up any success criteria. Knowledge sharing is hard to measure.”

• Decreased amount of irrelevant emails • New employees can get an overview of the employees and the organization a lot easier because the information is in one place. • Reduced workload, when updating documents

“It’s hard to say, but information needs to be relevant for employees that want to use the platform.”

“We don’t really do that, but the platform allows us to track who of the employees are online and when.”

• Top management needs to be involved. • Employees are willing to use a social platform at work (knowledge sharing behavior not so different from private lives). • You have to be mobile.

“We haven’t focused on that yet, but the platform provides a number of methods to track and measure the employees’ online activity.”

The old system needed to be replaced. Telecommunication company

Improvement of business processes and knowledge sharing between the employees (primarily used for HR related matters)

Shipping company

Optimization of • Increased productivity and communication revenue and collaboration • Decreased amount of across the irrelevant emails organization, • Project collaboration easier globally.

190

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

In all three companies, the main goal of introducing social media for knowledge sharing was to achieve faster communication and collaboration among employees. As main benefits of using social media, the managers see the reduced amount of emails and the faster communication, that go along with an increased productivity (and shorter timescales). But, these benefits are not easy to achieve. The interviewed managers claim that employees as well as the management are not yet aware of the value of social media for knowledge sharing. Thus, the top management should be involved in such projects, and the knowledge that the platforms provide should be relevant for the employees. The interviewees pointed out that “knowledge sharing is hard to measure”. The direct business value of social media for knowledge sharing is not yet measured in the companies, although managers have already an idea how it could be measured. Employees and managers see similar benefits from the usage of social media for internal knowledge sharing in the interviews: •

“The essence of social media is to share relevant content with your colleagues. If it’s not relevant people will consider it as useless information, and you don’t want to waste your colleagues’ time. You want to provide value”.

“It reduces the number of irrelevant emails I have to send, when I can post the information in one place.”

The platform has reduced the workload when we update documents, and the platform has been very useful for new employees to get an overview and keep updated on what happens in the organization.”

“We have already seen an increase in productivity in the company, and the goal is to increase the revenue even more”.

“It is a lot easier to search for and find information as well as look for people with a certain expertise than it is on the intranet.”

CONCLUSION Social media platforms are increasingly adopted by businesses bringing new innovative ways of working and collaborating within organizations. So far little work has been conducted to measure social media effects and align social media initiatives with organizational goals. The focus of this study is the understanding of business value of social media from both managers’ and knowledge workers’ perspectives. The three main factors that contribute to the use of enterprise social media in organizations are: faster communication, less emails and improved team building. However, the prerequisite for gaining tangible business value from these platforms is that employees are active, motivated to contribute and that social media is integrated into daily routines and work practices. Therefore, in order to get employees to use social platforms during their workday to collaborate and share knowledge, motivation is key. Lack of management support and motivation of employees to engage on the platforms will diminish the opportunity to gain business value. Changing the behavior of employees to communicate through social media is particularly a challenge, because many employees are “stuck in the old habits” (e.g. writing emails) (Razmerita, Kirchner, et al., 2016). Previous research has found that organizations have had difficulties in motivating employees to collaborate and share knowledge through enterprise social media e.g. (Denyer et al., 2011; Razmerita, 2013). And according to a report published by Gartner, the vast majority of social collaboration initiatives fail due to lack of purpose and a ‘provide and pray’ approach, which only leads to a 10 percent success rate (Gartner, 2013). The assumption of our study is if managers and employees are aware or convinced of the business value of social media for their organization, they are more motivated to use these social platforms for communication, collaboration and knowledge sharing. Although our study reveals that companies are aware of the business value of social media at work, the interviews shows that the successful usage metrics are not incorporated yet. Such key performance indicators can be defined and measured on these platforms (e.g., the number of logins, the number of contributions, type of contributions, key users). Such indicators could be further used to introduce performance gamification5 to foster engagement, communication strategies and active participation. According to our study findings, managers are aware of some potential indicators, but they do not measure them yet. Other factors that contribute to the business value of social media are more intangible (e.g. the improved team performance) and therefore more difficult to measure. Future work should consider the definition of key performance indicators associated with the goal of adopted social media at work and provide concrete metrics on how they can be measured. 5

http://www.gameffective.com/conventional-enterprise-gamification-wisdom-is-flat-out-wrong/

2016 - M SPHERE

B O O K O F PA P E R S

-

191


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

LITERATURE 1. Ali-Hassan, H., Nevo, D., & Wade, M. (2015). Linking dimensions of social media use to job performance: The role of social capital. The Journal of Strategic Information Systems, 24(2), 65-89. 2. Andriole, S. J. (2010). Business Impact of Web 2.0 Technologies. Communications of the ACM, 53(12), 67-79. 3. Berger, K., Klier, J., Klier, M., & Richter, A. (2014). “ WHO IS KEY...?”-Characterizing Value Adding Users In Enterprise Social Networks. Proceedings of European Conference on Information Systems (ECIS), Tel Aviv, Israel, 1-16. 4. Bughin, J., Chui, M., & Harrysson, M. (2016). How Social Tools Can Reshape the Organization. Retrieved from http://www.mckinsey.com/ business-functions/digital-mckinsey/our-insights/how-social-tools-can-reshape-the-organization 5. Cabrera, A. & Cabrera, E.F. (2002). Knowledge-Sharing Dilemmas. Organization Studies, 23(5), 687-710. 6. Calero Valdez, A., Schaar, A. K., Bender, J., Aghassi, S., Schuh, G., & Ziefle, M. (2016). Social Media Applications for Knowledge Exchange in Organizations. In L. Razmerita, G. Phillips-Wren, & L. C. Jain (Eds.), Innovations in Knowledge Management: The Impact of Social Media, Semantic Web and Cloud Computing (pp. 147-176). Berlin, Heidelberg: Springer Berlin Heidelberg. 7. Chui, M., Manyika, J., Bughin, J., Dobbs, R., Roxburgh, C., Sarrazin, H., Sands, G., & Westergren, M. (2012). The Social Economy: Unlocking Value and Productivity through Social Technologies. Report by McKinsey Global Institute. Retrieved from http://www.mckinsey.com/insights/ high_tech_telecoms_internet/the_social_economy 8. Cooper, C., Martin, M., & Kiernan, T. (2010). Measuring the value of social software. Defining a measurement approach that maps activity to business value. Retrieved from ftp://public.dhe.ibm.com/ftp/lotusweb/services/ibm_wp_measuring-social-software_june2010.pdf 9. Denyer, D., Parry, E., & Flowers, P. (2011). “Social”,“Open” and “Participative”? Exploring Personal Experiences and Organisational Effects of Enterprise 2. 0 Use. Long Range Planning, 44, 375-396. 10. Gartner. (2013). Gartner Says the Vast Majority of Social Collaboration Initiatives Fail Due to Lack of Purpose. Press Release Retrieved from http:// www.gartner.com/newsroom/id/2402115 11. Harrysson, M., Schoder, D., & Tavakoli, A. (2016). The Evolution of Social Technologies. Retrieved from http://www.mckinsey.com/industries/ high-tech/our-insights/the-evolution-of-social-technologies 12. Herzog, C., Richter, A., Steinhüser, M., Hoppe, U., & Koch, M. (2013). Methods And Metrics For Measuring The Success Of Enterprise Social Software-What We Can Learn From Practice And Vice Versa. Proceedings of the 21st European Conference on Information Systems (ECIS), Paper 132. 13. Huang, J., Baptista, J., & Galliers, R. D. (2013). Reconceptualizing rhetorical practices in organizations: The impact of social media on internal communications. Information & Management, 50(2-3), 112-124. 14. Kane, G. C. (Producer). (2014). Social Business is Dead. Retrieved from http://sloanreview.mit.edu/article/social-business-is-dead/ 15. Kimmerle, J., Wodzicki, K., & Cress, U. (2008). The social psychology of knowledge management. Team Performance Management, 14(7-8), 381401. 16. Kiron, D., Palmer, D., Phillips, A. N., & Berkman, R. (2013). Social business: Shifting out of first gear. MIT Sloan Management Review—Deloitte, Research Report. Retrieved from http://sloanreview.mit.edu/reports/shifting-social-business/ 17. Kollock, P. (1998). Social dilemmas: The anatomy of cooperation. Annual Reviews in Sociology, 24, 183-214. 18. Kozanecka, O., & Thompson, M. (2012). Animation of Stakeholders: Understanding the Benefits of Social Networks to Organisations. Dachis Group. European Commission Final Report. 19. Lam, A., & Lambermont-Ford, J.-P. (2010). Knowledge sharing in organisational contexts: a motivation-based perspective. Journal of knowledge management, 14(1), 51-66. 20. Larson, K., & Watson, R. (2011). The value of social media: toward measuring social media strategies. Proceedings of the 32nd International Conference of Information Systems, Shanghai, 1-18. 21. Leonardi, P. M., & Treem, J. W. (2012). Knowledge management technology as a stage for strategic self-presentation: Implications for knowledge sharing in organizations. Information and Organization, 22(1), 37-59. 22. Li, C., Webber, A., & Cifuentes, J. (2012). Making the Business Case for Enterprise Social Networking: Focus on Relationships to Drive Value. Altimeter Group. Retrieved from http://charleneli.com/2012/02/report-making-the-business-case-for-enterprise-social-networks/ 23. Lin, H.-F. (2007). Knowledge sharing and firm innovation capability: an empirical study. International Journal of manpower, 28(3/4), 315-332. 24. Majchrzak, A., Faraj, S., Kane, G. C., & Azad, B. (2013). The Contradictory Influence of Social Media Affordances on Online Communal Knowledge Sharing. Journal of Computer Mediated Communication, 19(1), 38-55. 25. MarketWatch. (2014). Enterprise Social Software Market (On Premise, On Demand, Social Collaboration, Enterprise Social Networks) - Global Advancements, Demand Analysis & Market Forecasts (2014 - 2019). Retrieved from http://www.marketwatch.com/story/enterprise-socialsoftware-market-on-premise-on-demand-social-collaboration-enterprise-social-networks-global-advancements-demand-analysis-market-forecasts-2014-2019-research-report-2014-07-29 26. Miles, D. (2011). Social Business Systems- success factors for Enterprise 2.0 applications. Retrieved from https://www.aiim.org/pdfdocuments/ IW-SocialBusiness-2011.pdf 27. Mukamala, A., & Razmerita, L. (2014). Which factors influence the Adoption of Social Software? An Exploratory Study of Indian Information Technology Consultancy Firms. Journal of Global Information Technology Management special issue: “IT in India and the Indian Region”, 17(3), 188-212. 28. Nagle, T., & Pope, A. (2013). Understanding social media business value, a prerequisite for social media selection. Journal of decision systems, 22(4), 283-297. doi:10.1080/12460125.2014.846543 29. Paroutis, S., & Al Saleh, A. (2009). Determinants of knowledge sharing using Web 2.0 technologies. Journal of knowledge management, 13(4), 52-63. 30. Pirkkalainen, H., & Pawlowski, J. M. (2014). Global social knowledge management – Understanding barriers for global workers utilizing social software. Computers in Human Behavior, 30(0), 637-647. doi:http://dx.doi.org/10.1016/j.chb.2013.07.041 31. Popadiuk, S., & Choo, C. W. (2006). Innovation and knowledge creation: How are these concepts related? International Journal of Information Management, 26(4), 302-312. 32. Razmerita, L. (2013). Collaboration using Social Media: The case of Podio in a voluntary organization. In e. a. Antunes P. (Ed.), the19th International

192

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Conference on Collaboration and Technology, CRIWGâ&#x20AC;&#x2122;13 (Vol. LNCS8224, pp. 1-9). Wellington, New Zealand: Springer. 33. Razmerita, L., Kirchner, K., & Nabeth, T. (2014). Social Media In Organizations: Leveraging Personal And Collective Knowledge Processes. Journal of Organizational Computing and Electronic Commerce, 24(1), 74-93. 34. Razmerita, L., Kirchner, K., & Nielsen, P. (2016). What Factors Influence Social Media Communication? A social dilemma perspecive of social media. Journal of knowledge management, 20(6), 1225-1246. 35. Razmerita, L., Kirchner, K., & Sudzina, F. (2009). Personal Knowledge Management: The Role of Web 2.0 tools for managing knowledge at individual and organisational levels. Online Information Review, 33(6), 1021-1039. 36. Razmerita, L., Phillips-Wren, G., & Jain, L. (2016). Advances in Knowledge Management: An Overview. In L. Razmerita, G. Phillips-Wren, & L. C. Jain (Eds.), Innovations in Knowledge Management (Vol. 95, pp. 3-18): Springer Berlin Heidelberg. 37. Razmerita, L., Wren, G., & Jain, L. (Eds.). (2016). Innovations in Knowledge Management: The impact of social media, semantic web and cloud computing: Springer. 38. Von Krogh, G. (2012). How does social software change knowledge management? Toward a strategic research agenda. The Journal of Strategic Information Systems, 21(2), 154-164.

DETAILS ABOUT AUTHORS: LIANA RAZMERITA ASSOCIATE PROFESSOR COPENHAGEN BUSINESS SCHOOL DEPARTMENT OF INTERNATIONAL BUSINESS COMMUNICATION FREDERIKSBERG, DENMARK lr.ibc@cbs.dk KATHRIN KIRCHNER PROFESSOR BERLIN SCHOOL OF ECONOMICS AND LAW DEPARTMENT OF COOPERATIVE STUDIES BERLIN, GERMANY kathrin.kirchner@hwr-berlin.de PIA NIELSEN COPENHAGEN BUSINESS SCHOOL FREDERIKSBERG, DENMARK pia_nielsen7@outlook.com

2016 - M SPHERE

B O O K O F PA P E R S

-

193


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

DETERMINANTS OF MOBILE INTERNET USAGE AND OPPORTUNITIES FOR M-MARKETING AMONG YOUTH IN THE REPUBLIC OF MACEDONIA KALINA TRENEVSKA BLAGOEVA MARINA MIJOSKA

ABSTRACT The number of mobile Internet users is growing rapidly worldwide and the use of mobile Internet is changing consumer behaviour. Therefore, companies are extending their marketing opportunities and reaching their audience via mobile devices. Mobile marketing is gaining popularity in the last couple of years, due to the possibilities offered by new technologies embedded in smart phones. There have been several theoretical models that explain technology acceptance. Building on the extensions on UTAUT, consumer use and acceptance of technology led to UTAUT2 model. The aim of the research is to connect use of mobile Internet among young people in the Republic of Macedonia and opportunities of mobile marketing. The penetration rate of smart phones is increasing globally and in the last trimester of 2015 more than 72% of the Internet users in the country used smart phones to access the Internet (DSZ, 2015). The survey was conducted in April /May 2016 among more than 300 young people. Original UTAUT2 model is proposed to examine the influence of several constructs that influence use behaviour (performance expectancy, effort expectancy, social influence, facilitating conditions, hedonic motivation, price value, and habit). The factors are explained in the context of the research and attention is paid on habit, hedonic motivation and price value as predictors of the mobile Internet usage. The results of the empirical study are fully supporting the model. Namely, all relationships hypothesized in the model are proved to be significant in our sample. However, the moderators such as age, gender and experience used in the original UTAUT2 model were not included, but are expected to be influential when analysed in larger and more representative sample. The significance of the proposed predictors can help managers formulate their marketing strategies and profound their marketing communication efforts. KEY WORDS: UTAUT2, mobile marketing, mobile Internet, Republic of Macedonia.

1. INTRODUCTION As the world becomes interconnected, the rapid technological development in recent years, especially the development of mobile technologies gives new opportunities for all types of organizations to expand their marketing communication channels with their customers and provide new ways of advertising. In the literature, there are several different terms that define the concept of marketing through mobile media, namely mobile marketing or m-marketing, mobile advertising, wireless marketing, and wireless advertising. According to the Mobile Marketing Association (MMA, 2009) mobile marketing is defined as, “A set of practices that enables organizations to communicate and engage with their audience in an interactive and relevant manner through and with any mobile device or network”. Mobile marketing also refers to using a wireless medium to provide consumers with time and location sensitive, personalized information that promotes products, services and ideas, thereby benefiting all stakeholders (Scharl, Dickinger and Murphy, 2005). Besides the Internet and personal computers, nowadays mobile phones are becoming the new “toy” in marketers’ hands because they are extremely popular and offer people the opportunity of immediate access to multiple information sources. Through the introduction of data services, Short Message Services (SMS), Multimedia Message Service (MMS), mobile Internet, etc., mobile phones are rapidly becoming a viable commercial marketing channel (Barutcu, 2008). The total number of mobile phone users worldwide from 2013 to 2019 has an increasing trend. For example, in 2013 there were 4.01 billion mobile phone users worldwide, 4.23 billion in 2014, while for 2017 the number of mobile phone users is forecasted to reach 4.77 billion worldwide (www.statista.com). Regarding the mobile phone Internet user penetration worldwide, in 2015, 52.7 percent of the global mobile phone population accessed the Internet from their mobile phone. This figure is expected to grow to 61.2 percent in 2018. According to the predictions in the Internet society global Internet report (2015), mobile Internet penetration is predicted to reach even 71 percent by 2019 and the usage per device is forecasted to more than triple by 2019 (Internet society global Internet report, 2015). According to the same report, 192 countries have active 3G mobile networks, which cover almost 50% of the global population. The total number of smartphone users worldwide from 2014 to 2019 is rising as well. For example, in 2014 the total number

194

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

of smartphone users worldwide has reached 1.59 billion and for 2016 and 2017 it is forecasted to reach 2.08 i.e. 2.29 billion respectively (www.statista.com). Smartphone sales are the majority of mobile handsets sold worldwide; tablet sales will soon exceed the total PC sales. While there are at least five mobile platforms, Android has an 84% share of smartphones, and 72% of tablets. There are well over 1 million apps available, which have been downloaded more than 100 billion times (Internet society global Internet report, 2015). These high rates and promising forecasts for the use of mobile Internet and smart phones offer a large mass of potential for all kinds of marketing-related applications, and most important of all, the possibility for marketers to develop and control new types of attitude and consumption habits (Cătoiu and Gârdan, 2010). Opportunities in wireless marketing and advertising have therefore risen a great deal due to higher penetration, also interactions between consumer and advertiser have been increasing rapid and easy (Cătoiu and Gârdan, 2010). According to the data of the State Statistical Office of the Republic of Macedonia, in the first quarter of 2015, 69.4% of the households had access to the Internet at home. Almost all (99.5%) of the households with Internet access had broadband (fixed or mobile) connection to the Internet. The Internet was mostly used by pupils and students, i.e. 94.7% (DSZ, 2015). 71.2% of the Internet users in the first quarter of 2015 used a mobile phone or a smart phone for accessing the Internet away from home or work (DSZ, 2015). According to the Agency for electronic communications at the first quarter of 2015 in the Republic of Macedonia, there were 2.131.027 registered active users of mobile phones. Almost half of them 48.7% (1.038.620) are users of mobile Internet. Regarding the penetration rate of smart phones which is increasing globally, in the Republic of Macedonia in the last trimester of 2015 more than 72% of the Internet users in the country used smart phones to access the Internet (DSZ, 2015). Today, mobile advertising is a big business. For example, eMarketer has estimated that in 2016, mobile ad spending worldwide will increase, reaching $100 billion and accounting for 51.0% of all digital ad spending. Between 2016 and 2019, mobile ad spending will nearly double, hitting $195.55 billion to account for 70.1% of digital ad spend as well as over one-quarter of total media ad spending globally. Not surprisingly, this growth in mobile ad spending is being driven by consumer adoption of mobile devices. According to the same source, the 2016 will be the tipping point where mobile ad spending surpasses desktop. And while desktop advertising will remain a significant portion of marketers’ budgets, mobile will continue growing in the double digits to gain more and more market share while desktop spending remains flat (eMarketer, 2016). Having such high prospect of mobile technologies, with emphasize on the rapid development and penetration of smart phones especially among young people, marketers from different types of companies have the ability to communicate offers directly to the target audience whenever and wherever they may be offering much more personalized services. But, as is common with so many digital advertising channels that offer the promise of ever-increasing efficacy, while mobile marketing adoption and acceptance is on the rise, the marketers would have little ability to consistently generate profits without a clear understanding of the elements driving consumer acceptance (Becker, 2005). Therefore analysing the determinants of mobile Internet adoption and the significance of the proposed predictors can help managers formulate their marketing strategies and profound their marketing communication efforts. This counts for companies in the Republic of Macedonia as well.

2. METHODOLOGY AND RESULTS Technological change and innovation are immanent forces that shape consumer preferences and behaviour, especially in the last decade of the twentieth century and the new era. Needs of the consumers and their wishes and attitudes are in line with the new products that are result of applications of the new technologies. Those words must be understood in the broadest sense from the view point of change – not only technological changes, but new ways of work habits, shopping experiences and patterns of communications are shaping the way consumers are behaving. Resistance to change is mantra that is not only that – a myth. Resistance to change is everywhere – from the physical world up to the way people as workers and consumers are behaving. Two behavioural dimensions can be analysed – acceptance as a positive attitude a (ranging from high-use to non-use) and resistance even going to aggressive resistance (Van Offenbeek, Boonstra and Seo, 2013). Resistance to change can be resistance of the organization to accept change (of technology that influence it business processes) and resistance of an individual. According to the latest researches leadership is the most important factor influencing organizational answer to change and is moderated by different factors (Appelbaum et al., 2015). Fresh perspectives for the adoption of innovation are analysed by Oreg and Goldenber (2016). They argue that companies can learn more about their consumers from analyzing the “laggards” who lack positive qualities and attitudes toward the innovativeness in product or service. Innovation and change resistance can be understood only by cross-disciplinary approach. According Oreg and Goldenberg (2016) resistance to change can be analyzed from four perspectives: “(1) individual-level factors include traits such as the tendency to experience anxiety in

2016 - M SPHERE

B O O K O F PA P E R S

-

195


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

the face of novelty; (2) practical reasons include switching costs and threats such as the potential loss of one’s expertise when an innovation makes it redundant; (3) process factors include, for example, communication and participation; and (4) contextual factors include country-level factors such as the economic situation and culture, as well as more finegrained matches between the innovation and the context” (cited in Vouri, 2016). The phenomenon of acceptance of new technologies is relatively widely elaborated especially in the last two decades. The interest of the researchers towards understanding the factors that influence organizational and individual acceptance of new technologies is nowadays not only general, but also industry or product focused. The beginnings of the theories are mainly based on theories in psychology and sociology. Adoption is an individual process which refers to the stages a person undergoes from first hearing about a product or service to finally adopting the new product or service. Diffusion signifies a group phenomenon, which suggests how an innovation spreads. Davis’s technology acceptance model (TAM) is one of the most influential approaches to explain and predict user acceptance of information systems (Davis, 1989). TAM model is based on the Theory of Reasoned Action (TRA) and to some point on the Theory of Planned Behavior as an extension of the TRA proposed by Ajzen (Ajzen and Fishbein, 1980). This theory is a theory of attitude-behaviour correlation that correlates attitudes, subjective norms, behavioural intention and behaviour. “ It has been shown that behavioural, normative, and control beliefs provide the basis, respectively, for attitudes toward the behaviour, subjective norms, and perceived behavioural control; that these three factors jointly account for a great deal of variance in behavioural intentions; and that intentions and perceived control can be used to predict actual behaviour. Based on these insights, investigators have been able to design effective behaviour change interventions“(Ajzen, 2012). In the Theory of Behavioural Control another factor is included as variable that is affecting both behavioural intention and behaviour-perceived behavioural control and the more resources and opportunities users think they possess, the greater should be their perceived behavioural control over the behaviour. The Technology Acceptance Model (TAM) is widely used for explaining the acceptance of ICTs. Four of the most important concepts that have been constantly used in the TAM literature are perceived ease of use, perceived usefulness, behavioural intention and actual usage behaviour. The perceived usefulness of a technology increases with perceived ease of use. The more ease of use a user thinks a new technology is, the stronger his or her intention to use the technology; furthermore, the stronger the usage intention, the greater the actual usage behaviour. TAM model is not a general model; and it is designed to be applied only to computer usage behaviour (Davis, 1989). The original TAM model is extended to explain perceived usefulness and usage intentions in terms of social influence (subjective norms, voluntariness, image) and cognitive instrumental processes (job relevance, output quality, result demonstrability, perceived ease of use). The extended model, referred to as TAM2, was tested in both voluntary and mandatory settings. The results strongly supported TAM2 (Venkatesh and Davis 2000). Unified Theory of Acceptance and Use of Technology (UTAUT) is formulated in order to incorporate different theories and to construct unified theory (Venaktesh et al., 2003). The role of UTAUT is to fully understand the usage as dependent variable. UTAUT is appropriate model for organizations that are in the process of introducing new IT and their employees are attending training of some sort, investigating both mandatory and voluntary use. The UTAUT methodology is primarily focused on acceptance in organizational context. The extension of UTAUT is UTAUT2 (Venaktesh, Tong and Xu, 2012). In UTAUT2 the theory is tested from consumer viewpoint, focused on consumer technologies. Actually, UTAUT was extended to be applicable to other context, such as the context of technologies for mass consumerism, such as mobile Internet and therefore mobile marketing which is a worldwide trend given the number of intelligent devices, applications, and services (the prediction is that in 2019 there will be more than 5 billion smart phone user in the world; www.statista.com). New contexts actually resulted in several types of important changes. The original UTAUT has been modified by three extensions: (1) investigation of its applicability in the context of new technologies, new user populations and new cultural settings, (2) the addition of new constructs in order to expand the scope of the endogenous theoretical mechanisms outlined in UTAUT and (3) inclusion of exogenous predictors of the UTAUT variables (Venkatesh et al., 2012). In order to use the proposed moderators of the constructs certain preconditions from the methodological viewpoint should be fulfilled. Therefore, in many investigations some constructs were dropped out, and more often some of the moderators due to methodological reasons. The UTAUT2 model is presented on Figure 1 (without moderators). This model is used in our research.

196

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 1. The Research Model (based on UTAUT2 model)

Source: Adapted from Venkatesh, V., Tong, J., Xu,W. (2012.) Consumer Acceptance And Use Of Information Technology: Extending the Unified Theory of Acceptance and Use of Technology, MIS Quarterly, 36(1), pp. 157-178., p.160.

There are 9 constructs and 3 moderators. Performance expectancy (PE) is defined as the degree to which using a technology will provide benefits to consumers in performing certain activities; effort expectancy (EE) is the degree of ease associated with consumers’ use of technology; social influence (SI) is the extent to which consumers perceive that important others (e.g., family and friends) believe they should use a particular technology; and facilitating conditions (FC) refer to consumers’ perceptions of the resources and support available to perform a behaviour (e.g., Brown and Venkatesh 2005). Performance expectancy, effort expectancy, and social influence are expected to influence behavioural intention to use a technology, while behavioural intention and facilitating conditions determine technology use. In UTAUT2 three more constructs are added –hedonic motivation, habit and price value. Hedonic motivation (HM) can be briefly defined as the “fun” dimension of the attitude (Bruner and Kumar, 2005). The growth of mobile technology and smartphones allow users to control when, where, and how they engage in chosen activities that serve their needs, saving time, completing a task (utilitarian), entertain them (hedonic), or connect with others (social). Findings indicate that mobile users’ engagement motivations including hedonic motivation do influence perceived value, satisfaction and mobile engagement intention (Kim et al., 2013). More precisely, hedonic motivation can be defined as “the fun or pleasure derived from using a technology” and it has been shown to play an important role in determining technology acceptance and use (Brown and Venkatesh 2005). Hedonic and utilitarian purpose of the mobile devices determine how the nature of the device influences user beliefs and hedonic or utilitarian orientation of the mobile technologies (and mobile Internet) has implications for maximizing use (Wakefield, Whitten, 2006). Therefore, hedonic motivation is predictor of consumers’ behaviour and use of technology. Price value (PV) is specific predictor for consumer technologies because consumers as individuals bear the costs unlike workers as employees. The prices and overall costs usually have important influence on the consumers’ intention to use a technology. For example, the result of an online survey among consumers of two most popular shopping websites in Taiwan shows that e-store image influences purchase intention through perceived value and utilitarian value exerts a larger influence than hedonic value (Chang and Tseng, 2013). Venkatesh (2012) is explaining that price value can be viewed as a “consumers’ cognitive tradeoff between the perceived benefits of the applications and the monetary cost for using them”. From the individual consumer view point price value of using the new technology is good when the perceived benefits of using the technology are greater than the real costs of obtaining it. In that case, price value has positive impact on the actual intention to use the technology. Experience and habit (HA) are related predictors that are shaping user adoption of technology. Experience is measured in quantity of time of operational usage of certain technology by an individual. The more experienced the customer is, the higher is the possibility for him to have positive attitude towards using a new technology. Habit has been defined

2016 - M SPHERE

B O O K O F PA P E R S

-

197


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

as the extent to which people tend to perform behaviours automatically because of learning (Limayem et al., 2007) Habit is understood as “learned sequences of acts that become automatic responses to specific situations which may be functional in obtaining certain goals or end states” (Verplanken et al., 1997). Some authors stress out that intention is the main causal mechanism behind the enactment of behaviour (Ajzen, 2002). Limayem et al. (2003) defined IS habit as “the extent to which using a particular IS has become automatic in response to certain situations.” The key word in this definition is automatic, while habit is logically connected with prior behaviour, as well. Experience may, or may not result in the formation of habit. Passage of time can result in the formation of differing levels of habit depending on the extent of interaction and familiarity that is developed with a target technology (Venkatesh et al., 2012). In this context, habit is a perceptual construct that reflects the results of prior experiences. Kim and Malhotra (2005) and Limayem et al. (2007) found empirical evidence that prior use was a strong predictor of future technology use. In their research, Wang, Harris and Patterson (2013) concluded that experience accumulates, customers’ continued use of a certain technology is initially largely rational driven (self-efficacy), then largely emotional driven (satisfaction), and, finally, habitual (habit). Over time, habit completely mediates the impact of intentions on future usage. For the purposes of this research i.e. to analyse the determinants of mobile Internet usage and opportunities for m-marketing among youth in the Republic of Macedonia, a survey was performed based on the previously prepared questionnaire consisting of 35 questions. The questions (3-4 per construct) were based on the UTAUT2 Venkatesh’s model and the answers were measured on a 5 level Likert scale (strongly disagree, …, strongly agree). The survey was conducted in April /May 2016 among more than 350 young people, mostly students. The total number of received answers was 352, but after filtering of the data, 35 questionnaires were excluded from further analysis due to the missing data (more than 10%) and low standard deviation in answers (Hair, 2010) i.e. the total number of the sample is 317. The demographic characteristics of the sample are presented in the Table 1. The demographics of the sample is representing pretty well the population of young people in the country. Table 1. Demographic characteristics Demographic characteristic Gender Citizenship   Nationality

Item

Percentage

Male

37.2

Female

62.8

Skopje (the capital)

54.3

Other

45.7

Macedonian

88.9

Other

11.1

Before testing the hypotheses based on the proposed research model, we performed a validity and reliability analysis. For the data sets of the constructs, Cronbach’s alpha as a measure of internal consistency is 0.891 and it is satisfactory. The measures of internal consistency for the constructs are presented in the Table 2 below. Those results are considered to be a good measure of scale reliability. Table 2. Cronbach’s alpha for the constructs Constructs

Cronbach’s alpha

PE

0.713

EE

0.787

SI

0.904

FC

0.790

HM

0.790

PV

0.877

HA

0.826

BI

0.799

Regarding the last construct (Use behaviour) the measure of the scale reliability is 0.571 which is considered satisfactory (Chakrapani, 2004).

198

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

We would like to point out that for the purpose of this research, although demographic factors are considered important moderating factors influencing technology use (Venkatesh, 2012), we concluded that for our sample those factors are not significant. This is so because we examined only young people, so the comparison of age was not an issue. Gender is not important moderator for young population, so the gender factor was not involved in the analysis as well. Based on the discussion above, and the proposed research model as presented in Figure 1, the following research hypotheses were set: H1: Performance expectancy will positively influence behavioural intention. H2: Effort expectancy has a positive effect on behavioural intention. H3: High social influence will lead to increased behavioural intention. H4: Facilitating conditions have a positive effect on behavioural intention. H5: High hedonic motivation will lead to increased behavioural intention. H6: Higher value-price ratio has positive effect on behavioural intention. H7: Habit has a positive effect on behavioural intention. H8: Facilitating conditions have a positive effect on use behaviour. H9: Habit has a positive effect on use behaviour. H10: Behavioural intention will lead to increased use behaviour.

In the Table 3, we summarize the findings regarding the research hypotheses based on the model presented in Figure 1. Table 3. Hypotheses results Hypotheses

Variable

β

Significance

H1

PE à BI

0.546

0.000

H2

EEà BI

0.415

0.000

H3

SI à BI

0.465

0.000

H4

FCà BI

0.506

0.000

H5

HMà BI

0.484

0.000

H6

PVà BI

0.337

0.000

H7

HAà BI

0.535

0.000

H8

FCà UB

0.246

0.000

H9

HAà UB

0.161

0.004

H10

BIà UB

0.281

0.000

The results are fully supporting the model. Namely, all relationships are proved to be significant in our sample. The well elaborated results in the literature were confirmed for the sample of young people in the Republic of Macedonia. From our sample we can derive conclusions about the importance of the previously explained predictors on the use behaviour towards technology use i.e. mobile Internet use of young population. However our sample is not representative enough to make conclusions for the whole population of the Republic. In order to perform such an extensive research, as in the original UTAUT2 model, bigger and more comprehensive sample is needed. Still, this research can be considered as a motive to perform comprehensive research for the whole population of the Republic of Macedonia where moderators can be investigated and their influence explained.

CONCLUSION The aim of this research is to analyse the determinants of mobile Internet adoption among young people in the Republic of Macedonia. The significance of the proposed predictors can help managers formulate their marketing strategies and profound their marketing communication efforts. From the analysis of the results and secondary data obtained the following conclusions can be noted.

2016 - M SPHERE

B O O K O F PA P E R S

-

199


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Mobile Internet is widely adopted, especially among young people. Availability of smart phones and the price of mobile Internet are not obstacles and that was proved from the results.

From the survey, it can be concluded that performance expectancy (average score 4.17) is rated very high. Effort expectancy to use mobile Internet is considered as negligible and not significant. Also, facilitating conditions (necessary knowledge, resources, and compatibility of mobile Internet with other technologies) are perceived as easily available and not an important obstacle at all.

On the other side, social influence in our sample measured by opinion and influence of people important to the respondent doesn’t have strong impact on the user behaviour of the young people.

Hedonic motivation to use mobile Internet is extremely important (average score 4.19). Using mobile Internet for young people is considered as fun, enjoyable and very entertaining.

The effect of price value on behaviour intention in our sample is moderate. In the context of young people the effect of price value is complex. Most of our respondents were students and therefore unemployed and their answers showed that price is relatively significant factor. Our empirical findings support the hypothesis about the implications of price value on pricing strategy of the vendors of consumer mobile applications for marketing purposes.

Not surprisingly, the use of mobile Internet is a habit for young people in our sample. They feel that they are addicted to mobile Internet and that they must use it.

Behavioural intentions i.e. the intention to continue using mobile Internet in the future and in a daily life , are considered very important, because most of the respondents answered that they have firm intention to use mobile Internet in the future (average score 4.48).

When discussing usage frequency i.e. use behaviour (UB) of the respondents, this construct was measured by the frequency of using SMS, MMS, ringtone download, java games, browse websites and mobile e-mail. As expected, the results are more inclined to the use of mobile Internet. Namely, the average values for the usage frequency for browsing websites and mobile e-mail are very high (4.68 and 4.04 respectively) in comparison to the rest of the variables in the construct (SMS, MMS, ringtone download, java games). This is mainly because, online there are more free applications and/or platforms available (like Facebook, Viber etc.) that provide young people a medium for sharing messages and/or media (pictures, videos etc.). As mentioned, young people in the Republic of Macedonia, are more frequent users of smartphones and mobile Internet technologies. Almost 95% of age group 15-24 are active users of Internet on daily basis (DZS, 2015).

Regarding the moderating effects of age, gender and experience, included in the original UTAUT2 model, in our sample these individual differences were not taken into consideration since the sample was consisted mostly of students, whose age and experience does not differ much. However, the typical demographic characteristics such as gender, age, education level, and experience should be analysed in further research since this constructs are considered to have strong moderating effects on behavioural intention and technology use in the original model (Venkatesh, et al., 2012). Overall, our study confirmed the important roles of defined determinants in influencing technology use i.e. use of mobile Internet. This could help marketers to better formulate their strategies towards use of m-marketing strategies and extend their marketing communication channels based on the increasing trend in the use of mobile Internet and smartphones among young people.

LITERATURE 1. Ajzen, I. (2002.) Residual Effects of Past on Later Behavior: Habituation and Reasoned Action Perspectives. Personality of Social Psychology Review, 6(2), pp. 107-122. 2. Ajzen, I. and Fishbein, M. (1980.) Understanding Attitudes and Predicting Social Behavior. Englewood Cliffs: Prentice-Hall 3. Ajzen, I. and Fishbein, M. (2012.) Legacy The Reasoned Action Approach, The ANNALS of the American Academy of Political and Social Science, 640(1), pp.11-27. 4. AEC - Agency for electronic communications of the Republic of Macedonia, annual Report on the electronic communications market development in Republic of Macedonia for Q1, 2015 available at http://www.aek.mk/mk/dokumenti/izveshtai/kvartalni-izveshtai-za-analiza-na-pazar/ item/1764-izveshtaj-za-razvoj-na-pazarot-za-q1-2015-godina 5. Appelbaum, S. H. (et al.). (2015.) Organizational outcomes of leadership style and resistance to change (Part One), Industrial and Commercial Training, 47(2), pp.73 – 80. 6. Barutçu, S. (2008.) Consumers’ Attitudes towards Mobile Marketing and Mobile Commerce in Consumer Markets. Ege Academic review, 8(1), pp.15-32.

200

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

7. Becker, M. (2005.) Effectiveness of Mobile Channel Additions and A Conceptual Model Detailing the Interaction of Influential Variables, available at http://www.iloopmobile.com/ news/mb_research_111705.htm. 8. Brown, S. A. and Venkatesh, V. (2005.) Model of Adoption of Technology in the Household: A Baseline Model Test and Extension Incorporating Household Life Cycle. MIS Quarterly, 29(4), pp. 399-426. 9. Bruner, G. C. and Kumar, A. (2005.) Explaining consumer acceptance of handheld Internet devices, Journal of Business research, 58(5), pp.553558. 10. Cătoiu, I. and Gârdan, D.A. (2010.), Romanian consumer perception towards mobile marketing campaigns. Annales Universitatis Apulensis, Series Oeconomica, 12(2), pp. 731-741. 11. Chakrapani, C. (2004.) Statistics in market research. Arnold Publisher, London 12. Chang, C. and Tseng, Y. (2013.) Research note: E-store image, perceived value and perceived risk. Journal of Business Research, 66(7), pp.864-870. 13. Cheung, C. and Limayem M. (2005.) The Role of Habit in Information Systems Continuance: Examining the Evolving Relationship between Intention and Usage. ICIS 2005 Proceedings of the 26th International Conference on Information Systems, AIS Electronic Library (AISeL). pp.471-482 14. Davis, F. (et al.). (1989.) User Acceptance of Computer Technology: A Comparison of Two Theoretical Models. Management Science, 35(8), pp. 982-1003. 15. eMarketer (2016.) http://www.emarketer.com/Article/Mobile-Ad-Spend-Top-100-Billion-Worldwide-2016-51-of-Digital-Market/1012299 16. Kim H.J., Kim, D.J. and Watcher, K. (2013.) A study of mobile user engagement (MoEN): Engagement motivations, perceived value, satisfaction, and continued engagement intention, Decision Support Systems, (56), pp 361-370. 17. Limayem, M. and Hirt, S. G. (2003.) Force of Habit and Information Systems Usage: Theory and Initial Validation. Journal of the Association for Information Systems, 4(3), pp.65-97. 18. MMA (Mobile Marketing Association) (2009.), http://www.mmaglobal.com/wiki/mobile-marketing 19. Oreg, S. and Goldenberg, J. (2015.) Resistance to Innovation: Its Sources and Manifestations. Chicago: University of Chicago Press. 20. State Statistical Office of the Republic of Macedonia. (2015.). News release No: 8.1.15.31. Retrieved from http://www.stat.gov.mk 21. Van Offenbeek, M., Boonstra, A. and Seo, D. (2013.) Towards integrating acceptance and resistance research: Evidence from a telecare case study. European. Journal of Information Systems, 22 (4), pp. 434-454. 22. Varma, S. and Marler, J. H. (2013.) The dual nature of prior computer experience: More is not necessarily better for technology acceptance, Computer in Human Behavior, 29 (4), pp 1575-1482. 23. Venkatesh, V., Tong, J. and Xu,W. (2012). Consumer Acceptance And Use Of Information Technology: Extending the Unified Theory of Acceptance and Use of Technology, MIS Quarterly, Vol. 36, No. 1, pp. 157-178. 24. Verplanken, B., Aarts, H., and van Knippenberg, A. (1997.) Habit, information acquisition, and the process of making travel mode choices. European Journal of Social Psychology, 27, pp.539-560. 25. Vouri, T., Oreg, S. and Goldenberg, J. (2016.) Resistance to Innovation: Its Sources and Manifestations, Administrative Science Quarterly 61(3), NP33–NP35. 26. Wakefield, R.L. and Whitten, D. (2006.) Mobile computing: a user study on hedonic/utilitarian mobile device usage, European Journal of Information Systems, 15(3), pp 292-300. 27. Wang, C., Harris, J. and Patterson, P. (2013.) The Roles of Habit, Self-Efficacy, and Satisfaction in Driving Continued Use of Self-Service Technologies A Longitudinal Study, Journal of Service Research August, 16(3) pp.400-414. DETAILS ABOUT AUTHORS: KALINA TRENEVSKA BLAGOEVA PROFESSOR kalina@eccf.ukim.edu.mk MARINA MIJOSKA ASSISTANT PROFESSOR marina@eccf.ukim.edu.mk FOR BOTH AUTHORS: UNIVERSITY OF SS.CYRIL AND METHODIUS FACULTY OF ECONOMICS – SKOPJE E-BUSINESS DEPARTMENT SKOPJE, REPUBLIC OF MACEDONIA

2016 - M SPHERE

B O O K O F PA P E R S

-

201


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

CLOUD COMPUTING AND THE SPECIFICS OF CONCLUDING CLOUD CONTRACTS ANNA ONDREJKOVÁ

ABSTRACT Cloud computing has already earned the significant position in the field of the use of new information and communication technologies (ICT), because it delivers efficiency and optimal solution, combined with cost savings and data backup with plenty of storage space. The concept of cloud computing may be understood as storage, processing and use of data through the Internet. Users have available computing power on demand without large capital investments and have access to their data anywhere via an Internet connection. The aim of the paper is to highlight the specificities of the conclusion of cloud contracts. In the conclusion of cloud contracts and the selection of the provider of the cloud services it is necessary to take into account a number of specifics, such as the question of the security of corporate data, the question of responsibility for the loss of data, their misuse, damage, guarantee the availability of services, testimonials and certificates provider as well as the question of the possible different legal systems of the provider and user of the cloud. The contract is recommended not to fail: the determination of ownership of data, protection of intellectual property rights, requirements to avoid the distortion data confidentiality (driven approach employed by the data record of the activity), guarantees data availability, problem solving (Response Time, Service Level Agreements), information obligations of the cloud (data breaches, the change of the service, the request for access). Cloud computing is developing fast. The European Union also supports the development of cloud computing in Europe with the research and innovation actions under the Horizon 2020 programme. Also the European Cloud Partnership (ECP) was established under the 2012 European Cloud Strategy. It is necessary to pay attention to the use of cloud computing. KEY WORDS: cloud computing, cloud services, information and communication technologies, provider, user.

1. INTRODUCTION In recent years we have encountered the term cloud computing in the context of the IT environment that provides the services that the user does not need to worry about. Today perhaps no one doubts about the advantages of the cloud for businesses, but this phenomenon has been penetrating into IT agenda of ordinary home users, students and small business owners more and more in various forms. The aim of these users is taking advantage of the cloud for placing their documents, personal agenda or the agenda of a small business (sole trade, freelance occupation) on site in order to use them comfortably and safely anywhere, anytime and from any device (Lacko, 2012). Cloud computing represents a rising trend that is similar to Web 2.0, based on the existing and proved technologies. It should make each element of IT infrastructure available as a service on demand: operating systems, applications, storage, servers, appliances and workflow management. Cloud computing is the culmination of a trend in the use of applications without the user having to have anything installed on his computer. This trend has therefore clear benefits. It is possible to have an access to applications, services and data from anywhere, any time and, in fact, from any client environment, including the wide range of mobile devices. No investments are needed and nothing needs to be managed. The end users only “consume” required functionality, they do not need to know any technical details (Lacko, 2012).

2. CHARACTERISTICS OF CLOUD COMPUTING AND DEFINITIONS OF SELECTED TERMS Cloud is a metaphor for the complex network environment. The term has been introduced in the information technology background, in the Internet environment. In the literature it is defined in various ways. Cloud computing can be defined as a method of providing IT as a service, where a customer pays only for what he is using at the moment. As defined by Gartner, cloud computing is a way of securing computing resources, where massively scalable IT resources are provided to several external customers through web-based technology as a service.

202

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Another definition describes cloud computing as IT resources and services fully automated and abstracted from the infrastructure through which they are provided. Moreover, they must be provided â&#x20AC;&#x153;on demandâ&#x20AC;? in the shared environment, sufficiently scalable and flexible (Lacko, 2012). Cloud computing represents a new business model where computing power and disc capacity are provided as a service using virtualization over the Internet, under the conditions of certain requirements completion in accordance with Service Level Agreement (Ä&#x152;o je to Cloud computing, 2009). In the cloud computing context, a number of relatively new concepts may be encountered. Some of them are used in IT in general, others are specific just for cloud computing. (Cloud Computing od B do Y, 2011). Concerning cloud computing, there are three main models of service provision (service delivery models). As typical ones the following services might be mentioned: SaaS (Software as a Service) - Providing software applications through the Internet that way applications run on the server of the service provider. The client does not have to deal with installing, managing or maintaining the application. In short, it is the provision of software over the Internet without the need for a local installation, eliminating the costs associated with its management. The software is hosted by the provider and runs on its infrastructure, thus, in the cloud. PaaS (Platform as a Service) - Provision of computers and software infrastructure as a service. It includes not only the hardware itself, but also so called solution stack, i.e. the software needed to run its own applications. The solution stack will typically include an operating system and a software ecosystem where necessary, for example web server, database server, etc. The client does not have to deal with the operation of the platform, he only solves the question of the installation, operation and maintenance of his applications. Platform as a Service provides a run-time environment on demand and allows to develop scalable applications in this environment (for example Java) that run in cloud infrastructure of the provider. IaaS (Infrastructure as a Service). Providing computer infrastructure (typically a virtual machine with the appropriate storage space and network connectivity) as a service. The client does not need to worry about hardware maintenance and operation. Infrastructure as a service allows you to create a complete cloud infrastructure, from network elements to running applications while offering high scalability of the infrastructure. Each of these models is useful. While software as a service provides services directly to end users, platform as a service and infrastructure as a service provide tools for developers and allow you to create highly scalable applications. As basic cloud types the following ones could be introduced: Public cloud is now the most commonly seen as the provision of IT services (IaaS, PaaS, SaaS) over the Internet by a third party while ensuring a high scalability and billing according to utilized resources. Private cloud: the infrastructure providing the same services as a public cloud, but only to one organization. In order to identify the infrastructure as a private cloud, it has to meet the criteria and requirements of high scalability. Some producers emphasize the ability of billing the utilized resources to individual sections of the organization. Community Cloud: Cloud used by a certain community, for example by cooperating companies, developers community, etc. Hybrid Cloud: Cloud that is made up of different clouds, such as several public and some private clouds. The organization can use different types of interconnected services from different cloud providers. The following features of a cloud belong to the most important ones: Sharing Systems (Multitenancy): Multiple users (for example organizations) use a device (server, storage system, communications network, etc.) at the same time. Virtualization: The technical solution that allows sharing resources in a way that each user appears to be part of the means as a whole, for example a virtual server appears to the user to be a real server regardless the fact that he actually uses for example only one quarter, one eighth, etc. An important feature of virtualised resources is the fact that they are mutually logically separated and, thus, one user can not access resources of another user. Thin provisioning: Virtual space allocation on the data storage. The required storage capacity is ostensibly dedicated to the sharing client system, but, in fact, it can be used (held heap) by other systems until the time it is actually utilized. This approach limits the inefficient use of storage space. Client systems, which generally use only part of the allocated data space, may virtually have a larger space at their disposal than the real installed capacity storage system is.

2016 - M SPHERE

B O O K O F PA P E R S

-

203


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Cloud reliability. Reliability is achieved through backup systems, and this on different levels (server, supporting infrastructure and complete data centers). The software reliability is an essential part of the solution because it is possible to replace the malfunctioning system during the operation by the functioning one rapidly. Scalability, in some sources referred as elasticity: the ability to change power performance of the provided solutions according to client needs. The ideal cloud provides such services to a client that use so many computing resources as currently needed. At low load it may use only part of the real server, but at high load it can run simultaneously on a large number of sites - without the need for a client to pay any attention to it. The client service is then billed according to the actual amount of usable resources. Security: The security is assured on two basic levels: the service provider’s systems and communication network transmitting data to the client. Used technical resources represent a security system and security as usual for other IT services (physical protection, data encryption). Measurement: As in case of other public services such as electricity or water supply, cloud computing services are provided as measured services to end users (Cloud Computing od B do Y, 2011). Providing that the cloud provider offers all three types of services they are hosted in a cloud on its infrastructure. End users access them through the public Internet network and use them.

Examples of cloud computing services The boom regarding cloud computing has brought a wide range of on-demand service. In short, we cite only a few pioneers in the world of cloud computing (Čo je to Cloud computing, 2009). Software as a service: •

eyeOS - Cloud Computing Operating System

Google Apps - office suite

Platform as a service: •

Google App Engine - Java and Python development platform

Microsoft Azure - development platform built on Microsoft

Infrastructure as a Service: •

Amazon Simple Storage Service (S3) - Storage capacity on demand

Nirvanix - Disc capacity on demand

Amazon Elastic Compute Cloud (EC2) - compute capacity on demand

In the everyday practice common users utilize for example Google Apps.

3. THE DEVELOPMENT AND HISTORY OF CLOUD COMPUTING The model for the cloud are utility services. The conceptual pioneer of so called utilities model was John McCarthy in the 60s of the last century. The principle of utilities model is to provide computing resources like other utilities sources, such as electricity, gas or water, and the user pays only for what he uses. A customer in the household usually does not realize where the electricity he uses is produced or how it is distributed. If he plugs his device into the electrical system, he expects to have enough electricity. He also expects to pay only for the value of the energy consumed. The same level of scalability and flexibility is also expected from cloud computing. The user who accesses, for example, to his email through a web interface or works with documents via cloud services, may not have any knowledge about cloud and even may have no control over its infrastructure. Cloud is very complex,

204

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

but for the user it has a simple intuitive control. The user is interested in the use of subscription services and the extent to which he needs. When a customer does not use the service he then pays nothing. The service should be reliable, of high quality and inexpensive. When we talk about paying for cloud services, it is necessary to emphasize that these are fully commercial services for businesses. The most cloud services are free for personal noncommercial use. A pioneer of the services provided through the website was mailhosting. In fact, every computer user has already created an e-mail account (gmail, hotmail, post ...) on the site. At a time when these accounts were being created it was not foreseen that this area would once be seen as one of cloud services. These services do not only provide a few gigabytes of space for the e-mail users, but they also provide the sophisticated spam protection. In many cases these mailhosting seats, to which a large number of customers were previously attached, have become after the completion of additional features (such as storage, Web office suite and provision virtual machines) the pillars of the current cloud products (Lacko, 2012).

4. ADVANTAGES AND DISADVANTAGES CLOUD COMPUTING The IT industry giants have started to promote cloud computing. Cloud computing brings many advantages and some disadvantages. The advantages of cloud computing are (Lacko, 2012): •

Rapid deployment - Cloud brings the concept of a centralized platform, which is always ready to use, just set up a service to self-service.

High flexibility – the access resources have a virtual character, the resulting potential of the cloud is not limited to the performance and capacity of local or remote computer.

Resource sharing - sharing of hardware resources enables to distribute power among individual users better.

Elimination of the costs of management and maintenance - eliminating a substantial part of the activities related to maintenance such as design, selection of software and hardware platforms, space and personnel.

Savings in energy consumption - better use of electricity by eliminating wasting.

Disadvantages of cloud computing, especially for business use, are as follows: •

Dependence on provider - customers using cloud lose the ability to decide which software and which version to use. Users must also reckon with the possibility that the provider can increase prices of services, which is mostly related to purchasing storage capacity for non-commercial use. There is also the high possibility that the provider may fail, which is unlikely in case of established companies such as Google or Microsoft. Most of the services provided for personal and non-commercial use are free, so it is advisable to place documents to cloud storage of multiple providers.

Distrust - cloud computing is a relatively new concept in IT. So far there are no long-term and reliable recommendations regarding the use of cloud technology. Many questions arise concerning data security.

Fewer features and less comfort of the user interface - Cloud solutions usually provide fewer features compared to desktop. It is not due to the server capability in the data center but constraints resulting from the HTTP protocol, which is the cornerstone of the site. These limitations are now overcome by means of AJAX, Flash, Silverlight.

Less stability - This disadvantage does not refer to their own data centers and technologies in them. The problem is in connection. The software on which we access online can sometimes run slowly or may even fail to connect.

Legislative problems - these problems arise from the fact that the provider and consumer services reside in different countries with different legislation. For example, companies located in the United States or providing services in the US are required to send the client data to the Government, which may present a problem for customers outside the US. In case of the obligation of private data protection it is similar. The anxiety about the securing sensitive data and business confidentiality is also frequent (Lacko, 2012).

The main advantage of the cloud is the fact that a customer pays only for what he needs, without a long-term commitment. An important choice criterion for the cloud solution is the economic stability and credibility of the provider of cloud services and his future prospects.

2016 - M SPHERE

B O O K O F PA P E R S

-

205


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

5. ISSUE OF SECURITY ON CLOUD SERVICES IN THE ENTERPRISE Using cloud services seems to be simple and easy. This simplicity is the main reason for the creation of corporate IT policies that analyze the feasibility of some cloud services. On the other hand, the selected technologies must meet the requirements of the company. It is essential that cloud services comply with the company policies, which are applied in accordance with the BCP - Business Continuity Plan and DRP - Disaster Recovery Plan. IT department has a major impact on the choice of cloud services. The selected solution of the cloud must be in line with the existing BCP and DRP. It is important to respect the ISO / IEC 27001, which is the best known standard in a family of standards that provide requirements for Information Security Management System (ISMS). Cloud services must meet strict audit requirements for enterprise systems. The aim of BCP is continuously available, which is one of the essential points in measuring Service Level Agreement (SLA). Some providers guarantee a refund in case of violation of the SLA (Schmidt, P., Rubóczki, E., 2016). Protecting corporate assets is one among the most important requirements. Cloud solutions must ensure that corporate data are only available to authorized users. Business continuity planning is the process of creating a system of prevention and recovery from the potential threats to the company. Business continuity plan is such a plan (BCP), which is allowed to continue operating if the place of business is affected by different levels of disaster. Disasters, accidents can have a short-term affect or a medium-term affect (breaking buildings) or a long term affect (in case of a smashup and a permanent damage of the building (Schmidt, P., Rubóczki, E., 2016). Disaster Recovery Plan (DRP) is a documented process or set of procedures that restore and protect business IT infrastructure in the event of a disaster. DRP specifies the procedures of the organization to be taken in case of a disaster. The company operation and maintenance of its prosperity depends largely on the availability of IT infrastructure for supporting business processes. Of course, everyone is committed to ensuring the operation of these systems, but the organization must be prepared for the event, when - as a result of changes in internal or external conditions – the regular operation of the systems cannot be maintained. The transition to cloud-based solutions has, in addition, its positive as well as negative aspects. It is quite difficult to create the IT infrastructure of cloud services to cover all the requirements of its employees and the business processes. In doing so, we must not forget the threats (accidents, catastrophes, natural disasters) the IT infrastructure currently encounters. In these cases, it is desirable to have well-developed plans - BCP and DRP. When deciding about the cloud or local solution, it is not enough to take only the fixed and operational costs into account, but we must think of the possibility of rehabilitation and restoration after accidents or disasters (Schmidt, P., Rubóczki, E., 2016).

6. EUROPEAN CLOUD COMPUTING STRATEGY AND SUBSEQUENT INICIATIVES On September 27 2012 European Commission finally praised the new strategy “Unleashing the potential of cloud computing in Europe” – European Cloud Computing Strategy 2012. The strategy aims to speed up and increase the use of cloud computing in the European economy (Európska komisia prijala stratégiu pre cloud computing, 2016). To deliver on these goals therefore the European Commission will launch three cloud-specific actions: 1. Key Action 1: Cutting through the Jungle of Standards 2. Key Action 2: Safe and Fair Contract Terms and Conditions 3. Key Action 3: Establishing a European Cloud Partnership to drive innovation and growth from the public sector.

Cloud computing has the potential to slash users’ IT expenditure and to enable many new services to be developed. Using the cloud, even the smallest firms can reach out to ever larger markets while governments can make their services more attractive and efficient even while reining in spending. Key areas, which it is necessary to solve and take action are (Uvoľnenie potenciálu, 2012): •

206

-

Fragmentation of the digital single market due to differing national legal frameworks and uncertainties over applicable law, digital content and data location ranked highest amongst the concerns of potential cloud computing adopters and providers. This is in particular related to the complexities of managing services and usage patterns that span multiple jurisdictions and in relation to trust and security in fields such as data protection, contracts and consumer protection or criminal law.

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Problems with contracts were related to worries over data access and portability, change control and ownership of the data. For example there are concerns over how liability for service failures such as downtime or loss of data will be compensated, user rights in relation to system upgrades decided unilaterally by the provider, ownership of data created in cloud applications or how disputes will be resolved.

A jungle of standards generates confusion by, on one hand, a proliferation of standards and on the other hand a lack of certainty as to which standards provide adequate levels of interoperability of data formats to permit portability; the extent to which safeguards are in place for the protection of personal data; or the problem of the data breaches and the protection against cyberattacks.

Where the World Wide Web makes information available everywhere and to anyone, cloud computing makes computing power available everywhere and to anyone. Like the web, cloud computing is a technological development that has been ongoing for some time and will continue to develop. Unlike the web, cloud computing is still at a comparatively early stage, giving Europe a chance to act to ensure being at the forefront of its further development and to benefit on both demand and supply side through wide-spread cloud use and cloud provision (Uvoľnenie potenciálu, 2012). The European Cloud Partnership (ECP) was established under the 2012 European Cloud Strategy. The ECP brought together industry and the public sector to work on common procurement requirements for cloud computing in an open and fully transparent way. The ECP Steering Board provided advice to the European Commission on strategic options to turn cloud computing into an engine for sustainable economic growth, innovation and cost-efficient public and private services. The policy recommendations of the Cloud Computing Partnership Steering Board were taken into account in the Digital Single Market strategy (DSM). The DSM strategy, adopted on the 6 May 2015, includes 16 initiatives to be delivered by the end of 2016. One of the DSM activities focuses on the European Cloud initiative, aiming at increasing trust when using cloud services and at establishing a European open science cloud. Currently, on the 11 October 2016 the European Commission has published the first report of the Commission High Level Expert Group on the European Open Science Cloud (HLEG EOSC). The Report recommends to close discussions about the ‘perceived need’ of a science cloud and to take immediate action on the EOSC in close concert with Member States, building on existing capacity and expertise. They also recommend writing clear Rules of Engagement for access to the EOSC and for the provision of services based on research data (European Open Science Cloud, 2016). Accompanying implementation activities were established, in particular the Cloud-for-Europe (C4E) initiative as a part of ECO geared towards public administrations, aiming at helping Europe’s public authorities procure cloud products and services, so as to build trust in European cloud computing. The important activity is also establishing the Helix Nebula Science Cloud (HNScicloud) focusing on cloud for public research and innovation. The Helix Nebula Initiative is a partnership between industry, space and science to establish a dynamic ecosystem, benefiting from open cloud services for the seamless integration of science into a business environment. Today, the partnership counts over 40 public and private partners (European Cloud Partnership, 2016). The European commission aims at enabling and facilitating faster adoption of cloud computing throughout all sectors of the economy which can cut ICT costs, and when combined with new digital business practices, can boost productivity, growth and jobs.

7. SAFE AND FAIR CONTRACT CONDITIONS OF CLOUD COMPUTING The Document Unleashing the Potential of Cloud Computing in Europe, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, issued in Brussels 09/27 2012 is dedicated in detail to the issue of cloud computing contract in the section Key Action 2: Safe and Fair Contract Terms and Conditions Traditional IT outsourcing arrangements were typically negotiated and related to data storage, processing facilities and services defined and described in detail and up-front. Cloud computing contracts, on the other hand, essentially create a framework in which the user has access to infinitely scalable and flexible IT capabilities according to his needs. However, currently the greater flexibility of cloud computing as compared to traditional outsourcing is often counterbalanced by reduced certainty for the customer due to insufficiently specific and balanced contracts with cloud providers. The complexity and uncertainty of the legal framework for cloud services providers means that they often use complex contracts or service level agreements23 with extensive disclaimers. The use of “take-it-or-leave-it” standard contracts might be cost-saving for the provider but is often undesirable for the user, including the final consumer. Such contracts may also impose the choice of applicable law or inhibit data recovery. Even larger companies have little negotiation power and contracts often do not provide for liability for data integrity, confidentiality or service continuity.

2016 - M SPHERE

B O O K O F PA P E R S

-

207


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

As regards professional users, the development of the model terms for cloud computing of the service level agreements for professional users were one of the most important issues that arose during the consultation process. The service level agreements determine the relationship between the cloud provider and professional users, and thus essentially provide the basis of trust cloud users can have in a cloud provider’s ability to deliver services. Concerning consumers and small firms, the Commission’s proposal, as an action aiming at building digital confidence under the Digital Agenda, for a Regulation on a Common European Sales Law, addresses many of the obstacles stemming from diverging national sales law rules by providing contractual parties with a uniform set of rules. The proposal includes rules adapted to the supply of “digital content” that cover some aspects of cloud computing. Specific complementary work for those issues that lie beyond the Common European Sales Law is needed to make sure that other contractual questions relevant for cloud computing services can be covered as well, by a similar optional instrument approach. This complementary work should cover such issues as data preservation after termination of the contract, data disclosure and integrity, data location and transfer, direct and indirect liability, ownership of the data, change of service by cloud providers and subcontracting. Although existing EU legislation protects users of cloud services, consumers are often unaware of their relevant rights especially including the applicable law and jurisdiction in civil and commercial matters, notably when it comes to contract law questions. Development of model contract terms was identified in the consultation as desirable to overcome these problems. Industrial users and suppliers have called for self-regulatory agreements or standardisation. For contracts with consumers and small firms European model contract terms and conditions based on an optional contract law instrument may be needed to create transparent and fair cloud services contracts. Identifying and disseminating best practices in respect of model contract terms will accelerate the take up-of cloud computing by increasing the trust of prospective customers. Appropriate actions on contract terms can also help in the crucial area of data protection. As noted above, the proposed Regulation on personal Data Protection will guarantee a high level of protection for individuals by ensuring continuity of protection when data is transferred outside the EU and EEA, namely through standard contractual clauses governing international data transfers and establishment of the necessary conditions for the adoption of cloud-friendly binding corporate rules (Uvoľnenie potenciálu, 2012).

8. SPECIFICS FOR THE DESIGN OF CLOUD CONTRACT In cloud computing, in addition to the benefits and efficiency, there are the associated risks and some disadvantages as well, such as: •

disputable data security,

the data is moving outside the user’s disposition cloud,

different legal systems of a provider and user cloud.

When choosing a cloud service provider it is recommended to take into account: •

References and certificates provider

Guarantee the availability of cloud services

Conditions Troubleshooting (reaction time)

Provider’s liability for loss of data, their abuse, the damage

Terms and conditions provider (Alušíková, 2015).

At the core of cloud contracts is the determination of the law which will manage the contractual relationship. This question is particularly important in cases when the parties reside in different countries, where services are supplied from abroad, or if abroad there is data storage. The specificity is in the domains of privacy, where recently new Regulation (EU) 2016/679 of The European Parliament and of The Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/ EC (General Data Protection Regulation) have been adopted. The certain attention should be paid to the subject of cloud-based contract. The subject of the contract should include

208

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

a specification of cloud services while defining the obligation of the beneficiary to pay the service fee for the provision of it (Alušíková, 2015). The subject of the agreement is necessary to be defined by means of specific actions and performance while it is important to accurately determine the extent of the service. The contractual relationship should specify the rights and obligations of the service provider in relation to specific requirements of recipient services, taking into account the specificities of a particular cloud solutions. Such specification is important for the subsequent verification of quality of services and the assessment of the proper implementation of the concluded contract provider. When cloud contracts, the following points should not be neglected: •

identification of ownership of the data,

protection of intellectual property rights,

requirements to avoid the distortion data confidentiality (employee-driven approach to data provider, a record of activities)

guarantee the availability of data,

troubleshooting (Response Time, Service Level Agreements)

information obligations of the cloud (data breaches, the change of the service, the request for access).

Within the cloud-based contracts the liability of the recipient as well as the cloud provider is recommended to adjust (Alušíková, 2015): •

the provider’s liability for optimal use cloud

the provider’s cloud security (for the loss or corruption of data)

the liability of the protection of personal data (responsible for access to data).

the responsibility for the content of the recipient cloud data

the responsibility of the beneficiary under the cloud of the law on personal data protection.

In preparing the cloud-based contracts it is needed to adjust the cessation of the contractual relationship, such as: •

specific process data handling user upon termination of the contract and the method of their removal

The time within which the data will be accessible to the beneficiary after the expiry of the contract,

The time in which the provider is obliged to return the data to the user, respectively convert the data to another provider (Alušíková, 2015).

The data of each company represent a fundamental value and irreplaceable importance, therefore the preparation of a cloud-based contract must be given the particular attention to ensure the key responsibilities of the service provider and service recipient by means of appropriate hedging instruments. In this regard, experts recommend to modify and issue the contract with the regard to the financial compensation.

9. DISTRIBUTION OF CLOUD COMPUTING IN EUROPE The new cloud solutions can help business understand the unique challenges, customer preferences and help implement new agile approaches, enabling companies to gain competitive advantage and achieve the set business goals. A study from Microsoft called Cloud and Hosting Study 2014, among other things suggests that the adoption of cloud computing will continue to accelerate. Almost half of respondents (45%) reported that they have already cloud applications in a production environment, and 58% of respondents declared that selectively targets new projects and applications in the cloud (Kišša, 2014).

2016 - M SPHERE

B O O K O F PA P E R S

-

209


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The above mentioned study, which Microsoft released in mid-March 2014, provides data that suggest moderate Europe’s decline in the active use of the cloud computing compared to the global market, especially in comparison to North America or Asia. Europe has particular problems specific to the European environment. One of the main particularities of Europe’s legislative diversity within the EU Member States. Each European country has its own rules and regulations on data protection and information security in general. When using cloud services it is very likely to be exceeded national borders, either because the data center is in another country, or operating personnel provider of cloud services operating in the country of a third party. This fact is not explicitly blocking factor, but adds complexity to the decision-making process, not infrequently leads to a preference for certainty and moving away from the use of the cloud. In the field of information security, not only for cloud computing but also for many other industries coming changes in the context of the actual adoption of Regulation (EU) 2016/679 of The European Parliament and of The Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation). The first conceptual proposal for an EU regulation on the protection of data published by the European Commission in January 2012, while the proposed framework has been defined as a radical new data protection regime. The EU Regulation on data protection covers not only to European companies but also to companies outside the Union, which hold personal data of EU citizens. The Regulation also contains various obligations for companies including providers of cloud services, for example: the appointment of a Data Protection Supervisors, detailed records of how personal data are collected, and auditing of their impact on privacy. Regulation also imposes an obligation to “without delay” take appropriate technical and organizational security measures in response to a report of a security breach. In any case, the need to harmonize EU legislation on the protection of personal data and ensure transparency of conditions is a prerequisite for the further development of the use of cloud services in Europe. Young companies (startups) about the fastest actively take advantage of cloud services as they need IT to quickly experiment and cloud offer adequate scalable platform without major investment costs. Traditionally, the number of start-up companies in North America (but in recent years in Asia) is higher than in Europe. In most studies describing the adoption of cloud computing the term interoperability is often mentioned for security. Interoperability and solving the problem of the status of standardization represented one of the three main pillars of the European Commission’s strategy for cloud computing, which was officially unveiled back in September 2012. In this perspective, standardization is seen as a strong activator of the potential benefits of greater security for investors and for customers. The European Commission officially delegated executive tasks of the Institute ETSI (European Telecommunications Standards Institute), which created a special coordination group (CSC Cloud Standards Coordination) on the formation of standards in the context of cloud computing. The main purpose of the group was to identify detailed map of the standards needed to support the whole of the objectives and policies defined by the European Commission. Standardization related to cloud computing in some areas become relatively established. How the world will continue in the adoption of cloud computing its status will improve. The maturation of the market for cloud services will improve the readability of the benefits of the cloud and increase the general willingness to invest. Regulatory conditions are becoming more harmonized, particularly in the EU (Kišša, P. 2014).

CONCLUSION Cloud computing is not for every company and does not cure all wounds, but in some specific cases it can save IT costs and effectively solve the problem. Adoption of cloud computing should be considered seriously, not only from the viewpoint of economic consequences, but also from its global nature. It brings non-trivial questions of law and other disciplines as well. Experts share different opinions about the use of cloud computing and are divided into two parts: One part highlights the potential simplicity, efficiency, security and flexibility. The second part, on the contrary, is concerned about the excessive complexity resulting from the attribution of infrastructure or data to external parties. Despite concerns, however, the interest in cloud computing is growing worldwide (Cloud Computing, Fenomén, 2012).

210

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Cloud computing should not be understood as a current fashion trend. It is the next evolutionary step in the development of informatization. Its heralds are the ever-present web applications and collaboration of people over long distances. It accelerates the access to new computing power. All major IT companies invest significant funds in the development of the cloud computing. Cloud providers seek to ensure the security solutions and data. The financial compensation for damages in the event of a breach of security services is also provided. The European commission calls upon Member States to embrace the potential of cloud computing. Member States should develop public sector cloud use based on common approaches that raise performance and trust, while driving down costs. Active participation in the European Cloud Partnership and deployment of its results will be crucial. The Commission also calls upon industry to cooperate closely on the development and adoption of common standards and interoperability measures (Uvoľnenie potenciálu, 2012). The dynamic development of new information and communication technologies (ICT) brings many questions to which the legislation must react. In the academic sphere, in many universities in the world, including Slovakia, new subjects emerged over the past two decades such as Computer Law, Software Law, Law of ICT or IT law. The topic of the article is in relation to the issue of the legal aspects of informatization of a society, on which the educational process is focused within the academic discipline called Computer Law. Teaching Computer Law has been provided since 2002 to students of the first degree of Bachelor’s studies in the study program Economic Informatics of the Faculty of Economic Informatics of the University of Economics in Bratislava in Slovakia.

LITERATURE 1. Alušíková, J. (2015). Na čo si dať pozor pri príprave cloudovej zmluvy. Prednáška s prezentáciou (Lecture with presentation). Konferecia E Focus - IT právo 2015 (Conference E Focus – IT Law 2015). 16. 5. 2015. Technopol, Bratislava, Slovakia. From http://konferencie.efocus.sk/images/ files/4_alusikova.pdf 2. Cloud Computing od B do Y. Edice BusinessIT ebooks. 2011. Bispiral, s. r.o. Autori: Redakce BusinessIT.cz. From http://www.businessit.cz/ ebooks/Cloud_Computing.pdf [Retrieved 15/6/2016] 3. Cloud Computing, Fenomén, který budí emoce. Edice BusinessIT ebooks. 2012. Autori: Redakce BusinessIT.cz, from http://www.businessit.cz/ ebooks/Cloud_Computing2012.pdf [Retrieved 15/6/2016] 4. Čo je to Cloud computing? From http://blog.innova.sk/2009/06/co-je-to-cloud-computing.html [Retrieved 15/10/2016] 5. European Open Science Cloud. From http://ec.europa.eu/research/openscience/index.cfm?pg=open-science-cloud [Retrieved 18/10/2016] 6. European Cloud Partnership. From https://ec.europa.eu/digital-single-market/en/european-cloud-partnership. [Retrieved 18/10/ 2016] 7. European Cloud Computing Strategy. From https://ec.europa.eu/digital-single-market/en/european-cloud-computing-strategy [Retrieved 15/10/2016] 8. Európska komisia prijala stratégiu pre cloud computing. From http://www.7rp.sk/aktuality/europska-komisia-prijala-strategiu-pre-cloudcomputing.html [Retrieved 05/05/2016] 9. Kišša, P. (2014.) Ako napreduje adopcia cloud computingu v Európe, Infoware 5 – 6 2014. From https://www.interway.sk/files/content/ interway-mediach/ [Retrieved 15/10/2016] 10. Lacko, Ľ. (2012.) Osobní cloud pro domácí podnikání a malé firmy. Computer Press Brno, 2012. ISBN 978-80-251-3744-4, 1. Vydanie, 270 s. 11. Schmidt, P., Rubóczki, E. (2016.) Implementácia cloudových služieb v podnikovom prostredí z hľadiska bezpečnosti. International Scientific Days 2016 (ISD 2016), Nitra, 19.-20. 5. 2016. Nitra. Vydavateľské údaje: SPU Nitra, 2016. ISBN 978-80-552-1505-1. From http://spu.fem.uniag.sk/ mvd2016/proceedings/sk/foreword.html [Retrieved 18/10/2016] 12. Uvoľnenie potenciálu cloud computingu v Európe, 2012. Unleashing the Potencial of Cloud Computing in Europe. (2012). Oznámenie komisie Európskemu parlamentu, Rade, Európskemu hospodárskemu a sociálnemu výboru a výboru regiónov. Európska komisia, Brusel 27.9. 2012 13. From http://eur-lex.europa.eu/legal-content/SK/TXT/PDF/?uri=CELEX:52012DC0529&from=SK 14. [Retrieved 20/10/2016] DETAILS ABOUT AUTHOR: ANNA ONDREJKOVÁ TEACHER LECTURER UNIVERSITY OF ECONOMICS IN BRATISLAVA FACULTY OF ECONOMIC INFORMATICS BRATISLAVA, SLOVAK REPUBLIC ondrejka@euba.sk .

2016 - M SPHERE

B O O K O F PA P E R S

-

211


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

CONSUMER KNOWLEDGE ABOUT FOOD LABELLING IN SLOVAKIA FERDINAND DAŇO PAULÍNA KRNÁČOVÁ

ABSTRACT The presented paper deals with the food labelling from the consumers’ point of view. Food labels play important role in the distribution chain. They help consumers to get information necessary for their deliberate food choice. On the other hand, food producers can promote and communicate basic information and specific characteristics of pre-packed food through the food labels. We conducted primary quantitative research by inquiry method via standardized online questionnaire that addressed three topics: (1) consumer interest, (2) consumer awareness and (3) consumer information and knowledge. In this paper we focus on evaluation of partial research results with the aim to find out an information and knowledge level of consumers about food labelling in Slovakia. The research results (published in Krnáčová, 2016) show us that 87% of consumers in Slovakia are interested in food labelling. Furthermore, over 95% of consumers read information stated on the food labels. In general, they do not know mandatory particulars that food producers have to label on food package in accordance with legislative requirements. The partial results in the presented paper show what information sources consumers use to learn about food quality and food safety. The results, among other facts, also reveal a lack of food labelling information in the market and misleading/deceptive labelling from consumers´ point of view. The paper is prepared within the scientific project VEGA No. 1/0134/14 entitled “Promoting innovation in distribution processes through implementing modern technologies and optimization of logistics activities with a focus on reducing the burden on the environment and improving the life quality”. KEY WORDS: food labelling, consumer behaviour, consumer knowledge.

1. INTRODUCTION Free movement of goods within the European Union countries brings Slovak consumers a wide range of suitable product choices based on individual needs and preferences. However, these options require competencies that consumer should have to choose appropriate products. Consumers should have knowledge of the products ingredients and content, effects, assessment of external characteristics and conditions of use. Based on knowledge the consumer creates a personal value and product quality that evaluates when making purchasing decisions. All external and internal features and product characteristics affect consumer behaviour. Advertising and marketing of products also play an important role (Tomengová, 2012). According to a Eurobarometer study published in 2011, less than 50% of EU consumers surveyed felt confident, knowledgeable and protected as consumers. Empowered consumers find it easy to identify the best offer, know their rights and seek redress when things go wrong. Vulnerable consumers find it hard to understand the choices they face, they don’t know their rights, suffer more problems and are unwilling to act when things go wrong. Significant numbers of consumers have problems making everyday calculations, understanding key information and in recognizing illegal sales practices or knowing their rights. Worrying results indicate that a significant number of consumers are potentially vulnerable to frauds, scams, pressure selling, and do not know they can re-consider their choices and avoid unnecessary purchases. If consumers cannot easily make choices and avoid harm, not only do they suffer but so do the innovative, honest businesses which drive growth. To conclude, these results will have to be taken into account if we want to help consumers in an increasingly complex market and in the face of information overload (European Commission, 2015). An essential concept of the modern theory of marketing, known as “4P”, the marketing mix represents “all the controllable marketing tactical tools that the company combines in order to produce the desired reaction on the target market” (Kotler & Armstrong, 2008). A proof that the marketing mix must be combined in accordance with the marketing strategies is that the same type of items, namely packaging and labelling of the product, are found in the product policy (since the final presentation of the product involves rules on packaging and labelling of the products, particularly food products with a determined shelf life), and within the price policy (the final price of the product also includes the price of the package, respectively the recycling price of the packaging), and also in the promotion policy, while the packaging and the information on the label represent the main communication channel between the producer / distributor and the consumer (Manea & Epuran, 2016). The legislation adopted at EU level by the EU Regulation no.1169/2011 is currently the most accurate and comprehensive food labelling regulation that enables informed and interested consumers to be able to compare the food products

212

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

and to choose the products according to their needs. In accordance with the regulation ‘labelling’ means any words, particulars, trademarks, brand name, pictorial matter or symbol relating to food and placed on any packaging, document, notice, label, ring or collar accompanying or referring to such food. Furthermore, the Article 2 defines food information such as information concerning food and made available to the final consumer by means of a label, other accompanying material, or any other means including modern technology tools or verbal communication. In the context of food labelling, § 3 of Act no. 250/2007 Coll. on consumer protection as amended defines that the consumer has a right to goods and services of good quality, to health protection, safety and economic interests, but also to education and information. According to § 11 and 12, the seller is obligated to inform the consumer. It must ensure that the product sold by him/her is clearly marked. At the national level Decree of the Ministry of Agriculture and Rural Development of the Slovak Republic No. 243/2015 Coll. on food labelling defines requirements of food labelling. Food is labelled on packaging intended for the final consumer. Labelling means written indication of information, trademark, pictures, pictogram or symbol relating to food, and are placed on the packaging, labels, or documents which accompany food. There is a large amount of published studies describing consumer perception, interest, knowledge or awareness of food labelling (Ipsos & London Economics Consortium, 2013; Aday & Yener, 2014; Flabel, 2011). Most of them are dedicated to the selected aspect of labelling, especially to nutrition labelling (Grunert & Wills, 2007; Hall & Osses, 2013; Andrews et al., 2014; Bleich & Wolfson, 2015; Grunert, Wills, & Fernández-Celemín, 2010; Gregori et al., 2014), allergen labelling (Watson, 2013; Sakellariou et al., 2010), organic foods (Kozelová et al., 2011; Müller and Gaus, 2015; Eden, 2011), local foods or country of origin (Rutberg, 2008; Bryla, 2015), food quality mark recognition (Festila, Chrysochou & Krystallis, 2014), sustainability labels (Grunert, Hieke and Wills, 2013) or packaging (Ampuero & Vila, 2006). Based on the research results, the aim of the presented paper is to find out an information and knowledge level of consumers about food labelling in Slovakia and to suggest recommendations to improve the current state.

2. CONSUMER KNOWLEDGE ABOUT FOOD LABELLING Educated consumer who knows his/her rights and responsibilities as well as rights and responsibilities of other subject of the market is able to protect himself/herself in cases when they are being broken, and take action accordingly. Consumer education provides an essential tool in increasing consumer protection. Therefore, as part of conducted research, we have focused on consumer knowledge about food labelling. Even though we realize the consumer education should be part of curriculum and exist as an individual subject, or at least be included in various current subjects, we assume this would not provide sufficient room for consumer education. Mostly generation of older people, who did not undertake this kind of education, need to acquire the knowledge about consumer issues from other sources and via different channels. Making sure there is enough information available (through media or other sources) guarantees that consumer has adequate ideas about the mentioned issues and will enable him/her to choose the right product, how to behave, or just simply know what to avoid buying, when to be careful when buying a certain product or what to pay attention to when food shopping.

2.1. Methodology Selection of scientific methods depends on the paper content focus and the paper aim. To elaborate theoretical knowledge, we primarily used theoretical scientific methods, including method of analysis and synthesis, method of induction and deduction, abstraction and concretization, but also the comparative method. As a method of collecting primary data we conducted research. We evaluated and interpreted the obtained quantitative data through statistical and graphical methods in the Statgraphics software and MS Excel. The basis for the analysis of consumer knowledge on food labelling represents the results of primary research that we conducted by the inquiry method through the standardized online questionnaire in December 2015. Our research was focused on three topics: (1) consumer interest; (2) consumer awareness and (3) consumer knowledge about food labelling. However, this paper focuses on the analysis of partial results concerning the consumer knowledge. We set the following research questions: What information sources do consumers use to obtain information about food labelling? Do consumers suffer lack of information on food labelling?

2016 - M SPHERE

B O O K O F PA P E R S

-

213


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Do consumers know what food information is mandatory on the labels of food? What is the level of consumer knowledge about food labelling? The questionnaire consisted of 26 closed-ended and open-ended questions (including 5 classification questions). The respondent´s answers were evaluated through frequency tables and cross tabulations, in some cases relevant descriptive statistics (e.g. average, standard deviation) were calculated. After testing for complexity, accuracy, validity, reliability and consistency, we analysed 139 questionnaires. We can consider our results to be representative. We calculated the sample size of 126 respondents with confidence level 95%, margin of error 7% and standard of deviation (on the basis of pre-research) 0,4.

2.2. Results and Discussion In this part of the paper, we present partial results of the research which provide us with answers to the research questions and also testify to consumer knowledge about food labelling. A total of 139 consumers participated in the research, of which 83 (59.71%) were women and 56 (40.29%) men. In terms of age structure, there was the largest representation of consumers aged 18-30 years (76, i.e. 54.68%) and 31-40-yearolds (42, i.e. 30.22%). 51-60-year-olds were represented by 9 consumers (i.e. 6.47%), and two age groups (41-50-yearand more than 60-year-olds) by 6 (i.e. 4.32%). The research results (published in Krnáčová, 2016) show us that 87% of consumers in Slovakia are interested in food labelling. We were concerned with the sources from which the consumers gain information about food labelling. As shown in Figure 1, the main information source is the Internet - 85.61% of consumers know food labelling from the Internet, more than half of consumers (58.27%) gets information through word of mouth from family and friends. Very important source can be considered TV. We would like to point out that results can be dangerous from the consumer´s point of view as the Internet and social networks represent the main source of information for large group of consumers. However, the accuracy and expertise of the information is oftentimes questionable. Therefore, in this part of our research we would like to pinpoint the need for educating the consumers not only in terms of food labelling, but also teaching them the skill of estimating the accuracy of their chosen information source.

Figure 1. Source of information about food labelling

Source: own results

n=139

Within the same part of our research, we also focused on finding out if the amount of information available through media is considered to be sufficient from the consumer´s point of view. As seen in Table 1, 74.10% of consumers believe that the information about food labelling accessible through media is insufficient. We are convinced that it is necessary to change this state and improve the knowledge of consumers.

214

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Table 1. Do you think there is a lack of information in the media? 1- Yes, certainly

2 - Yes, maybe

3- I do not know

4 - No, probably not

5 - No, certainly not

21

82

19

16

1

15.11%

58.99%

13.67%

11.51%

0.72%

Average 2,23 n=139

Source: own results

In terms of what kind of information there should be accessible through media, and based on setting the average values for certain types of information, we have found out that consumers are lacking information about the food ingredients, meaning of quality and/or origin marks; mandatory particulars labelled on the food, basic information obligations of food business operators. Table 2. More of which information should media provide to consumers? Type of information

1 - Yes, certainly

2 - Yes, maybe

3 - I do not know

4 - No, probably not

5 - No, certainly not

Average/ Rank

Mandatory particulars labelled on the food

60 43.17%

57 41.01%

10 7.19%

11 7.91%

1 0.71%

1,82 3.

Possibilities and procedures for submitting suggestions and complaints about the food quality and safety

44 31.65%

63 45.32%

18 12.95%

13 9.35%

1 0.72%

2,02 5.

Difference between a ‘best before’ date and a ‘use by’ date

59 42.45%

44 31.65%

10 7.19%

24 17.27%

2 1.44%

2,03 6.

Meaning of quality and/or origin marks

66 27.48%

62 44.60%

6 4.32%

5 3.60%

0 0.00%

1,64 2.

Basic information obligations of producers/ distributors in relation with consumers

51 36.69%

68 48.92%

9 6.47%

11 7.91%

0 0.00%

1,85 4.

Explaining of nutrition labelling

49 35.25%

55 39.57%

13 9.35%

21 15.11%

1 0.72%

2,06 7.

List of ingredients

84 60.43%

47 33.81%

6 4.32%

2 1.44%

0 0.00%

1,47 1. n=139

Source: own results

The resulting lack of knowledge can be caused by the fact, that 44.60% of consumers think that food available on the market is not labelled sufficiently (see Figure 2). We cannot agree with this, as our legislation sets mandatory particulars that are labelled on the food packaging. The particulars are extensive enough to guide the consumer while shopping. At the same time, the results can explain that consumers do not possess enough knowledge about mandatory particulars and about food labelling (see Table 3). Furthermore, over 95% of consumers claim that they read information stated on the food labels (Krnáčová, 2016). This means they do not pay enough attention to the food labelling. Figure 2. Is food on the market labelled adequately?

n=139

Source: own results

2016 - M SPHERE

B O O K O F PA P E R S

-

215


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Most consumers believe that the mandatory particulars are a list of ingredients (97.84%), a food name (95.68%), a date of durability - ‘best before’ date or a ‘use by’ date (94.96%) and a country of origin (86.33%). Consumers should choose the information that they deemed mandatory from the list which contains only one optional data – a bar code, which the majority of consumers (66.91%) considers mandatory. However, the truth is that certain information must be listed under defined conditions – e.g. if their omission would mislead the consumer (it applies for the country of origin, with the exception of specific commodities (meat, honey, etc.) or instructions for use and preparation). Nutrition labelling is mandatory from 1 December 2016, at present it is so only if the packaging has a nutrition claim. Based on the results of the research, we claim that consumers do not have sufficient knowledge about the mandatory particulars that must appear on food packaging (Krnáčová, 2016)

Table 3. Mandatory particulars in the view of consumers Name

List of ingredients

Nutrition facts

Net quantity

Identification of lot

Barcode

Food business operator

Allergens

133

136

106

73

31

93

33

103

95,68%

97,84%

76,26%

52,52%

22,30%

66,91%

23,74%

74,10%

Country of origin

Date of durability

Instructions for use

Storage conditions

Nutrition or health claims

120

132

44

82

86,33%

94,96%

31,65%

58,99%

Actual alcoholic strength

In official language

23

84

99

16,55%

60,43%

71,22%

Source: Krnáčová, 2016

n=139

Misleading/deceptive food labelling was the focus of the next part of our research. We have been witnessing number of cases of misleading/deceptive labels on the market, broadcasted by the media. It is alarming that more than quarter of consumers (51, e.g. 36.70% - Yes, certainly and/or Yes, maybe) consider the food labelling to be misleading/deceptive (see Figure 3). Another 38.13% of consumers were not able to express their own opinion, which also can be understood they lack information in this field.

Figure 3. Is labelled information on the food misleading?

Source: own results

n=139

The majority of consumers who view information as misleading believe the declared quality of food does not represent its true quality. A lot of consumers consider the pictures on food packaging to be misleading, because the real food looks different. In particular, we would like to pinpoint that 27.45% of consumers are convinced that, when the food producers name their product using the country of origin which is actually not the same as producing country, this is considered misleading (see Figure 4). In this case, we see the problem exactly in the fact that consumers do not pay sufficient attention to the information on the label. Because in accordance with the Act No. 152/1995 Coll. on food as amended

216

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

the country of origin must be labelled on the packaging of foodstuff, whose name consists of a geographical indication. For example, Dutch cocoa produced in the Czech Republic shall be marked with the country of origin: Czech Republic. At the same time, it is applied for foods which are typical for certain countries. For example, Mozzarella as a typical Italian cheese that is produced in another country must be labelled with the country of origin. Figure 4. Why do you think that information is misleading?

n=51

Source: own results

In the long term, consumers have declared problems with font size of information labelled on the packaging. Our results in Figure 5 show that 59.71% of consumers consider the font size small and they prefer greater font size. Based on the research conducted by European Commission, minimum font size was estimated. Regulation (EU) of the European parliament and of the Council No. 1169/2011 of 25 October 2011 on the provision of food information to consumers brought to the practice legibility of information - the x-height of the font size of mandatory information is equal to or greater than 1,2 mm, in case of packaging or containers the largest surface of which has an area of less than 80 cm2, the x-height of the font size has to be equal to or greater than 0,9. Figure 5. Font size of information labelled on the packaging

n=139

Source: own results

Considering various food scandals broadcasted in the media in the last period, we wondered if consumers know which institution they should contact in case of problems, questions or complaints relating to food products. According to the results we can conclude that consumers do not have the right information. The most of the consumers (94.96%) would contact the Slovak Trade Inspection which controls the quality and safety of selected non-food products. In Slovakia the state control authority for product quality and safety represents Slovak State Veterinary and Food Administration of the Slovak Republic (hereinafter SVFA) which 71.22% of consumers would contact. There is a scope for improving consumer knowledge. Despite the increased recent publicity of SVFA relating to various scandals, consumers do not perceive it as a control body for the food.

2016 - M SPHERE

B O O K O F PA P E R S

-

217


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Figure 6. Knowledge of state control authorities

Source: own results

n=139

2.3. Suggestions and Recommendations Based on the research results, we propose suggestions and recommendations designed to increase the level of consumer knowledge about food labelling. While their processing we took into account the views and suggestions of consumers Figure 7: Consumer preferences of food labelling information sources

Source: own results

n=139

In terms of forms of providing information about food labelling (see Figure 7), consumers prefer the design of a specialized website (75.54%), information brochures available free of charge directly in stores (48.92%) or consumer TV program (33.09%). We suggest some recommendations as follow:

• To establish Information centre for food safety – we lack this kind of organization in Slovakia. Existing consumer

associations fail to cover such a wide area of ​​consumer information and education, they lack sufficient personal and financial resources. Furthermore, there is no umbrella consumer association in Slovakia that would cover several small consumer associations or organizations. Therefore, we recommend to create such an entity (e.g. within organizational structure of the Ministry of Agriculture and Rural Development of the Slovak Republic), which would have different roles in consumer education and would improve consumer knowledge in the field of food quality and safety (including food labelling) by various forms: website, educational activities and lectures (training programs for pre-schoolers and pupils, lectures for students and teachers of secondary schools, colleges

218

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

and also for adult consumers), organizing of events for consumers and/or publishing activities focused on electronic or printed publications, leaflets, manuals, which would be available for free.

• To design and create specialized webpage dedicated to the field of food products – the Internet currently represents

the most powerful information medium. As the research results show, 85.61% consumers get information about food labelling through the Internet. Many newspaper websites have a separated section that serves to inform about the food scandals arising at the market, to inform and explain information about food labels for consumers. All these activities are positive, but they are not sufficient in our view. The biggest advantage of the webpage portal would be that the consumer has information “all under one roof “, obtains them from a credible source, does not have to seek information and decide whether it is credible. All important, relevant information and contacts would be easily found in one place.

• To produce information brochure/leaflet available directly in stores for free – the brochure should contain basic

information about: (1) mandatory particulars labelled on the packaging with emphasis on that particulars to which consumer should pay attention to avoid misleading; (2) institutions responsible for food quality and safety control activities; (3) quality and/or origin marks – their characteristics, logos and meaning (e.g. Quality Mark SK, Quality of Our Regions, Protected Designation of Origin, organic mark, etc.). Almost half of the consumers (48.92%) claimed this form of information spreading would be appropriate for them.

• To create and broadcast consumer TV program focused on food products - 33.09% of consumers (see Figure 7) would accept this form of information sharing. Currently, the Test magazine such as TV program is broadcast, but it is not focused only on food.

• To broadcast more information on the issue of food labelling on TV - TV news, which is a television format with

high ratings? According to the research results, 52.52% of consumers receive information through TV (see Figure 1). Therefore, we think that TV stations could broadcast more information of this kind. They needn´t only inform about the food scandals, deficiencies in the control activities, but can also create educational content about what to pay attention to on packaging, what to be aware of, what quality brands are used at the market, etc.

• To admin social networks actively - according to the research results, 43.17% of consumers (see Figure 1) obtain

information on food labelling through social networks. Therefore, it is necessary to create a profile on Facebook (Facebook is the most used social network in Slovakia) addressing all relevant information concerning the food labelling as part of food safety and quality. At present, consumer associations use Facebook profiles, which are, however, mainly oriented to consumer rights with less or no focus on food issues. It is worth noting the Facebook profile of the Ministry of Agriculture and Rural Development of the Slovak Republic, where we can also find information on food labelling. On the other hand, for example the State Veterinary and Food Administration of the Slovak Republic as the state authority in the field of food quality and safety does not have a Facebook profile that could be used to effectively inform, but also to educate consumers. These facts reveal the possibilities for a more efficient use.

• To improve consumer sections in newspapers and magazines containing news, other informative articles dealing with the food labelling, food quality, results of food testing, etc.

• To train persons of the first contact to provide information related to food quality, food labelling directly at the

point of sale – similar to best practices of some specialized stores (e.g. electro, cosmetics, footwear), in which the customer can ask competent employees when needing help.

• To teach consumer education at schools (primary, secondary schools and higher education institutions) - the consumer education should be part of curriculum and exist as an individual subject, or at least be included in various current subjects.

CONCLUSION Based on the research results, the aim of the presented paper was to find out an information and knowledge level of consumers about food labelling in Slovakia and to suggest recommendations to improve the current state. We conclude that consumer knowledge about food labelling issues is at low to moderate level, i.e. consumers have limited knowledge in this field. Research results reveal low level of knowledge about state control authorities in the field of food products. 94.96% of consumers consider the Slovak Trade Inspection as a control authority for the food. The truth is that food quality (including safety and compliance with the requirements of food labelling) is controlled by the State Veterinary and Food Administration of the Slovak Republic, which was identified by 71.22% of consumers.

2016 - M SPHERE

B O O K O F PA P E R S

-

219


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Furthermore, we have identified a lack of knowledge of consumers regarding the mandatory particulars on the prepacked food labels. In terms of partial results that we present in this paper, we consider consumers’ knowledge about the mandatory particulars which must be stated on the packaging of food to be insufficient. If we generalize the results, consumers consider the name of the product, the date of durability and the list of ingredients to be mandatory particulars. Moreover, the vast majority of consumers think that the country of origin and the nutrition labelling are mandatory as well. According to the research results, we can also conclude that consumers get information from various sources that their relevance and amount is not sufficient. The vast majority of consumers use the Internet as an information source (85.61%), more than half of consumers TV (52.52%) and more than half of consumers (58.27%) get information through word of mouth from family and friends. Social networks are used to gather information by 43.17% of consumers. At the same time majority of consumers feel that there is a lack of information on food labelling in the media. Consumers lack information about the food ingredients (94.24%), meaning of quality and/or origin marks (92.08%); mandatory particulars labelled on the food (84.18%), basic information obligations of food business operators (85.61%). The resulting lack of knowledge can be caused by the fact that 44.60% of consumers think that food available on the market is not labelled sufficiently. Furthermore, it is alarming that more than quarter of consumers (36.70%) consider the food labelling to be misleading/deceptive. Another 38.13% of consumers were not able to express their own opinion, which can also be understood they do not have enough information in this field. The most consumers believe that the declared food quality does not correspond to their real quality (70.59%). 45.10% of consumers consider pictures on the food packaging to be misleading and 27.45% of them are misled by name of the food that evokes country of origin. Based on the research results, we propose suggestions and recommendations that can increase the level of consumer information and knowledge about food labelling, as follow: (1) to establish an Information centre of food safety, (2) to design and create specialized web page; (3) to create and produce a brochure available in-store free of charge; (4) to create a consumer TV program on food; (5) a larger volume of information on the issue of food labelling in television news; (6) active use of social networks; (7) to improve consumer categories in magazines/newspapers; (8) training activities for employees directly at the point of sale; and (9) active teaching of consumer education in schools.

LITERATURE 1. Act No. 152/1995 Coll. on foods as amended 2. Aday, M. & Yener, U. (2014). Understanding the buying behaviour of young consumers regarding packaging attributes and labels. International Journal of Consumer Studies, 38(4), pp.385-393. 3. Ampuero, O. & Vila, N. (2006). Consumer perceptions of product packaging. Journal of Consumer Marketing, 23(2), pp.100-112. 4. Andrews, J., Lin, C., Levy, A. and Lo, S. (2014). Consumer research needs from the food and drug administration on front-of-package nutritional labeling. Journal of Public Policy & Marketing, 33(1), pp.10-16. 5. Bleich, S. and Wolfson, J. (2015). Differences in consumer use of food labels by weight loss strategies and demographic characteristics. BMC Public Health, 15(1), pp.1275. 6. Bryła, P. (2015). The role of appeals to tradition in origin food marketing. A survey among Polish consumers. Appetite, 91, pp.302-310. 7. Decree of the Ministry of Agriculture and Rural Development of the Slovak Republic No. 243/2015 Coll. on food labelling 8. Eden, S. (2011). Food labels as boundary objects: How consumers make sense of organic and functional foods. Public Understanding of Science, 20(2), pp.179-194. 9. European Commission. (2015). Consumers’ awareness and skills worryingly low, survey finds. Retrieved 20 October, 2016 from http://europa.eu/ rapid/press-release_IP-11-455_en.htm 10. Festila, A., Chrysochou, P. and Krystallis, A. (2014). Consumer response to food labels in an emerging market: the case of Romania. International Journal of Consumer Studies, 38(2), pp.166-174. 11. Flabel. (2011). Food labelling to advance better education for life. Retrieved 10 January, 2016 from http://www.flabel.org/en/ 12. Gregori, D., Ballali, S., Vögele, C., Gafare, C., Stefanini, G. & Widhalm, K. (2014). Evaluating food front-of-pack labelling: a pan-European survey on consumers’ attitudes toward food labelling. International Journal of Food Sciences and Nutrition, 65(2), pp.177-186. 13. Grunert, K., Hieke, S. & Wills, J. (2014). Sustainability labels on food products: Consumer motivation, understanding and use. Food Policy, 44, pp.177-189. 14. Grunert, K. & Wills, J. (2007). A review of European research on consumer response to nutrition information on food labels. Journal of Public Health, 15(5), pp.385-399. 15. Grunert, K., Wills, J. & Fernández-Celemín, L. (2010). Nutrition knowledge, and use and understanding of nutrition information on food labels among consumers in the UK. Appetite, 55(2), pp.177-189. 16. Hall, C. & Osses, F. (2013). A review to inform understanding of the use of food safety messages on food labels. International Journal of Consumer Studies, 37(4), pp.422-432. 17. Ipsos & London Economics Consortium. (2013). Consumer market study on the functioning of voluntary food labelling schemes for consumers in the European Union EAHC/FWC/2012 86 04 : Final Report. Retrieved 10 January, 2016 from http://ec.europa.eu/consumers/consumer_ evidence/market_studies/food_labelling/docs/final_rrrepo_food_labelling_scheme_full_en.pdf

220

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

18. Kotler, Ph., & Armstrong, G. (2010). Principles of marketing. London : Pearson Education. 19. Tomengová, A. (2012). Ako byť aktívny a uvedomelý spotrebiteľ. Bratislava : Metodicko-pedagogické centrum. 20. Kozelová, D., Zajác, P., Matejková, E., Zeleňáková, L., Lopašovský, Ľ., Mura, L., Čapla, J. & Vietoris, V. (2011). Perception of bio-food labeling by consumers in Slovakia. Potravinárstvo, 5(1), pp.33-38. 21. Krnáčová, P. (2016). Consumer awareness of food labelling. In Central and Eastern Europe in the changing business environment : proceedings of 16th international joint conference. Prague : Oeconomica Publishing House, University of Economics, Prague, pp. 258-269. 22. Manea, I. & Epuran, Gh. (2016). The packaging and labelling of food products in the European regulatory requirements. Bulletin of the Transilvania University Braşov, 9(58), pp. 175-184. 23. Müller, C. and Gaus, H. (2015). Consumer response to negative media information about certified organic food products. Journal of Consumer Policy, 38(4), pp.387-409. 24. Regulation No. 1169/2011 of the European Parliament and of the Council of 25 25. October 2011 on the provision of food information to consumers 26. Rutberg, S. (2008). Local or organic? Shoppers say ‘both, please’. The Natural Foods Merchandiser, May 2008, pp.30. 27. Sakellariou, A., Sinaniotis, A., Damianidou, L., Papadopoulos, N. & Vassilopoulou, E. (2010). Food allergen labelling and consumer confusion. Allergy, 65(4), pp.534-535. 28. Watson, R. (2013). Managing allergens from a food retailer perspective including an update on allergen labelling regulation. Nutrition Bulletin, 38(4), pp.405-409.

DETAILS ABOUT AUTHORS: FERDINAND DAŇO PROFESSOR ferdinand.dano@euba.sk PAULÍNA KRNÁČOVÁ ASSISTANT PROFESSOR paulina.krnacova@euba.sk FOR BOTH AUTHORS: UNIVERSITY OF ECONOMICS IN BRATISLAVA FACULTY OF COMMERCE BRATISLAVA, SLOVAKIA

2016 - M SPHERE

B O O K O F PA P E R S

-

221


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

VALUE BASED MANAGEMENT WITH SOME PRACTICAL EXAMPLES IN SLOVENIAN INDUSTRIES VLADIMIR BUKVIČ

ABSTRACT Nowadays firms perform their activities in a business environment which requires them to implement such a system of indicators that will better illustrate value and profitability. Financial indicators that are now used by firms to follow their profitability and value creation are inconsistent with the mechanism of capital markets and with what market considers to be crucial for determining value. Constantly bigger efficiency in the capital markets requires a more efficient allocation of capital within firms. Therefore a new system of indicators, as for example Value Based Management (VBM) which better reflects opportunities and threats, is urgent and needed. Within the VBM framework the author especially focuses in this paper on the economic value added (EVA) and on the cash value added (CVA). In the theoretical part, besides making a literature review on this topic, and shortly presenting the research methodology basically using Capital Asset Pricing Model, he analyses and estimates advantages and disadvantages of both indicators, at first by comparing them with standardized financial indicators and then by comparing them between each other. In the empirical part, the two indicators are applied on some selected firms from various industries (automotive industry, chemical industry, pharmaceutical industry and mining industry). At the end of this paper, the author emphasizes and advocates the thesis that a simultaneous choice of both indicators, i.e. EVA and CVA, has an important effect on managerial resources, and on the selection of a strategy as well as on the question of how investors (owners) estimate an individual firm as their potential investment. KEY WORDS: Economic Value Added, Market Value Added, Cash Value Added, Capital-Asset-Pricing Model, coefficient beta, weighted average cost of capital.

1. INTRODUCTION Performance meausurement is often discussed but rarely defined. Performance measurement is the process of quantifying action, where measurement is the process of quantification and action leads to performance (Neely, Gregory & Platts, 1995). According to the marketing perspective, organizations achieve their goals, that is they perform, by satisfying their customers with greater efficiency and effectiveness than their competitors (Kotler, 1984). Effectiveness refers to the extent to which customer requirements are met, while efficiency is a measure of how economically the firm‘s resources are utilized when providing a given level of customer satisfation. How about the satisfaction of the owners? How do effectiveness and efficiency of a firm‘s performance influence their satisfaction? They want to get either the dividend payouts as much as possible or they want to be rewarded for their capital invested in a firm with higher value of their shares. In this paper we are especially interested in a performance measurement dealing with the owners. In this context a simple question can be posed: what measures are the most appropriate to quantify the value creation? Shareholder value creation has become the motto of the most blue-chip companies since the late 1990s. The most fundamental objective is to bring an improvement in the value addition to the shareholders investment. In a marketdriven economy, there are a number of companies that create wealth whereas others certainly destroy it. Some researchers, like Narang and Kaur (2014) suggest that decision makers should strive to push their management teams to think creatively and aggressively about upcoming opportunities leading to the long term shareholder value creation. This paper reveals at the very beginning a short literature review on shareholders‘ value creation presenting some measures which are the most relevant for shareholders‘ value. Among them the focus is given to economic value added (EVA) and cash value added (CVA). There are more advocates of these two indicators than opponents and critics, who defend market value added (MVT) as the most appropriate measure for owners‘ value, and some others, like Tobin‘s q. Firstly, the advantages of EVA and CVA are presented in comparison with some most commonly used financial ratios, further on we prefer CVA as a more indicative measure and it is also easier and less complicated to comopute than EVA. It simply avoids so many adjustments needed to be made in accounting while computing EVA. It follows profitability and value creation better than EVA. These theses are tested and proven in the empiriral part of this paper. Several companies have been (chosen, each from different industry, for which EVA and CVA have been computed. At the end of the empirical part a short comparitive analysis is made, including conclusive findings. The paper ends up also with some suggestions for further research in this particular field.

222

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

2. LITERATURE REVIEW After having scrutinized the studies dealing with shareholders‘ value creation we have found out that most of them have focused on the comparison of traditional performance meausures on one hand, like earnings, cash flow and productivity parameters, net present value, etc., and value-based measures on the other, like EVA, etc. There are quite a few of researchers who have dealt with such a comparison while identifying the most significant performance measure that best explains the shareholder value, like Lehn and Makhija 819969, Biddle et al. (1997), Chen and Dodd (1997), Fernandez (2001), Kramer and Pushner (1997), Malik (2004), Medeiros (2005), Misra and Kanwai (2004), Ramana (2004), Worthington and West (2004), Kyriazis and Anastassis (2007) and others. The existing literature has not yet developed the factors and determinants sufficiently that shall define the shareholder value creation. The value drivers to be identified emphasized associate shareholder value with specific financial or strategic attributes only. Thus, Kakani (2001) studied the relationship between ownership distribution and shareholder value creation in the stock markets. Some others, like Venkkateshwarlu and Kumar (2004) empirically studied the relationship between non-markert value performance indicators and market value. They examined accounting profitability, cash flow and growth, etc. Kaur and Narang (2010) examined the corporate attributes that can be associated with the companies‘ EVA disclosure choices. Some researchers, like Pandey (2006) empirically explored the significance of profitability and growth as drivers of shareholder value, measured by market-to-book value. Pandey‘s finding has shown that the economic profitabilitygrowth interaction variable has a positive coefficient. It indicates that growth associated with economic profitability influences shareholder value positively. Literature review on the subject has revealed the need for a further study to explore how the firm-specific attributes contribute to shareholder value. According to Stern Stewart & Co’s1 EVA is a measure of economic profit and has the following advantages over traditional performance measures: •

EVA is the measure that correctly takes into account value creation or destruction in a company

EVA is a measure of the true financial performance of a company

there is evidence that increasing EVA is the key for increasing the company’s value creation

EVA is the only measure that gives the right answer. All the others, including operating income, earnings growth, ROE and ROA may be erroneous

more EVA always is unambiguously better for shareholders

managing for higher EVA is, by definition, managing for a higher stock price

EVA is the performance measure most directly linked to the creation of shareholder wealth over time (www.eva.com).

Biddle, Bowen and Wallace (1997) conducted a study on some companies that used EVA and CVA as parameters for their executives’ renumeration. They compared their progress with another set of companies without using these parameters. Among other things the companies that used EVA and CVA bought 112 % more shares on the market (in order to decrease WACC) than those which did not use these parameters. Kleiman (1999) compared the performance of some ten companies that adopted EVA and CVA with that of its most direct competitors that did not adopt these indicators. Among other things the companies that introduced EVA had on average a hire shareholder return, and sale of assets increases significantly after introduction of the EVA. On the other hand there are also some critics, like Kyriazis and Anastassis (2007) who do not see any particular value added of these two indicators, especially EVA. Other researchers, like Fernandez (2001) disagrees that EVA and CVA are really creating value for the shareholders. He argues for thesis, that a firm’s value and the increase in the firm’s value over a certain period are basically determined by the changes in expectations regarding the growth of the firm’s cash flows and also by the changes in the firm’s risk, which lead to changes in the discount rate. Further, he says, a company creates value for the shareholders when the shareholder return exceeds the equity’s cost or the required return to equity, and vice versa a company destroys value when the opposite occurs. Fernandez sees usefulness of EVA and CVA as management performance indicators only, for they take into account not only the earnings but also the cost of the resources used to generate those earnings.

1

Stern Value Management is a global management consulting firm and the world’s leading advisor on value management, value strategy and value creation.

2016 - M SPHERE

B O O K O F PA P E R S

-

223


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

3. METHODOLOGY This research was based on a standard method, on Capital Asset Pricing Model (CAPM) as a partial statistical model. CAPM is a model that describes the relationship between systematic risk and expected return for assets. CAPM is an important tool used to analyze the relationship between risk and rates of return. Originally CAPM is a static (single-period) model although it is generally treated as if it holds temporally (Merton, 1973). Fama (1970) has provided some justification for this assumption by showing that, if preferences and future investment opportunity sets are not state-dependent, then intertemporal portfolio maximization can be treated as if the investor had a single-period utility function. Merton (1973) has shown in a number of examples that portfolio behavior for an intertmeporal maximizer will be significantly different when he faces a changing investment opportunity set instead of a constant one. We can also refer to the definition of Brigham and Houston: »the relevant riskiness of an individual stock is its contribution to the riskinesss of a well-diversified portfolio« (2004, 189). In this research the stocks of four companies in four different industries are the subject of consideration. CAPM is used for the pricing of risky stocks, which generate expected returns for assets. These assets (stocks) are submitted to risk, and cost of capital has to be considered as well. The formula for calculating the risk of a stock given its risk is the following: , where

is risk free rate,

beta of the stock, and

expected market return.

In the context of VBM, CAPM indicates that investors need to be compensated for their input by time value of money and risk. The first one is represented by the risk-free rate, , rate in the formula above. It compensates the investors for putting money in any investment over a certain time period. The risk-free rate represents the yield on government bonds. The other half of the formula represents risk and computes the amount of compensation the investors/owners require for taking on additional risk. This is computed by means of beta, β, a risk measure. Thus, in the CAPM formula a coefficient beta is used. The tendency of a stock to move up and down with the market is reflected in its beta coefficient, β. Beta is a key element of the CAPM and compares the returns of the asset to the market in a given period of time, and to the market premium, i.e. for how much the return of the market is bigger than risk-free rate. Beta measures how risky an asset is in comparison to market risk. Beta is a function of the volatility of the asset and the market. It reflects the correlation between the two (Investopedia, 2016). Beta is the most relevant measure of any stock‘s risk, for a stock‘s beta coefficient determines how the stock affects the riskiness of a diversified portfolio, or as Brigham and Houston (2004, 193) say, since a stock‘s beta measures its contribution to the riskiness of a portfolio, beta is the theoretically correct measure of the the stock‘s riskiness.3 CAPM model indicates the expected return of an individual stock equals the rate on a risk-free stock increased by a risk premium. If the expected return does not meet the required return of an investor/owner, the investment should not be undertaken. The calculations of our both VBM indicators, EVA and CVA, are based on CAPM model.

4. VALUE BASED MANAGEMENT Indicators currently used by firms to follow their profitability and value creation are not consistent with the mechanism of capital markets and with what market considers being key in determining value. Therefore, we must build on management that is based on value. For internal financial management firms should use VBM instead of an accounting system. According to Weissenrieder (1998) a firm may be illustrated by two most important areas: the first is directed at the owners (capital market) and the other at the buyers (customers). The latter represents a business reality; these are activities that take place in a real business world. Firms have to manage these activities as effectively as possible to maximize value for shareholders. At the same time firms have to be able to complete these activities in such a way that they satisfy market expectations. This may only be achieved on the part of a firm’s management by simulating the reality with the mechanism of the capital market. By making a financial exemplification of a business reality they acquire the necessary management skills. This gives them a relevant feedback which they need to improve their business activities. Weissenrieder (1998) says that the boundary between a business reality and the mechanisms of capital markets can be quite rapidly abused, similarly as it can be abused with financial statements. With this every opportunity to prepare for effective corporate management is lost. They become completely misinformed unless they perceive and comprehend a business reality on the basis of VBM. A firm must operate on a strategic feedback loop which means a constant 2 3

One of the more important developments in modern capital market theory is the Sharpe-Lintner-Mossin mean-variance equilibrium model of exchange, commonly called the capital asset pricing model (Sharpe, 1964; Lintner, 1965; Mossin, 1966). For stocks, the market is usually represented as the S&P 500.

224

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

evaluation of strategies in which doing management carry out the evaluation by using information from the strategies in order to make necessary adjustments in their firms later. There are a lot of cases in firms where the scope of a business reality does not work as it should, but there are very rare cases where it functions efficiently. Financial simulation of a business reality, of course, has to take into account a discounted cash flow. According to Morin and Jarell (2000) value derives from three broad areas of decision-making: strategic, financial and corporate. Strategic determinants include production and marketing strategies and portfolio planning. Financial determinants include the optimization of capital structure and risk management. Corporate determinants include governance, mainly rewarding executive managers and business evaluation. VBM is a relatively simple framework for setting objectives of those business decisions that add an economic value to a firm in both short and long term. Several approaches to quantifying a corporate value exist and they all have roots in a discounted cash flow model, since this is also the method and manner used by investors and capital markets to actually value their firms and securities. The value of every firm is a function of expected future cash flows correspondingly discounted with relation to risk. A corporate value which is measured by a free cash flow, discounted at a time and subject to risks, has become popular and widespread as an excellent measure of value creation.

4.1. Economic value added EVA has gained wide acceptance among investors as a measure that links managerial decisions to shareholder value creation (Ramezani et. al, 2002). Stewart (2000) defined EVA to be an estimate of true economic profitability and the performance measure that is most directly linked to the creation of shareholder value over time value creation. EVA is a model that relies on a firm’s accounting. Its mechanism is therefore related to accounting: Net sales revenue - Operating Expenses (= costs) - Taxes -------------------------------Operating profit

- Financial requirements (= costs of financial resources) -------------------------------= EVA The capital base of EVA is formed by a balance sheet:

Balance sheet x WACC = Financial requirements (= costs of financial resources) „Financial requirements“ are calculated as defined assets (adjusted balance sheet), multiplied by the appropriate weighted average cost of capital (WACC). Although the advantage of the EVA concept as an indicator, which is here following also Bržan case (2008) still asserting itself, lies in its long-term orientation while taking into account the overall capital cost, according to investors, quite some errors appear in accounting what Stewart (1991) points out. They need be corrected in order to simulate cash flow. Disadvantages exist primarily in the valuation of inventories, depreciation, revenue recognition, capitalization and depreciation of R & D activities, marketing, education, restructuring costs, acquisitions premiums, and so forth. EVA should be a framework for VBM. Is it really? Some of the literature – Pettit (1998), Stern, Stuart and Chew (1995) – argues that EVA increases shareholders‘ wealth (Kim) (2006). This depends on how well this framework simulates the business reality from the point of view of shareholders, i.e. the reality of financial markets. According to Weissenrieder (1998, 8) the idea of EVA can be illustrated by the reference circle shown in Figure 1. Point 1 shows the capital market’s reality: investments, cash flow, economic lifetime and cost of capital. In this point, we should measure value and profitability. Here we use the discounted cash flow (DCF). All data about a firm derive from here. 2. In point 2 a firm invests and cash flows are shown on transaction accounts. Managing a firm has legal requirements intertwined with the economic reality.

2016 - M SPHERE

B O O K O F PA P E R S

-

225


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

3. In point 3 a firm’s bookkeeping is not adjusted for cash flow. Economic information is further burdened with regulatory requirements and recorded in the income statement and balance sheet. Figure 1. Reference circle flow; Adapted to Fredrik Weissenrieder : Value Based Management: Economic Value Added or Cash Value Added? (1998, 8)

1

Capital market reality (the area of measuring a company‘s value)

2

Unrealistic economic inclusion of balance sheet items into an income statement

3

A result of unadjusted statements of a balance sheet and an income statement

4

Unsuitable valuation of performance (accounting data)

5

The beginning of EVA adjustments

6

EVA with all adjustments: linear depreciation

7

Final EVA; economic depreciation (cash flow)

4. In point 4, economic information is converted to traditional accounting information. Managers are no longer in a position to measure profitability or value. 5. In point 5 a long road back begins. At least 164 corrections / adjustments are needed, if cash flow is supposed to be restored on the circle. 6. In point 6, necessary corrections and adjustments are made. In the EVA calculation we use a straight-line depreciation. 7. Point 7 shows EVA and so-called „annuity depreciation“. EVA, as we know it today, has remained at 164 corrections and adjustments. But at least two more adjustments are necessary. We will have a look at them later on. The logic of the above illustration lies in the fact that at the beginning all firms have their operation data shown through the prism of money. These are then placed in a firm’s economic framework outlined through an accounting prism. When an accounting process ends, when all past events are properly entered, a firm finds itself on the far right of the upper circle. The mission of the EVA indicator is that it then takes us back to the starting point 1 on the far left upper circle, because only in this point we are in the state according to financial terminology to simulate the business reality of a firm as seen by shareholders.

226

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

4.2. Cash value added Weissenrieder (1998) defines CVA as a net present value model which classifies the calculation of net present value at a time and investments into two categories: strategic and non-strategic. Strategic investments are those whose goal is to create new value for shareholders such as firm’s growth. Non-strategic investments are those that maintain the value created by strategic ones. A strategic investment, such as, for example, an investment in a new product development or an investment in the acquisition of a new market, is followed by several non-strategic. A strategic investment may be tangible or intangible; traditional view of whether an investment is expenditure or not is here irrelevant. Anyway, all that in a firm counts as cash expense which is associated with creating new values and can be defined as a strategic investment. Strategic investments form a capital base in the CVA model, because the financial demands of shareholders (i.e. a reward for invested money) should come precisely from the entrepreneurial ventures, from strategic business decisions, but not, for example, from office furniture. This means that all other investments that are intended to preserve the original value of strategic investments have to be considered as „costs“ such as, for example, buying new office equipment. How is thus capital base in the CVA calculated? The operating cash flow demand (OCFD) is calculated for each strategic investment (the first factor out of four, which defines value). The sum of the required operating cash flow of every strategic investment in each business unit is the capital base of this business unit. OCFD is calculated as cash flow (the second factor out of four which defines the value). These are the same amounts in real values of every year. If it is discounted at the appropriate cost of capital (the fourth factor out of four which defines value), we will get net present value equal to zero for a strategic investment during its economic lifetime (the third factor out of four which defines the value). OCFD is a real annuity, adjusted to the actual annual inflation (not average inflation). If strategic investments are supposed to create value, the operations cash flow (OCF), which is a cash flow before strategic investments, but after non-strategic investments, has to cover OCFD. A strategic investment creates value if at the time period OCF is higher than OCFD which can according to Weissenrieder (1998) be presented as follows:

+ Net sales revenues - Costs --------------------------------= Operating profit or loss (excess of income over expenditure) + / - Changes in working capital - non-strategic investments

-----------------------------------= Cash flow from operating activities - Required cash flow from operating activities --------------------------------------------= Cash value added

CVA shares common origins with EVA and it represents value creation from the point of view of shareholders. It can be shown for different time periods. Ottosson and Weissenrieder (1996) express it as an index: Cash flow from operating activities --------------------------------------------------------- = CVA index Required cash flow from operating activities CVA is based solely on cash flow.

4.3. Why CVA follows profitability and value creation better than EVA Someone might think that EVA and CVA are similar. In theory they are, but not in reality. In theory, they are alike, because CVA is located on the far left of the circle in Figure 1, which is the point on the circle, where EVA would like to bring us. As we know, Ekar (2000) reminds us that in reality only a few corrections and adjustments are carried out, so that we do not travel too long along the circle. According to Weissenrieder (1998) they are therefore not similar in real life.

2016 - M SPHERE

B O O K O F PA P E R S

-

227


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

The first of the two adjustments which are necessary in order to use CVA as a relevant criterion for decision making relates to the so called non-strategic investments. Why should we not, say, office furniture, which is included in the accounting data and financial requirements of EVA include into financial needs of the company? Because owners of firms are not interested in this. But they are very interested in which strategies create value and which do not. Why should management of a firm be directed by accounting principles rather than business logic in making investments? Some costs associated with development, research, and marketing should be treated and regarded as an investment in firms, and vice versa, certain payments which are today regarded as capital expenditures should take their place among running costs. Traditionally, accounting has a fairly sharp view of what is an investment. The confusion in today‘s business environment, where cash expenditure for a machine is far from achieving success by selling a product or service in the global market, has many faces. All of a sudden, „hidden values“ are found within firms and those holding responsibility in firms rush looking for the value of intangible assets (intangible investments) and intellectual capital, rather than triggering a change in the basic economic framework of a firm. Can we really be surprised by the fact that firms often create money out of investments that are not listed in their balance sheets? Hopefully not. The balance sheet is produced by accountants with regard to the relevant legislation and accounting standards, not business reality and business logic. Therefore, discussions regarding the nature of the overall strategic assets of a firm (tangible and intangible) are very important and should according to the previously mentioned author Weissenrieder (1998) be focused on relevant topics. Value of the firm is created by long-term and short-term strategic assets. The firm’s managers have to understand their mutual relationship well, because only on this basis do the business reality and reality in financial markets join. Relying merely on the financial concept of investments only increases the confusion. Effective VBM structures strategic assets to intangible and tangible assets and makes no distinction between the two. Thus, capital will have its price or cost and all of a sudden a debate about the value of the capital structure (strategic assets) will become important. When comparing the value of strategic assets with the market value of equity, we must be careful because the latter will not include only the present value of the existing strategic assets, but also the net present value of future strategic investments. Net present value of future strategic investment may be positive or negative. If we include non-strategic investments in cash flow from operations instead of activating them as investments, financial requirements will be very close to the required cash flow of the CVA indicator. This is followed by another necessary adjustment. After all this we can ask ourselves a simple question: why travel on a circle in the figure above from the point on the far left to the point at the far right in order to return to the point from where we left off. We were at the beginning and why not stay there? From this point on the circle it is not possible to measure historical performance and value until CVA is developed. Now that we have developed it, firms have strategic and operational tool that focuses solely on strategic investment (tangible and intangible assets), their cash flow, their economic life and cost of capital. In such firms we can now link their business reality with the reality in financial markets. Let’s go back to the process of VBM. To achieve a successful VBM, we have to improve the three already existing functions. A process is successful if it increases wealth for shareholders (value of shares and dividends). 1. A firm has a properly oriented concept of VBM if management focus on important issues, if they rely on four factors that determine value: strategic investments (both tangible and intangible assets), their cash flow from operations, their economic lifetime and in their cost of capital. Accounting, unfortunately, does not focus on these four factors. EVA can to some extent help us (it is well designed in theory), but we are still in accounting. 2. The concept of VBM, which is based on financial theory, gives a firm an opportunity to increase the quality of financial analysis. EVA offers a firm a little better analysis, but is still far from what should in the real world be our ambitions. 3. The two functions will have an effect on the intrinsic value of a firm, which will in the long term have an impact on market value. Discounted cash flow should much better fulfill the requirements of the shown process than those concepts which rely on financial statements. Some firms will still choose the criterion measure of EVA instead of CVA because their management have smaller ambitions with the VBM process. If ambition in a firm within the framework of the value of property for shareholders is smaller, then EVA may be a perfectly appropriate criterion. Making up to ten corrections and adjustments in accounting is not such a difficult task. Some proponents of the EVA criteria, like Stewart (2000), suggest that EVA is all we have to know and that it is also simple. It is simple because it draws data from the accounting.

228

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Some authors, as for example Korošec (2001) go a step further and suggest that for the assessment of achievements it is advisable to use also other long-term criteria in addition to the EVA amount, as well as non-financial criteria. We also want to somewhat move away from the latter. CVA is also simple if we have any knowledge of corporate finance. CVA focuses on relevant factors, while EVA does not. CVA is more correct. We simply cannot meet our expectations with the criterion of EVA, when our ambitions for the quality of information from our VBM process are bigger, or if we want to change a firm in the direction of understanding the meaning of „property value for shareholders.” In other words, if we want to travel for more than about 10% along the circle in Figure 1, where we have to make a number of accounting adjustments, then we according to Weissenrieder (1998) certainly benefit more if we use a concept that is based on cash flow starting at the point on the left side of the circle. In this case accounting adjustments are no longer needed. We pursue the discounted cash flow, wherever it appears.

5. EMPIRICAL APPLICATION OF EVA AND CVA In the empirical part of this paper EVA and CVA performance indicators are applied on some concrete economic entities. Four big Slovenian companies (they wish to remain anonymous) have been chosen, company A is a parts manufacturer for the European automotive industry, company B is a manufacturer of pharmaceutical products, a company C is a producer of chemical products, and company D is a producer of pre-coated silica sand and cores for the foundries. In the Apendix (9 pages) – it is not published in these proceedings – the entire process of calculating the two indicators, first EVA and then CVA for the period from 2010 to 2014 is given only for the company A, for the other three only the final results are shown. Further within this section the key findings on the basis of the results are summarized.

5.1. Conclusive findings for company A (automotive industry) Let us show both the calculated criteria of business performance, EVA and CVA, for our company A during the past five years in a joint Table 1. Table 1: A review of EVA and CVA for the company A in the period from year 2010 to year 2014 in 000 €

2010

2011

2012

2013

2014

EVA

6.093

6.560

1.548

5.339

4.935

CVA

8.396

7.136

2.904

5.916

5.115

Indicator

Year

Source: Table 8 and Table 12 in Appendix

We find that both the criteria for their absolute values differ one from another largely due to consideration of depreciation in the calculation of CVA, but they indicate approximately the same trend in changing business performance of an economic entity. EVA and CVA have throughout the period from year 2010 to year 2014 always been positive. They have both essentially dropped in 2012. In this year sales revenues have dropped for 5 % according to the previous year. This year has owing to exceptionally high growth of business in society seen a great increase in the demand for additional working capital. The company financed it by short-term borrowed resources, which resulted in an increase in the cost of debt capital. The relationship between the equity and total debt of the company also deteriorated, and its financial leverage increased. Depreciation as a result of increased investment in tangible assets (increase in production capacity, while technological upgrading) has also contributed to the increased lower value of the EVA indicator. The comparison of the two time series shows that the business performance of our commodity producer, the company A, in the automotive industry despite the drop in sales revenues in 2012 has been improving in 2013 and 2014. The company despite almost the same volume of sales of its products in the European automotive market (approximately € 190 million) over the years 2010 and 2014 and even with slightly increased adjusted invested capital in the last two years achieved a relatively better business outcome as measured by the two criteria than the year before (in 2012). Such a change can be attributed to a significant decrease in the prices of raw materials and components with unchanged selling prices of finished goods. These have decreased at the expense of so-called productivity which manufacturers of car parts have to grant to their customers in the amount of up to 5% every year. Exceptionally well performed are the years 2010 and 2011. In 2011 the company increased the sales for 21 %, what influenced the values of EVA and CVA in that year.

2016 - M SPHERE

B O O K O F PA P E R S

-

229


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

Furthermore, the company in the year 2014 immediately embarked on cost reduction (cost cutting) based on the rationalization of its business (at the increased level of sales, the material costs remained practically the same). It also reduced the stocks (for one tenth), took certain measures in collecting receivables (although most of its customers are fairly reliable payers), reduced short-term payables and made all its hired labor redundant, etc. Through this short analysis we can confirm the company A has been successfully able to create value for its shareholders. On comparing industry-wise composite frequencies for EVA for all years, it was found that there has been a significant increasing trend in EVA of the automobile industry firms which means that companies have a positive trend to improve their firm values ( Selvi & Vijayakumar, 2007, 459-460).

5.2. Comparative analysis of EVAs and CVAs for all selected industries After having calculated EVAs and CVAs for all four companies, based on data from their income statements, balance sheets and other internal data of the four companies (see the calculations in Appendix), the final statements can be rounded up as it follows: â&#x20AC;˘

The trend of course for EVAs are equal to the trend of course for CVAs for all the companies; it means if EVA increases in an individual year CVA increases as well, and if EVA drops in an individual year, similarly CVA diminishes, too regardless if the values for these two indicators are positive or negative. Direction of tendency is with both indicators the same. This tendency can be seen in the figures 2 and 3 below and for each company in the appendix.

â&#x20AC;˘

If the absolute value of these two indicators are taken into consideration, in our case we find out that for two companies (company A and company B) EVAs have bigger values than CVAs.

Figure 2: The tendency trends of EVA for the selected manufacturing companies; Source: Calculations in Appendix

Figure 3: The tendency trends of CVA for the selected manufacturing companies; Source: Calculations in Appendix

230

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

On average the company D has the highest WACC; it is a cost of capital and directly influences CVAs. This is also a reason why this company has negative CVA during the whole 5-year period.

The company B had extremely high NOPATs in 2011 and 2012; relatively good performance in those two years can be explained by the record-breaking sales revenues, also by the improved productivity. Although WACC increased in 2012 almost to 14 %, this influenced significantly the values of CVAs in those two years. Similarly EVA is extremely high in 2011. The main reason can be ascribed to the high value of the changes in long-term provisions that company had made in that year.

Owing to exceptionally high growth of business in 2011 the company B had to increase its net working capital. In that year accounts payable as a short-term funds increased significantly, for 20 % in comparison to year before. The need for additional working capital was also in 2012.

What was also specific for the company B - this is not the case with the other three though – is its deleveraging. The company was relatively high indebted in 2010. Already in 2011 short-term financial debt was cut in two, and the company succeeded to reduce its long-term credits down to almost one third.

The company D among the four companies selected in this sample is the only one having negative values of EVAs and CVAs in the whole 5-year period. This particular company is an excellent example showing us that the ratios like NOPAT, ROIC, etc. are not sufficient for measuring company performance, its efficiency. On the contrary, EVA and CVA show that the shareholders are not recompensed for what they had invested into the company. These two indicators are much better though, more indicative, and real measures of shareholders’ value.

It is obvious that pharmaceutical industry is the most prospective industry. The figures of company C in Table 15 above confirm this statement. The company is a worldwide independent producer of drugs (mainly generic). It is r&d intensive – it invests approximately from 9 to 10 % of its annual sales revenues into research and development of new products. If we add investments into marketing research this percentage becomes significantly higher (around 12 %). It’s average annual growth rate of sales is about 5 %. The company has constantly increased its adjusted operating invested capital, between 5 and 7 % a year. However this is not the case for the other three companies. For company B the adjusted operating invested capital has been shrinking in the last two years. For the companies A and D it stayed practically at the same level in all five years or for the last two years respectively.

Coefficients Beta have the highest values for the company D (always above 1), and for the company A (above 1 in the last three years). The coefficient Beta is the lowest for the company C, what could have been expected while having in consideration the basic characteristics of the pharmaceutical industry. For the company A, automotive industry, Beta coefficient has been constantly increasing since 2011. The automotive industry was in big recession till the second half of 2010 when it has started to recover from a significant sales drop in 2008 and from then on.

Although the company D, mining industry, was not leveraged excessively, for the Slovenian economy far below the average, this means on the other hand the cost of own funds are the most expensive, the required rate of return on invested capital (equity) is the highest among the four companies in our sample. This implies high cost of capital and makes the values of EVA and CVA negative. On top of that, ROIC for this company is also relatively low, only around 1,2 % on average.

We have used some concrete examples to show that EVA and CVA are relatively good alternative criteria of so called residual income statement of a company. CVA is designed in such a way that it tries to bring a company‘s profit and cash flow together while still maintaining the advantage that EVA has over standard indicators of performance when considering the cost of capital. The main shortcoming of the CVA indicator lies in the fact that it can get us into a dangerous illusion, believing that cash flow is the only thing that matters in capital market, so we have to devise a measure right on it. Such thinking may be wrong, or as Young & O‘Byrne (2000) put it „money may be the king, but only in the form of the expected free cash flow”.

6. CONCLUSION For an ongoing strategic development of every economic entity measuring business performance is extremely important. As Turk says (2002), shortcomings of traditional, standard indicators of business performance, while looking at business performance and a relationship between the attainment of the aims expressed by outputs from operations and set goals expressed by outputs from operations, have long been subject of many discussions of economists, especially because

2016 - M SPHERE

B O O K O F PA P E R S

-

231


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

traditional indicators attempt to measure only past business performance. Any criterion of a firm’s profitability, which does not take into account the total cost of capital and which does not incorporate all the relevant information for strategic decision making, may be misleading. With the classic indicators of business performance short-term aspect is highlighted, which may, for example, quickly lead an economic entity to irrationally reduce investments in research and development. Thus the short-term business performance increases, but in the long run such economic entities run into difficulties and may fall out of the market. These and similar shortcomings should be resolved by EVA and CVA measures. Their advantage lies in their long-term orientation and in their consideration of the total cost of capital. Managers who make investment decisions focused also on the opportunity cost of their own resources create a basis for increasing the value of owners’ property. Both criteria, EVA and CVA, reflect business performance in the temporal scope. They are indicators which represent a criterion for decision making, where emphasis lies on the added value on the invested resources of the owners. The last decade and a half has seen academic discussions revolving around a single concept on which useful value of EVA indicator is designed. Questions are raised whether EVA is suitable enough as a benchmark, albeit at an indicative value it exceeds the standard indicators and is at the same time a simple and easily understood indicator. Let us only recall the problem of its adjustments, which must be implemented urgently if the indicator should have an indicative value. Odar (2001) here warns us that users of accounting information that represent a record of past events and owners for decision-making need also more recent and other information, as they are usually focused on the future. For this reason and also because of criticism directed at the accounting concept of EVA, where no notice is taken of future operations, the idea of CVA came into existence. All the louder are also the advocates of the so-called market value added (MVA). The aim of the value-based management (VBM) is to increase the value of an owner’s property as much as possible. But how can we measure this? Authorities with strong expertise in the field of VBM, such as, for example, Stewart (2000), thus introduced a MVA measure. They argue that owners’ property only maximizes by maximizing the difference between the total value of a firm and the total capital invested by owners - investors. This difference is named MVA. Grant and Abate (2001) in this respect even equate it with the present value of the future EVA. However, one of the major disadvantages of this criterion once again lies in complete adjustment of the balance sheet, when defining the capital in the calculation of MVA. In conclusion of this paper it can be emphasized that, despite numerous attempts in academic circles to find on the one hand, a comprehensive, integrated, all inclusive and on the other hand simple and easy to evaluate measure of business performance, no measure of a firm’s performance is ideal, or such that we could with it, expressed in absolute values or in relative numbers, unambiguously and subject to many factors, stakeholders, mainly shareholders and aspects, including the time dimension, measure business performance of a firm. EVA and CVA definitely represent a step further away from traditional or standard performance indicators. It is opportune to calculate both criteria simultaneously. If the former focuses more on past performance the latter strongly focuses on future, because the CVA concept is built on strategic investments. Although the criteria are based on two different concepts, EVA on accounting and CVA on finance, there is a strong correlation between the two. In the time series they both indicate the same trend in changing business performance. We have also seen this in our cases. Their combined use may be quite a fortunate combination or such a system of indicators devised on the value-based management, which on the one hand expresses value and profitability, and on the other it reflects the opportunities and points out the dangers. The owners/ investors can with this strongly bind the management of the firm to striving to increase the value of their property. A thesis can also be advocated that a simultaneous selection of the two indicators has a significant impact both on management resources and strategy selection, as well as on the question of how investors/owners evaluate a certain firm as their potential investment.

REFERENCES 1. Bergant, Ž. (1998). Sodobni pogledi na ugotavljanje uspešnosti podjetja. Korporacijsko prestrukturiranje. Zbornik 6. letnega srečanja Zveze ekonomistov Slovenije. Ljubljana. Zveza ekonomistov Slovenije. 94. 2. Biddle, G., Bowen, R., & Wallace, J. (1997). Does EVA beat earnings? Evidence on association with stock returns and firm values. Journal of Accounting and Economics. 24(3). 301-336. 3. Biddle G., R. Bowen Y. J. Wallace (1999), “Evidence on EVA”. Journal of Applied Corporate Finance. Volume 2, n. 2, pp. 69-79 4. Boston Consulting Group. (1996). Shareholder Value Metrics. 5. Bržan, T. (2008). Merjenje poslovne uspešnosti gospodarskih družb s posebnim poudarkom na ekonomski dodani vrednosti. Diplomsko delo. GEA College - Visoka šola za podjetništvo, Piran. 5. 6. Capital Asset Pricing Model – CAPM definition. Investopedia. http://www.investopedia.com/terms/c/capm.asp#ixzz4QTVsE49y 7. Chen, S., & Dodd, J.L. (1997). Economic value added (EVA super TM): An empirical examination of a new corporate performance measure. Journal of Managerial Issues.9(3). 318-333. 8. Damodaran, A. (2012). Investment Valuation: Tools and techniques for determing the value of any asset. John Wiley & Sons. 9. Ekar, A. (2000). Model ekonomske dodane vrednosti kot orodje za poslovno odločanje. Magistrsko delo. Ekonomska fakulteta Ljubljana. 81.

232

-

B O O K O F PA P E R S

2016 - M SPHERE


S E L E C T E D PA P E R S P R E S E N T E D AT 5 T H M - S P H E R E I N T E R N AT I O N A L C O N F E R E N C E F O R M U LT I D I S C I P L I N A R I T Y I N S C I E N C E A N D B U S I N E S S

10. Fama, E.F. (1970). Multiperiod Consumption-Investment Decisions. American Economic Review. 60. pp. 163-174 11. Fernandez, P. (2001). EVA and cash value added do not measure shareholder value creation. Retrieved from http://papers.ssrn.com/sol3/papers. cfm?abstract_id=270799 12. Financial statements (Income statement and Balance sheet), annual business reports and other internal data of the Company A for the period from year 2010-2014. 13. Financial statements (Income statement and Balance sheet), annual business reports and other internal data of the Company B for the period from year 2010-2014. 14. Financial statements (Income statement and Balance sheet), annual business reports and other internal data of the Company C for the period from year 2010-2014. 15. Financial statements (Income statement and Balance sheet), annual business reports and other internal data of the Company D for the period from year 2010-2014. 16. Fortune, “The Real Key to Creating Wealth”, 20 September 1993 17. Grant, L.J, & Abate A.J. (2001). Focus on Value: A Corporate and Investor Guide to Wealth Creation. John Wiley & Sons. 4-5. 18. International Standards of Accounting and Reporting. 2008, 2009. IUS-INFO 19. Kakani, R.K. (2001). Ownership distribution and shareholder value creation in Indian stock markets: A note. XLRI Working Paper No. 2001-09 (Sep). Retrieved from http://ssrn.com/abstract=914107 20. Kaur, M., & Narang, S. (2010). EVA ® disclosures in the annual reports of Indian companies. An empirical study. Global Business Review. 11(3). 395-420. 21. Kim, W.G. (2006). EVA and Traditional Accounting Measures: Which metric is a better predictor of market value of hospitality companies? Journal of Hospitality & Tourism Research. 33-49 22. Kleiman, R. (1999), The Quest for Value . The EVA Management Guide. Harper Business 23. Korošec B. Računovodski vidik ekonomske dodane vrednosti. V: Zbornik referatov 33. simpozija o sodobnih metodah v računovodstvu, financah in reviziji. Ljubljana: Zveza ekonomistov Slovenije: Zveza računovodij, finančnikov in revizorjev Slovenije. 2001; 115. 24. Kotler, P. (1984). Marketing Management Analysis, Planning and