Book of Proceedings PART 1 - M-Sphere Conference Dubrovnik 2012 by Tihomir Vranesevic

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

Book of Proceedings PART 1 Dubrovnik, Croatia 4th-6th October 2012

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

Book of Proceedings PART 1 Dubrovnik, Croatia 4th-6th October 2012

1st M-Sphere Conference, Book of Proceedings. Copyright 2012. All rights reserved. The authors are responsible for all of the content that has been published. Published in Croatia. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in crtitical articles or reviews. Committee Members (Alphabetical Order) SCIENTIFIC COMMITTEE MEMBERS FOR THE CONFERENCE: Professor Ivo Ban University of Dubrovnik, Croatia Professor Vesna Babić Hodović University of Sarajevo, Bosnia and Herzegovina Professor Antoni Serra Cantallops Universidad de les Illes Balears, Spain Professor Stjepan Dvorski University of zagreb, Croatia Professor Leopoldo Gutiérrez Gutiérrez Universidad de Granada, Spain Professor Pablo Gutiérrez Rodríguez Universidad de León, Spain Professor Branko Maričić University of Beograd, Serbia Professor Jože Mencinger University of Ljubljana, Slovenia Professor Božo Mihailović University of Montenegro, Montenegro Professor Žarko S. Pavić University Singidunum Belgrade, Serbia Professor Dušan Radonjič University of Maribor, Slovenia Professor Drago Ružić University of Osijek, Croatia Professor Ivona Vrdoljak Raguž University of Dubrovnik, Croatia Professor Vesna Vrtiprah University of Dubrovnik, Croatia ORGANIZING COMMITTEE MEMBERS FOR THE CONFERENCE: Professor Marija Dragičević University of Dubrovnik, Croatia Boris Hudina, prof.pscyh. HDPRO, Croatia Miroslav Mandić, PhD University of Zagreb, Croatia Professor Ivana Pavlić University of Dubrovnik, Croatia Professor Doris Peručić University of Dubrovnik, Croatia Professor Tihomir Vranešević University of Zagreb, Croatia CORRESPONDENCE: Professor Tihomir Vranešević

info@m-sphere.com.hr

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

M-Sphere Association for Promotion of Multidisciplinarity in Science and Business

MISSION

Promote multidisciplinary approach by encouraging and providing the circumstances to exchange of experiences and ideas from different disciplines, in order to further encourage scientific curiosity in research and practical work, with the aim of achieving positive change in all spheres of science and business – 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 KEY NOTE PAPER: MULTI-DISCIPLINARITY OF SCIENCES, CURRENT ECONOMICS AND BUSINESS �� 1 Soumitra Sharma

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

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

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

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

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KEY NOTE PAPER MULTI-DISCIPLINARITY OF SCIENCES, CURRENT ECONOMICS AND BUSINESS Soumitra Sharma

ABSTRACT The issue of multi-discipliarity in sciences is not only important issue for the various fields of science and knowledge, but also an imperative for the study of Economics and Business in theory and in practice. My views actually stem from a prevalent crisis of confidence in the central tenets of the various scientific disciplines and its impact that has afflicted simultaneously the business and intellectual community all over the world. A universal feeling of frustration and hollowness pervades in most sciences. KEYWORDS: Multi-disciplinarity, Development of Knowledge, Science, Economics and Business Studies, Economic Downturn

1. Multi-disciplinarity and its Significance for the Development of Knowledge and Science Today, as new needs and professions have emerged, multi-disciplinarity has attracted researchers, students, and teachers alike in an endeavour of connecting and integrating several academic thoughts, professions, or technologies. The concept of multi-disciplinarity has its root in Greek Philosophy and it implies combining of two or more academic fields into one. The Greek historians took elements from other realms of knowledge to further understand their own. It involved creating something new by crossing boundaries, and thinking across them. Multidisciplinary programmes usually arise from a shared conviction that the traditional disciplines are unable or unwilling to address an important problem. For example, social sciences, such as economics and sociology, pay scant attention to the social analysis of technology. But, with the growing interest in the subject many people have joined such courses that are conducted by scholars coming from varied disciplines. Multi-disciplinarity may also arise from new research developments such as nano-technology, quantum information processing, bio-informatics, molecular biology etc. Lately, in economics and business studies, the concept of sustainable development has attracted worldwide attention. Since, the concept deals with the analysis and synthesis across economic, social and environmental spheres, experts from various fields have joined the search for eco-econ solutions. Debate among scholars over the usefulness of multi-disciplinarity continues. While some consider it as a remedy to the harmful effects of excessive specialization, others are worried because most participants in multi-disciplinary ventures are basically trained in traditional disciplines, and thus they fail to learn to appreciate differing perspectives and methods. The simple argument, in such cases, is that a discipline that places more emphasis on quantitative ‘rigour’ may produce practitioners who think of their discipline as ‘more scientific’ than others; in turn, professional in ‘softer’ subjects may associate quantitative approaches with an inability to grasp the broader dimensions of a problem. Furthermore, a multi-disciplinary programme may not succeed because team members remain stuck in their original fields of specialization. The obstacles and challenges faced by multi-disciplinary activities today can be classified as ‘professional’, ‘organizational’, and ‘cultural’. Supporters and detractors alike, in academic institutions and businesses are faced with a most common complaint that these programmes lack in synthesis. In academic field, for example, multi-disciplinary programmes may generally fail, if they are not given sufficient autonomy. Resulting from the above difficulties, today many multi-disciplinary research areas are strongly motivated to become disciplines themselves. Examples to cite are: cybernetics, biochemistry, bioengineering, etc. But, let us not forget that when new solutions to problems emerge, much information is fed back to the various disciplines involved. Therefore, multi-disciplinary work may also be considered as complementary.

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2. Multi-disciplinarity in Economics and Business Studies In this context, I would like to address two questions: First, who are the economists and what are their duties that they need to discharge in the future; and Second, I want to answer myself as an educationist: what sort of economics and business education is required for economists and managers of the future? Let me remind that during the last three decades, on the one hand, to no one’s surprise, the classical teaching of economics has slowly withered away even in the most prestigious universities on one hand; at the same time, on the other hand, in the US, Europe and Asia there had been a strong surge in admissions to the Business Schools at the cost of pure Economics. If we look at the state of Economics and Business studies, sadly enough, these sciences are ailing today. In the 1980s scepticism engulfed the economic forecasting activity. As the doubts in its accuracy grew, the interest of researchers in pure economics declined. Inside the companies, stress was laid down on focused research. Many companies disbanded their forecasting units. Independent forecasting economic consultancies withered away. Naturally, after thirty or more years, we are asking ourselves as to what has happened to Economics. My quest for answer takes me back to the history of philosophical and economic thought. From there we learn that the general technique to study the doctrines and philosophers who develop, apply, and discuss the theory is to rely on the tentative results of contemporary economics and on initial judgments concerning the nature and worth of economic theory and economics as a discipline. Economists, usually, talk about their own work in terms of principles, models, theories, assumptions, and definitions and make use of previous work by epistemologists and philosophers of science. Let us give the economists same benefit of doubt as we do to the philosophers of science seeking knowledge. However, economists need to trim, revise, and even invent philosophical categories in trying to make sense of economic theory. Since 1990s, the confidence of American, Japanese and West European corporations in the economic forecasts was badly shaken, because even with the help of sophisticated computer models, Economists had failed to foresee the stagflation of the 1970s and the cyclical trends of the 1980s. The confidence further depleted in the usefulness of Economics as a science for the experts did not accurately predict the consumption pattern of the households or the firms. In the wake of economic shake-up of 1980s and 1990s the reputation of the science has taken the beating. In the mid 1990s some big multinationals in the US started firing their crystal bowl watchers1. The Swedish Academy of Sciences too recognised this shifting course in Economics by awarding the 1990 Nobel Prize in Economics to Harvey Markovitz, Merton Miller, and William Sharpe. I should mention here that the macroeconomic models of the 1930s were based on consumption and saving/investment equations. The year following the WWII, were the golden years for such models. For two decades the world recorded high growth rates, but in the 1970s the high hopes were watered down when these models could not foresee the repercussions of the explosive hikes in oil prices. The mainframe computers were fed with known and unknown parameters to produce equations that could be used in justification of proposed growth policies2. These models were designed to simulate faster sustained economic growth of the national economies3. Recession that has afflicted the global economy during last five years, and may even last longer than the mentioned Biblical years, has anew placed Economics in fire. During these five years, economic failures have provoked a lack of confidence in the validity of economic theories and business wisdom. It is being said often among the economists themselves that few economic bubbles have burst more spectacularly than the reputation of Economics as a science. While, famous economist, Paul Krugman in 2008, in his LSE lecture, argued that much of the macroeconomics of the past 30 years was spectacularly useless at best and positively harmful at worst; Barry Eichengreen, another renowned economist, went on to say that current economic turmoil has cast in doubt much of what we thought we knew about economics. Nevertheless, I would like to add that the troubles of economic science are purely methodological issues and it is in this context that these should be addressed. We should acknowledge that the discussions of economic issues are often biased and distorted because of their importance to interests of individuals and social groups. Economists can, however, address a broader audience and a wider spectrum of issues if they do not start by taking them as the paradigm for

General Electric, a giant corporation that earned revenue of some 70 billion in 1996 did not employ even a single economist, IBM fired its ‘team of economists’ in favour of good ‘portfolio and risk managers’, because as one spokesperson said, ‘it is much cheaper for us’. Soon company experts became more concerned with risk management, watching financial derivates, hedging against price and interest rate fluctuations, inventory management, etc. 2 Note that using such models in 1974 the Economic Council of the President of the United States enthusiastically overestimated the economic growth for 3 per cent and underestimated inflation by the same percentage. 3 One worthy author of such models Lawrence Klein won a Nobel Prize for his models in 1980. 1

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what economics should be. Economics must thus struggle to avoid becoming apologetics for any school of economic thought. History is a witness that, usually, the business cycles have been followed by the reassessments of the economic science. Deep recessions have been followed by negation of the existing orthodoxies giving way to the new. As more than over a century ago, as now, economists seemed to feel that the glaring lack of consensus on fundamental principles compromised the scientific status of Economics, and there were strong professional and public pressures to establish new orthodoxies that could speak authoritatively on economic matters. Now let us now redeem who is an economist in practice? What he does? Is he someone a social philosopher like Adam Smith or an analyst and teacher like Alfred Marshall or a dentist of Keynes’s dream? To me, it seems that modern economist is none of the said sort. He is someone – with a little bit of everything – a theoretician, observer/researcher, analyst, diagnostician, policy designer and sometimes one who gets involved in policy implementation. Evidently, such a person would have to be an intellectual giant and could exist only in our minds. Keynes in his remark on the role of the future of economists was rather sceptic as he thought that economists could manage to get themselves thought of a humble, complete people, on a level with dentists. If so, he said, that would be splendid! Alas, even after eighty years of this remark that has not happened. Today, economists have either been reduced to pure theorists – academics caged in prestigious university campuses, some receiving the Nobel Prize in Economics for their theoretical contributions, or the massive number holding graduate degrees in economics and business working for state or private employers. Except a few, to our regret, the vast majority is neither well averse with real economics nor is able to use the acquired knowledge in appropriate manner. Professional economists have been to their desks doing some routine statistical analyses of little use. Evidently, we have reached nowhere close to Keynes’s dream. Personally, I would like to see my fellow economists of the future in the role of a mechanic – knowledgeable, wellequipped with plenty of analytical tools in his tool-box, capable of fixing the defects in the economic system4. I see him well aware of economic doctrine, finance, economic history, mathematics and philosophy. I see him talented in understanding the socio-psychological reactions of the people in face of economic trends, and capable of using appropriate analytical tools. Since, the economic system by nature, like an old car, is prone to frequent breakdowns and cyclical fluctuations, his role as constructor and repairer is of utmost priority. For such a role, I visualise an apprenticeship in places where economic policy is evolved. Let me also mention that we do not require an army of economists. Thus, there is no need to enrol a massive number of students in the universities. Educating an economist5 of the needed type is not going to be an easy task. While the students will have to be gifted, the teachers would have to be highly qualified and competent and curriculum tough. For a moment, let us not be misled by Keynes’s remark that the study of Economics does not seem to require any specialised gift of an unusually high order6, instead I would like to cite and agree with him when he writes in his essay Alfred Marshall that …the master economist must possess a rare combination of gifts7. I see education as a complex process. As a teacher, I am inclined to believe that education is not only acquiring skill or aptitudes, but it is also about acquisition of attitudes. People need to know not only methodology, but also reality and should be problem/solution driven. They should know the scope as well as the limits of techniques they learn. Greek philosophers have long back recognised the importance of education of the people. Modern economics, in pioneering work of Theodore Schultz8 has recognised the significance of the role that education plays in economic development of a country. Questions are many and open. Should it be general or specialised, scientific or skill-oriented, intermediate or higher, self-paid or state funded, etc? But let us not forget that from a country’s perspective and its Economic system should be understood as a compound of institutional framework including economic legislation, economic structure of the society and economic policy of the state. 5 I mean here graduate (master) and postgraduate (doctoral) education of ‘economists’ only. 6 Keynes, J. M., ‘Alfred Marshall’ in his Essays in Biography, London: Macmillan (1972). This remark should be taken in context to the then prevailing widespread feeling among the university students and the public that the study of economics, compared to other sciences or law, does not require any pre-requirements and is easy to complete. 7 “Is it not intellectually regarded a very easy subject compared with the higher branches of philosophy and pure science? Yet good or even competent, economists are the rarest of the birds”. He further adds, He must reach a high standard in several different directions and must combine talents not often found together. …. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purpose of the future. No part of human nature or their institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.” Ibid. 8 See his (1963), The Economic Value of Education, New York: Columbia University Press; (1971), Investment in Human Capital: The Role of Education and of Research, New York: Free Press. 4

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future, all types of education facilities need to find proper place to suit the public choice. But, at all levels and for every science/art there must be the right type of education. This, moreover, depends upon the choice of curriculum, length of study, intensity of learning, quality of teachers and institutional facilities, etc. In the 1980s, voices against Economics and the Economists were uttered loudly9 and are reflected in an earlier statement of Nobel economist Fredrich August von Hayek that no body can be a great economist who is only an economist..., and (as such he) is likely to become a nuisance if not a positive danger10. In academia, the pressure for jobs, promotion, tenure and publication in American and British universities grew such that the economists had to cultivate ever narrower fields. The slogan became publish or perish. The result was that the economics students were trained to become narrow specialists without understanding the institutions, the economic thought, the economic literature, the handling and evaluation of quantitative and qualitative data, learning to weigh evidence, and without wider visions. Lately, with the reform of the education system within Europe, the so called Bologna Process, Europe has lost its edge. Unfortunately, as against its age-long tradition and culture, it has followed the poor American example, destroying the very foundations of knowledge. Economics requires broader knowledge. Does this broadening not mean that we have to sacrifice some education in economics that is all the time becoming more and more technical, specialised, fragmented and professional? I am afraid that unless we lengthen the time of study, evidently, some sacrifices in curriculum will have to be made. As far as the question of specialised economics education is concerned, to me it basically relates to business studies. Scholars are saying world-wide that the specialist knows more and more about less and less until he knows everything about nothing. The real question is should a well-trained business economist deal with few areas or spread his investigation widely? I feel that it should be left to individual choice. Since J. M. Keynes published his General Theory of Employment, Interest and Money (1936), Economics education in the Western world, particularly in the US, has moved far away from the tradition. Many distinguished economists in 1990s accepted that in the US Graduate (Master) education tools and theory are preferred at the cost of creativity and problem solving. It was also noted that graduate students who come from other fields can get Ph.D.s with little or no knowledge of economic problems and institutions11. To me, it seems that time has come to reverse the trend. In the light of the above observation, I believe that it would perhaps be right to sacrifice some technical aspects of economics (including some of mathematics) in favour of disciplines like political science, logic, sociology, philosophy and history. Philosophy consists of logic, epistemology, moral and political philosophy. A sound knowledge of logic and theory of knowledge will make an economist not only good theorist but also teach him to distinguish between, on one hand, tautology and deductions from them, and on the other, empirical facts and their relation. Economics suffers from mistaken validity for truth and the easy transition to falsehood that lies at the alleged rigour and precision of mathematical economics. Conclusion may be valid but untrue. Similarly, a good education in moral and political philosophy would avoid or at least reduce the numerous hidden biases in economic reasoning. The knowledge of political institutions and processes makes the economist aware of the constraints and opportunities for getting policies right. The economists need to take their investigation into the political variables in economic policy, and supplement positive with normative political economy. Further, social, political and economic history is deeply neglected in modern economics education. It hardly needs any argument of defence. Does this broadening not mean that we have to sacrifice some education in economics that is all the time becoming more and more technical, specialised, fragmented and professional? I am afraid that unless we lengthen the time of study, evidently, some sacrifices in curriculum will have to be made. A widely held criticism of modern American and European education of economics is that it has, unfortunately, become too narrow and too far from reality12. The Economics Departments in universities are awarding degrees to generations of fach idiots - brilliant at esoteric mathematics yet innocent of actual economic life13. I would rather agree with my late friend Professor Paul Streeten and favour being a broad-gauged economist and vaguely right to being precisely wrong14. Economics is not a science in which controlled experiments can be conducted and no economic theory has ever been falsified by an experiment.

F.A. von Hayek (1988), in his The Fatal Conceit. F.A. von Hayek (1967), in his Studies in Philosophy, Politics and Economics. 11 See Krueger, Ann, et. al., JEL, Vol. XXIX, No.3 Sept. 1991, pp 1035-1053. 12 Klamer, Arjo and David Colander, (1990), The Making of an Economist, Boulder: Westview Press. 13 Kuttner, R (1986), “The Poverty of Economics”, Atlantic Monthly, February Issue, pp 74-84. 14 Paul Streeten, American Economics Education, Mimeo. 9

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3. Economic Downturn and the Multi-disciplinarity of Sciences As we all know, the World economy, for a couple of years, is passing through a serious economic recession. Many of its problems are deep rooted and have long been neglected. Problem-fixing solutions have not yet been found. We learn from economic history of some serious recessions in the past15. Of course, every time the intensity of the economic pain and social cost was different. I have discussed these in of some detail in my key note speeches and papers at Opatija (2010) and Pula (2011) Zagreb (2012) Conferences. In short, I can mention that recessions of the 19th century were acute and lasted long enough to create economic hardships for the ordinary people. Hunger, poverty, unemployment were widespread and the governments made it more difficult by doing little or nothing. The Great Depression of 1929-32 was definitely the worse in the series with deep effects on global economy. Note that each recession and its negative effects have in the past had serious impact on the economic thinking that followed. Current recession is in no way less severe than most in the past. Most of the recessions have lasted long. The only difference now is that the sustainability of the global world has increased tremendously and that the world can absorb the shocks much easily than ever before. Geographically, Europe is worst hit by it and recovery soon is not in sight as yet. Let me make a passing comment on the most recent developments in European Union countries. Although, The IMF, The World Bank and the European Bank have reacted to the situation with a bail-out packages. Hardly, any improvement in job creation and GDP growth is visible. Why? Firstly, to my mind, the economic DNA of the Southern Euro-zone countries is altogether different than that of the North. While the South basically depends upon the primary sectors, the North relies heavily upon export of industrial goods. Accordingly, there is a great North-South divide in per capita GDP of the countries in the zone. Secondly, sticking to a utopian ideal of economic convergence, spill-over effects and automatic evaporation of income distribution gaps through common denominator of money – the Euro, the EU is living under a false hope. It has not happened so far and will not in the near future. It is unrealistic because of the disparity in the terms of trade among the primary, secondary and tertiary sectors within the zone. For this to happen over time, major economic restructuring will have to take place, and the financial costs of this change will be enormously large for which there is no money available in near future. Finally, in this very context, let me make another point. In the post WWII era the World in general and the OECD economy in particular, has witnessed an unprecedented economic growth in past history. The Western world, however, has learned to live rather too well, that had unmatched with its labour productivity and sustainability of natural resources. The globalization process that the West has so enthusiastically pushed forward in the 1990s had let loose forces in which the tides shifted to the Eastern hemisphere. Now a days, every body talks about the rising economic power of the Asian economies. Let us record that in the Asian economies the production, incomes, consumption, investments, employment have rapidly grown over last two decades. Their higher absolute productivity of labour and the low wage rates has led the OECD countries to gradually bleed for quite some time, and dices are not to likely change in the near future. Some people would like to ask if some more dominos will fall victim to this recession in the East (e.g. Japan, China, India and others). I would say, hopefully yes! Must we worry? No! From history we learn that mankind has always resisted to odds and adapted to the situation. It has also moulded the course of events by making strides in science and technology. How multi-disciplinarity does come in the picture in current economic context? To my firm belief it is the key to many solutions. We have learned from the past history and everybody acknowledges that progress in science and technology is vital to economic growth of nations. Innovations, inventions and scientific progress, in general, brings in new entrepreneurs in the markets who create new jobs, products, incomes and profits and turn the business cycle in upswing and ultimately recovery and economic growth.

4. Conclusion Finally, we all know that ‘knowledge’ is a ‘stock’ (fund) that grows over time. Education is a process of learning and experiments. As there are no boundaries in science, the ‘mixing’ or the multi-disciplinarity creates new knowledge and new solutions. In times of crisis, by nature, human mind looks for new avenues. So is happening now. Scholars and scientists in the universities, institutes, laboratories; engineers and mechanics in workshops and factories are busy in search for new solutions. Acquisition of interdisciplinary knowledge is an inborn characteristic of human mind, and the

In the last 250 years, recessions have caused economic failures and wide-spread misery and destitute e.g. 1750s, 1820s, 1870s, 1880s, 1920s, 1970s, 1990s, and now 2008/12. 15

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scientific progress relies on this very trait. In times of current economic difficulties, it is not only the natural scientists but the economists and business managers too are busy in finding new ways to ride the tide of recovery when it comes. Combined knowledge of different sciences is our future and hope.

LITERATURE As referred in the foot notes to the text. DETAILS ABOUT AUTHOR: Professor Emeritus Soumitra Sharma JURAJ DOBRILA UNIVERSITY OF PULA (CROATIA) soumitra-kumar.sharma@zg.t-com.hr

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VOLUNTEERS AND NONPROFIT SECTOR IN ALBANIA XHILIOLA AGARAJ (SHEHU)

ABSTRACT Volunteers are critical to the success of most nonprofit organizations. Their ranks include a good proportion of adult population and a growing number of individuals belonging to developed and developing countries. Volunteering helps to reduce cost while providing a channel for social conscious people to contribute time to a matter in which they believe. The aim of the paper is to indicate the situation of volunteerism in Albania. What are the characteristics of volunteers in terms of age group, profession, gender, mode of information, activities they perform, and compensation tools used by nonprofit sector. Does the tools of marketing mix used by nonprofit organizations in Albania to attract volunteers? In the context of the paper is choosing a representative sample of nonprofit organizations operating in Albania. For data collection are used questionnaires which are addressed to non-profit organizations and volunteers. Depth interviews are used during data collection, and focus groups were a function of information provided by data processing. For data processing computer program SPSS is used. The findings are interpreted and in relation with the level of usage of marketing mix are made conclusions and recommendations. KEYWORDS: Volunteers, Non-profit sector, Non-profit marketing, Marketing mix

1. INTRODUCTION The core concept of volunteering is that individuals participate in spontaneous, private freely chosen activities that promote or develop some aspects of the common good, as it is perceived by persons who participate in these activities1. These activities are not provided by any institution in society and the logic is that participation should not be primarily for financial gain. Work that volunteers carry out are: direct service increased funding, advice, information, organizing an event, visit people, associations, administrative, board members, funds manager, solicitor2. The concept of volunteering is better adapted in modern American experience. However, the concept of volunteering is less accepted in other parts of the world. In some countries, especially Scandinavian countries, the society governed by a model of “social democracy” that tends to allow the state to deal with charitable activities which are managed privately in countries like USA, UK and Australia. In Sweden and Denmark, there is simply no need for volunteerism. Also there was not much need for volunteerism in socialist countries of ex Soviet Union and ex communist countries of Eastern Europe. Today, however, since the new democratic states have less desire, and even not able to provide social services, countries like Russia and Hungary are return private voluntary and the nonprofit sector to provide necessary services and secure networks3. Private voluntary organizations (PVO’s) are also becoming important in Africa, where private sector efforts of state for economic and social development have had limited success. Exploratory studies have argued that private voluntary organizations should be preferred because they (1) have lower costs, (2) are less bureaucratic, (3) are less subject to political influence, (4) are more sensitive to the needs and demands of ordinary people and (5) are better able to mobilize the poor while at the same time, provide services when the public sector fails. In Asia volunteering model is better adapted, as it is in the USA, however in countries like Japan it is rooted in a different culture religious. Japan has a very effective system of voluntary self-organized through neighborhood societies, called jichikai.

2. LITERATURE REVIEW The challenge for any nonprofit marketer is: defining the target market, determining the position of the organization compared to competitors, making the marketing mix to strong positioning in the market. The obligation of every company must start with a deep understanding of target market. This means, to understand what makes them act as the organization wishes.

Philip Kotler, Alan R. .Andreasen (2003) “Strategic marketing for nonprofit organizations” (6th ed) Pearson Prentice Hall Publication pp 216-235 Adrian Sargeant (2005) “Marketing management for nonprofit organization”, (2nd ed), Oxford University press pp 349-371 3 Philip Kotler, Alan R. .Andreasen (2003) “Strategic marketing for nonprofit organizations” ( 6th ed) Pearson Prentice Hall Publication pp 216-235 1 2

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There are two concepts that should govern the analysis of the market in this stage. First people become volunteers with stages and so it is important to determine in what phase are volunteers, and second to adopt a strategy for the stage. There are four such stages: pre-contemplation, contemplation, preparation/action, maintenance. Pre-contemplation - where the challenge is to find the target audience that considers volunteering. Contemplation - where the challenge is to find the target audience that think that volunteering is something meaningful and desirable to be done. Preparation / Action - where the challenge is to find those who are predisposed to volunteer where actually go ahead and make decisions. Maintenance - where the challenge is to maintain the initial volunteers to continue with this effort and expand their service. The challenge for many organizations is with contemplators, so the model BCOS (benefits, costs, others, and self-efficacy), becomes a useful organizing framework. Benefits: There are many benefits that are found to influence the minds of individuals who are considered volunteers. A comparative list compiled recently by the Tallaght Volunteer Centre at Coleraine House in Dublin, Ireland, includes the following items as possible motivations for people to come volunteers4: To feel worthwhile, to recognize a new neighborhood, to help someone, to make new friends, to have that for what you awake in the morning, for pleasure, religious reasons, for work experience to satisfy a debt, to be part of change, to learn the truth, because they are upset, because no other can, as an alternative to giving money, to gain status, To test yourself, etc. Observations are also a useful way to learn what motivates volunteers. Gallup study for the independent sector drew more information on the motivations of volunteers and how they relate to their non-profit organizations. Cost: A surprising result of the study of Chinman and Wandersman was that high participation rates of volunteerism were associated with higher costs as perceived by the participant. This is obviously due to the deeper involvement and perhaps greater participation of volunteers. However, studies also showed that these high costs were overcome by high levels of perceived benefits. Others: A number of studies have shown that having a personal motivation to volunteer (a high ratio of profit/cost) is not sufficient to promote action “others” can have a very important influence. First of all many studies show that prime prompter of the actions performed by volunteers is being asked by someone else. Independent Sector in USA showed only 22.3% of people volunteer without being asked, while 89.5% volunteer when requested. In a number of studies show that many individuals have learned about volunteer opportunities by others or simply joined with others in voluntary action. Different studies showed the friends were persons referred to recruit a volunteer (50%), followed by someone in church or synagogue (32%), a family member or relative (19%), or someone at work (12%)5. Self-Efficacy: Motivating individuals and getting their friends to support this behavior is not enough to have action. Everyone can consider the volunteering opportunities that look promising, and that others support but were never acted on. Organizations that provide volunteers should be very careful to avoid all the barriers that can make people feel unable to volunteer experiences occur and succeed. Barriers that inhibit the actions should be eliminated. In this view, a development that has facilitated the growth of volunteerism is the World Wide Web. Marketing is not simply an external activity. It applies wherever the organization has a target audience and they need to influence to be successful. Volunteers present a significant market and need for an internal marketing. This is important for three reasons: First, internal marketing will help volunteers to become better, more dedicated, more loyal and more involved, making the organization more effective. Second, internal marketing will make it difficult for current volunteers to leave. Marketers of private sector know very well that it is much less costly to sell the “current customers” than to go and seek new clients. Finally satisfied volunteers are a good source of other voluntary organization in the future, and will use positive rumors to the community in general.

Walter Wymer, Patricia Knowles, Roger Gomes (2006) “Nonprofit Marketing. Marketing Management for Charitable and Nongovernmental Organizations” Sage Publication, pp 279- 292 5 Adrian Sargeant (2005) “Marketing management for nonprofit organization”, ( 2nd ed), Oxford University press pp 349-371 4

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2.1. Research Methodology With the purpose of research, were used three methodological research instruments: questionnaires, focus groups and depth interviews. The questionnaire was designed to provide information regarding the characteristics of volunteerism in Albania. As gender, age group, the tendency, occupation, activities they perform, the way of information to be made voluntary, benefits provide etc. The questionnaire was designed to identify the involvement of marketing tools used by nonprofit organizations and their importance to attract volunteers. Intense interviews and focus groups are used to provide more detailed information on the questions asked. Object of study were NPOs that operate in Tirana, North and South area of Albania. For sample selection were based in the database that District Court of Tirana disposed on the registration of all NPOs in Albania. Depth interviews and focus groups were conducted after processing the questionnaire in order to argument the findings. The data obtained through the questionnaire were processed through a computer program SPSS (Statistical Package for Social Sciences). During analysis were used control procedures to ensure their reliability.

2.2. Data Analysis and Presentation of Findings Fig 1. Percentage of volunteers by sex and by type of NPO

For all types of NPOs as association, foundation, or center the highest percentage of volunteers in Albania belongs the female gender. Fig 2. Tendency of volunteers in years

98.6% of NPOs declare that the tendency of volunteers over the years has been growing, only 1.4% thinks that it has not changed, and that percentage belong centers.

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Fig 3. Volunteers by age

91% of NPOs declare that the age of the volunteers working in their organizations is 15-25 years old. For the higher age group percentage of NPOs that declare their volunteerism come dropping. With increasing age the desire of individuals to volunteering comes dropping. That’s the fact that they have less free time, have more economic obligations to family, more experience, etc Fig 4. Professions of volunteers

A large percentage of volunteers working in NPOs are pupil 85.9% and students 88.5% of them. Volunteers of different professions are in a lower percentage. Fig 5. Percentage of volunteers according to the recommendations

Volunteers who choose an NPO informed through numerous ways, more important is mouth to mouth communication. 80% of them are influenced by a friend or colleague, and 72% from a pedagogue. The rest in a small percentage are influenced by media, from others NPOs, family, or even any religious institution.

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Fig 6. Activities carried out by volunteers

96.1% of volunteers who work in NPOs dealing with organized activities, and 88.3% of them deal with direct services such as repairs, transportation. Most of the volunteers involved in tasks that are simple to realize, this is related to age and occupation of the volunteers. Since a large percentage of the volunteers are pupils and students who do not have experience, they are given simple tasks to be realized. A small percentage of volunteers involved in activities that are important for NPO.

Fig 7. The benefits of volunteers

93.6% of volunteers reported that their benefits are not material but personal experience, 84.6% provide recommendations, 59% of them claim to have social benefits and 24.4% of them provide material benefits. Table 1. Assessment the effectiveness of marketing mix tools to attract volunteers. Assessment the level of usage of marketing mix to attract volunteers

Min

Max

Mean

Std. Deviation

Assessment the level of use of offer`s type

4,94

,462

Assessment the level of use of public relation

3,88

,582

Assessment the level of use of direct marketing

3.37

.694

Assessment the level of use of price

3,34

1,164

Assessment of the importance of location

3,28

1,127

Assessment the level of use of personal persuade

3,08

1,016

Assessment the level of use of Advertising

2,56

,793

Assessment the level of use of sales promotion

2,16

,737

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Type of offer is a widely used tool to attract volunteers. Is the type of the offer who could concern volunteers, especially those who seek a personal experience. Public relations tools have an average use in attracting volunteers. Is one of the most used tools except offer to provide volunteers (table 2). Location, personal persuasion, and direct marketing are characterized by an average use in attracting volunteers. Location of NPO is not important for volunteers that want to offer their service free or at a low price. Personal persuade is moderately used because it is not very necessary to attract volunteers because they are more interested for NPOs. Price has an average usage. 44% of NPOs felt that the price is a tool which is important in attracting volunteers in terms that they would like to offer services NPOs which offer their services for free. However a percentage thinks that the price does not influence volunteers. Advertising and sales promotion characterized by a low level of use because they are costly, do not justify the benefits, and we are dealing with a redundancy offer by the volunteers. Table 2. Assessment of the level of usage of direct marketing to attract volunteers Assessment of the effectiveness of marketing mix tools to attract volunteers Assessment the level of use of offer type

Assessment of the use of price

Assessment the importance of location

Assessment the level of use of advertising

Assessment the level of use of public relations

Assessment the level of usage of sales promotion

Not used Little used

Moderately Used used

Very Used

Total

1,3%

.0%

1,2%

96,3%

100,0%

7,6%

20,3%

15,2%

44,3%

12,7%

100,0%

7,7%

16,7%

28,2%

34,6%

12,8%

100,0%

6,3%

42,5%

41,3%

8,8%

1,3%

100,0%

.0%

2,5%

16,3%

72,5%

8,8%

100,0%

15,0%

58,8%

21,3%

5,0%

.0%

100,0%

CONCLUSIONS The tendency of the volunteers these past 5 years has been on the rise according to statements made during completion of questionnaire. From the search results that the largest percentage of the volunteers and age group that offers more volunteer work is 15-25 years old, these are pupils and students. For the age group greater involvement in voluntary work is lower. Some of the reasons are: • Largest age group have less free time • Have more economic obligations to family • Have more experience etc. Volunteers that choose an NPO informed through numerous ways, with the largest share is mouth to mouth communication, influence from a friend or colleague, a teacher etc. The rest is a small percentage influenced by the media, others NPOs, family, or the religious institution. Most of the volunteers are involved in tasks that are simple to realize, this is related to age and occupation of the volunteers. Since a large percentage of the volunteers are pupils, and students who do not have experience, they are given simple tasks to be realized. A small percentage of volunteers involved in activities that are important for the NPO.

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NPOs claim that the benefits of the volunteers are not material but personal experience, making recommendations, social benefits and a small percentage of states that have and material benefits In attracting volunteers a high level of use has type of the offer, because since the most of the volunteers are students they care about the choice of NPO that correspond with their field of study. Public Relations are used and are important in attracting volunteers because they are more reliable and less costly. Location, direct marketing, and personal persuade have an average use in attracting volunteers, and advertising and sales promotion characterized by a low level of use. Usage of marketing mix tools in attracting volunteers is low because we are dealing with a surplus on their offer, unless when we seek a massive volunteerism. A high percentage of NPOs staff was volunteers that performed simple tasks in the organization. In this context is difficult to find a large number of volunteers if needed in the project, so NPOs should be directed to universities to promote volunteerism.

LITERATURE 1. 2.

Philip Kotler, Alan R .Andreasen (2003) “Strategic marketing for nonprofit organizations” (6th ed) Pearson Prentice Hall Publication pp 216-235 Adrian Sargeant (2005) “Marketing management for nonprofit organization”, (2nd ed), Oxford University press pp 349-371

Walter Wymer, Patricia Knowles, Roger Gomes (2006) “Nonprofit Marketing. Marketing Management for Charitable and Nongovernmental Organizations” Sage Publication, pp 279- 292

Kline Henley.T (2001) “Integrated marketing communication for local nonprofit organization: Communication tool and Method”. Journal of Nonprofit & Public Sector Marketing pp 157-168

Sridhar Samu, Walter W.Wymer,Jr. (2003) Nonprofit-Business Alliance Model: Formation and outcomes. Journal of Nonprofit & Public Sector Marketing pp 45-62

Kline Henly, T. (2001) “Integrated marketing communication for local nonprofit organization: Developing an integrated marketing communication strategy: Journal of nonprofit & Public Sector Marketing, pp 141-155

Walter W. Wymer, (2003) Dimensions of Business and Nonprofit Collaborative Relationships. Journal of nonprofit & Public Sector Marketing, pp 3-22

Arnold, M.J., & Yapp,S.R (2003) “Direct Marketing in nonprofit services” Journal of Services Marketing, pp141- 160

DETAILS ABOUT AUTHOR: XHILIOLA AGARAJ (SHEHU) PHD UNIVERSITY “ISMAIL QEMALI” OF VLORA, FACULTY OF ECONOMY, DEPARTMENT OF BUSINESS ADMINISTRATION VLORE, ALBANIA xhiliagaraj@yahoo.com

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THE INFLUENCE OF WIVES IN THE TOURISM DECISION PROCESS KRISZTINA ARPASI

ABSTRACT Nowadays 80% of all consumer decisions are made either directly or indirectly by women. Therefore, future enterprises should keep the needs of female consumers in mind. As men and women are substantially different, it is not surprising that this difference can be observed also in the buying habits and the processes of decision making. The planning of the yearly holiday is of high importance in the lives of almost all families. I would like to emphasize the importance of tourism-related motivation assessment. It is well-known that family holidays are often marked by negotiations, discussions and compromises before, during and after the vacation. The main negotiations are taking place between the spouses and after a while the third party potentially involved are the siblings (mostly at a teenager age). Although it is also important to focus on children as an influencing factor in holiday decision making, in this study I am focusing on women and their roles in tourism-related decision making. A survey methodology was applied in order to explore the family decision making process , a total of 200 females/males were recruited specifically for the study. KEYWORDS: tourism, women, female customers, decision making

1. INTRODUCTION Nowadays, 80% of the buyers’ decisions are made directly or non-directly by women. Due to this, future’s business enterprises cannot leave woman consumers’ demands out of consideration. Since there are a lot of differences between men and women, it is not surprising that difference can be recognized in buying habits as well as decision processes. Making the decisions connected to spending leisure time are special kinds of buying because planning the yearly holiday has significant importance in every family’s life. The analysis of motivation connected to tourism is important in making the decisions in connection with purchasing. In this field, a continuous change could be noticed in the past 60 years; the direction of development is clear. In this study, I examine what the role of women was like regarding decision making in the families in the past 10 years. The starting point of the study is the subject of tourism, the decision maker, the potential tourist. There is demand and supply in tourism, too. Tourism demand means the willingness of the tourism’s subject having free-time that he is able to and will purchase various, definite quantity of tourism service for a given amount of money. Women are in the focus of my research because they are partly the subjects and decision makers of tourism. (Rice)

2. HISTORICAL BACKGROUND Before the 50’s, it was a totally one-sided view who made the decisions in the family, since the only and absolute decision maker the husband was in the family or household. However, from the 50’s – when women started to work – the statement that husbands have absolute, might as well say, autocratic power over their wives proved to be false. Sharp and Mott’s (1956) analysis was considered to be new compared with the previous factfindings, since they examined the husband and wife’s collective decision making. According to their hypothesis, it was not possible to name one absolute decision maker in the family, so in their opinion both the husband and the wife made the decision. Their study also found that during the whole decision process concerning holidays (from raising the idea to the final decision) they made their decision together at least two third of the time. Davis (1970) made a very important observation, according to which a buyer decision consists of several vice-decisions (decision units), so making decisions connected to spending leisure time are made up of more parts, for instance where, when, how etc. should the family go on a holiday. When we would like to define who the main decision maker in the family is regarding holidays, we have to examine the process, in other words, who can be considered to be the definite decision maker concerning certain questions.

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Cunningham and Green (1974) focused concretely on the common decision making in their survey and they came to the conclusion that the common decisions connected to spending leisure time was becoming more and more significant, which was mainly due to the endeavour of equality between sexes. In his study, Jenkins (1979) examined the roles of the members of the family. He did a research on how significant each family member’s influence was. He said that the husband decided whether they would travel with or without the children, what type of mean of transport they would use, what free activities they would do, what type of accommodation they would choose and what their holiday destination would be. Smith (1979) studied a sample consisted of 141 travellers and he modelled the family decision making roles on the base of it. As a result of this, he named women to be the main decision makers, although he remarked this may not have been true in the case of male-dominated families in Europe and Japan. Filiatrault and Ritchie (1980) claimed the opposite of Jenkins’ model. Filiatrault and Ritchie scrutinized the measure of the couple’s influence on certain decision parts (vice-decisions). They found that the measure of influence depended on the number of children and income. Fodness (1992) stated that the decision making process in family was dependent on the particular family’s life cycle and the demographical variables, and besides the various incomes, the certain households’ decision making models were different. In Zalatan’s (1998) study, the measurement of wives’ decision is in the focus, too. He defined 17 categories on decisions concerning tourism and he observed interesting differences regarding the certain categories during his research. For instance, women have a relatively low participation proportion in the case of finances while they have comparatively big influence in topics such as shopping and choosing restaurants, collecting information and packing. Zalatan did not study separately the woman and man decision making proportions in the certain processes; he only found that it was multidimensional and both took part in the decision. The majority of the studies emphasize the three most typical possibilities of decision making in the family (husbanddominant, wife-dominant, common decisions), but the models do not take children’s, especially teenagers’ influence into consideration. However, children often have very important role in some consumer process so it is essential to highlight this group. To understand the family decision process connected to spending leisure time, we should study this model. Figure 1. Family decision-making model of Vacation Purchases Influential factors Characteristics of Vacation: - Type of Vacation - Price of Vacation - Distance to destination - Length of Vacation - Activities Involved Toward Husband and Wife - Culture and Subcultural Factors - Personal Characteristics - Degree of Involvment - Role Specialization

Decision unit

Everybody

Husband and Wife together Husband Wife

Roles

Actions

Gatekeeper

Recognise the nedd of the Vacation

Information Gather Gather all relevated information Influencer Evaluate Travel Alternatives Decision Maker Buyer

Toward Children - Socidemographic Factors - Type of Family ( Family Life Cycle) - Family Socialization

Children

Decide Final Choices

User Book and pay the Vacation

Sources: Modified from Nandu et al, 2008

In the previously mentioned studies, the researchers examined the three most frequent situations. In the husbanddominant families, obviously the husband is the main decision maker, in the wife-dominant families, the wife it is, while common decision making shows equal decision proportions between the husband and wife. According to the model in

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figure 1, each family member plays different role in different decision situations. We talk about six different roles which are not permanent. (Nada, Hu, Bai, 2008) Initiators initiate the decision process in the whole family. They realize firstly the necessity of holidays. Information collectors are primarily responsible for collecting information and they are said to be the most influential since they set up a valuable aspect system. Influenters discuss the particular purchasing process. The decision of the buying process is influenced significantly by their judgement. Decision makers formally or non-formally have the biggest influence on making the final decision. Buyers actually carry out the purchasing of the particular product, service or travel. Users are considered to be final users. Martinez and Polo (2001) discovered four reasons why the husband and wife make common decisions in the family: 1. the decision is about a huge amount of money, 2. the decision has an effect on the future of the family, 3. the decision includes further possibility of quarrels, 4. the decision supposes certain common experiences. Decisions connected to travel are always special because they are not ordinary, everyday ones; on the other hand they involve quite big expenses. Hawkins, Best and Coney (2001) studied the factors which affect the behaviour of the family members in the decision processes. These factors contain cultural and sub cultural determinants, role specializations as well as personality characteristics. M. A. Belch and Willis (2002) pointed out that decisions connected to holidays are generally common, however in these common decisions, wives have determining role in deciding where to go and what type of accommodation should the family choose. Culture has a significant influence whether in a given situation, the husband or the wife has more dominant role or they make a common decision. Blood and Wolfe (1960) emphasised if - for example - the husband is the dominant on the basis of cultural traditions, his role will be more typical in the decisions regarding holidays. Wives have more complex role. Former studies prove that women or wives’ role can be different in certain stages of the family’s life cycle. For instance, the couple try to make decisions common in the first year of the marriage, while after that, wives try to increase their influence in the field of finances. Another important influential factor can be the competence in a certain field. If one of the spouses is expert in a particular product, he or she has obviously greater role in the decision. Furthermore, presumably women’s role in deciding how to spend leisure time changes with the changing of the structure of the households. So over the past few decades women – because of the ambition for emancipation – have had bigger and bigger role in certain buying processes. They have collected information, they have had bigger knowledge and they have had bigger influence in the process of making decision at the same time. It can be stated that the person who has experience and competence in certain phases, also has more important role in the decisions. (Zalatan, 1998) Characteristics also have an effect on participating in the final decision. Filiatrault and Ritchie called attention to the importance of husbands’ income as one of the influential factors. However, these influential factors have been changing in the family for the past few decades, which is a result of the fact that women are no longer housewives but they educate themselves and work so they have greater influence in the family. M. A. Belch and Willis’ study (2002) states this, too. They found that 20% of the women worked in the beginning of the 1900’s, while this number increased to 60% to the beginning of the 2000’s. Women’s increasing education, employment and income seem to have a growing influence in making decisions in the family. To summarize, according the former studies, women’s influence is increasing in the decision making in the family with the changing of households’ system. Although, spouses have almost equal roles in deciding where and when they would go, as well as how much they can spend. Moreover, researches prove that income is a significant factor in decision processes (Zalatan 1998) but competence may also affect who should make the decisions. The more expert is the spouse, the bigger influence he or she has on purchasing processes (Madrigal 1998).

3. THE ANALYSIS OF HUNGARIAN EXPERIENCES As I have already mentioned in the introduction, I analysed the Hungarian situation in the last decade in my study. During the analysis, I laid a special emphasis on motivation connected to tourism, fundamentally the motivation and decision making in the family with a special regard to woman decision making. In other words, do women refer to travel, recreation or holiday at first in the family? Do women decide where, how long and how the family would go? Do women decide how much they should spend? Do women rather use the internet or go to a travel agency? Do men and children use one of these to collect information and if yes, which one? Does a typical woman or man role exist during the process of planning holidays? I made the analysis on the basis of a questionnaire survey. I took the aforementioned elements from the historical background into consideration during the compilation of the survey. The questions considered the whole decision process

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from who initiates of the possibility of the holiday, travel or recreation to who makes the final decision, that is to say who makes the bookings, who pays or transfers the money for the travel. The main question of the survey is whether typical woman or man roles can be distinguished connected to the decision process of spending leisure time. Besides this, I would like to answer several other questions, so that I asked 30 question altogether. I would have liked to know whether the presence of children in the family influences the role and person of the decision maker. Furthermore, does education, age or income have an effect on the decision making process? It was also a question whether the person who decides on spending the free time is the same who decides on other questions arising in the household.

3.1. Methodology We made 250 questionnaires altogether of which around 200 were usable. Parents, the childless, the young, the old, couples living in partnership and the married answered. The majority of the people were from Budapest. So they were in Budapest, when we made people fill in the questionnaires in busy areas of the city and even when we asked families having their holidays in holiday resorts 300 kilometres away from Budapest. We chose the respondents randomly by stopping them in the streets and in the certain holiday resort who were spending their vacation, too. Thanks to the random choosing we did not know whether the respondents were planning to go on a holiday abroad or inland, we neither knew the length of their holidays nor whether they intended to go on a holiday in 2012 or not at all. In the 90% of the cases, we were present when the people filled in the questionnaires in order to minimalize the number of errors. In other words, we had 180 questionnaires filled in personally while the rest 20 were distributed so we did not give any help or explanation for the filling in. The generic distribution was 50:50 per cent among the respondents; with regard to the age groups 75% of them were between 25 and 49 years old; more than 80% of them had a job and nearly 60% had children.

3.2. Conclusion The most important conclusion (figure 2) is that the majority of the interviewees make a common decision in the family on the finances concerning travels as well as where and when to go on a holiday. Mainly women decide in the case of other questions, such as who collects the information, what type of travel agency they should choose or who should pay the costs. According to the result of the research, we can state that women have a dominant role in the first steps, the preparations, collecting information and making the reservations. However, as we have already mentioned, most households make a common decision in the case of the most significant questions like finances as well as when and where to travel. 52% of the respondents said that women have decisive role in raising up the question of travelling. In other words, more than 50% of the interviewees’ opinion was that women dominate in the initiative of the topic. One of the typical characteristics of planning holidays is that the first steps are usually made in the beginning of the year, because at the workplaces, the range and time of yearly holidays has to be fixed in the first quarter and several months are needed to prepare for the big expenditures financially. 49% of the participants of the survey answered that women collect the information in the family for the planning and choice. According to the respondents, women mainly go to travel agencies, use the internet or catalogues in order to collect information. On the contrary, men consider recommendations from acquaintances, friends, relatives or colleagues. This is a key-result for the workers in tourism, in other words, if the particular hotel, city, place of entertainment wants to reach its guests, it is good to know that women have dominant role at this stage and that from where and how they collect the information. It is also worth thinking (although the questionnaire did not deal with this but it should not be ignored) that after gathering it, how women distort the information, from which they will decide and choose mutually. That is to say, if we take it as a basis that women collect the information, we can reason out that they give information about places, travels, accommodations to the family which serve as their recreation. For instance, they choose a hotel room with full service instead of an apartment etc. So the question is the following: if women really act in this way, is the decision making process the same in the family when they do not act in this way? It is clearly observable from the figure that settling the costs, date, length of time and even the type of accommodation are common decisions. Actually, these are such important factors that women and men decide them together in the 70% of the cases.

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Table 2. Male-female dynamics in the staged holiday decision Female

Male

Both

Who initiates the discussion about vacation?

52%

28%

20%

Who decides which country/resort to go

15%

14%

71%

Who collects the information?

49%

30%

21%

Who decides how much to spend?

12%

10%

78%

Who decides which travel agent to use?

49%

19%

32%

Who decides which accomodation to choose?

32%

60%

Who decides when to go?

15%

80%

Who books the holiday?

62%

12%

26%

Nearly 40% of the interviewees said there is a main decision maker in the family and women were named in this case. The research supported that planning leisure time is definitely more important than other household-related questions since families have to plan several months before it and it is significantly more expensive. If we take a look at the final result of the study, woman dominance can be clearly observable in planning leisure time as well as other household-relate.

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

Belch, G. E., Belch, M.A., Ceresino, G. (1985). Parental and teenage child influences in family decision making. Journal of Business research, 13(2), pp. 163-176 Belch, M. A. – Willis, L. A. (2002): Family decisions at the turn of the century: Has the changing structure of households impacted the family decision-making process? Journal of Consumer Behaviour, 2(2), pp.111-124 Blood, R. O., Jr., Wolfe, D.M. (1960). Husbands and wives: The dynamics of married living. Glencoe, IL: Free Press Brennan, Bridget (2009): Why she buys,, ISBN 978-0-307-45038-8, Crown Business, New York, 2009 pp. 57-63 Clift, Stephen, Grabowski, Peter (1997): Tourism and Health: Risks, Research and Responses, Thomson Learning, 1997 Cunningham, Jane – Roberts, Philippa (2006): Inside her pretty little head, 2006, ISBN-13 978-1-904879-96-1, Marshall Cavendish Limited, London, 2006, pp. 124-133 Davis, H. L.(1970): Dimensions of marital roles in consumer decision making. Journal of Marketing Research, 7(2), pp. 168-177 Filiatrault, P., Ritchie J. R. B. (1980). Joint purchasing decisions: A comparison of influence structure in family and couple decision making units. Journal of Consumer Research, 7(2), pp.131-140 Fodness, D. (1992). The impact of family life cycle on the vacation decision-making process. Journal of Travel Research, 31(2), pp.9-13 Ganesh, G. (1997). Spousal influence in consumer decisions: A study of cultural assimilation. Journal of Consumer Marketing, 14(2), pp.132-155 Geuens, M., De Pelsmacker, P., Mast, G. (2003) How family structure affects parent-child communication about consumption. International Journal of Advertising and Marketing to Children, 4(2), pp.57-62 Hawkins, D. I., Best, R. J., Coney, K. A. (2001) Consumer behaviour: Building marketing strategy (8th ed.). New York, NY: Irwin/McGraw-Hill Jenkins, R. L. (1979). Family vacation decision making. Journal of Travel Research, 16(4), 2-7 Madrigal, R., Havitz, M. E. , Howard, D. R. (1992) ‚Married couples involvement with family vacations‘, Leisure Sciences, Vol. 14, pp. 283-301 Martinez,E. – Polo, Y. (1999). Determining factors in family purchasing behaviour: An empirical investigation. Journal of Consumer Marketing, 16 (4/5), pp.461-481 Mathieson, A.- Wall, G. (1982) ‚Tourism: Economic, Physical and Social Impacts‘, Longman, London Mayo, E.- Jarvis, L. (1981) ‚The Psychology of Leisure Travel‘, CBI Publishing, Boston, MA Mottiar, Z.- Quinn D. (2004), Couple Dynamic in Household Tourism Decision Making: Women as the Gatekeepers? Nanda, D.- Hu, C.- Bai, B. (2006), Exploring Family Roles in Purchasing Decisions During Vacation Planning: Review and Discussions for Future Research, Journal of Travel&Tourism Marketing, Vol. 20 (3/4), pp.107-125 Scharp, H.- Mott, P. (1956). Consumer decisions un the metropolitan family. Journal of Marketing, 21(2), 149-156 Schmoll G. (1977) ‚Tourism Promotion‘, Tourism International Press, London Silverstein, Michael J. – Sayre, Kate (2009): Women want more, ISBN 978-0-06-177641-0, Harper Collins, New York, 2009, pp. 23-78 Smith, V. L. (1979). Women: The taste-makers in tourism. Annals of Tourism Research, 6(1), pp.49-60 Wilks, Jeff, & Page, Stephen (2003): Managing tourist health and safety in the new millenium (advances in tourism research), Pergamon, 2003 Zalatan, A (1998). Wives’ involvement in tourism decision processes. Annals of Tourism Research, 25(4), pp.890-903

DETAILS ABOUT AUTHOR: KRISZTINA ARPASI PHD STUDENT, SZT, ISTVÁN UNIVERSITY, FACULTY OF ECONOMICS AND SOCIAL SCIENCES GÖDÖLLŐ, HUNGARY arpasikrisztina@gmail.com

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CUSTOMER PERCEIVED VALUE AS A MEDIATOR BETWEEN CORPORATE REPUTATION AND WORD OF MOUTH IN BUSINESS MARKETS MAJA ARSLANAGIĆ VESNA BABIĆ-HODOVIĆ ELDIN MEHIĆ

ABSTRACT This paper examines customer perceived value as one of the most important marketing concepts in business markets and its mediating role between corporate reputation and word of mouth. Corporate reputation represents an intangible asset for the company and its positive influence on customer value has been widely researched. Additionally, reputation is usually related with the concept of word of mouth (WOM). WOM is becoming one of the most powerful promotional tools, and this is especially true for business markets as well as for services. Our research is done in the organizational services setting with focus on the relationships of banks with their organizational customers. Data in the study were analyzed using partial least squares (PLS) structural equation modeling. Results of the study confirm hypothesized model and show that customer perceived value is mediating the relationship between corporate reputation and word of mouth. KEYWORDS: word of mouth, customer perceived value, corporate reputation, services, business markets

1. INTRODUCTION Value is one of the most crucial elements when it comes to any relationship. This statement is also true when it comes to the business relationships analysis. In our research, we look for more insights and better understanding of customer perceived value in organizational setting. We observe relationship between clients and business services providers. As perceived value is defined as a tradeoff between all benefits and sacrifices from the relationship (Zeithaml, 1988), we assume the necessary evaluation of all possible tangible and functional elements such as quality and price, however we search for more information about the influence of other, intangible elements on consumer perceptions of services (Levy, 1959). Primarily, we assert the influence of corporate reputation on customer perceived value in business relationships. On the other hand, the same way we are interested in corporate reputation as the intangible antecedent of customer value, we are interested in customer value consequences. More precisely, we are interested in relationship consequences and hence we analyze the influence of customer perceive value on word of mouth (WOM) in this setting. Word of mouth has been increasingly popular research construct in relational analyses and it has been analyzed as a consequence of customer perspective (Walsh et al., 2009). Therefore, the main purpose of this research is to examine a potential mediating role of customer perceived value between corporate reputation and WOM (Baron & Kenny, 1986) in business services through empirical research. The structure of this paper is as follows: first we give basic theoretical assumptions and review of relevant literature for the field. Secondly, we present our empirical research methodology and our research findings. Finally, we give conclusions and recommendations for further research.

2. THEORETICAL FRAMEWORK 2.1. Corporate reputation Authors often define corporate reputation as a collective impression about the company, internally from the side of employees and externally from the side of other interest groups (Bailey, 2005; Fombrun & Van Riel, 1997; Walker, 2010). Thereby, Wartick’s (2002) emphasis on the fact that reputation of a company or of an individual could not be anything else but the observers’ perception should not be forgotten. Reputation could be defined as stakeholders’ perception of companies’ success in satisfying demands and expectations of its interest groups (Longsdon & Wood, 2002). This understanding implies the fact that each individual formulates its individual perception about the company and its own attitude towards its activities. This is much more acceptable for services and service interactions customers assess in the so-called ‘moments of truth’ (Albrecht & Zemke, 1985), Different dimensions of corporate reputation could be perceived differently, depending on the subject that is perceived, and on the importance given to certain dimensions and criteria that are used (Dowling, 1988; Walsh & Beatty, 2007).

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Although authors mostly represented the viewpoint that there are relatively homogeneous attitudes on corporate reputation within certain interest groups (Bromley, 2002), some researches (Helm, 2006) showed that there is significant overlapping within the dimensions different stakeholders assess as important ones. Relationship between customer loyalty and profitability has been identified in previous research (Bown & Chen 2001) as well as satisfaction and customer perceived value influence on loyalty formation (Aaker, 1995; Anton, 1996; Hoyer & MacInnis, 2001). On the other hand, influence of corporate reputation on the customer perceived value represent an important avenue in business relationships research (Hansen et al., 2008) and this is in focus of our research.

2.2. Customer Perceived Value Customers and service providers’ interaction create certain level of value for both sides. Essentially it is a measure of gains both sides receive from the mutual interaction. Value concept hence becomes customer perceived value that represents the individual experience of the interaction between customer and service provider, often compared with company’s competitors (Anderson & Narus, 1999; Ulaga & Chacour, 2001). Consumer (customer) behavior measurement models are essentially reduced to comparing of what is invested and what received from the interaction (Zeithaml, 1988; Lovelock, 1996; Teas & Agarwal, 2000; Grönroos, 2000). On the other hand, provider’s value creation is basically a result of marketing activities and service process. If service process and service providing creates value for the company it will be a base for developing and building relationships between service provider and a client (Peterson, 1995; Egan, 2004; Berry, 1995; Roig et al., 2006). For service companies it is important that customers are having positive perception about service and the service process share their experience with the others. That will have positive influence on company’s reputation between prospective customers, as well as positive public opinions. Analysis of perceived value structure, actually of its “benefit side” from the perspective of customers often includes psychological value of the relationship with the service company that has positive reputation in the public. Since customers want to create the perception of themselves as the responsible members’ community, they prefer to build exchange and relations with socially responsible companies (Yeung, 2011). Based on previous mentioned, customer perceived value delivered by service company will be influenced by company reputation too. Our previous research (Babic-Hodovic et al., 2012) had shown intermediate influence of customer perceived value (CPV) between corporate reputation and WOM, no matter the fact that primary goal was to investigate separate relations between corporate reputation and WOM, and between CPV and WOM. The level of influence is stronger if customer perceived value is intermediate, comparing with the separately measured influence of corporate reputation on the customer perceived value. Caused by the fact that corporate reputation has significant influence on customer perceived value and a fact that WOM could be regarded as an outcome of customer perceived value in business relationships, we improved our research with hypothesis that customer perceived value is mediating relationship between corporate reputation and WOM.

2.3. Word of mouth Personal sources and WOM messages used by customers in pre-purchase phase are mostly the result of others customers’ previous experience. This means that the influence of this element of the communication mix can be attributed to company’s previous customers and clients (Hartmann et al., 2008). Nature, power and quality of WOM’s influence will depend on the business practices and effects that company has provided to its customers (Anderson et al., 1994; Athanassopoulos et al., 2001). Specifically, customers will evaluate the positive economic (Peterson, 1995) and psychological (Lewis, 2001) benefits just in case that company provided services better tailored to their needs, preferences, or additional services (Gwinner, Gremler & Bitner, 1998; Rust, Zeithaml & Lemmon, 2000). Therefore, customers will be willing to continue with the relationship and, accordingly, to spread a “positive word” about the service and the service provider only if they perceive positive value as a result of interaction (Peterson 1995), that is, if their expectations had fulfilled (Zeithaml, Parasuraman & Berry, 1985; Kano 1984). Hence, if we observe WOM from the services customers’ point of view, we can conclude that it appears on two “opposite” sides of corporate and service encounters. Primarily, in consideration phase, as “borrowed WOM”, and afterwards,

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at the end of purchase phase as “own WOM” and the message that the user wants to pass on. As much as the previous expectations are significantly influenced by WOM spread by previous customers, the source of WOM stimuli is in service encounter and a result of the service process (Grönroos, 2000). Together with the messages of personal sources in the consideration phase, corporate reputation has the specifically important role. As one of two visible attributes (Hoffman & Bateson, 1997; Zeithaml, 1981.) customers can assess in the service provider and service selection process, corporate reputation represent especially significant help and contribution to the decision of company selection and of accepting some of the services. This is especially true when it comes to new services that customers do not have enough information about. This category “produces” certain level of WOM. Firstly, in the form of messages and expectations formed as an effect of the corporate reputation analysis before service interaction. Secondly, it is produced as the results of quality perception ‘’filtering’’ through corporate reputation. According to Grönroos (2000) quality model, corporate reputation (image) is a factor that significantly influences functional and technical quality perception. Depending on the results and the value they received, users will create a positive or negative word of mouth (Walsh et al., 2009, Sundaram, Mitra & Webster, 1998). WOM represents a very important marketing instrument that is difficult to manage. It is often considered as a complementary factor that follows advertising (Herr et al., 1991; Hogan et al. 2004), and some authors are evaluating it as much more powerful compared to traditional forms of promotion (Silverman, 2001). This is especially the case when advertising is used as the factor and the initiator of the first purchase, and positive post purchase experience transfer through WOM messages “complements” target communication, given that customers share their experiences (Chevalier & Msyzlin 2006). In the paper we will present how corporate reputation influence on the level of WOM.

3. METHODOLOGY With the footholds in previous theoretical and research findings (Hansen et al., 2008; Walsh et al., 2009; Babic-Hodovic et al., 2012) we hypothesize conceptual framework shown on a Figure 1. Figure 1. Conceptual Framework H1 Corporate Corporate Reputation (CR) (CR) Reputation

H2 Customer Perceived Customer Perceived Value (CPV) Value (CPV) H3

Word Mouth Word of of Mouth (WoM) (WoM) Source: Authors

Therefore, we test following hypothesis in our research: H1: Corporate Reputation (CR) has positive and significant influence on Customer Perceived Value (CPV) in business services relationships. H2: Customer Perceived Value (CPV) has a positive and significant influence on Word of Mouth (WoM) in business services relationships. H3: Customer Perceived Value (CPV) mediates the relationship between Corporate Reputation (CR) and Word of Mouth (WoM).

3.1. Measures and data gathering Developed and previously validated measurement scales were used in the survey for the purpose of this research (Hansen et al., 2008; Selnes, 1993; Zeithaml, Berry & Parasuraman, 1996). Six items were used to measure customer perceived value (CPV), and three item scales were used for corporate reputation (CR) and word of mouth (WOM) measurement. Five point Likert scale was used to see the level of respondents’ agreement with the items. Additionally, a set of demographical questions was included in the survey. Survey was conducted amongst CEOs, top managers, directors or financial managers who represented their companies, in year 2011 in Bosnia and Herzegovina (B&H). They were asked to evaluate their perceptions of reputation, value and WOM for a bank that they have business operations with. We selected a banking sector as representative and generaliz-

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able for business services relationships as it is more than 90% owned by foreign banks, therefore, representing a structure present at markets in Europe. We used random sample and convenient sampling method for collecting our data. Questionnaires were sent by e-mail and respondents were afterwards reminded with a telephone call. A total of 104 valid responses out of 650 sent questionnaires were collected, which makes an acceptable response rate of 16%. Hypothesized model was analyzed using partial least squares (PLS) structural equation modeling and SmartPLS software (Ringle et al., 2005).

4. RESULTS AND DISCUSSION In our research sample, 19% of companies were in production, 28% in trade and 34% in services while the rest were having business activity that is combination of previous ones. Companies with less than 50 employees comprised 64% of the sample, while 37% categorized them to small and 34% to medium enterprises, which leaves us with 27% large enterprises. With this and other demographical data provided (58% trade on both domestic and foreign market; 50% trades at more than 4 markets; 86% are limited liability companies, 73% are in domestic ownership) we conclude that our sample is representative according to the Statistical Business Register (Agency for Statistics of Bosnia and Herzegovina, 2011). As our primary goal was to explore customer perceptions about service providers in business to business relationships, we used PLS modeling as it is claimed it has more significance when it comes to practical results and less when it comes to theory confirmation (Hair, Ringle, & Sarstedt, 2011; Henseler, 2010). Graphical summary of our results is presented on a Figure 2 below. Figure 2: Graphical Summary of the Results

Source: Authors

From this comprehensive figure, we can analyze both measurement and structural part of the model. When it comes to measurement model, we can see that all items measuring Corporate Reputation and Word of Mouth loaded higher than 0,85 and all items in Customer Perceived Value loaded higher than 0,6 which is an acceptable range (Hair et al., 2006). Additionally, validity and reliability of measures was tested through composite reliability, Cronbach’s Alpha and Average Variance Extracted (AVE) measures. Table 1. Reliability and validity of measurement part of the model Description

Cronbachs Alpha

AVE

Composite Reliability

Corporate Reputation (CR)

0,88

0,80

0,92

Customer Perceived Value (CPV)

0,79

0,49

0,85

Word of Mouth (WOM)

0,89

0,82

0,93 Source: Authors

When it comes to additional quality criteria aimed at the measurement part of the model, we can asses that coefficients of determination for CPV (R-square = 0,338) and WOM (R-square = 0,523) are high which underlines that CR construct is explaining a significant amount of variance of CPV construct and that CPV constructs is explaining even more of variance of WOM construct. Now as we asses that our measurement model is acceptable, valid and reliable, we continue our analysis with the structural analysis. Structural part of the model aimed at testing our research hypothesis. Results are summarized in a Table 2 below.

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Table 2. Structural model Hypothesis

Description

Path coefficient

Corporate Reputation -> Customer Perceived Value

0,582***

Customer Perceived Value -> Word of Mouth

0,723***

Note: *** Significant at the p< 0,001 level Source: Authors

We can observe that both hypothesized relationships (H1 and H2) are confirmed. Corporate reputation significantly and positively influences CPV and CPV has the same type of influence on WOM. However, although from the strengths observed in the paths we can conclude that CPV is a mediator between CR and WOM; this is still not necessary information when it comes to testing H3. In order to test H3, we observed second model, where there is no mediating CPV construct and where there is just a direct relationship between CR and Word of Mouth. Our results are presented in Table 3. Table 3. Results for a model without mediating CPV variable Hypothesis H3

Description

Path coefficient

R-square

Corporate Reputation -> Word of Mouth

0,513***

0,262***

Note: *** Significant at the p< 0,001 level Source: Authors

Now we observe that, when CPV construct is omitted from the analysis, that we have significant paths and coefficients between CR and WOM, however that their size is considerably lower than when CPV is included in the analysis. This is a necessary condition for confirmation of H3.

5. CONCLUSION This research has its theoretical, methodological and practical contributions. When it comes to building the theory, it confirms the theoretically developed relationship between selected concepts. Hence, it positions the customer perceived value as an intermediate between corporate reputation and word of mouth in business services. This helps us to understand the concept of value in business markets and its influence better. From the methodological perspective, this research replicates already developed scales and helps improving them with additional empirical evidences, in terms of reliability and validity. It also gives evidence from the developing economy. Last, but not the least, this research is important from practitioners too, especially for service companies/providers who are doing their business on business markets. More precisely, we find that corporate reputation as an intangible asset of the company plays very significant role in explaining the perception of value in companies, which is regarded as important as customer satisfaction on business markets (Eggert & Ulaga, 2002), with significant percentage of variance. Additionally, we pointed out the influence of both reputation and value on word of mouth phenomenon, which is out of substantive significance when it comes to services and business markets. As for the limitations of this study, we need to mention the sample size, which was not crucial for the method of statistical inference used, but it is necessary to conduct a study on a larger sample to get more generalizable results. Additionally, as PLS SEM method is used, we understand that theoretical implications are not that strong as they would be with covariance based SEM, and that this kind of analysis would also be desirable. Further researches in this area should analyze the influence of other intangible marketing aspects on customer perceived value.

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DETAILS ABOUT AUTHORS: MAJA ARSLANAGIĆ SENIOR TEACHING ASSISTANT SCHOOL OF ECONOMICS AND BUSINESS, UNIVERSITY OF SARAJEVO SARAJEVO, BOSNIA AND HERZEGOVINA maja.arslanagic@efsa.unsa.ba VESNA BABIĆ-HODOVIĆ FULL PROFESSOR SCHOOL OF ECONOMICS AND BUSINESS, UNIVERSITY OF SARAJEVO SARAJEVO, BOSNIA AND HERZEGOVINA vesna.babic-hodovic@efsa.unsa.ba ELDIN MEHIĆ ASSISTANT PROFESSOR SCHOOL OF ECONOMICS AND BUSINESS, UNIVERSITY OF SARAJEVO SARAJEVO, BOSNIA AND HERZEGOVINA eldin.mehic@efsa.unsa.ba

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INTERDISCIPLINARY HIGHER EDUCATION: THE CASE OF CROATIAN HIGHER BUSINESS SCHOOLS LJILJANA BABOGREDAC MARTA RAČIĆ

ABSTRACT In higher education, interdisciplinarity involves the design of subjects that offer the opportunity to experience “different ways of knowing”. Such an education is increasingly important in a global knowledge economy. Many universities throughout the world have begun to introduce interdisciplinary studies or subjects to meet this perceived need. Until now, interdisciplinary education was not available from accredited universities and business schools or universities of applied sciences, in Croatia. This paper examines interdisciplinary education in the business/economics universities and higher business schools in Croatia. Our purpose was to twofold; first we have attempted to locate the master’s level, business/economics, education programs offered by accredited universities and colleges in Croatia. Second, we hoped to gather enough information about those programs to be able to comment on their underlying philosophical foundation and compare that mindset to similar programs in business education to determine if there was interdisciplinarity in business/economics studies. We located 15 institutions with business/economics programs. Using catalogues and program descriptions, the analysis was undertaken to find interdisciplinarity in programs. We were able to establish four categories of core courses based on groupings of similar and/or related courses. Most programs are based firmly in management studies and quantitative techniques. The findings generally support the notion that higher educational business/economics programs should be created with humanities - interdisciplinary. The fact is that by studying the arts, cultural history, literature, philosophy, and religion, students develop their powers of critical thinking and moral reasoning. KEYWORDS: interdisciplinary education, business studies, business schools.

1. INTRODUCTION 1.1 Interdisciplinarity defined In higher education, interdisciplinarity involves the design of subjects that offer the opportunity to experience “different ways of knowing” from student’s core or preferred disciplines (Davies, Devlin, and Tight 2010). Although the term interdisciplinarity is quite new, the basic idea of the integration or synthesis of knowledge resonates throughout the history of Western philosophy of knowledge (Klein, 1990 according to Baalen, Karsten, 2012). Julie Thompson Klein (Klein, 1990 according to Baalen, Karsten, 2012) explains that interdisciplinary learning has a long history, dating back to Aristotle, and interdisciplinarity as a concept has been defined over the years in a variety of ways. However one defines it, interdisciplinarity points to a deficiency or inadequacy of a strictly disciplinary approach to learning. The separation of learning into disciplines or academic departments, is designed to discipline the minds of students so that their acquisition of discipline-specific knowledge and skills prepares them for employment in their chosen field. The word discipline derives from the Latin word disciplina – literally ‘the instruction given to a disciple’. Compared to the word subject, which describes a skill and knowledge base, the term discipline brings dimensions of access and boundaries, with associations of profession, elitism, and exclusivity. Key words that come up in discussing the nature of disciplines include territory, discourse, identity, belonging, and status, as described by Becher (1989) and others. Disciplines have originated in different contexts, geographically and historically, and provide a lens on the world. Different disciplines have different philosophical strands, narratives, content, frameworks, and temporal timescales; there are different approaches in terms of detail. Interdisciplinarity enhances such learning by creating alternative learning, which encourage students to broaden their perspectives and to develop their ability to think creatively (Interdisciplinarity Focus Group, Southern Utah University, 2010). For this paper, we defines interdisciplinarity as the intentionally focused study of a historical period, geographic region, life experience (gender, race, age), or theme from two or more disciplinary perspectives (arts, literature, philosophy) in order to model and foster holistic critical inquiry.

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The goal of interdisciplinary study is not solely to acquire knowledge; rather, emphasis is placed on integrative, creative thinking and problem-solving skills (adjusted according to Dalrymple and Miller, 2006).

2. The nature of interdisiciplinarity In attempting to get at the heart of what is entailed in interdisciplinary working, the related concepts of pluridisciplarity, multidisciplinarity, and transdisciplinarity were raised. For example, many environmental science courses do not follow a truly interdisciplinary approach, but instead provide a collection of disciplines throughout different modules and levels; however, it is recognised that interdisicplinarity is more than this; it is where the academic crosses the divide and creates a new knowledge. It involves true collaborative learning – bringing different perspectives from the culture of the ‘home’ discipline, and being open to perspectives from other disciplines.The communities disciplinary practice interact through boundary negotiation and communication (Wenger, 1998). Transdisciplinarity is an expression of a unitary type of inquiry emerging, where disciplines are integrated to the point beyond demarcations, whereas interdisciplinarity comprises a dynamic of supplement, complement and critique. One demand during the US student protests of the 1960s was for a move within university education towards more holistic concepts that related more to real life than the disciplinary structures. Interdisciplinarity came to denote reform, innovation and progress. Metaphors of knowledge production moved from static logic of foundations and structures to dynamic conceptions of networks, webs, systems and fields (Chettiparambil, 2006). Interdisciplinary working is said to foster deep, or thirdorder, learning - or, alternatively, critics have suggested that interdisciplinarity leads to a superficiality, dilettantism and blandness with its own bureaucratic machinery. Familiarity with the main principles, concepts, theories and debates of a discipline has been seen as the best way to produce graduates with the knowledge, skills and values that are needed by individuals, society and the economy. However, as Murray (1983) argues, „Perfect knowledge is a chimera; imperfect knowledge our timeless condition“ (quoted in Klein, 1996, p. 23). Most interdisciplinary courses are based on active learning strategies and promote higher-order critical thinking skills, of analysis, synthesis, application and evaluation. They include methods such as: “collaborative, cooperative learning, discovery and problembased learning, writing and maths across the curriculum, and methods of assessment that are multi-dimensional, including qualitative and quantitative measures, normed measures, and self-assessments.” Types of learning involved in interdisciplinary working are seen to be those that are: self-directed, creative, expressive, feeling, online, continual, reflexive. The OECD (1972) noted key aspects of interdisciplinarity to involve: Teaching relationship: facilitator Level 1: Guidance and personal development Level 2: Specialisation and vocational training Level 3: Introduction to research It is both within the process and as the product of the curriculum that the nature of interdisciplinarity needs to be made. In other words, interdisciplinarity encourages ‘multilogical’ thinking – the ability to think accurately and fair-mindedly within opposing points of view and contradictory frames of reference. It is exactly these high level analytical skills that employers are often looking for rather than a discipline-specific expertise: Chettiparambil (2006) notes that 40% of jobs for graduates recently advertised in the UK are open to applicants from most if not all disciplines. In essence, interdisciplinarity is a state of mind: “an attitude that combines humility with open mindedness and curiosity, a willingness to engage in dialogue, and, hence, the capacity for assimilation and synthesis.” (Emory University, Appendix C, 1990). The same emphasis on collaborative language and integrating disciplinary concepts characterizes the seminal report, Interdisciplinarity: Problems of Teaching and Research in Universities, issued in 1972 by the Organization for Economic Cooperation and Development (OECD), a subdivision of the United Nations Education, Social, and Cultural Organization. Even today, this report remains one of the most widely cited references on interdisciplinarity, defining it as “the interaction among two or more disciplines” that “may range from simple communication of ideas to the mutual integration of organizing [disciplinary] concepts, methodology, procedures, epistemology, terminology, [and] data” (OECD, 1972, p. 25). However, the OECD report fails to address the need for a process by which integration could be operationalized across the disciplines. Though the OECD report does not use the term “common ground,” it does use related terms such as “common language”, “interlanguage”, “collaboration”, “common set of axioms”, and “common denominators”.

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Joseph J. Kockelmans (1979) makes two important contributions to the development of interdisciplinarity and common ground. First, he introduces the term “common ground,” seeing it as a basis for collaborative communication — “a common ground”—among research scientists from different disciplines working on large government and industry projects. It is the fundamental element of all interdisciplinary investigation because, without it, “genuine communication between those who participate in the discussion would be impossible” (Kockelmans, 1979). Second, Kockelmans is the first to connect integrating relevant disciplinary “insights” (i.e. scholarly opinion grounded in research) with developing common ground. He is unclear, however, about how to develop common ground or whether a distinct interdisciplinary research process should be developed.

2.1. The Idea of Interdisciplinarity The idea of interdisciplinarity can be summed up in DeZure’s (DeZure, 2009) answer to the question, “Why pursue interdisciplinarity?” Her response is, “Simply put: life is interdisciplinary.” (DeZure, 2009). In the old academic context, interdisciplinarity means the community of disciplines of knowledge (lat. universitas scientiarum) and the community of teachers and students (lat. universitas magistrorum et scholarum) (Klein, 1990 according to Baalen, Karsten, 2012). These ideas were inspired by a “Leonardo da Vinci aspiration” of creating and training universal man, who is competent in all of sciences (Baalen, Karsten, 2012). Well-known versions of this utopian ideal of the integration of knowledge in education are reflected in the nineteenth century educational philosophies of Cardinal Newman about liberal education, of Humboldt about Bildung and in the French pursuit for encyclopedic knowledge and education (Baalen, Karsten, 2012). The twentieth century idea of interdisciplinarity was primarily a response to the increasing specialization and formalization of knowledge in scientific disciplines. In her well-documented and rich history of the concept of interdisciplinarity, (Klein, 1990 according to Baalen, Karsten, 2012) distinguishes two different views on interdisciplinarity: the synoptic (or conceptual) and the instrumental (pragmatic) view (Klein, 1990 according to Baalen, Karsten, 2012). The synoptic view assumes a natural order of things. As a whole, they reflect the cognitive composition of nature as a whole. It is assumed here that in the end through methodological unification, a sound coherent theory, which is applicable to a wide range of problems can be developed (Klein, 1990 according to Baalen, Karsten, 2012). Within the instrumental perspective there is no one and only statement - interdisciplinarity is primarily associated with solving practical problems. It mobilizes theories from different disciplines in order to solve practical problems (Baalen, Karsten, 2012). During the 1960s and 1970s, discussions about interdisciplinarity invoked clear actions that resulted in the set up of new research and educational programs in different scientific fields. The main idea behind these actions was that the results from science should be put into practice and had to serve societal ends and student demands. At that time, interdisciplinary research and education became closely associated with political activism of students who criticized academic science for its abstractness and its inability to respond to real-life problems (Baalen, Karsten, 2012). The enthusiasm for interdisciplinary education and research continued in the early 1980s.

2.2 The Disciplinary Paradox To establish an interdisciplinary field, disciplines are needed as constituting building blocks, and this is what Klein (Klein, 1990) has called the Disciplinary Paradox. The Disciplinary Paradox suggests that interdisciplinary movements will be particularly strong where disciplinary structures prevail. While the idea of disciplinarity prevails in Western business school, in Croatia there is deficiency in theoretical discourse about interdisciplinarity. It is due to the fact that educators are not involved enough in theory of education nor they practice research an praxis which can enable students to “learn, understand and do”. This can be changed and developed by Bologna process, which has been introduced in higher education in Croatia. The idea of interdisciplinarity in business higher education can be paraphrased from DeZure’s (DeZure, 2009) answer to the question, “Why pursue interdisciplinarity in business education?” The response is, “Simply put: business life is interdisciplinary.” (cited according to DeZure, 2009). That is why the authors have attempted to locate the master’s level business/economics education programs offered by accredited universities and colleges in Croatia to find out the scope of interdisciplinarity in the foundation of the subjects.

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3. Research The purpose of this analysis was two-fold; first we have attempted to locate the master’s level, Business/economics education programs offered by accredited universities and colleges in Croatia. Second, we hoped to gather enough information about those programs to be able to comment on their underlying philosophical foundation and compare that mindset to similar programs in business education to determine if there was interdisciplinarity in business/economics studies. We define business/economics education programs as programs that lead to a Master of Arts or Science in management or entrepreneurship. We are convinced that interdisciplinarity in business education in the sense of liberal arts education should be a new and unique departure in Croatian universities and we chose to examine that new phenomenon. During the phase of investigation we have found out a lot of similarities regarding the institutions and their programs. Some of the institutions have not met our methodology either they do not have post-graduate programs or their programs are in the status of establishing. Therefore, in the place of institutions we have chosen the larger number of programs which could stand alone and are part of the universities. Finally, we have 15 programs which we analysed through research on 11 institutions.

3.1. Methodology The data used for our analysis consisted of brochures, program announcements and catalogs; the information each school made available on its Internet home page. Our paper consists of a discussion of the demographic commonalties and differences of the various programs, an overall analysis of the data, and concluding comments. In our analysis of program content, our consideration was directed to core and elective courses as these indicate those aspects of the discipline that the program faculty consider essential for their students to master. To facilitate that analysis we first listed the core courses of all programs, then looked for commonalties by conducting a modified affinity diagram exercise. Using catalogues and program descriptions, the analysis was undertaken to find interdisciplinarity in programs. We were able to establish four categories of core courses based on groupings of similar and/or related courses. Category I, Quantitative consisted of subjects in the areas of financial management and research methods Category II, Social science and/or behavioral consisted of those in organizational behavior, organizational theory, organizational development, communication, leadership, leadership and ethics, policy, and a small miscellaneous sub unit. Category III Introduction and capstone courses contains courses which were either behavioral or quantitative in nature; they appear to be designed primarily to give a certain structure to their programs. In other words, those institutions with an introductory course most likely believe that the field is new enough to require some student orientation. Additionally, those programs with a capstone course want to create the opportunity for their students to achieve closure concerning their academic experience. Category IV consists of core courses, which are designed to allow the student to obtain certain professional skills as part of their educational experience. They are courses in management subjects, human resources, entrepreneurship, and strategic management courses, which one could find in many professional degree programs. We believed that by viewing each program’s core courses through the lens of these categories we would be able to determine the foundational emphasis of those programs.

3.2 Demographics We were able to obtain some demographic data from each of the 11 universities and colleges that we located for the research. The data indicate that the programs are located mostly in private colleges (7) and 4 are public institutions – universities. The survey data also indicate that interdisciplinarity is a relatively recent phenomenon in academe. Of the analysed schools, three have programs that are ten or more years old, one program is eight years old and the rest are three or less years old. There was no information about the total number of graduates produced by responding programs thus far. Little hard data is available concerning the specific activities and/or employment of program graduates because none of the institutions compile that information. There is also considerable variety with regard to full-time faculty. Eight of the responding programs have at least one fulltime faculty member. In four programs faculty are full-time, but are shared between the program and another depart-

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ment. As one might expect for such an eclectic field, several academic disciplines are represented in the terminal degrees of the faculty: economics, communication, political science, sciences, languages, and social psychology/organizational behavior. There are no faculty with degrees in public administration, anthropology, philosophy, history, and theology. All of the responding programs employ adjunct faculty and the ratio of full-time to part-time varies from 1:2 to 1:20.

4. Findings Our analysis indicates that of the total number of required core courses in all programs, 63 per cent are in Category I, 22 per cent are in Category II, 8 per cent are in Category III, and 7 per cent are in Category IV. Since Category III courses are designed to create structure and Category IV to give professional skills to the programs’ students, they do help determine a general disciplinary emphasis of the programs under consideration, and they are not interdisciplinary. Therefore, our analysis focused on Category I and II. We note that based on the percentage of core courses in either Category I or II, the emphasis of most programs is tilted toward the social sciences/behavioral areas, and in the selected schools in Croatia they are not interdisciplinary. TABLE I shows that two programs, Project Management (Zapresic School) and Communication Management (Zapresic School), have less than 50 per cent (37 %) of their core courses in Category I. An additional two programs, Creative Management (Agora School) and Management (ZSEM) have 50 per cent or less of their core courses in Category I. All the other schools from which data was collected (12 in total) have core curricula that exhibit an emphasis in the quantitative/analytical area. On the other hand the data in TABLE II reveal that a total of four programs have 50 per cent or less of their core courses in Category II. All other programs have at least one-fourth of their core curriculum in the same category: therefore we concluded that a majority of programs studied have a social sciences/behavior foundation, but not intredisciplinarity. While these figures reinforce the importance placed on the social science foundations of the programs studied, it also emphasis the importance of introducing of interdisciplinarity. TABLE III displays the frequency that a particular subject is placed in the required core by various institutions; as might be expected in academic programs, but it is not the case, 73 per cent does not require a research methods course. The fact that almost all of programs require a thesis could indicate that the methodologies being taught are more concerned with traditional academic research. The practice e.g. organizational assessment and analysis is required in only two programs (Effectus school and University Osijek, Entrepreneurship). The fact that only 5 subjects in 5 different schools require a capstone, could also indicate a near consensus concerning program structure rather than agreement on program foundation.

5. The list of the institutions and programs I VISOKA ŠKOLA ZA POSLOVNO UPRAVLJANJE BALTAZAR ADAM KRČELIĆ – ZAPREŠIĆ www.vspu.hr) 1. Specijalistički stručni studij PROJEKTNI MENADŽMENT 2. Specijalistički stručni studij KOMUNIKACIJSKI MENADŽMENT II VISOKA POSLOVNA ŠKOLA LIBERTAS – ZAGREB www.vps-libertas.hr 3. Specijalistički diplomski stručni studij MENADŽMENT UNUTARNJE I MEĐUNARODNE TRGOVINE III VISOKA ŠKOLA AGORA – Zagreb www.vsa.hr 4. Diplomski studij KREATIVNOG UPRAVLJANJA IV ZAGREBAČKA ŠKOLA EKONOMIJE I MANAGEMENTA, Zagreb www.zsem.hr 5. Specijalistički diplomski stručni studij MANAGEMENT V VISOKO UČILIŠTE EFFECTUS – ZAGREB www.effectus-uciliste.eu 6. Specijalistički studij MENADŽMENT FINANCIJA VI VELEUČILIŠTA VERN’ – Zagreb www.vern.hr 7. Specijalistički diplomski stručni studij PODUZETNIČKI MENADŽMENT VII EKONOMSKI FAKULTET ZAGREB www.efzg.unizg.hr 8. Poslijediplomski specijalistički studij POSLOVNO UPRAVLJANJE MBA 9. Poslijediplomski specijalistički studij VODSTVO

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VIII Odjel ZA EKONOMIJU I TURIZAM “DR. MIJO MIRKOVIĆ, SVEUČILIŠTE JURJA DOBRILE U PULI – www.oet.unipu.hr 10. Poslijediplomski specijalistički studij LJUDSKI RESURSI I DRUŠTVO ZNANJA IX EKONOMSKI FAKULTET U OSIJEKU; SVEUČILIŠTE J.J. STROSSMAYERA –awww.efos.unios.hr 11. Poslijediplomski specijalistički studij PODUZETNIŠTVO 12. Poslijediplomski specijalistički studij UPRAVLJANJE EKONOMSKIM RAZVOJEM X EKONOMSKI FAKULTET U RIJECI – www.efri.uniri.hr) 13. Diplomski studij ekonomije GOSPODARSTVO EUROPSKE UNIJE 14. Diplomski studij ekonomije PODUZETNIŠTVO XI EKONOMSKI FAKULTET SVEUČILIŠTA U SPLITU – www.efst.hr) 15. Poslijediplomski specijalistički studij POSLOVNA EKONOMIJA Table 1. Core Courses in Category I Category

Uni Split Poslov Ek

Program #15

Uni Rijeka Poduzet

Program #14

Sch Libertas Mngm Trg

Program # 3

Uni EFZG Vod

Program # 9

Uni Rijeka Gospod EU

Program #13

Sch Effectus Mngm Fin

Program # 6

Uni EFZG MBA

Program # 8

Sch VERN’ Pod Mngm

Program # 7

Uni Osijek Uprav Ek Raz

Program #12

Uni Osijek Poduzet

Program #11

Uni Pula Uljp i Drus Znan

Program #10

Sch ZSEM Mngm

Program # 5

Sch Agora Kreat Uprav

Program # 4

Sch Zapresic Kom Mngm

Program # 2

Sch Zapresic Project Mngm

Program # 1

Category

Sch Agora Kreat Uprav

Program # 4

Uni Pula Uljp i Drus Znan

Program #10

Sch Zapresic Project Mngm

Program # 1

Sch VERN’ Pod Mngm

Program # 7

Sch ZSEM Mngm

Program # 5

Uni Rijeka Gospod EU

Program #13

Sch Zapresic Kom Mngm

Program # 2

Uni Osijek Uprav Ek Raz

Program #12

Uni Osijek Poduzet

Program #11

Uni EFZG MBA

Program # 8

Sch Effectus Mngm Fin

Program # 6

Uni Rijeka Poduzet

Program #14

Uni EFZG Vod

Program # 9

Sch Libertas Mngm Trg

Program # 3

Uni Split Poslov Ek

Program #15

Source: the author’s selection

Table 2. Core Courses in Category II

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Table 3. Subject offered Subject

Research methods

Capstone Course

Ethics

Organizational Development

Organizational Behaviour

Communications

Management

Human Resources

Financial Management

Entrepreneurship

Strategic Management

Leadership

Diversity

Marketing

Thesis Course

Public Policy

Source: the author’s selection

6. Conclusions Earlier we noted that in higher education, interdisciplinarity involves the design of subjects that offer the opportunity to experience “different ways of knowing”. Such an education is increasingly important in a global knowledge economy. It is this academic/practitioner dichotomy that prompted our study of interdisciplinarity in business education. Interdisciplinarity education should utilize the best of the field of business management (practitioner oriented) as well as several aspects of the social sciences (more academic in orientation) in an attempt to understand and teach business. The educational challenge is, according to Baalen and Karsten (2012) to avoid “being stuck in the middle” by compromising on disciplinary depth and interdisciplinarity breadth (Baalen and Karsten, 2012). The disciplinary – interdisciplinary trade off in universities is in fact a false one. One of the biggest fallacies according to Baalen and Karsten (2012) is that university education is still often viewed as a one-shot event instead of life-long learning process in which depth and breadth alternate one’s career (Baalen and Karsten, 2012). Today and in the future, interdisciplinarity in business management studies will remain a significant educational challenge, for Croatia particularly. It is a field that is modern and ancient, philosophical and practical, and combines the best of the academe and the world of work. Most MBA programs we analysed are based firmly in management studies and quantitative techniques, while interdisciplinarity has not yet settled into a recognizable format, its roots seem firmly based in the subjects which include the behavioral sciences. The purpose of our analysis was to find interdisciplinarity in programs and to attempt to determine their philosophical foundation. As indicators of each program’s foundation we chose to examine the required, core courses of each. Additionally, we had hoped that the academic background of the faculty would offer some indication as to the philosophical source of each program. While the academic background of program faculty is so narrow, a clear indication of program foundation can be extrapolated, and there is no diversity and it is indicative of a narrow approach to program formulation. Of the programs examined three higher schools, School Zapresic, School Agora, and ZŠEM can be placed in the moderate interdisciplinarity category - equally quantitative and social science, oriented. A clear majority of programs examined fall into the category of heavy quantitative science influence, 60 per cent or more of their required core courses are in Category I.

7. Implications Generally speaking, both the academic community and the public at large are the beneficiaries of interdisciplinary programs. Ethan Kleinberg writes, “The benefits [of an interdisciplinary program] will include the production of knowledge through innovative scholarship, the creation of working networks across the disciplines and departments throughout the

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university, and most important, the fostering of an informed and critical public.” (Interdisciplinarity White Paper, 2010) More specifically, DeZure (2009) lists six reasons to pursue the creation of an interdisciplinary program: (1) “social problems . . . cannot be resolved by a single disciplinary perspective”; (2) a curriculum based on disciplinary structures artificially fragments knowledge; (3) employers want a workforce that can apply learning to a variety of situations; (4) “administrators hope to make more efficient use of resources and equipment by sharing them across disciplines”; (5) disciplines can be transformed by their interactions with other disciplines; and (6) the linear organization of knowledge is being supplanted by networks of knowledge made available electronically (DeZure, 2009). The promotion of interdisciplinary study can enhance student learning, encourage faculty collaboration, and foster community involvement. As Klein notes, “Interdisciplinary practices arise from different motivations and have different trajectories. Yet, their cumulative force has made boundary crossing a major factor in shaping contemporary knowledge” (Klein, 2002). Earlier we noted that Aristotle began the study of interdisciplinarity and that John Henry Newman is remembered as a creator of the term artes liberales in the sense of the man’s freedom of acting in society as whole (Klein according to Baalen and Karsten, 2012). For example, Aristotle taught that genuine business (put by the authors) leadership consisted in the ability to identify and serve the common good. To do so requires much more than “technical” management training. It requires an education in moral reasoning, which includes history, philosophy, literature, theology, and logic - interdisciplinarity. The usefulness of the study, that is how the new knowledge can be utilized in society, can be gained either by influencing policy makers and/or by influencing practitioners. Influencing policy (curriculum) makers through the findings of this study is possible if business schools introduce interdisciplinarity - liberal studies into the curriculum and initiate a series of significant intellectual and educational challenge.

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

Baalen, P., Karsten, L. (2012) The Evolution of Management as an Interdisciplinary field, Journal of management History, Vol. 18 Iss: 2 pp. 219-237 Becher, T. (1989) Academic Tribes and Territories – intellectual enquiry and cultures of disciplines, Buckingham and Bristol, The Society for Research into Higher Education and Open University Press. Chettiparambil, A. (2006) Interdisciplinarity: a literature review, Report for the Higher Education Academy Interdisciplinary Teaching and Learning Group. Davies, M., Devlin, M., Tight, M. (2010) Interdisciplinary higher education: Perspectives and Practicalities (International Perspectives on Higher Education Research, Volume 5), Emerald Group Publishing Limited, pp. 3-28 DeZure, Deborah (2009) Interdisciplinary Teaching and Learning Essays on Teaching Excellence, Oregon State University. Web. 17 Nov. 2009. Emory University, Appendix C). http://www.gees.ac.uk/planet/p17/jd.pdf (02.07.2012) Interdisciplinarity Focus Group White Paper (2010) Southern Utah University, Academic Planning Steering Committee, Documents, www.suu. edu (02.07.2012) Klein, J.T., (1996) Crossing Boundaries: knowledge, disciplinarities, and interdiscipliniraties, University Press of Virginia, Charlotteville, VA and London Kockelmans, J.J., (1979) Why Interdisciplinarity? Interdisciplinarity and Higher Education, The Pennsylvania State University Press, University Park, PA and London Liberty, V.James, Prewitt, Jim, (1999) “Professional leadership education: an analysis”, Career Development International, Vol. 4 Iss: 3, pp.155 – 162. Moratis, T. Lars, van Baalen, J. Peter, (2002) “The radicalization of the multiversity”, Journal of Educational Management, Vol. 16 Iss: 4, pp.160 – 168. OECD (1972) Interdisciplinarity – Problems of Teaching and Research in Universities, OECD, Paris, http://www.gees.ac.uk/planet/p17/jd.pdf (02.07.2012.) Parker, J. (2010) Competencies for interdisciplinarity in higher education, International Journal od Sustainability inHigher Education, Vol. 11 N0. 4, 2010 Transdisciplinarity Net. (2009) Transdisciplinarity research, available at http://www.transdisciplinarity.ch/e/Transdisciplinarity/index.php. (02.07.2012.) United Nations Educational Scientific and Cultural Organisation (UNESCO) (2004), Draft international implementation scheme for the UN decade of education for sustainable dvelopment, available at : http://portal.unesco.org/education (02.07.2012)

16. Wenger, E. (1998) Communities of Practice, Cambridge:Cambridge University Press DETAILS ABOUT AUTHORS: LJILJANA BABOGREDAC LECTURER, UNIVERSITY OF APPLIED SCIENCES VERN’, ZAGREB, CROATIA, TRG BANA J. JELAČIĆA 3/3 liliana.bratnar@hi.htnet.hr MARTA RAČIĆ, PROF. LECTURER, UNIVERSITY OF APPLIED SCIENCES VERN’, ZAGREB, CROATIA, TRG BANA J. JELAČIĆA 3/3 marta.racic@vern.hr

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ECONOMIC TRANSACTION WITH THE WORLD – EXTERNAL AND INTERNAL BALANCE OLIVERA BAIĆ

ABSTRACT This paper deals with the relations that exist between the balance of payments, the real, fiscal and monetary sector. Connections between external sector (balance of payments) and internal sectors of the economy (real, monetary and fiscal sector) are realized in two directions. The first reflects the impact of internal economic conditions in the external sector, and the other the reverse influence of the external sector to domestic. Given these connections, consideration will be made between national saving, investment, money supply and a disbalance in the current balance. KEYWORDS: external, internal balance, interest rate, exchange rate, competitiveness, import, export, balance of payment

1. INTRODUCTION Theoretically, the equilibrium of balance of payment can be seen as an automatically sustainable state, without interventions by the economic policy measures, if characteristics of macroeconomic variables are given. However, this is a rare circumstance. Almost every country is facing some version of economic disbalance within the balance of payments. More often, we define it through deficit, but it is not unknown that even great surplus brings certain problems and disbalance as well. Economic disbalance in balance of payment can be deprived from different factors: broken relations between the production and expenditures, negative external shocks, poor macroeconomic policy, the need for accelerated economic growth, development and so on.

2. CLASSICAL AUTOMATIC ADJUSTMENT MECHANISM Classical automatic adjustment mechanism of balance of payment means establishing the balance of payment by the mechanism of change of prices and money stock. This is classical mechanism of adjustment of balance of payment and it is quite simple. This mechanism is of an inflation-deflation type, where direct interdependence of change in prices and money stock represents the basis of automatic adjustment mechanism. In the core of this method is Quantity Theory of Money, relative change in domestic and foreign prices, as well as fulfillment of the well-known Marshall-Lerner Theorem. Quantity Theory of Money means that the balance on the money market is achieved when there is an equality of money supply and demand. Money supply is directly connected to the gold exchange, although it can also change according to the change of the credit to domestic sector. When it comes to the money supply decrease, the aggregate demand and output are automatically decreased as well. The surplus of the capacity and increase of unemployment rate, created by the decrease of the aggregate demand and output, influence the decrease of the prices and payments. According to Quantity Theory of Money, the decrease of money supply influences the interest rate growth, whereas the increase of interest rate, through greater productivity, can stimulate attraction of short-term foreign capital in the country. As a result there can be slower decrease of money supply, unlike in case where there is not the influence of the interest rate. When there is a disbalance between the economies, the automatic adjustment mechanism will, through the changes of money stock and prices, initiate the process of the division of available amount of gold among countries, until the balance is achieved again. Namely, the part of the final expenditures that goes to imported goods is deprived from the multiplication process and represents the permanent loss, form the point of view of national production growth. The import increase of one country initiates the multiplication process in the other, as well as the growth of Gross Domestic Product. Foreign repercussions can easily be involved in foreign trade multiplier, if the multiplication process is seen from the point of view of balance between two countries. Even OECD experts have developed macroeconomic model (Interlink), based exactly on the logic of adjustment principle. With certain preconditions, the model has a purpose to serve as a stimulation of possible event developments in the global economy. It is also necessary to mention the mechanism of absorption approach, which deals with synthesis of previous approaches, by monitoring the adjustment of balance of payment. It makes the synthesis from two points of view: from the stand of net national product and absorption, as well as from the stand of devaluation on import and export flows. Devaluation

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implies the growth of export. It is going to enhance balance of payment if it influences the decrease of absorption with the unchanged national product, or if it increases national product with the unchanged absorption. The greatest effect, however, would be if national product could be enhanced along with the decreased absorption.1

3. ADJUSTMENT POLICY – SUSTAINABLE ECONOMIC GROWTH AND DEVELOPMENT Deflation adjustment of balance of payment, in classical adjustment mechanism, caused by gold and money stock decrease, has led to the production deprivation, decrease of salaries and prices, unemployment rate increase, and only then to improvement in balance of payment. In the real life, we are not always ready to accept recession as an expenditure of automatic adjustment mechanism, within the establishment of new, external balance. The utmost goal is establishing of simultaneous internal and external balance, but not at the cost of socially unacceptable expenditures. Instruments and measures that are at disposal to the economy authorities while defining adjustment policy are: instruments of monetary, fiscal, investment, foreign trade, policy of foreign currency etc. Sometimes the adjustment leads to simultaneous realization of internal and external balance. Sometimes it leads to its destruction, which is why the economy authorities are often in a position to decide whether to finance external balance or to start a process of adjustment, by the set of certain measures, in the purpose of the elimination of external balance. Deficit of balance of payment does not always have to represent the signal of an external disbalance. It is important to estimate whether it is possible to approach to the policy of adjustment or is it possible to finance the existent disbalance. Each adjustment demands relocation of resources, the change in production structure, the change in comparative advantages, and along with that, the change in the export and import structure. Financing means the delay of adjustment process. This is justified if the deficit of balance of payment is a consequence of a country’s aspiration for faster economic growth and development. When the level of domestic accumulation is insufficient form the stand of necessary level of investment for greater economic growth and development, the country can reach for the import of foreign accumulation, in order to increase its production and economic capacities. Deficit of balance of payment, which is a consequence of higher economic growth and development, is not seen as external disbalance, because we expect that the current growth of investment activities will lead to the growth of export activities in the future. On that basis, we could service our obligations, given the loans we have undertaken. Financing external balance is justified in the situation where we have deficits in the balance of payment of a temporary character, single, season or cyclic. Along with possible loans from the international capital market, the great role is given to foreign exchange reserves that can serve as a cover. For disbalance that occur as a result of over-expansion of aggregate demand, as well as for fundamental disbalance, the adjustment is recommended. In this case, economy authorities will take in restrictive measures of monetary and fiscal policy. In the case of fundamental disbalance, which means that the economy has great problems with its economic structures, and that the adjustment process is more complex and requires the policy which leads to relocation of production forces. This relocation will, along with monetary and fiscal policy measures, include measures of foreign currency policy, work force, structural reform etc. Restrictive measures of monetary and fiscal policy have a goal to decrease absorption i.e. aggregate demand in the country. Redistributive measures comprise devaluation/depreciation, as well as foreign currency limitations.

4. ECONOMIC TRANSACTION WITH THE WORLD AND ITS RELATIONSHIPS WITH OTHER ECONOMIC SECTORS Within the current balance, there are some economic transactions which influence creation and distribution of economic worth, which directly influence on the level of economic activity. Economic transactions within current balance influence the size of GDP. However, what happens with the transactions which refer to income/expense from the revenues and net transfers? These transactions cannot neglect the fact that they refer to the revenues from the production factors outside economic territory of the country. That is why these transactions comprise wider indicator of economic activity of a country – Gross Domestic Product, which measures economic activity of domestic production factors in the country and abroad. In the situation where GDP is higher than aggregate expenditures, there is a surplus in the current balance i.e. positive balance of current transactions with foreign countries, which means that when expenditures are higher than GDP, there is a deficit. 1

Miljković D. (2008), Međunarodne finansije, Centar za izdavačku delatnost Ekonomskog fakulteta, Beograd, p. 206

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Previous identity is important from the aspect of production analysis, expenditures and current balance, but it is necessary to see the relationship between savings and investments and current balance. National savings are a part of national product which is not spent on personal or budget expenditures. It has two components – private savings (economy and citizens) and government’s savings. If we take away net taxes, gathered from economy and citizens, as well as personal expenses from GDP, we will get a part of available national income, which private sector separates as its own savings. The difference between income and expenditures in the budget depicts government’s savings. Surplus in the budget means that income is higher than expenditures, and implies positive savings of the government itself, whilst deficit in the budget means expenditures grater than income, i.e. negative savings of the government. Unlike private sector, the government’s decision towards savings depends on the state of internal and external balance. When it comes to production decrease and unemployment increase, the government can, through savings decrease (by increase of budget expenditures and/or tax decrease) initiate higher economy growth and improve employment rate. If we have great deficit in the current balance, the government can, through savings increase (by decrease of budget expenditures and/or tax increase), influence the decrease of the deficit of current balance. For example, an X country had deficit of current balance in the previous year, and, at the same time, it had balanced budget (income levels same as expenditures). The previously mentioned means that the investments were greater than savings. This does not mean higher investment activity of the county X, given that the difference between the investments and savings could be a result of the savings’ decrease, caused by the growth of the personal expenditures. Disbalance in the current part of balance of payment can be neutralized by the change of the foreign exchange reserves. There are situations when bottom line of the capital and financial balance is not enough to cover current balance bottom line, so the intervention by foreign exchange reserves is necessary, in order to keep the equilibrium. There also is an opposite situation which results in foreign exchange reserves increase.2

4.1. Balance of payment in the process of reproduction Monitoring of balance of payment in the process of reproduction has a goal to point out how aggregate demand is created in an open economy, how balanced level of production is formed, as well as bottom line of balance of payment, given that the balance on the market of goods means equality between aggregate demand and supply, i.e. output. In an open economy domestic demand is partly satisfied, along with domestic products, with imported products. The fact is that the domestic demand is not equal to the demand for domestic products. However, the demand for domestic products comprises domestic demand for domestic products, as well as foreign demand for domestic products (export), which still is determined by the income in the import country, its competitiveness, as well as its nominal currency rate. Namely, if the balanced level of income is lower than the one which enables optimum employment rate, the government can make a decision to increase budget expenditures in order to stimulate economic growth. The increase of budget expenditures by government can be directed to domestic products which could mislead into thinking that there is no effect on the bottom line of the current balance. The growth of the budget expenditure leads to the growth of real national income, which creates a mechanism of induced changes in the current balance; as the export is dependant on real national income, and with its growth, the export grows as well. Along with the unchanged export value the deficit of current balance grows as well. Deficit would be lower if, at the same time, foreign national income grew as well. This is a truly important conclusion from the standing point of coordination of economic policies among countries. Surely, for a country it is by far better situation if there is a growth of foreign demand for its export. The government can keep positive effects of devaluation of national currency on the bottom line of the current balance by preventing the growth of real national income and induced changes in the current balance, caused by the growth of real national income. It will have to change budget expenditures, simultaneously along with the foreign currency rate change, which will neutralize the growth of aggregate demand which is a consequence of export growth and import decrease. This mechanism is well known as a foreign trade multiplier, which shows the extent to which real national income will increase, as a consequence of autonomous export increase, if we know border rates. This process takes place until all effects of autonomous export increase are utilized. The changes in certain economic transactions cause disbalance of balance of payment, which then demands the government’s response through the application of certain economic measures which will neutralize disbalance of the balance of payment. The question of economic balance of balance of payment is a quite complex one. The division of transactions within the balance that cause disbalance is done by the method of horizontal cut of balance of payment. That is 2

Kovačević Radomir (2010), Ekonomski odnosi Srbije sa inostranstvom, Ekonomski fakultet Beograd

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the way we get partial sub-balance, according to which we can perform economic analysis. Surplus of deficit of the current balance can be useful indicators of movement of aggregate demand and its influence on external disbalance. Deficit of the balance of payment can be a consequence of higher level of savings from investments, and so it means the import of foreign accumulation that has a goal to increase economic growth and development through the increase of investment depositing, while surplus means the export of domestic accumulation. Also, we have to state that in certain cases deficit in the current balance can also represent external balance, especially when it is a result of higher investment activity, which, in further period enables, through increased economic activity and export, enough foreign currency income for servicing obligations, on the basis of current export of foreign accumulation. It is usual that deficit of current balance, which is higher than 5% in comparison to GDP, represents situation that would at least make economic authorities reconsider measures for adjustment of balance of payment. If cutting of balance of payment is done in such a way that along with current transactions we comprise financial transactions, which depict the movement of long-term capital, then we get basic balance. Its purpose is mid-term balance monitoring, because the suitable development of economic situation, form the point of view of external balance, means that the bottom line of the current balance is covered by the change of long-term capital. This is how stability of external balance in mid-term would be enabled. If deficit of current balance is not covered by the long-term capital flow, then the remaining deficit of basic balance is covered by the flow of short-term capital and/or the decrease of foreign currency reserves, which is not a good thing, because the decrease of foreign currency reserves influences the decrease of credit rating of a country, and sometimes disables the approach to the international capital market. It also influences decrease of the primary money, money supply, and it also can influence slowing of economic activity. In the regime of fluctuating foreign currency rate, the disbalance between short-term capital flows will influence the change of foreign currency rate which can have a negative effect on foreign trade activities. If basic balance is in the balance, than disbalance in the official balance of payments is a consequence of the oscillations in the short-term capital flow. The disbalance of official payment which is a consequence of unintentional, season and cyclic flows of short-term capital does not represent alert situation for economic authorities if country has a presupposed level of foreign currency reserves. The problem is if the disbalance occurs in the longer period of time in the same direction, without reversible changes. The most acceptable defining of external balance is that the balance of the balance of payment is seen as a state that cannot be sustained automatically, without interventions by economic policy measures, given the characteristics of macroeconomic variables.3

5. THE INTERNATIONAL INDEBTEDNESS PROBLEM, DEBT CRISIS AND SUSTAINABILITY OF FOREIGN DEBT A necessary condition for increase of international exchange between developed and developing countries is that these countries have enough quantity of financial assets at the disposal, in order to follow the growth of international trade. However, developing countries are in that sense quite handicapped. Economic health of each economy is not only dependant on the moves a government makes to it, but also on economic health and directions they move to in other countries. The fear that developing countries’ problems, such as the GDP growth, overspending, the decrease of investments, deficit of the current balance is then justified, and can easily be transferred to the developed countries as well. The lack of basic production factors, capital and workforce is an enormous limitation on the way to fulfillment of economic and political goals. Making loans on the market of capital in the purpose of increase of economic growth, development, export etc., can lead to great problems. In the beginning of the 60-ties most countries leaned on numerous state interventions in economic activity’s regulation. In those years, the development of imported-substitution industry was common, and it had a goal to decease a burden of external disbalance.

Kovačević Mlađen (2002), Međunarodne finansije, Ekonomski fakultet Beograd

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Beginning economic reforms process is a necessity. In most countries these processes have, unfortunately, remained unfinished. The existent structural characteristics mean: • Intensive and direct control of economy by the government, numerous barriers in the foreign trade, ownership and control over large industrial companies, high level of budget control and expenses. • Long inflation history that often use to slip into a hyperinflation. Developing countries could not cover that with their fiscal incomes, so they printed money. Too high emission of money which was not in accordance with real demand caused high inflation rate and deficit growth. • Weak banking system and flat regulation in the financial field. • Fix foreign currency rates or managed float, with intensive and frequent interventions of monetary authorities on the foreign currency market. • Poor structure of exported products which price on the world’s market often use to show negative trends with great oscillations. • Corruption caused by large bureaucracy.4 Foreign accumulation demand in order to increase economic growth and development could not result in positive effects in terms of increase of growth and development and decrease of lagging for developed countries. The decision between financing and adjusting has not represented a difficult choice for the countries because of unacceptable expenses of adjustment, from the stand of decreased growth rate and unemployment rate, and there has also been a possibility to use unlimited and cheap financing. The export price fall leads to greater competitiveness, but it also leads to less foreign currency flow, which disables the possibility of a country to service its obligations to its creditors. All these notions are induced by an inflation, which countries try to deal with by the application of restrictive monetary policy (interest rate increase and budget expenditures decrease). It is also necessary to add that oil prices growth, as well as growth of its derivates is an important factor as well. Undoubtedly, the increase of a loan leads to the problem of servicing it in a certain period in the future. The constant financing of the deficit of current balance by surplus in financial balance increases the loan of the country and additionally burdens deficit of a current balance, through the increase of the item expenditures from the income. Sooner or later, owning countries will have to face a situation where their financial obligations to their trustees by far overcome the level of their financial income from foreign trade activities. The foreign debt in any moment is defined as a state of overall obligations to non-residents which demands the paying of the principal and/or interest by the residents. The foreign debt does not include contingent obligations to foreign countries, and the change in the debt state does not clearly state which economy sector contributes to the growth of national debt. In its structure it can be public, publicly guaranteed and non-guaranteed private debt. Solvency of the country in terms of servicing its obligations means its continual possibility to respond to obligations to its trustees at all times. The problems of solvency in the public sector can easily be transferred to private sector, even when private sector does not have identical problems in terms of solvency as public sector. Problems in servicing a debt can make government apply restrictions, by which it prevents obligations servicing and private sectors, in order to prevent capital outflow and an increase of foreign currency reserves. However, insolvency of private sector, which is more of a problem for the loaner than for the government, can negatively influence on public sector in terms of decrease of capital affluence, or in terms of harder approach to international market, because of the poor country’s rating. This problem can be met with the liquidity problem, which represents short-term insufficiency of financial assets, which are needed for momentary coverage of the obligations. At the same time, great capital outflow can initiate powerful turbulence in the foreign currency market and start capital flight. Liquidity problem can be a consequence of temporary external shock or significant increase of imported expenditures. Managing the policy of foreign debt means the analysis of wider spectrum of different factors. World Bank and MMF in cooperation with Paris Club Creditors and OECD have developed methods and techniques through which in mid-terms, by using different scenarios, the solvency indicators change as well as countries’ liquidity. The influence of expected changes of different macroeconomic variables on the changes on solvency and liquidity indicators are monitored, and most used ones are: • Ratio of external debt and export of goods and services (EDT XGS), • Ratio of principal and interest repayment (TDS/XGS), • Ratio of external debt and Gross Domestic Product (EDT/BNP), • Ratio of repayment of interests and goods and services export (INT/XGS), • Ratio of foreign currency reserves and external debt.5 4 5

Dornbusch, R.l (2001) A Primer on Emerging Market Crises, Massachutes Institute of Tehnology Press Miljković D. (2008), Međunarodne finansije, Centar za izdavačku delatnost Ekonomskog fakulteta, Beograd, p. 375

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All the above mentioned represents only preliminary estimations, based on the indicators values which require a further analysis from the point of view of tendencies in the current balance, the relations between long-term and short-term capital, export increase, overestimation or underestimation of the currency. Constant monitoring of the named indicators contributes to the improvement of the external debt management, although it is not completely capable to predict possible situations in terms of servicing debt stop. Due to the fact that countries are intertwined, if one or more of them stops servicing its debts, it does not become only the problem of these countries, but it becomes wider problem, where international community gets included into its solving.

CONCLUSION In the first phase of solving the debt problem, the greatest burden of solving it is carried by developing countries. Forceful adjustment is applied, even if it does not come on voluntary basis. In order to establish external and internal balance, the country, helped by its organs and central bank, undertakes measures of restrictive and expansive monetary and fiscal policy, in order to increase/decrease interest rate, increase/decrease demand of circulating capital, increase/ decrease of budget expenditures. It is also necessary that countries accept stabilization programs. The application of deflation measures would have a goal to increase foreign currency reserves through export increase and import decrease, although this kind of an adjustment means acceptance of high price of mentioned programs, and that is a recession. Some of the suggestions in the debt solving and establishing balance were that the commercial banks approve additional assets to the owning countries, along with the arrangement of the debt reprogramming, so that multilateral institutions, especially World bank increase fresh capital inflow, in order to stimulate growth and development, so that these counties could continue with the adjustment policy along with the reforms in fiscal policy and market liberalization. Commercial banks have, by the exchange of debt into debentures, which can easily be traded with at the international capital market; gained the possibility to regain certain financial assets on discount prices on the secondary market, which means that the market price of the debt on secondary markets is by far lower than nominal value; and it mainly depends on estimations of skillfulness and capabilities of the owning countries to service their obligations. When analyzing risks the most commonly factors taken into consideration are: deficit, monetary aggregate flows, exchange relationships, real foreign currency rate, prices liberalization and foreign trade flows, political factors, corruption level etc.

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

Blanchard, O. (2003), Macroeconomics, Prentice Hall Dornbusch, R.l (2001), A Primer on Emerging Market Crises, Massachutes Institute of Tehnology Press Fischer, S. (2001), Exchange rate regimes: Is the bipolar view correct?, International Monetary Fund, Washington Kovačević Mlađen (2002), Međunarodne finansije, Ekonomski fakultet Beograd Kovačević Radomir (2010), Ekonomski odnosi Srbije sa inostranstvom, Ekonomski fakultet Beograd Miljković D. (2008), Međunarodne finansije, Centar za izdavačku delatnost Ekonomskog fakulteta, Beograd

www.bis.org (2004), Triennial Central Bank Survey 2004, Bank for International Settlement, Basel

www.nbs.rs

DETAILS ABOUT AUTHOR: OLIVERA BAIĆ TEACHING ASSISTANT UNION UNIVERSITY, FACULTY OF MANAGEMENT SREMSKI KARLOVCI, SERBIA oliverabaic@gmail.com

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THE IMPACT OF QUALITY ON CROATIAN MANUFACTURING SMEs PERFORMANCE TOMISLAV BAKOVIĆ TONĆI LAZIBAT INES SUTIĆ

ABSTRACT Quality management has been a key component of manufacturing industry competitiveness for several decades. This fact is equally important for big and small & medium enterprises but SMEs do posses certain uniqueness that needs to be considered. Investigating ways to increase SME competitiveness is especially important for post transition economies. In this paper the influence of basic quality principles on SME business results in manufacturing industry is considered. Paper starts with presenting the basic quality principles and then analyzes the role of SMEs in modern economies. Theoretical part of the paper also presents the results of previous research on the topic of quality vs. business results. The method used for research is a series of multiple linear regressions with business results measured by: productivity, quality, profitability and market share as dependent variables. Results show that some of the quality principles have much more effect on business results than others and these findings could be of great importance for SME quality managers. KEYWORDS: quality principles, SMEs, business results, manufacturing industry

1. INTRODUCTION Quality is often cited as being fundamental to firms business success (Zu et al. 2010) or a main precondition for the survival of companies especially in the manufacturing industry (Karim et al. 2008). This fact is even more pronounced by the process of globalization and rising international competitiveness. The manufacturing sector firms find themselves competing intensely with multinational and local companies for customers in both domestic and export markets (Singh & Smith 2004). Some of the pressures include competition from foreign products, rapid technological innovation and shorter product life, unanticipated customer shifts, and advances in manufacturing and information technology (Karim et al. 2008). To compete in the global market, companies in developing countries must also implement quality management practices, tools and techniques in all sections of their industries (Zakuan et al. 2010). The best indicator for the increased significance of quality in Croatian economy is the number of ISO 9000 certificates which has risen from 963 in 2004 to 2861 in 2010 (HR Survey 2011).

2. QUALITY PRINCIPLES DEFINED The quality management literature has shown that quality management is a multidimensional construct which encompasses multiple practices (Dean & Bowen 1994, Prajogo & Sohal 2004, Prajogo & McDermott 2005,).The implementation of TQM is accomplished through a set of practices that supports the TQM philosophy (Dean & Bowen 1994). Every quality expert has a list of his own quality principles. Although most of them emphasize the same content under different names with years the list has gotten longer and the position of key principles has also been changing. Practices that are considered crucial in this paper are cited by many quality experts and appear in different papers under different names (Hackman & Wageman 1995, Easton & Jarrell, 1998, Samson & Terziovski 1999, Douglas & Judge 2001, Talavera 2004, Sing & Smith 2004, Prajogo & McDermott 2005, Das, A. et al. 2006) they are: • Customer focus/ customer relationship • Management of people/employee involvement/TQM training/human resource management/ workforce management • Analysis of variability/use of information and analysis/management by fact/use of TQM methods/ quality information • Continuous improvement/ systematic improvement • Process improvement/process management/focus on work process • Leadership/top management involvement/top management support • Supplier relationship • Product design There are off course many other quality principles mentioned in the literature (Hackman & Wageman 1995, Easton & Jarrell, 1998, Samson & Terziovski 1999, Douglas & Judge 2001, Talavera 2004) but not used in this study because the primary aim of the paper was to investigate the real effect of key quality principles on SME performance and not to list

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all existing principles. Some of the non including principles are: • Strategic and quality planning • Cross functional management • Adoption of quality philosophy • Benchmarking • Workplace organization • Reward and recognition The general list of quality principles is often divided into groups of soft and hard principles (Gadenne & Sharma 2009; Lewis et al. 2006; Prajogo & McDermott 2005; Rahman & Bullock 2005) or mechanistic and organic practices (Prajogo & Sohal 2004). Soft principles emphasize the organizational and people side of quality management and use a variety of organizational development techniques to facilitate changes; some authors equalize soft practices with HRM practices (Rahman & Bullock 2005). Hard principles on the other hand are more concerned with the methodological and technical side of quality management and focus on using quality management tools and techniques to solve quality problems, including use of quality information, product/service design, and process management. When it comes to formalization, standardization, and centralization shifting the emphasis from hard to soft elements trough TQM should lead to low levels of these three variables. Many authors stress the importance of mixing soft and hard elements for the purpose of achieving positive business outcomes (Godenne & Sharma 2009; Shea & Howell 1998, Rahman & Bullock 2005).

3. THE RELATIONSHIP BETWEEN QUALITY AND BUSINESS PERFORMANCE Many authors question TQM as a source of sustainable competitive advantage (Powell 1995, Easton & Jarell 1998, Shea & Howell 1998; Samson & Terziowski 1999, Hendricks & Singhal 2001, Douglas and Judge 2001, Arawati & Ridzuan 2001, Kaynak 2003,) and each of them offers different key factors for the success of implementation, for instance: importance of tacit knowledge generated by individual organizations (Powell 1995), firm characteristics (Hendricks & Singhal 2001), organizational structure: control and exploration (Douglas & Judge 2001), lack of top management support or inability of companies to satisfy their employees (Kaynak 2003), organizational culture (Prajogo & McDermott 2005), management styles (Shea & Howell 1998) Kaynak (2003) supports the assumption of positive impact of TQM on company performance. Using the prices of stocks for companies that adopted TQM in the period from 1981 to 1991 Easton & Jarell (1998) found positive impact. According to a later study by Easton & Jarell (2001) the positive impact was stronger for smaller and less capital intense companies. One way of investigating the real effect of TQM was to examine the results of quality award winners and companies that did not won such an award (York & Miree 2004). Quality award winners were better in all categories but such situation existed even before they won the award so the real influence was this way questioned. However there are many researchers who did not find any positive relationship between TQM and performance (Martinez-Costa et al. 2009). According to Shea and Howell (1998), the preferred structure for organizations that implement TQM balances the need for control of activities with the flexibility needed to respond and adapt quickly to the changing marketplace. Quality is often characterized by emphasizing control and for this reason in conditions of insecurity or fuzzy goals its real influence on performance can be questioned (Dean & Bowen 1994). Some of the problems Hackman and Wageman (1995) found when it comes to measuring the influence of total quality management on company performance are associated with: linking the performance of a certain company unit to the overall company performance, presence of external factors that affect company performance and the problem of temporal lag between implementing TQM and measuring its effectiveness. In terms of TQM implementation in SMEs, although a number of studies have shown that small companies can adopt some of the aspects of TQM such as training, usage of quality tools and benchmarking as effectively as larger companies (Ahire and Golhar, 1996), a number of other researchers suggest that there are some barriers for SMEs to implement TQM effectively. Some of those barriers relate to cultural issues, management awareness, and financial and training related issues. There are authors who found a positive connection between quality principles and SME performance (Fening 2012, Karim et al. 2008). Idris (2011) found certain soft quality principles namely: leadership, best practices, productivity, customer, employee and community focus significantly improve company performance. On the other hand a combination of soft and hard elements is needed in to improve company performance according to Gadenne & Sharma (2009). Prajogo & Brown (2006) found a connection between quality principles and product characteristics on one side and TQM implementation on the other side. Islam and Karim (2011) also found SMEs to be way ahead of large companies when it

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comes to quality principles implementation. Quality practices in small to medium-sized enterprises (SMEs) helps them to sharpen their market focus, use their material and human resources more efficiently and improve their competitive positioning in the market (Godenne & Sharma, 2009). Karim et al. (2008) in their study of manufacturing industry competitiveness found quality & reliability to be ranked first together with company reputation. Even more their conclusion was that it was the same construct since companies can’t have a good reputation without quality & reliability. Islam and Karim (2011) on the other hand found that SMEs find quality & reliability as their first competitive weapon while larger companies find company reputation to be most important.

4. CROATIAN MANUFACTURING SMEs Small and Medium Enterprises (SMEs) are vital to economic growth especially in developing and transition economies (Miller, Besser and Mashe, 2007). In creating jobs, and developing new products and ways of doing business, SMEs add value to their economies and improve the quality of life of the people (Dobson et al., 2001). Thus their survival and success have both social and economic consequences for developing and transition countries (Miller, Besser, and Mashe, 2007). This may explain why many governments in the past used policies to protect SMEs from direct competition with large and multinational or foreign firms. However, due to globalization and liberalization over the past few decades, SMEs are no longer receiving adequate protection from direct competition with large and foreign firms (Zain and Ng, 2006). In order to respond to this rising competition SMEs need efficient ways of creating competitive advantages and this is where quality management comes into play. It is also generally considered SMEs should be more innovative than their larger rivals due to the characteristics and simplicity of their business models. Tipuric and Galetic (1998) stated that SMEs are more flexible and more adaptable in their business behaviour than large companies and take business decisions much more quickly.

5. RESEARCH METHODOLOGY AND FINDINGS This section describes the questionnaire development and administration process along with the information about respondents. Measurement scales used in this study to measure quality principles were a combination of scales from Singh and Smith (2004) and Perdomo- Ortiz et al. (2006). A 7-point Likert scale was used, as: 1 = Strongly Disagree to 7 = Strongly Agree. The questionnaire was sent on the e-mail addresses of 3000 companies from Croatian manufacturing industry in December 2009. The addresses were randomly selected from the internet address http://www1.biznet. hr/HgkWeb/do/extlogon which contains all the companies classified in Croatian manufacturing industry according to national classification of activities (NKD 2007). The Manager responsible for quality systems implementation, Quality Manager, or Production Manager was requested to complete the questionnaire. After one month and three rounds of sending the questionnaire 263 answers were collected out of which 210 were valid and came from SMEs.1 Table1. offers a brief overview of quality principles in Croatian manufacturing SMEs. It is possible to notice Croatian SMEs find “customer relationship” to be the most important quality principle while “human resource management” is considered least important (mean). When it comes to scale reliability (Cronbachs alpha) all constructs were valid except for “supplier relationship” and therefore this construct was omitted from further research. Table 1. Descriptive statistics and internal consistency analysis for quality principles Construct

Mean

Variation coefficient (%)

Number of items

Deleted number

Cronbach’s alpha

Soft/hard principle

Top management support

5.37

1.15

21.41

0.76

Quality information

5.08

1.41

27.75

0.81

Process management

5.37

1.23

22.90

0.82

Product development

5.30

1.15

21.69

0.74

Human resource management

4.94

1.25

25.30

0.77

Supplier relationship

5.03

1.18

23.45

0.64

Customer relationship

6.12

0.90

14.70

0.84

Continuous improvement

5.32

1.23

23.12

0.89

H Source: Authors

To filter the results the criterion of number of employees was used and all the enterprises in the sample had less than 250 employees.

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Overall according to data from table1 soft quality management principles scored an average grade of 5.36 while hard practices scored an average of 5.26. This indicates Croatian manufacturing SMEs find soft and hard quality principles to be equally important. Before interpreting the results of multiple regression analysis several comments have to be made. First of all it was especially interesting to test the influence of each quality principle on business results and therefore a series of four multiple linear regressions were made. Second all the assumptions of multiple linear regression were satisfied, namely: linearity, multicolinearity, homoscedasticity, autocorrelation and normality (Field, 2005). In the process of checking outliers’ normality several cases had to be removed as outliers so in the end the final sample size was 205 cases. There are a couple of main conclusions that can be drown from this research. When analyzing the influence of quality principles on business results in general it can be said that the quality principles do explain a certain amount of variance in performance indicators. Quality was influenced the most and market share & profitability the least. R2 shows us 20% of variance in quality can be explained by quality principles while this percentage for market share and profitability is only 9%. The second question to be answered is which of the variables included in the model contributed to the prediction of dependent variable the most either in positive or negative way? These are the answers to this question:

•

The first dependent variable was “productivity” and only one the quality principle showed statistically significant positive influence. It was: “top management support”. The results for productivity can be interpreted as: an increase in top management support by one standard deviation would cause autonomy to rise by 0.220 standard deviations. The second dependant variable analyzed was “quality”. In this case both “product development” and “customer relationship” had significant influence. The positive beta values were 0.291 and 0.175. The third dependant variable analyzed was “profitability”. In this case an increase of one standard deviation in “top management support” would cause profitability to rise by 0.017 standard deviations. The results for “market share” showed an increase of one standard deviation in “top management support” would cause market share to increase by 0.249 standard deviations.

• • •

Table 2.Summary of regression analysis Dependent variable

Model significance

Significant independent variables (p < 0.05)

Beta

Productivity

0.10

0.005

Top management support

0.220

Quality

0.20

0.000

Product development Customer relationship

0.291 0.175

Profitability

0.09

0.017

Top management support

0.235

Market share

0.09

0.022

Top management support

0.249 Source: Authors

6. CONCLUSION AND RESEARCH LIMITATIONS The results of this paper support the findings of other authors (Godenne & Sharma 2009; Shea & Howell 1998, Rahman & Bullock 2005) who found that both soft and hard quality principles are needed for raising SME performance. In this case “top management support” and “customer relationship” are considered as soft elements while “product development” can be considered as a hard element. The main conclusions from this study can be summarized as follows: • First the real influence of quality principles on manufacturing SME performance is actually very low. This is evident for all four business result categories since only a small proportion of variation in results can be accredited to quality principles. The only exception is quality but again even higher result than 20% was expected here. One of the key questions for future research would be to investigate what are the problems in quality systems implementation in SMEs? • Second only three out of eight quality principles demonstrated significant influence on manufacturing SME performance. They were: top management support, customer relationship and product development. • Third the role of soft and hard quality principles in Croatian manufacturing SMEs is the same. This can be supported by average grade of all principles and with results from the regression analysis. • There are three key limitations to this paper that need to be addressed by future research. First of all research should be encompassing service SMEs as well because a clear distinction between products and services is very vague in recent times and this problem is not adequately solved by Croatian national classification of activities (NKD 2007). Second a factor analysis of quality principles taken from previous research should be undertaken to

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see which one of them really apply to Croatian manufacturing SMEs. And third there is a clear need for taking the existence of formal quality management system into account together with the time of its existence. This would also allow us to check how effective the implementation of formal quality management systems really is.

LITERATURE 1.

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Arawati, A. Ridzuan, S, M. (2001), The structural relationship between total quality management, competitive advantage and bottom line financial performance: an empirical study of Malaysian manufacturing companies, Total Quality Management, Vol. 12, No. 7&8, pp. 10181024

Das, A., Paul, H. and Swierczek, F.W. (2006),˝A measurement instrument for TQM implementation in the Thai manufacturing industry˝, International Journal of Innovation and Technology Management, Vol.3, No.4, pp. 361-377.

Dean, J. W. Jr. and Bowen, D. E. (1994), ˝Managing theory and total quality: improving research and practice through theory development˝, Academy of Management Review, Vol. 19 No. 3, pp. 392–418.

Douglas, J. T. and Judge, W. Q. (2001), ˝The Quality Management Implementation and competitive advantage: The role of structural control and exploration˝, Academy of Management Journal, Vol. 44, No. 1, 158-169

Easton, G. S. and Jarell, S. L. (1998),˝The Effects of Total Quality Management on Corporate Performance: An Empirical Investigation˝, The Journal of Business, Vol. 71, No. 2, 253-307.

Fening, F. A., (2012), Impact of Quality Management Practices on the Performance and Growth of Small and Medium Sized Enterprises in Ghana, International Journal of Business & Social Science, Vol. 13, pp. 1-14

Field, A. (2005), Discovering Statistics Using SPSS, Sage Publications, 2E, London.

Gadenne, D., Sharma, B., (2009), An investigation of the hard and soft quality management factors in Australian SMEs and their association with firm performance, International Journal of Quality & Reliability Management, Vol. 26, No. 9, pp. 865-880

10. Hackman, J. R. and Wageman, R; (1995), ˝Total Quality Management: Empirical, Conceptual and Practical Issues˝, Administrative Science Quarterly, Vol. 40, pp. 309-342 11. Hendricks, K. B., Singhal, V. R., (2001), Firm characteristics, total quality management and financial performance, Journal of Operations Management, pp. 269-285 12. HR Survey 2010, (2011), Croatian Quality Association, Osijek 13. Idris, F., (2011), Total Quality Management (TQM) and sustainable company performance: Examining the relationship in Malaysian Firms, International Journal of Business and Society, Vol. 12, No. 1, pp. 31-52 14. Islam, M., Karim, A., (2011), Manufacturing practices and performance, International Journal of Quality and Reliability Management, Vol. 28, No. 1, pp. 43-61 15. Karim, M. A., Smith, A. J., Halgamuge, S., (2008), Empirical relationship between some manufacturing practices and performance, International Journal of Production Research, Vol. 46, No. 13, pp. 3583-3613 16. Kaynak, H. (2003), ˝The relationship between total quality management practices and their effects on firm performance˝, Journal of Operations Management, Vol. 21 No. 4, pp. 405-435. 17. Lewis, P. G., Pun, K. F., Lalla, T., (2006), Exploring soft versus hard factors for TQM implementation in small and medium sized enterprises, International Journal of Productivity and Performance Management, Vol. 55, No. 7, pp. 539-554 18. Martinez- Costa, M., Martinez- Lorente, A.R., (2008), Does quality management foster of hinder innovation ? An empirical study of Spanish companies, Total Quality Management, Vol. 19, No. 3, str. 209-217 19. Miller, N.J., Besser, T. and Malshe, A. (2008), ˝Strategic Networking among Small Businesses in Small US Communities˝, International Small Business Journal, Vol. 25, pp. 631. 20. Perdomo-Ortiz, J. Gonzales-Benito, J. Galende, J. (2006), Total quality management as a forerunner of business innovation capability, Technovation 26, pp. 1170-1185. 21. Prajogo, D. and McDermott, C. M. (2005), ˝The relationship between total quality management practices and organizational culture, International˝, Journal of Operations & Production Management, Vol. 25. No. 11, pp. 1101-1122. 22. Prajogo, D., Brown, A., (2006), Approaches to Adopting Quality in SMEs and the Impact on Quality Management Practices and Performance, Total Quality Management, Vol. 17, No. 5, pp. 555-566 23. Prajogo, D.I. and Sohal, A.S. (2001) ˝TQM and innovation: a literature review and research framework˝, Technovation, 21, 539-558. 24. Prajogo, D.I. and Sohal, A.S. (2004) ˝The multidimensionality of TQM practices in determining quality and innovation performance - an empirical examination˝, Technovation, Vol. 24, pp. 443-453. 25. Prajogo, I.P. and Sohal, A.S. (2006) ˝The integration of TQM and technology/R&D management in determining quality and innovation performance˝, Omega, Vol. 34, pp. 296-312. 26. Rahman, S. and Bullock, P. (2005), ˝Soft TQM, hard TQM, and organizational performance relationships: an empirical investigation˝, Omega, pp. 73-83. 27. Samson, D. and Terziovski, M; (1999), ˝The relationship between total quality management practices and operational performance˝, Journal of Operations Management, Vol. 17, pp. 393-409. 28. Shea, C. M. Howell, J. M. (1998), Organizational Antecedents to the Successful Implementation of Total Quality Management: A Social Cognitive Perspective; Journal of Quality Management, Vol. 3, No.1, pp. 3-24 29. Singh, P. J. Smith, A. J. R. (2004), Relationship between TQM and innovation: an empirical study, Journal of Manufacturing Technology Management, Vol. 15, No. 5, pp. 394-401 30. Small Business Management, 34(2), 1-11.

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31. Talavera, G. V. (2004), ˝Development and validation of TQM constructs: The Philippine Experience˝, Godjah Mada International Journal of Business, Vol. 6, No. 3, pp. 335-381. 32. Tipuric, D.; Galetic, L. (1998), “Strategic issues of small firms in a trasition economy – an empirical study”, available at: www.sbaer.uca.edu/ research/1998/ICSB/g001.htm 33. Zain, M. and Ng, S. I. (2006), ˝The impacts of network relationships on SMEs’ internationalization process˝, Thunderbird International Business Review, Vol. 48, No. 2, pp. 183–205. 34. Zakuan, N. M. Yusof, S. M. Laosirihongthong, T. Shaharoun, A. M. (2010), Proposed relationship of TQM and organizational performance using structured equation modeling, Total Quality Management, Vol. 21, No. 2, pp. 185-203 35. Zu, W., Robbins, T. L. Fredendall, L. D. (2010), Mapping the critical links between organizational culture and TQM/Six Sigma practices; Int. J. Production Economics, 123, pp. 86-106 DETAILS ABOUT AUTHORS: TOMISLAV BAKOVIĆ ASSISTANT PROFESSOR FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF ZAGREB ZAGREB, CROATIA tbakovic@efzg.hr TONĆI LAZIBAT PROFESSOR FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF ZAGREB ZAGREB, CROATIA tlazibat@efzg.hr INES SUTIĆ ASSISTANT FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF ZAGREB ZAGREB, CROATIA isutic@efzg.hr

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HEALTH AND SPA TOURISM: TRENDS IN SOUTH TRANSDANUBIA IN ECONOMIC DEVELOPMENT AND QUALITY OF LIFE TERMS MÁRTA BAKUCZ ALEXANDRA FLINK ÁRON KOVÁCS

ABSTRACT Hungary has accessible thermal waters below 80% of its land area, and optimal development potential lies in remote, peripheral areas, a remedy for chronic regional disparities. South Transdanubia is an excellent example, with the sector prioritised due to its significant resources. Investment, however, has been weak, with a few resourceful spas challenging old-fashioned socialist-era relics. In the EU’s 2007–2013 planning period, accommodation-related projects do feature, but there continues to be a serious lack of quality accommodation. This is especially important in this field and without improvement it will be difficult to remain competitive. However, economic results are no longer the sole target; no longer can eco-unfriendly plants (e.g., chemicals) be built in beauty spots. Economic activity is needed, but not at any price. Terms such as Quality of Life (QoL) now appear in government policy in relation to both traditional industrial areas and also to favoured regions whose residents are concerned about their environment. The authors devised a focused survey among residents of Harkány, an established spa 25 km south of Pécs, famous for treatment of rheumatic disorders. On-line and paper-based multiple-choice surveys questioned the effects of the 2003 renovation of the bath. Responses showed that the QoL was not thought to have benefited. Results (economic, political) are analysed. KEYWORDS: spa-tourism development, regional disparities, quality of life N.B. This study and the integral survey were undertaken with financial assistance from the European Union’s Social Renewal Operational Programmes TÁMOP-4.2.1.B-10/2/KONV-2010-0002 and TÁMOP 4.2.2/B-10/1-2010-0029.

1. INTRODUCTION The study aims to show the growing significance of what we broadly term health-, spa- or thermal-tourism. The value of the sector is clearly evident, even on a global scale, and is fully recognised by the European Union. The spread of thermal waters across Hungary shows a potential for development away from main centres and into peripheral areas, clearly meeting the need to combat regional disparities. South Transdanubia is an excellent example of this and it is entirely logical that the Region should prioritise the sector in view of its significant natural resources in the field. It has, however, noticeably lagged behind other Hungarian regions in recent years in that there have been few investments – and those realised were uncoordinated, with the result that no overall improvement was visible. The attractiveness of a few active, resourceful spas contrasts with relics of the socialist era with old-fashioned facilities unchanged for years. However, from 2000 to the current planning period 2007–2013, national and EU funding for the development of accommodation and baths has supported several serious investments within Hungary. Overall, accommodation-related projects have received most support, and a relatively wide range of businesses have been accepted as meriting aid. In consequence, developments in the accommodation field should be the first to show results in the local economy. These will be based on an increase in visitor-nights and in increasing tourist tax revenue for local authorities, on a natural improvement in employment statistics and in general income in these regions through the demand for labour – both for construction work and for the subsequent operating activity.

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2. SPA AND THERMAL BATH POTENTIAL IN SOUTH TRANSDANUBIA When the project was commenced - in September 2011 - we planned to examine all 15 registered spas in the Region. Figure 1. Thermal and Medicinal Baths in South Transdanubia

Source: Dél-Dunántúli Regionális Fejlesztési Ügynökség „Gyógy és termálturisztikai stratégia fejlesztési irányainak meghatározása”,-Xellum, 2008.

2.1. Characteristics of the spas surveyed During the early stages we acquired data on 10, although it must be said that the general data were not always complete. In fact, that provided by the Central Statistical Office (CSO = KSH in Hungarian) were available only by county, with no data for individual establishments. Individual spas could not be identified. Some general data were available from the homepages of individual spas or from other internet sources, although there was no uniform method of presentation. The relative lack of progress compelled us to prioritise our plans for personal visits and these were accompanied by requests for interviews with management. Our experiences were at all stages curiously uneven, and this has played a role in our final thinking and, in consequence, in our conclusions. Table 1. South Transdanubian Spas Surveyed

Personal interview

Year Opened

Latest development (year)

Harkány

1824

2003

Magyarhertelend

n. a.

2011

n. a.

Siklós

2010

Sikonda

Szigetvár

2007

Barcs

2006

Csokonyavisonta

1950s

2006

Igal

1962

2010

Kaposvár

1968

2011

Marcali

2003

2010

Nagyatád

1907

2006

Sellye

Siófok

2006

Dombóvár

1973

2006

Tamási

1973

2011 Source: Authors’ own construction

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Table 2. Category of Spas The Category of the Spa Medicinal Harkány

Csokonyavisonta

Igal

Nagyatád

Kaposvár

Thermal

Leisure Pool

Swimming Pool

Children’s Swimming Pool

Strand

Other

Sikonda Szigetvár

Barcs

Marcali

Siklós

Magyarhertelend

X X

Source: Authors’ own construction based on data of Central Statistical Office (HCSO)

Table 3. The Physical Area of the Spas The Area of the Spas

Harkány

Water surface (1,000 m2)

Green area (1,000 m2)

136.3

92.4

Csokonyavisonta

Igal

Nagyatád

8.3

7.2

Kaposvár

Sikonda

n.a.

Szigetvár

24.7

21.6

Barcs

Marcali

Siklós

9.9

5.1

Magyarhertelend

3.048

2.1

Source: Survey 1054 (Spas) of the HCSO

The services available in individual establishments vary and this is bound to have its influence on the volume of traffic. These are listed here, followed by the names of spas which offer them continuously: • Sauna: Harkány, Csokonyavisonta, Igal, Nagyatád, Kaposvár, Szigetvár, Barcs, Marcali, Siklós and Magyarhertelend, • Medical screening: Harkány, Csokonyavisonta, Igal, Nagyatád, Kaposvár, Szigetvár and Barcs, • Medical treatments, balneotherapy, hydrotherapy: Nagyatád, Kaposvár, Szigetvár and Barcs, • Mechanotherapy: Nagyatád és Barcs, • Electrotherapy: Harkány, Nagyatád, Kaposvár, Szigetvár and Barcs, • Reflexology: Harkány, • Wellness-treatment: Harkány, Kaposvár, Szigetvár, Siklós, Marcali and Barcs. It is clear, therefore, that the spas do offer some variety of services, but it must also be acknowledged that they are, in fact, quite similar. There is no regional overview of services and so individual spas are often in direct competition with each other, with little to distinguish one from the other.

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Table 4. Data for Visitors to South Transdanubian Spas Visitors per year

Number of treatments

Ticket Sales

Spa

Total

Visitors supported by OEP1

Total

Treatments supported by OEP

Tickets

Season Tickets

Barcs

162,223

1,855

83,795

892

Csokonyavisonta

66,158

11,496

23,115

49,779

Harkány

596,653

7,742

116,429

431,082

23,653

Igal

110,000

8,000

80,000

62,000

105,000

1,978

Kaposvár

200,000

28,000

110,000

138,000

9,800

Magyarhertelend

55,766

52,704

100

Marcali

63,389

52,404

899

Nagyatád

87,312

11,115

69,727

65,184

30,110

745

Siklós

120,000

143,559

11,642

63,638

60,429

143,559

Sikonda Szigetvár

Source: Survey 1054 (Spas) of the HCSO

The greatest number of visitors (Table 4.) target the Medicinal spa in Harkány, which has the highest international reputation among the spas of the region. The Harkány spa has 600,000 visitors per year, whilst the numbers of visitors annually to the spas in Csokonyavisonta, Marcali, Nagyatád and Magyarhertelend are each below 100,000. This is due to a smaller area and capacity in the case of Magyarhertelend and Nagyatád, but the major problem for Csokonyavisonta is the lack of modernisation, which itself is due to a basic lack of resources. This spa has one of the most highly evaluated thermal waters in Hungary, but the spa as a whole seems obsolete when compared to those of Barcs and Nagyatád. This was very evident at the time of our personal visit and interview. The spa in Marcali has a larger area than the average among those examined, but the number of visitors remains well below that of visitors to the Kaposvár establishment (ca 200,000). The spas in Barcs, Igal, Kaposvár, Siklós and Szigetvár are visited by between 100,000 and 200,000 per year. Numbers at Barcs are quite surprising, since it is very little larger than the smallest in the region (Magyarhertelend), but Barcs does have over 100,000 more visitors per year. One reason for the advantage might be that the spa in Barcs was opened earlier (and so is better known), but the likeliest explanation is the location of the spa which encourages a relatively large number of foreign visitors. Barcs is situated close to the Hungarian-Croatian border and so there are many Croatian visitors. Further, the spa in Barcs is one which offers medical screening and treatment. Health services in the spas are provided by medical specialists which makes the local treatment of medical cases possible. Treatments are carried out in their own Medical Centre or with additional input from other Medical Institutes. The government Health Insurance Fund (HIF) has in the past contracted with spas to support Medical treatments, but only if the spa had a pool, operated in a closed field and if the supplier had a licence for at least four medical spa treatments of the supported services.2 Those spas are supported by the HIF which have a contract with them. The spas supported, according to our survey, are: Harkány, Csokonyavisonta, Igal, Nagyatád, Kaposvár, Szigetvár and Barcs. The next table shows the proportion of HIF-supported visitors and of the supported treatments in the supported spas. Table 5. Proportion of supported visitors and treatments (%)

1 2

Spa

Supported visitors (%)

Supported treatments (%)

Barcs

1.14

Csokonyavisonta

17.38

Harkány

1.30

Igal

7.27

77.50

Kaposvár

14.00

100.00

Nagyatád

12.73

93.48

Szigetvár

8.11

94.96

Source: Survey 1054 (Spas) of the HCSO

OEP = National Health Insurance Fund According to the webpage of the National Health Insurance Fund

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The data show clearly (Table 5.) that the proportion of supported treatments is high. For example, all treatments are supported by the HIF in the Kaposvár spa. The lowest proportion is found at Igal, but it is remarkable to note that most of the medical treatments are supported in the contracted spas. The level of support given for simple bathing falls below that for the treatments supported. The water temperature in those spas using medicinal and thermal water is important from the point of view of medicinal treatment. The temperature of both (mineral and thermal water) is termed ‘excellent’ in Csokonyavisonta and ‘remarkable’ in Igal. All the spas examined extract their own medicinal and thermal waters, and none use ‘imported’ water. Some spas use delivered water, but only for drinking or other specialised purposes. The quantity of water used or required depends on the number of pools, on the total water surface area, on the operating depths of water in individual pools and on the performance of the water rotating system. The Harkány spa leads in this respect also. The total of 16 pools have a gross water surface area of 8,250 m2, which means that the spa as a whole needs 16,000 (sixteen thousand) m3 of water to fill the pools. Table 6. The number of pools in the individual spas Number of pools Medicinal

Children

Swimming

Strand

Leisure

Relaxation3

Other

Total

Barcs

Csokonyavisonta

Harkány

Igal

Kaposvár

Magyarhertelend

Marcali

Nagyatád 1.

Siklós

Szigetvár

Source: Survey 1054 (Spas) of the HCSO

It is clear that the more types of pool found means that the spa’s ‘supply’ sector is more complex. There are four spas in the South Transdanubian Region with, as can be seen in Table 6 a complete variety of pools: Harkány, Igal, Kaposvár and Szigetvár4. The spas in Barcs, Csokonyavisonta, Magyarhertelend, Marcali and Siklós are “quasi-complex” since they are almost complete in respect of pool services. The spas in Kaposvár and Harkány have significantly more pools than the other spas. The Kaposvár spa has 21 pools, and there are 16 in Harkány. A spa’s overall size can, perhaps, be best characterised by its “simultaneous capacity”, and the merits of the spas are more easily differentiated if we analyse values by this particular variable. When analysing other variables, it was relatively easy to group spas, but ‘simultaneous capacity’ cannot be used as a grouping variable due to the significantly different values of the spas. We can rank the spas according to the analysed data, and we can see in this way how the South Transdanubian spas relate to each other in terms of size, number and category of pools and so on – as in Table 7. The first three ranking values are obtained by ranking three types of data, the fourth value shown being the sum – the aggregated value – of these (the figures having been rounded off).

3 4

Water temperature: over 34°C The ’other’ category is lacking, but there is a complete range of pools.

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Table 7. The ranking order of spas Number of pools

Water surface

Capacity

Sum

Barcs

Csokonyavisonta

Harkány

Igal

Kaposvár

Magyarhertelend

Marcali

Nagyatád 1.

Siklós

Szigetvár

8 Source: Survey 1054 (Spas) of the HCSO

When we rank the spas according to their size, one interesting issue arises: is there a significant relationship between the size and the number of visitors? To examine this we used MS Excel’s Correlation method, and this produced the following values: Table 8. Correlation analysis Number of pools

Water surface

Simultaneous capacity

Number of pools

Size of the water surface

0.88

Simultaneous capacity

0.55

0.87

Visitors

0.58

0.89

0.99

Visitors

Source: Survey 1054 (Spas) of the HCSO

From this (Table 8.) we can see that there is an almost deterministic relationship between simultaneous capacity and visitor numbers, and so we can conclude that the number of visitors is high in those spas with a greater capacity. Further, there is a strong relationship between visitor numbers and the size of the water surface area: hence, bigger pools - more visitors. The one variable which has a relatively weak relationship with the others is that of the actual number of pools in any spa.

2.2. Spa-related tourist accommodation in South Trandanubia The availability of good quality accommodation is clearly important for a thriving health and thermal tourism industry. Other forms of tourism may find basic accommodation acceptable – even appropriate!– but the very nature of Spas and Spa Tourism means that visitors will not be attracted on a long-term basis without a degree of comfort at least as high as their own home standards. To prove this, we examined the number of beds in commercial accommodation, with an emphasis on the number of beds in hotels, the visitor turnover of hotels and their capacity utilisation over the last five years. Statistical data since the change of regime show that the touristic position of the Region is in decline; it is falling behind its competitors, and Regions with a more disadvantaged situation (e.g., the Great Hungarian Plain) could overtake South Transdanubia. The reasons for this slippage are the lack of developments envisaged which could attract FDI and a neartotal lack of investment in hotels. More specifically, there is almost no high-quality accommodation (four- and five-star hotels) in the Region. The decline was aggravated by the traditional, popular destinations - the spas such as Harkány – have lost much of their reputation, whilst new touristic products have not yet developed turnover. In short, there are no touristic products in the Region currently able to attract serious visitor numbers. Paralleling this is the sombre fact that the Southern shore of Lake Balaton (by Hungarian standards, a traditionally busy destination) is continuously losing its popularity with foreign visitors. Although some regional products have gained a degree of prestige (the country’s first Wine Road, the ECoC programme in Pécs and new baths), there is no significant effect on turnover. The reasons must

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include poor infrastructure, a peripheral location and the lingering effects of the Yugoslav Wars. Table 9-1. Number of beds in commercial accommodation, 2007-2011 Year 2007

Year 2008

Year 2009

Year 2010

Year 2011

Hungary

314,742

302,889

301,873

311,490

304,087

South Transdanubia

56,626

53,527

50,398

56,141

42,899

Harkány

4,147

4,228

2,932

1,657

1,843

Magyarhertelend

428

216

370

220

Sellye

125

150

275

104

282

Siklós

122

Szigetvár

451

670

Barcs

Csokonyavisonta

532

282

548

376

699

Igal

443

475

437

428

382

Kaposvár

875

792

953

731

630

Marcali

Nagyatád

586

509

184

Siófok

14,041

13,467

12,633

12,400

10,456

Dombóvár

691

686

379

373

Tamási

334

331

295

325

Table 9-2. Number of beds in commercial accommodation, 2012 January-April 2012 January

2012 February

2012 March

2012 April

Hungary

184,793

185,519

192,683

230,117

South Transdanubia

17,202

17,207

18,536

26,685

Magyarhertelend

Sellye

292

Harkány

2,155

2,168

2,376

2,479

Siklós

Szigetvár

203

224

Barcs

Csokonyavisonta

714

712

Kaposvár

531

620

Marcali

Nagyatád

189

Siófok

2,817

3,341

6,331

Dombóvár

416

346

342

Tamási

125

Igal

Source: HCSO - edited by Alexandra Flink

Analysing the trends in the spa sector individually, we see a significant (40%) growth over the last five years in the Region’s most important spa, Harkány, for which the reason is a huge accommodation-, bath- and hospital development project. However, in percentage terms, the largest change was in Csokonyavisonta where the 2011 figure was almost five times that of 2007.

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Table 10 below shows the absolute numbers behind the percentages. The dominance of Harkány and Siófok shows once more (with, respectively, 1,434 and 5,092 hotel beds in 2011). Table 10-1. Number of beds in hotels, 2007-2011 Year 2007

Year 2008

Year 2009

Year 2010

Year 2011

Hungary

114,227

115,669

118,420

123,518

129,082

South Transdanubia

18,436

17,490

17,307

16,528

14,735

Harkány

1,010

1,111

1,286

1,348

1,434

Siklós

Szigetvár

124

Csokonyavisonta

158

Igal

Kaposvár

269

290

260

210

Marcali

Nagyatád

175

164

Siófok

7,224

6,613

6,691

6,608

5,092

Dombóvár

103

Table 10-2. Number of beds in hotels, 2012 January-April 2012 January

2012 February

2012 March

2012 April

Hungary

115,778

117,133

119,629

124,907

South Transdanubia

10,355

10,534

11,304

12,692

Harkány

1,301

1,314

1,406

1,442

Siklós

Szigetvár

149

Csokonyavisonta

170

Kaposvár

210

270

Marcali

Nagyatád

164

Siófok

2,755

3,279

4,141

Dombóvár

402

332

328

Dombóvár

103 Source: HCSO - edited by Alexandra Flink

At national level, visitor turnover in commercial accommodation rose until 2008. There followed a slight decrease before it again reached the 2007 level - mainly due to an expansion in domestic tourism. However, foreign visitors were fewer. Not only is the overall number of visitors to the Region in decline, but the Region’s actual share of national turnover is behaving likewise. The number of foreign visitors staying in Hungarian commercial accommodation grew since 2000, albeit unevenly, but post-2007 the national figures fluctuate. Ten years ago foreign visitors exceeded domestic visitors, but since 2002 domestic tourism has dominated and has continued to grow. The territorial distribution of foreign visitors is highly concentrated, and recently this characteristic has further developed. The Central Hungary Region (especially Budapest) is the most attractive destination for foreigners among the Hungarian statistical regions. South Transdanubia has suffered the greatest loss, with the number of foreign visitors decreasing continuously since 2007. At regional level, Harkány has suffered most. Here, the decline in foreign visitors started at the time of the dissolution of the Eastern Bloc and has simply continued. The realignment of visitors by ‘sending country’ is especially remarkable. For many years pre-1990, German families separated by Wall or Curtain were able to meet on holiday in Hungary (conveniently and economically). This culminated in the dramatic events of the late summer of 1989. Post-1990, however,

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the number of German visitors (from both East and West Germany) declined and the leading position was assumed by Czech visitors, although, of course, in much smaller numbers. The number of overnights shows similar trends in the shape of the number of beds in hotels, specifically, stagnation at national level and a significant plummeting (28%) in the South Transdanubian Region. In respect of Harkány, tourist arrivals did not follow the major investments in accommodation, and, in fact, the number of overnights actually declined by 20% between 2007 and 2011. The number of overnights increased significantly in Dombóvár-Gunaras (150%) and, slightly, in Szigetvár (32%) thanks to high-quality hotel services. The most radical slippage in hotel-based overnights is seen in Siklós (where numbers for 2011 were only 17% of those for 2007). This problem may be alleviated in the near future by the completion of a hotel building project. A dramatic downturn was experienced in connection with overnights in Igal (33%), in Kaposvár (42%) and also in Nagyatád and Siófok. Their values in 2011 were respectively 53% and 36% of the values of 2007 (HCSO 2012). Further, 2011 HCSO data lead us to conclude that the rate of decline in overnights was lower at national level than at regional. The decrease was more intense than that of visitors to the Region, and so the average length of stay clearly declined. Again this can probably be explained by the upsurge in domestic tourism. The growth in commercial overnights can be seen in those places where the number of visitors rose – for example, in Szigetvár and Dombóvár. The number of overnights decreased remarkably in Barcs and Siklós, probably due to a lack of quality accommodation, which would deter visitors to the new, very modern baths from staying. A new four-star hotel, with direct access into the bath, opened in Spring 2012. Interestingly, the financing and management of the 45-room Thermál Spa Hotel, Siklós, is Aquaplus Kft., who are also the long-term, contractual operator of the bath (itself owned by the local authority). Building operations of the hotel in Barcs were suspended due to the impossibility of obtaining a bank loan; this was possible only by selffinancing. The same problem occurred in Marcali, in Somogy County. Even though Igal and Csokonyavisonta have medicinal water of outstanding quality, they are also struggling with a similar lack of quality accommodation. A meaningful rise in tourist arrivals and overnights can only be achieved by quality hotel development. Day visitors to a spa’s facilities are, of course, hugely important, but one of the basic features and advantages of Spa-Tourism is surely its ability to attract the ‘longer-stay’ visitor. The number of domestic visitors has become more important over the past few years. In respect of overnights, the figures for domestic and international tourists were very similar, as is also the case at national level. However, the number of international overnights decreased more in the Region than in the country as a whole, which is, unfortunately, unique in relation to Hungarian regions. This can be explained by the declining popularity of Lake Balaton among foreigners and the deteriorating performance of the Baranya County centre, Pécs. Whilst the national hotel room-occupancy rate was 44.6% in 2010, the figure for the Region showed only 34.9% (see Table 11). Among the reasons lies the Region’s deteriorating socio-economic situation, which can also have a negative influence on touristic appeal. This weakening appeal is also due to a lack of harmonisation in developments and the increasing attraction and accessibility of the Adriatic coast. At the same time, the positive effects of the new M6/M60 motorway which opened in March 2010 have, as yet, been unable to counter these negative factors. The occupancy rate decreased slightly between 2007 and 2010 both over the whole country and in the Region, although a moderate improvement could be seen in South Transdanubia from 2009 to 2010 - explained by the European Capital of Culture programme in Pécs in the latter year. The reason for the blank spaces in the table is the new statistical law. Under the terms of the new regulation the HCSO cannot provide turnover data on any settlements which have fewer than three establishments in the same accommodation category.

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Table 11. Occupancy rate, 2008-2011 Room occupancy rate (%) (Hotels)

Bed occupancy rate (%) (Hotels)

2008

2009

2010

2011

2008

2009

2010

2011

Hungary

48.5

43.1

44.6

46.5

37.3

33.6

35.1

34.9

South Transdanubia

37.8

34.3

34.9

31.6

29.7

27.2

27.7

24.3

44.5

37.8

34.5

37.5

30.7

28.9

22.5

19.9

22.3

12.2

12.5

43.9

42.6

41.5

33.5

34.3

33.1

Magyarhertelend Sellye Harkány Siklós Szigetvár Barcs Csokonyavisonta Igal Kaposvár Marcali Nagyatád Siófok Dombóvár

33.9 33.1

25.8 30.8

Tamási Source: HCSO - edited by Alexandra Flink

The wide distribution of thermal and medicinal waters throughout Hungary has led to the term ‘Thermal Hotel’ being widely used to describe hotels which are attached to, or incorporate, spa facilities. They are, on the one hand, orthodox hotels, but they also offer associated in-house medical treatments of varying levels of sophistication under qualified medical supervision. Their formal categorisation is conditional on a government inspection and certification process. The number of such ‘Thermal Hotels’ grew from 55 to 62 between 2007 and 2010 over the whole of Hungary (HCSO 2012). The 12% growth, however, is slightly illusory since most of the increase was the result of a reclassification of hotels (mainly from the “other hotels” category).South Transdanubia was the home to only four of the national 62 Thermal Hotels in 2010, and of the four, three are found in the Region’s most important spa, Harkány. Moreover, by 2012 it is expected that all such establishments in South Transdanubia will be located in Harkány only – and will be merely three in number. This follows the withdrawal of formal recognition from the fourth. This number is disappointingly low when compared to both national and regional statistics, and can still not be called competitive. The number of beds in Thermal Hotels in the Region did, in fact, rise, with more than 14,000 guests spending more than 41,000 nights in these establishments. Based on this, the average length of stay is not quite 3 days - a little below the length expected, as tourists in this sector generally spend more time on treatments. On the other hand, the total numbers of visitors, of foreign visitors, of overnights and of international overnights all declined in the Region (HCSO 2012). In 2010, 91.5% of South Transdanubia’s Thermal Hotel guests lodged in Harkány, and 92% of the overnights were also spent there. This shows the lack of quality accommodation in the Region as a whole.

2.3. The Quality of Life issue Most spas are attractive places both to visit and to live in – with commuters and the retired finding the latter particularly convenient. South Transdanubia in these terms offers us one outstanding subject for examination – Harkány, by far the most significant settlement in this category. The town, quite simply, has no future outside the Spa/Medicinal Bath sector. The appropriate assets are almost all in place for success in the field, but otherwise there is nothing and, in view of the town’s peripheral location no serious potential in any alternative field. The town - which essentially means its residents – needs to accept this and adapt itself totally to it. The National Development Strategy embraces a Medicinal Bath Development Programme, and this is planned to lead to a significant expansion of capacity, even in settlements where the demand of the local and regional population is unable to ensure the economic operation of the Bath, should tourism in the region not reach the required level. Harkány does, of course, in theory meet all of the requirements for concentrated development as a true centre of national or even transnational (cross-border) significance. However, the

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extent to which a town believes in itself and the level of satisfaction with its achievements and its potential are most important issues which need to be addressed and, if needed, nurtured. Local recognition that ‘life is good’ and that this is because of the town’s character as a spa town is a highly desirable base for a long-term development philosophy, concept and programme. This is why we considered it useful to show the Bath-visiting habits of Harkány’s residents. Considering the strong correlation between Health and the Quality of Life (Michalkó & Rátz, 2011) the intensive use of the Medicinal Bath should contribute to the general well-being of the local population and symbolise their commitment to the future of their community. 89.6% of respondents claimed to have visited the Medicinal Bath at least once since it was opened in 2003. Residents of Harkány who had never paid a visit (10.4%) blamed high prices for deterring them. Residents who do visit the Bath usually go at a frequency depending on the season (see Table 12). The proportion of non-users is higher in the season between October and April (17.0%) than in the season between May and September (5.6%). The usage of the Bath is more intense in the summer season; the proportion of local residents who use the Bath monthly or even more frequently is higher between May and September than between October and April. The biggest difference can be seen in the group of weekly visitors; 22.5% of these respondents visited the Bath in the summer season but only 9.1% went regularly in the winter season. From the higher proportion of monthly (or more frequent) visitors in the summer season, we can conclude that the residents of Harkány also prefer to go to the Bath when the weather conditions are good. Table 12. The frequency of visiting the Bath among local respondents (%) Frequency

In season (May-September)

Out of season (October-April)

Total

Never

5.6

17.0

Once every 6 months

9.0

19.3

Once every 2/3 months

19.1

28.5

Monthly

28.1

15.9

Weekly

22.5

9.1

Once every 2/3 days

10.1

7.9

Daily

5.6

2.3 Source: own research (n=297)

As most of the Baths built or modernised from resources provided by the Széchenyi Plan, the Harkány Bath also became a multifunctional establishment offering services to all generations. The Medicinal Bath has both indoor and outdoor pools, one part of which also operates during the winter season although the outdoor pools only operate during the summer. The Bath complex offers a wide range of year-round services and, according to the establishment’s policy, every age group can find a part of the Bath to satisfy their specific needs, and those parts can also be used separately. The outdoor Bath (77.9%), the Medicinal Bath (66.3%) and the swimming pool (57.7%) are the most popular of the facilities. These are used by at least half of the residents who visit the Bath. The adjacent hospitality units are used by 45.3% of the locals. Pools with relaxation facilities are also in demand, as are saunas (each 31.4%). Beauty treatment (solarium, hairdressing salon and beautician) and therapeutic services (e.g. massage), the complementary services, are of limited interest to locals, 31.6% of whom received financial assistance from the social security system when using the Medicinal Bath. The respondents evaluated Bath services as 3.1 on a 1-5 scale – in other words, a mediocre grading.

3. CONCLUSIONS In order to show the connection between Hungarian Health and Wellness tourism and the Quality of Life, we first examined the national picture from a tourist point of view prior to undertaking varied research in a Bath settlement. The research conducted in Harkány mainly targeted the nature of the connection between the locals and tourism, its effect on the subjective quality of life and the opinions and attitudes concerning the Bath development. The modernisation of the Bath in 2003 had little effect on demand, although there was a positive impact on the quality

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of the hospitality units. The increase in traffic also slowed due to the economic crisis of 2008. The Health Tourism investments focusing on the Bath had little impact on the residents’ quality of life, explained by the investments inability to boost the local economy, to create jobs and also by the modest usage of the Bath by local residents. Their subjective judgment of their own health shows that usage of the Bath cannot in itself create a Quality of Life higher than the county average. The residents of Harkány are aware of the importance of the traffic generated by visitors; the demand in itself improves the general feeling, but the real beneficiaries of tourism who enjoy a higher Quality of Life are in a minority. In fact, these outcomes support the national results, whilst they also show that, although Harkány is regarded as famous by locals, this is not enough to improve their everyday Quality of Life. They consider the QoL of Budapest or Pécs to be higher than their own, but they feel that the Bath gives them a higher Quality of Life than that of the neighbouring micro-region. Locals use the Bath (as well as tourists) mainly in the summer and do not take advantage of the quieter winter season. Apart from the use of the pools, therapeutic and beauty treatments are in low demand (due to their high prices). This may be a reason for the perceived lower Quality of Life. Harkány is a Bath settlement where the Bath complex in itself cannot improve the Quality of Life in the settlement. As a result – even as an ‘indicative-only’ product – this is a somewhat disappointing conclusion to offer. Nevertheless, the authors contend that universally growing interest in health matters will almost certainly mean that the health tourism sector will suffer somewhat less in any recession than the more general, traditional forms of tourism. As the fundamental aim of the Regional Development Operative Programme is to facilitate the balanced development of the Regions and to reduce disparities, the issues of regional distribution and the local effects of successful tourism development applications related to the Measures merit further research. The basic conclusion of this review of tourism as a factor in improving the economic potential of South Transdanubia is that a much higher level of competitiveness could be achieved, given the current potential of spa tourism, although support from funds allocated to tourism infrastructural development remains necessary. In this current paper analysing the tourism opportunities in South Transdanubia we have essentially tried to prove that, based on the recognised potential of thermal tourism, the general economic performance capacity of regions can be improved and their competitiveness increased with the help of appropriate tourism policy and funds spent on the development of tourism infrastructure. Our research produced certain basic conclusions and at the same time issues for further discussion:

•

In Hungary, problems related to the availability and accessibility of complete data cause difficulties in exploring the condition of the medical baths, and, consequently, in creating an insight into their performance, but even the database of the Hungarian Central Statistical Office hampered our extraction of data on individual baths. There is an official form of the HCSO directed at the collection of data in this field, but it gives a far-from-complete picture. It is, in fact, impossible to detect which spas provided data and which are not included in the aggregated results at county level. This makes it extremely difficult to comprehend, analyse and compare data at local and regional level. Collecting and sharing commercial data among the stakeholders would provide new opportunities for developmental cooperation within the sector. Networking and clusterisation would co-ordinate and support marketing activity among the spas as a whole, would help to organise further training, find market niches and facilitate unique, specific development opportunities for all spas of the region For this process, the continuous provision of data would be in the common interest of all parties involved. Unfortunately, however, even though excellent and positive examples such as the TourMIS scheme. Developed and pioneered in Austria and propagated by European Cities Marketing, the concept has proved and is proving outstandingly successful. However, as we mentioned earlier, genuine cooperation (especially if openness and data are involved) is not easy to find in the cultural climate of Hungarian business. To provide higher profit in the South Transdanubian medicinal spa segment it is essential to establish quality accommodation facilities preferably directly attached to the baths themselves – since separately operating and maintaining and progressively developing medicinal baths are rarely profitable. High quality, four-star (even five-star) hotels physically connected to the spas with differentiated supplementary services would attract the type of visitor needed – demanding, sophisticated, with above-average PDI (Personal Disposable Income) and, perhaps, with not too much pressure from time, to the region. The so far exclusive involvement of local authorities (as ‘owners’ of the waters) in running and operating the spas is considered to be a major problem as, in most cases, this results in the lack of expert, innovative and profit-centred management. The reasons for this can be seen very clearly in inadequate business experience and expertise and in inefficient operational practice. The lack of funds is also a general problem which blocks the development of the spas even in providing the self-financing part of EU development projects. The local authority-related management has, in most cases, had a negative influence on planning development. The risk of fundamental change to the eco-

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nomic direction due to the four-year election cycle is a further problem as is the failure to understand (as mentioned earlier) the need for co-operation by the individual local authorities. All of these factors hamper any movement towards regionally harmonised decision-making in respect of development. The new modified Local Authority Law will obviously bring about some changes in the field of medicinal spas as operated by local authorities, but what these changes may involve is, as yet, unpredictable.

LITERATURE 1. 2. 3. 4. 5.

Dél-Dunántúli Regionális Fejlesztési Ügynökség „Gyógy és termálturisztikai stratégia fejlesztési irányainak meghatározása”,-Xellum Kft. (Determination of Development Direction of Health and Thermal Tourism Strategy. Xellum Report. S. Transdanubian Regional Development Agency). 2008. Harkány QoL Survey Results 2011. In: Michalkó, G. – Bakucz M. – Rátz T. Examination of relationships between tourism and residents’ quality of life: The case study of Harkány the Mecca of rheumatism in Hungary (Unpublished paper, 2012). Michalkó, G. - Rátz, T. 2011: Egészségturizmus és életminőség Magyarországon–Fejezetek az egészség, az utazás és a jól(lét) magyarországi összefüggéseiről. MTA Földrajztudományi Kutatóintézet, Budapest. South Transdanubian Spa and Thermal Baths (authors’ interviews with bath managers) 2011. Source of the applied database: Hungarian Central Statistical Office’s website www.ksh.hu.

DETAILS OF AUTHORS: MÁRTA BAKUCZ PHD ASSOCIATE PROFESSOR E-mail: bakucz@ktk.pte.hu ALEXANDRA FLINK PHD STUDENT E-mail: flinxandra@gmail.com ÁRON KOVÁCS PHD STUDENT E-mail: aronkovac@gmail.com ALL AUTHORS: INSTITUTE OF ECONOMICS AND REGIONAL STUDIES FACULTY OF BUSINESS AND ECONOMICS, PÉCS UNIVERSITY PÉCS, HUNGARY

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COMPARISONS OF COMMODITY AND EQUITY MARKET DUŠAN BARAN MARTIN RANUŠA

ABSTRACT The results of the development of science and technology in the field of information technology, significantly affected the trading on the financial markets. Trading on world stock exchanges are essentially continuously. Time intervals of these trading are carried out by the microseconds. Information necessary to trade in financial and commodity exchanges, are freely available to the general public. On the basis of the investment process, in addition to institutional investors in may, involved also small investors and population. In the article, deal with comparing the commodity and stock market. The comparison is processed from the point of view of performance of the stocks and commodity futures and correlation between them. KEYWORDS: Commodity market, commodity exchange, investors, derivates, futures, commodity index, volatility, comparison, liquidity, precious metals, agriculture, exchanges, inflation.

1. INTRODUCTION The revolution in information technology has significantly changed the method and system of trading on all world stock exchanges. Trading on the stock exchange floor using the human voice, businessmen running around in colourful suits, waving arena cards, is becoming a thing of the past and is being replaced by computer systems. These processes take the form of receiving, processing, matching, negotiating and settling trades. At the same time there is regulation and supervision of the financial markets. The electronization of stock exchanges has thus dominated and closely linked stock markets around the world. It allows all-day 24-hour trading from anywhere in the world. We have also recorded the emergence of new financial products such as financial derivatives and ETF, and on the other hand it also enables the spreading of a pessimistic mood quickly.

2. CHICAGO MERCANTILE EXCHANGE Chicago Mercantile Exchange (CME) is the world’s largest and most diverse exchange, trading with a wide range of commodity derivatives, futures contracts and options on interest rates of foreign currency, energy, agricultural commodities, indices, metals, and other alternative instruments such as weather and real estate. Since 2008, CME Group is the common operator of Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMEX) and its COMEX Division. Since 2000 there has been a large increase in trading volumes on the financial derivative exchanges. In the last ten years, global growth rate has increased over the previous year by 30% in 2003, by 9% in 2004, by 12.5% in 2005, by 19% in 2006, by 31% in 2007, by 14% in 2008 and by 0.12% in 2009.1 Table 1. shows the evolution of the volume of trades on financial derivatives stock exchange in the past ten years. Table 1. Development of the volume of trades on financial derivatives stock exchanges in the past ten years

Source: Futures Industry Institute. Trading Volume Statistics. [online], 2001-2011 [cit. 2011-01-31]. Available in WWW: <http:// www.futuresindustry.org/volume-.asp>.

CME Group [online]. 2010 [cit. 2010-12-28]. Available in www.cmegoup.com/trading/agricultural/grain-and oilseed/corn_contract_specifications.html

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Table 2. shows the twenty largest stock exchanges ordered by volume of trading futures. Table 2. The twenty largest stock exchanges ordered by volume of trading futures

Source: Futures Industry Institute. Trading Volume Statistics. [online], 2001-2011 [cit. 2011-01-31]. Available in WWW: <http:// www.futuresindustry.org/volume-.asp>.

3. COMMODITY AND EQUITY MARKET When we compare financial instruments, equities and commodities, we must state that commodities are still considered an unknown group of assets, although they have been stock traded for hundreds of years. This may be caused by the fact that the commodity futures are absolutely different from equities, bonds and other conventional assets. “The stock is a security representing a share in ownership of the joint stock company. The joint stock company issues shares to raise capital for its establishment or the development of its activities.”2 The economic function of commodity futures is not as for corporate securities, to raise external resources for business investment, but rather commodity futures are derivative securities that allow firms to obtain security for their future outputs and inputs.3

3.1. Comparison of return on shares and futures For a comparison of share returns and commodity futures we used the study Fact and Fantasies about Commodity Futures of Yale International Center for Finance by the authors Gary B. Gorton and K. Geert Rouwenhorst.4 In this work the authors created a weighted average commodity profitability index for the period from June 1959 to March 2004, to compare commodities as investment assets. The authors chose as the source of data for this research the database Commodities Research Bureau, which included the daily prices of individual futures contracts. The authors added data from the London Metals Exchange to it. This index was then compared with the stock index S&P 500 Total Return Index (Stocks) and the index of Ibbotson Corporate Bond Total Return Index (Bonds). In Figure 1. we can see that for the past 45 years the average annual return on investment in commodity futures has been comparable to shares, which were however of slightly higher volatility. Both shown assets however exceeded bonds in returns. This implies that the investments in commodities are not riskier than investments in real estate, stocks or bonds.

SVOBODA, M. How to Invest or the Anatomy of Stock Market Lies (in Czech), 2nd ed. Brno : CP Books, 2005, p. 198., p. 18, ISBN 80-251-0527-X. BARAN, D. Capital Market and Corporate Finances (in Slovak), Publ. House STU Bratislava, 2003, 169 pp., ISBN 80-227-1856-4. 4 Yale School of Management. Published Papers [online]. 2011 [cit. 2010-11-21]. Available in WWW: <http://faculty.som.yale.edu/garygorton/published_papers.html>. 2 3

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In figure 1 we can see the comparison of stock, commodity and bond index. Figure 1. Comparison of stock, commodity and bond index

Source: Yale School of Management. Published Papers [online]. 2011 [cit. 2010-11-21]. Available in WWW: <http://faculty.som.yale.edu/garygorton/published_papers.html>.

3.2. The correlation of commodity futures with stocks When we make the correlation of commodity futures and stocks we can state that the return on investments in commodities are negatively correlated with equity returns and bonds. The main reason is the fact that equities and commodities behave differently during the investment cycle. Figure 2. shows the individual phases of the investment cycle. Figure 2. The phases of the investment cycle

Source: Authors from, Yale School of Management. Published Papers [online]. 2011 [cit. 2010-11-21]. Available in WWW: <http://faculty.som.yale.edu/garygorton/published_papers.html>.

Figure 2. shows the individual phases of the investment cycle, divided into particular sections. Based on the study Fact and Fantasies about Commodity Futures, equities and commodities recorded during over 1959 to 2003 a similar return of 10.8% to 10.5%. Surprisingly, equities and commodities followed a similar trend also in the phase of expansion and recession. S&P 500 Total Return Index showed an average return of 13.29%, weighted commodity index showed a return of 11.84% in the expansion phase and in the recession phase, the average monthly returns of the S&P 500 Total Return Index of 0.51% and in the commodity index 1.05%. From this comparison, the investments in equities and commodities seem to be very similar. An important difference occurs in the situation where the different phases of economic cycle are divided into two parts. During the Early Recession phase, the stock return is negative - 18.64%, on the other hand, the

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commodity futures return is positive +3.74%.5 Table 3 shows the return of stocks, bonds and commodities in different phases of the investment cycle. Table 3. Return of stocks, bonds and commodities in different phases of the investment cycle

Source: Yale School of Management. Published Papers [online]. 2011 [cit. 2010-11-21]. Available in WWW: <http://faculty.som.yale.edu/garygorton/published_papers.html>.

The theory of the stated cycles is also confirmed by the study The Inflation Cycle of 2002 to 2015 by the authors Barry Bannister and Paul Forward,6 who have created an analysis of growth equity and commodity markets since 1880. It results from this analysis that over the past one hundred and thirty years, equities and commodities in the USA alternate in leading the market on average every eighteen years (18-year cycles), which also corresponds to deflationary and inflationary cycles. Commodities thus can be considered as one of the few asset classes which positively correlate with inflation. In figure 3 of the growth equity and commodity markets we see growing lines representing declining inflation where equity return exceeds commodity returns. Falling lines indicate rising commodity prices. Simultaneously, the inflation rises and commodity returns exceed equity returns. For the past 130 years, three bull commodity markets shifted on the market, each lasting on average eighteen years. The first bull period was in 1906-1920, the second in 1933-1948 and the third in 1968-1982. We can thus state that at present we are in the fourth commodity growth trend. If we accept the theory of repeating history, the recent growth trend should last to 2014 or 2020. Figure 3. shows an analysis of growth equity and commodity markets in the USA since 1880 Figure 3. Analysis of growth equity and commodity markets in the USA since 1880

Source: War, Legacy Debt, and Social Costs. [online]. 2003. [cit. 2011-01-11]. In WWW: <http://www.rcgai.com/articles/InflationPressures.pdf>. Yale School of Management. Published Papers [online]. 2011 [cit. 2010-11-21]. Available in WWW: <http://faculty.som.yale.edu/garygorton/published_papers.html>. 6 War, Legacy Debt, and Social Costs. [online]. 2003. [cit. 2011-01-11]. In WWW: <http://www.rcgai.com/articles/InflationPressures.pdf>. 5

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Figure 4 shows development of inflation since 1880. Figure 4. Development of inflation since 1880.Figure 5 shows development of the S&P index

Source: War, Legacy Debt, and Social Costs. [online]. 2003. [cit. 2011-01-11]. In WWW: <http://www.rcgai.com/articles/InflationPressures.pdf>.

Figure 5 shows development of the S&P index. Figure 5. Vývoj indexu S&P 500

Source: Secular Bull and Bear Markets. [online]. 2011 [cit. 2011-01-07]. In WWW: <http://dshort.com/articles/SP-Composite-secular-bull-bear-markets.html>.

From the interpretation of Figures 3, 4 and 5, and Table 4. it is clear that stocks and bonds negatively correlate with inflation. This implies that commodities are thus good protection against inflation. With rising inflation, stock and bond returns fall and vice versa, and commodity futures always positively correlate with inflation. In connection with this,

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with rising inflation, commodity futures returns rise. We can state that inflation thus positively influences commodities in all fields. Based on the interpretation, in Figure 6 is shown the correlation of stocks, bonds and commodity futures with inflation in terms of time horizons. Figure 6. Correlation of stocks, bonds and commodity futures with inflation in terms of time Horizons

Source: Authors from, Commodity Correlations [online], 2009 [cit. 2011-01-13]. Available in WWW: <http://www.marketoperation.com/index.php?option=com_contentview=articleid=121Itemid= 119eec86572714ce954078ce954078c219351033410=5a548b23da5e0357abe09528ce1c01a5>.

If we look at the penultimate commodity boom over 1968-1982, it is clear that commodity prices experienced rapid growth. Many of the commodity prices reached their historic price maximums in this period. But after every boom comes a decline - failure and this period was no exception. To distinguish individual cycles we use the investment bubble graph, see Figure 8. In Figures 6 and 7 for the prices of gold and oil there is a commodity bubble in the 80s, followed by a rapid fall of commodity prices. Figure 7 shows the comparison of gold and oil prices, Housing Index and the Nasdaq stock index in 1980. Figure 7. Comparison of gold and oil prices, Housing Index and the Nasdaq stock index in 1980

Source: Authors from U.S. Business Cycles. [online]. 2011 [cit. 2011-02-13]. In WWW: <http://www.thumbcharts.com/ series/us-business-cycle-graphs-1913-2011>.

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Figure 7 shows the comparison of gold and oil prices, Housing Index and the Nasdaq stock index inindex in 2000. Figure 7. Comparison of gold and oil prices, Housing Index and the Nasdaq stock index in 2000

Source: Authors from, U.S. Business Cycles. [online]. 2011 [cit. 2011-02-13]. In WWW: <http://www.thumbcharts.com/ series/us-business-cycle-graphs-1913-2011>.

Figure 8 shows the interpretation of investment bubbles comparison. Figure 8. Comparison of investment bubbles.

Source: Authors from, U.S. Business Cycles. [online]. 2011 [cit. 2011-02-13]. In WWW: <http://www.thumbcharts.com/ series/us-business-cycle-graphs-1913-2011>.

All these theories are also confirmed by the behaviour of gold precious metal. Figure 8 shows the performance of gold since July 2002 against three of the biggest bubbles in the past 40 years. When we make an analysis of the process of the previous bubbles, we can see strong but steady growth in the first seven to eight years, before they got into a hypergrowth phase lasting about eighteen to twenty-four months. According to the interpretation in Figure 8, in the current boom under the condition of repeating bubbles the price of gold could reach USD 3,000/ounce.

4. CONCLUSION The results of technical developments in the information technology area have significantly influenced trading on financial markets. Trade on world stock exchanges is performed continuously, and individual trades in micro-second time intervals. Information about trading on stock exchanges as well as off-exchange markets and price movements is available to the general public. The preconditions for participation in the investment process are thus met for institutional investors, as well as for small investors and citizens. In the article I analysed the history of trading with commodities, stocks and bonds. From the processed analysis, we submit generalizations and development assessment suggestions in individual segments of the financial market.

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LITERATURE 1.

Baran, D. (2003.) Capital Market and Corporate Finances (in Slovak), Publ. House STU Bratislava, 2003, 169 pp., ISBN 80-227-1856-4.

Jílek, J. (2002.) Financial and Commodity Derivatives (in Czech), 1st ed. Prague : Grada, 2002, 623 p. ISBN 80-247-0342-4.

Nesnídal, T., Podhájský, P. (2007.) Trading in Commodity Markets (in Czech), 2nd rev. ed. Prague : Grada, 2007, 200 pp. ISBN 80-247-1851-0.

Rogers, J. (2008.) Hot commodities (in Czech), 1st ed. Prague : Grada, 2008. 240 pp. ISBN 978-80247- 2342-6.

Jílek, J. (2009.) Stock Markets and Investing (in Czech), 1st ed. Prague: Grada, 2009. 656 pp. ISBN 978- 80-247-2963-3.

Svoboda, M. (2005.) How to Invest or the Anatomy of Stock Market Lies (in Czech), 2nd ed. Brno : CP Books, 2005, p. 198.ISBN 80-251-0527-X.

Williams, L. (2008.) Complete Guide to Commodity Trading (in Czech), Prague : Centre of Financial Education , 2008. 277 pp. ISBN 97880-9038742-3.

Oxford Futures [online]. 2010 [cit. 2010-12-20]. Available in WWW: <http://www.oxfordfutures.com/history.htm>.

Interactive Brokers [online]. 2010 [cit. 2010-12-28].Available in WWW: <http://www.

interactivebrokers.com/en/p.php?f=exchangesEdu>.

10. CMEGroup[online]. 2010 [cit.2010-12-28].Available in WWW 11. <http/:www.cmegoup.com/trading/agricultural/grain-and oilseed/corn_contract_specifications.html>. 12. Financnik.cz.Více očtení grafů(More about Reading Diagrams-in Czech)[online],209[cit.2010-12-31].Available in WWW: <http://www.financnik. cz/komodity/manual/komodity-grafy-zdarma.html>. 13. U.S.Commodity Futures Trading Commission. Market Reports.[online], 2011[cit. 2011-03-01]. Available in WWW: <http://www.cftc.gov/dea/ futures/deacbtsf.htm>. 14. Financnik.cz. Základní typy příkazů (Basic Types of Orders-in Czech) [online], 2009 [cit. 2010-12-31]. Available in WWW: <http://www.financnik. cz/wiki/obchodni_prikaz>. 15. Futures Industry Institute. Trading Volume Statistics. [online], 2001-2011 [cit. 2011-01-31]. 16. Available in WWW: <http:// www.futuresindustry.org/volume-.asp>. 17. Yale School of Management. Published Papers [online]. 2011 [cit. 2010-11-21]. Available in WWW: <http://faculty.som.yale.edu/garygorton/ published_papers.html>. 18. Secular Bull and Bear Markets. [online]. 2011 [cit. 2011-01-07]. In WWW: <http://dshort.com/articles/SP-Composite-secular-bull-bear-markets. html>. 19. War, Legacy Debt, and Social Costs. [online]. 2003. [cit. 2011-01-11]. 20. In WWW: <http://www.rcgai.com/articles/InflationPressures.pdf>. 21. U.S. Business Cycles. [online]. 2011 [cit. 2011-02-13]. In WWW: <http://www.thumbcharts.com/series/us-business-cycle-graphs-1913-2011>. 22. Commodity Correlations [online], 2009 [cit. 2011-01-13]. Available in WWW: http://www.marketoperation.com/index.php?option=com_content view=article&id=121&Itemid= 119&eec86572714ce954078ce954078c219351033410=5a548b23da5e0357abe09528 ce1c01a5>.

DETAILS OF AUTHORS: DUŠAN BARAN PROFESOR, DIPLOM. ING., PH.D., SLOVAK UNIVERSITY OF TECHNOLOGY IN BRATISLAVA, FACULTY OF MATERIALS SCIENCE AND TECHNOLOGY IN TRNAVA, SLOVAKIA dusan.baran@stuba.sk, MARTIN RANUŠA UNIVERSITY OF CENTRAL EUROPE IN SKALICA, SLOVAKIA martin.ranusa@gmail.com, The contribution was written within the framework of a research project VEGA 1/1109/12 on “Indicators for evaluation of the proprietary, financial and income situation of business subjects in globalization conditions”.

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SPECIFICS OF MARKETING STRATEGY IN THE SEGMENT OF HIGH FASHION RUŽICA BUTIGAN ALICA GRILEC KAURIĆ DARKO UJEVIĆ

ABSTRACT The success of high fashion designers is not only in a specificity of the products but also in specific and very well executed marketing strategy. Emphasis is placed on the design of very specific marketing program and marketing strategies that must concider all the characteristics of the high fashion market. Therefore, a scientific research problem is defined as follows: although the market of high fashion at first glance does not imply a completely different marketing approach than other fashion market, its needs are quite specific and require specific marketing program and strategies. The subject of research was to explore all the specifics of high fashion marketing program, and to define marketing strategies due to experts opinions. The paper used secondary and primary data sources (conversations / interviews with experts in the field of clothing industry). The scientific methods that were used are: the method of analysis and synthesis, inductive and deductive methods, methods of proof and disproof, description method and the method of compilation. This paper presents SWOT analysis of the high fashion industry and fulfills the research objectives - defines specific marketing programs on the market of high fashion and proposes marketing strategies that are prerequisite to the successful functioning of the high fashion market. KEYWORDS: high fashion, marketing strategies, marketing mix

1. INTRODUCTION Profitable strategy for fashion industry is in directing effort on “emphasizing the exclusivity” of their products (Amaldoss & Jain, 2005, p 40). High fashion industry success results depend on possibility to deliver their products, satisfy their very demanding customers (Brun et al., 2008, p 568), capability to “keep the fashion good exclusive” (Kort et al., 2006, p 1369) and not to be available to mass market. Factors that contribute to luxury fashion brand success are (Moore & Birtwistle, 2004. p 421): defined brand positioning (Bridson & Evans, 2004,p 410), coordinated distribution strategy, brand reputation created via media (Završnik & Mumel, 2007, p 15), flexible foreign management approach. Numerous studies have analyzed fashion marketing program (Anic et al., 2008; Quinn et al., 2007; Završnik & Mumel, 2007; Knezevic, 2006; Kotler & Keller, 2006; Vigniali et al., 2006; Moore & Fairhurst, 2003; Birtwistle et al., 1998; Gašović, 1998; Marinac, 1997; Drvar, 1993) and fashion marketing strategies (Easey, 2009; Grilec Kauric, 2009, Okonkwo, 2007; Quinn et al., 2007; Moore & Fairhurst, 2003; Newman & Patel, 2003; Murphy, 1998). However, there is a lack of researches of a specific marketing strategy for high fashion industry. As part these issues, a scientific research problem is set up: although the market of high fashion at first glance does not imply a completely different marketing approach than other fashion markets, their needs are quite specific and require specific marketing strategies. Aim of this paper is to analyze specifics of marketing program in a segment of high fashion, and to define the marketing strategy proposed by Croatian fashion experts, which would provide success in high fashion industry marketing.

2. Haute couture theoretical framework The word couture is French word for fine, custom dress design, made to measure for a particular customer. Haute couture is the most exclusive couture and its characteristic is the best design and the highest quality of fabrics and performance. Construction of haute couture apparel usually takes weeks and only a few hundred women can afford to buy an haute couture. Designers (for example: Chanel, Gucci, Escada) introduced the concept of semicouture – or special order. In semicouture concept customers obtain semi-fitted apparel at lower price than haute couture (Stephens Frings, G., 2008, p 186-188). If designer wants to be a part of haute couture in Paris, he has to be a member of Federation Francaise de la Couture. Membership is very expensive, it is based on high standards of performance and other special conditions.

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Based on these facts about haute couture or high fashion, it is possible to set the following research objectives: Ad 1: Investigate specific marketing programs on the market of high fashion. Ad 2: Explore and define marketing strategies that are prerequisite to the successful functioning of the high fashion market.

3. Literature review 3.1. High fashion market characteristics Until the early twentieth century fashion market was the domain of the upper class of society (kings, queens, aristocrats and other important people). Fashion was part of elite world and it served to show off wealth and position of elite group above average people. Over the time, textile and clothing market have become an international network of supply and demand. Today’s fashion market is open to everyone due to the development of technology, availability of media, cultural change and increasing globalization. The greatest impact of the media began in the early 70-ies of the twentieth century, when a variety of fashion books and magazines became available to people, allowing them to create their own fashion style (Easey, 2009, p 18,19.). Observing the product dimension of high fashion market it can easily be said that there is a low degree of substitution between the market segment of luxury fashion products and market segments of other fashion products, while all the products within the segment of high fashion are interchangeable (Melin, 2002, p 20.). High fashion market is divided into different business segments (Okonkwo, 2007,p 131): clothing, leather goods and fashion accessories (shoes, belts, handbags and wallets), fragrances and cosmetics, watches and jewelry, sunglasses and other business segments that fall into the luxury goods (wines and spirits, textiles, gifts, hair accessories, furniture, stationary, home decoration, etc.). If we take geografical dimension of high fashion market in consideration, it can be divided in three geografical areas: USA, Europe and Asia, and five big world towns which are considered as capitals of high fashion industry: Paris, Milan, London, New York and Tokyo (Easey, 2009, p 28). According to a study conducted in Greece (2005) the reasons for buying products of high fashion are “the status and image” and “product quality” (Kamenidou, I. et al, 2007, p 157). Main characteristic of high fashion market is demanding and knowledgeable customer, focused high-end marketing, elite sales channels and also unquestionable quality product (Vignali et al, 2006, p 81).

3.2. Specifics of high fashion marketing mix Specifics of fashion marketing are express through the features and characteristics of the marketing mix that is defined as: “combination of product, pricing, distribution and promotion that in the greatest extent meet the needs of consumers” (Bratko et al, 2001, p 279). High fashion industry product Fashion products are designed to meet the needs of consumers that can be functional (for example, the need for glasses due to low vision) or intangible dimension to highlight a social statue (eg. the need for wearing glasses with the Dior logo) (Okonkwo, 2007, p 129). Luxury fashion items are often result of emotional, psychological and social benefits arising from the purchase of high fashion products that represent status symbols of prestige, wealth and influence in society of its customers. The most important characteristics of the product in fashion industry are design, product quality, product range, price, brand, and other characteristics such as brand image, packaging, sales service, etc. (Grilec Kauric, 2009 from Drvar, 1993, p 223). Six elements that characterize the luxury fashion products are (Hines & Bruce, 2007. from Dubois et al, 2001): excellent quality, high cost, shortage and uniqueness, aesthetics and sensuality, inheritance and personal history and excess. Other specific features of luxury fashion products are attractive, soundful and creative names that fashion designers provide for their products. Price of high fashion industry product High fashion brands have low relationship functionality for the price and the high ratio of intangible and situational uses for the price. Prices are much higher than the price of a product with similar material characteristics, but high quality and intangible properties of the high fashion products justify the high price. High fashion brands adopt the strategy of determining high-priced products in order to emphasize the high quality, exclusivity, brand image and differentiation from other

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brands at the mass market. Target group of high fashion products is not price sensitive, and for such products is expected premium price rather than determining the economic pricing (Okonkwo, 2007, p 141). Distribution of high fashion industry product Designers of high fashion products use exclusive and selective distribution channels. Selective distribution involves more than one agent, but still not every agent who wishes to distribute the product, and when the exclusive distribution is chosen, there is only one or several intermediaries who have the exclusive right to sell their goods (Samanovic, 2009, p 132). Participants in high fashion industry are aware of the advantages offered by e-commerce as a distribution channel, as well as introducing a system of data management and monitoring of clients, its consumption and analysis of purchasing habits. Promotion of high fashion industry product Communication between high fashion brand product and consumer is carried out through the media, respected fashion magazines, sponsoring the most visited world famous events, and placing the product on exclusive places (Hines & Bruce, 2007, p 142.). Promotional assets and means of communication in high fashion industry include (Okonkwo, 2007, p 145): advertising, sales promotion, personal selling, public relations, Internet, direct marketing, sponsorship and Celebrity Endorsement. Public relations in high fashion marketing are important to highlight the fashion products in the fashion magazines on fashion shoots, in the editorials etc. (for example: anti-fur movement Stella McCartney). Sponsorships are often encountered in the industry of high fashion (for example, Louis Vuitton has sponsored a group of young artists). Celebrity Endorsement ensures credibility through the brand known and regarded personalities that complement particular brand with their continuous and lasting attractiveness. (Okonkwo, 2007, p 154,155,157). The risk of this collaboration is the reliance on the character of the celebrities. There are Internet sites as well, as means of promotion that are used in high fashion industry (Marciniak and Bruce, 2004).

3.3. Fashion marketing strategy Marketing strategy can be defined as fundamental framework that includes current and planned objectives, exploitation of enterprises resources, and interacts between enterprises and market, competition and other factors of the environment (Renko, N, p 16, from Walker et al 1996). Fashion marketing strategy is defined as a business philosophy that deals with current and potential customers of clothing, as well as products and services that are directly related to textiles and clothing in order to achieve long-term objectives, and differs from other areas in which marketing operates (Easey, M., 2009, p 7).

4. Future of haute couture marketing development 4.1. Research methodology Secondary and primary data sources were used in this paper. Sources of secondary data include foreign and domestic literature: books, scientific journals in marketing and textile and apparel industry, specialized business magazines, databases and Internet. Bibliography is on topic of marketing, apparel and fashion industry. Research that includes experts (in the field of clothing and fashion industry) was carried out In primary research. The sample werw experts that included experts from the fashion industry in Republic of Croatia. As a type of research, investigative research was used. In-depth interviews were conducted with 10 experts in the field of high fashion industry in Republic of Croatia and they answered the following questions: • What are the main features of high fashion market? • What are the components of specific marketing program in high fashion? • What are the prerequisites for successful high fashion marketing strategy? • What would be the ideal marketing strategy in high fashion? • What are the critical factors in high fashion marketing strategies?

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In the period between December 2011 and January 2012 in-depth interviews with Croatian experts in the field of high fashion were conducted. In-depth interviews were chosen for the purpose of deep, extensive and detailed analysis of this problem and for better understanding of specific marketing programs and strategies applied in high fashion industry. This type of interview allows flexibility, while respondents are unrestricted and free in their answers (Tkalac Vercić et al., 2010, p 108). When analyzing the data obtained content analysis was used. Profiles of experts who participated in the quantitative research can be found in Table 1. Table 1. Description of sample Interviews Experts from the Faculty of Textile Technology

Experts from other fashion educational institution

Experts from the fashion companies with experience in high fashion industry

Source: Authors

4.2. Research results 4.2.1. Specifics of marketing programs in high fashion market Taking into consideration the history of the emergence of high fashion, it can be concluded that high fashion has always represented the inaccessible clothes for “ordinary people”. As such, it acts on a specific market, and it is characterized by an exclusive product, a very high cost, specific promotions and exclusive distribution. Specifics of high fashion market Expensive in the making - from choice of textiles to production, perfect style and creative perfection that carry the name of fashion brands and their top creators. Customers are mainly secret and do not like to expose themselves to the media. According to the answers of respondents, currently popular high-fashion markets are Russia, Japan and China. Customers are characterized by love for luxury features, and includes jet-set, actors and nobility. Table 2. Specifics of high fashion market Specifics of high fashion market 1.

Small and limited market, there is not much creations - small quantities of products, small selection of potential buyers.

Meeting of an extremely costly and unique products and rich customers.

High fashion market is declining, it is becoming dominant confection production.

There is a lack of buyers of high fashion products and market is declining.

An elite market that is reserved for customers with higher purchasing power.

A very small market.

The need to create a high fashion as pret-a-porter destroyed high fashion in its true sense, and it no longer exists, it extincts.

The market of high fashion provides customer specific quality of the product and status symbol by a specific brand name of the product.

Pressure and desires of potential customers to immediately have a finished product, puts high fashion in new market framework - where it is impossible to produce a real product of high fashion.

10. Intended for the high purchasing power consumers. Source: Authors

Specifics of high fashion products High fashion product is associated with high quality workmanship and quality materials. These are special types of silk, lace, hand-woven fabrics, printed exclusive unique designs, as well as installation of precious or semiprecious stones. One respondent stated that the product of high fashion is “a sculpture that wraps around the body, without the aesthetic and technical errors”. It belongs to the peak of artistic expression that can provide the designer who creates. Products of high fashion are hard to reach and visually attractive and therefore interesting to a large crowd. In high fashion, there is no production numbers; product is adjusted to the person/buyer. It is unique because it is made for a particular body.

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Table 3. Specifics of high fashion products Specifics of high fashion products 1.

Expensive fabrics, unique products, research in the pattern and model, may not be wearable, but artistically; a lot of manual labor.

Quality, originality, uniqueness.

The handiwork of craftsmen is included; the product is intended for a specific person and is made of luxurious fabrics.

Is generally only one time wearable - made for a special occasion and a particular person.

Haute couture clothes are tailored and sewn to measure, exclusive character.

This is a sculpture that wraps around the body, and must not have any aesthetic or technical error. It belongs to the peak of artistic expression that can provide the designer who creates.

Product of high fashion is associated with high quality. These are special types of silk, lace, hand-woven fabrics, printed exclusive unique designs, until the installation of precious or semiprecious stones.

Exclusivity is in the fact that such clothing cannot be bought by everyone are this clothing is different from industrially mass-produced clothing. Materials used in making it, are expensive and high quality.

Very expensive product from the emerging and selection of specific types of textiles to minucioze production, authentic style, creative and perfection that carry the name of fashion houses and their top creators.

10. Haute couture is exclusive clothing for special occasions that are made by certain fashion houses. Clothes are sewing manually which provides character of creation originality. Source: Authors

Specifics of high fashion prices In high fashion, high costs of products are necessary, partly because of the costly manufacturing and materials involved in making, and because of the image of fashion houses that produce high fashion products. High proportion of manual labor and uniqueness is one more reason for high costs. Materials used in construction, like lace, are handmade and therefore their prices are extremely high. Table 4. Specifics of high fashion prices Specifics of high fashion prices 1.

Extremely high - because of the tendency everything to be unique.

Equivalent quality; the name of the creators is paid.

Very high.

High but acceptable to extremely wealthy customers who buy it.

The price includes the name of the designer, depends as famous designer is, price of materials (which are expensive), and service production that is customer-specific.

Expensive production and materials justify the high price.

Extremely high price justified by very expensive materials.

Price is determined by the design and creation of ideas that raise the price.

Price reflects the image of fashion house that separates sums of millions in the promotion to maintain its primacy in the fashion world.

10. Very high. Source: Authors

Specifics of high fashion promotion Starting from the required high fashion shows in Paris and exclusive advertising in fashion magazines like Vogue, it can be concluded that the costs of promoting high fashion products are very high. Very often, high fashion dresses are given to actresses or singers, in order to connect the name of famous fashion house with the name of celebrities. Designer has a high-cost production of high fashion product, and at the same time, promotion depends on the image of celebrities that wore specific garment.

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Table 5. Specifics of high fashion promotion Specifics of high fashion promotion 1.

Through fashion shows, fashion magazines and especially important "red carpet". There are no savings to promote a collection of high fashion.

Very targeted. In the print media through discrete PR.

Exclusive fashion shows for a small number of invited guests are kept in secret, and at the same time for general public fashion shows are prepared as well as promotion in fashion magazines.

High fashion is only for designer’s promotion.

Mostly on the fashion shows.

It is a participation in the haute couture shows in Paris that only take into account as prestigious.

In the most cases, dresses and couture gowns are given to actresses or singers, in order to associate their name to the famous fashion house. It is mutual love without money transaction. Creating of image is mutually important.

Direct in the studios through direct contact.

Specifically in the Vogue in which only one side od adverts may cost 10.00,00-50.00,00 Euro. It is very expensive to promote high fashion products.

10. An exclusive product - exclusive promotion. Source: Authors

Specifics of high fashion distribution The specificity of distribution is in its exclusiveness. It uses a small number of intermediaries, and sales are generally conducted in mono-brand shops and ateliers in city centers. Access to the individual customer and the product is treated very cautiously. Table 6. Specifics of high fashion distribution Specifics of high fashion distribution 1.

Selling only in mono-brand stores or within exclusive department stores in separate rooms.

A limited number of participants. Carefully treated product.

Special attention is given to the sale - in the studios; very important personalized approach.

Very important personal customer service.

Through the exclusive shops - custom sews.

High fashion boutiques in major centers in the world, that sells only parts of high fashion collection.

Closed type shops in the luxurious parts of the city, where a client comes with announcement, and when the client is a famous person, the designer alone takes care about her/him.

Characterized by selling in the studios.

High fashion products are usually sold in specialized show rooms that are usually quite isolated and have nothing to do with shops and boutiques.

10. Only in the mono-brand stores. Source: Authors

SWOT analysis of the high fashion industry SWOT analysis of the high fashion industry is presented in table 2. The main strengths of high fashion company can be found in special and high quality materials made for them and in the products from renowned designers who are completely original and unique. The strength of these companies is also the

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fact that they are trendsetters and fashion leaders. The weakness includes rapid expansion of original products copies and breach of contract on licensing as well as high expense of maintaining fashion houses owned by the high fashion company. Business opportunities can be found in association with the cheaper fashion companies like Zara and H&M in which they can sell customized, less expensive collection, as well as cooperation with designers whose products can then be sold in the fashion houses, as well as the approaching to semicouture products. Opportunity is also on-line business that greatly simplifies arrivals to the rehearsal in the boutiques. Threats to high fashion are primarily recession and reduced consumer purchasing power, and a small number of loyal consumers, the high cost of brand promotion and the threat of substitutes. Table 7. SWOT analysis of the high fashion industry Strenght

Weakness

High quality products

Fake copies

Finest fabrics and materials used

Highly paid workforce

Popular brand image

High operating cost of fashion stores

High brand equity

Lack of presence in certain countries

Fashion liders

Non respecting the Licensing agreement

Trend setters Loyal customers Celebrities that buy and at a same time promote products Presence at international market Attractive to the workforce

Opportunity

Threats

Semicouture products

Trade embargo

The possibility for on line orders of high fashion products

Global recesion – decline in personal consumption

Technological advances open up the possibility of increasing

Small number of loyal consumer

production, as well as faster distribution

High cost of brand image promotion

Cooperation with cheaper retail chains (as Zara, H&M…)

Threat of substitutes - products of cheaper brands

Availability of luxury fashion products to the wider masses

that extend their collections to high fashion brand

through the cooperation of world famous fashion designers

and that connect with high fashion designers

and big fashion chains Source: Authors

4.2.2. Specifics of marketing strategies in the market of high fashion Marketing and high fashion are very connected. High fashion creates a visual impression of untouchability, unattainability, and expensiveness and thereby encourages the individuals to purchase it. It is the bait for the masses and that is why large investments in the image of the fashion house are made. It is represented to a customer as a “fine and elegant”, so in the most cases they consume part of it, but from serial production. Specifics of marketing strategies in the market of high fashion One respondent stated that “propaganda material is so complexly refined and keeps fine-wrapped luxury, so even for a moment as you navigate a fashion magazine, it provokes you to fantasize about wrapping a very expensive scarf, holding a very expensive bag and carrying very expensive shoes and at the same time, you are wearing “cheep” dress.” Buyers are mostly unaware why they chose Dior or Chanel sunglasses that are not high fashion, but on the edge of the frame is brand label of which Angelina Jolie wears gowns.

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Table 8: Marketing strategies in the market of high fashion Marketing strategies in the market of high fashion 1.

Limited market with a small number of potential buyers requires carefully planned strategies of on the market. It is important to have loyal customers and they shall never be disappointed with quality. The focus is placed on the promotion with celebrities on the "red carpet". Product price must be high because buyers of high fashion like "expensive stuff".

The strategy is based on a carefully elaborated promotion via celebrities and their pictures in the media.

High fashion is designer promotion for itself, in order to become interesting to a wider range of customers by promoting her/his creativity.

The most important thing is to find potential customers and adapt product design to them and to the trend.

Addressing to target groups of customers by individual approach.

Marketing of high fashion is managed by the best agencies invent a campaign, the most prestigious fashion magazines are included; the world's best photographers and models; the best hairstylists and makeup artists that together form a picture of a supernatural beauty.

High fashion is bait for the masses that can not consume high fashion products, but when they will have the first opportunity, they will buy a pret-a-porter product of the same brand and satisfy a fashion desire.

Through exclusive fashion shows, attract wealthy customers.

High fashion is precisely what creates the visual impression of untouchability, unattainability, expensiveness and encourages the individual to want to own such a product at least once in their lifetime.

10. Via celebrities promote their own name in the collection of high fashion, to become (designer) appealing for mass market of other collections (pret-a-porter ...). Source: Authors

5. Discussion High fashion is often used by designers to present their creativity. Great promoters for the general public are the “red carpets”. Designers generally borrow their gowns for the occasion and this is a major designers promotion. In the high fashion promotion there is no savings, but also, no earnings. Such creations do not make a profit, but the prestige and reputation. Many fashion houses dropped high fashion production because investments are not economically justified. One respondent stated that the ideal marketing strategy of high fashion is to do everything to make the product seem unattainable, and to show that it is consumed only by “special and chosen” persons. In this way, a wider circle of potential buyers interest is awaken. The others mostly state that the basis of ideal marketing strategy in high fashion is to detect potential customers and access to them personally. One respondent stated that “the critical factor in the marketing strategies is creating the illusion that the luxury is a set of all that can provide the character a good man to a customer.” Elements that are stated by Hines and Bruce as a characteristics of the luxury fashion products (Hines & Bruce, 2007) are also specified by interviewed experts. The conclusion about high price of fashion products that is important for brand image and differentiation as well as Celebrity Endorsement that ensures credibility through regarded personalities is in the accordance with research made by Easey and Okonkowo (Easey, 2009; Okonkwo, 2007). Mrketing strategies that were imposed by experts were harmonized with high fashion strategies researched by Easey (Easey, 2009).

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6. conclusion In the world of high fashion, there is a large number of fashion designers whose primary objective is to step out from the mass of competing fashion creations, and ensure the sale of produced fashion collections and survive in highly turbulent fashion market. The success of designers of high fashion lies in high fashion products’ characteristic but also in specially planned and very well executed marketing strategy, characterized by many peculiarities. Special emphasis is placed on design of marketing mix that includes high quality and special product, very thoughtful prices allocation, carefully selected channels of distribution and promotion of precision, which must take into account all the characteristics of high fashion market. There is no profit from high fashion production. It promotes the designer’s ingenuity and creativity. To show a collection of high fashion is very demanding, in the last two or three years only a few fashion houses managed to do it. That is a great creative challenge where you have to justify the enormous financial investment from the initial sketches to the realization of the show. Through SWOT analysis the main strengths were defined as high quality materials that are used in high fashion production; as weakness - rapid expansion of fake products; as opportunity - on-line business and as threats - recession and reduced consumer purchasing power. From the conducted interviews, it can be concluded that the specificity of high fashion products are quality design, uniqueness, and very high price. Specifics of promoting are in the individual approach to a very small number of potential clients as well as exclusive promotion via Celebrity Endorsement. Distribution of high fashion products is exclusive with a small number agents and at the same time, salling is very specific in mono-brand shops and luxury ateliers in the luxury neighborhoods with very discrete and individual approach to clients. The aim of the marketing strategies of high fashion is to do everything to make the product seem unattainable and perfect in its execution, carried by the known person and in the same time desirable to many customers. Then a broad demand for other products of high fashion designers are created and purchase of “pret-a-porter” collection is increased in order to satisfy customers fashion needs, even in the “lower” version. By the conducted research the objectives of the research were met and it is concluded that high fashion market requires a specific marketing program and that specific marketing strategies on the high fashion market are condition for the successful functioning of high fashion market.

7. Limitations and recommendations for future research The study has a limitation because it was conducted on a small sample of ten experts who can not give a completely accurate picture of the situation in the marketing of high fashion. Also, the research is largely based on the subjective experience of high fashion marketing given by experts, while managers with real experience in marketing of high fashion are only partially represented (20%). Future research could be focused on changing high fashion strategies in a recession with regard to company size and sector in which the high fashion company operates. Also, this type of research can be conducted only on a sample of managers of high fashion enterprises, and can be compared due to the impact of recession on marketing strategies in high fashion companies.

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

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10. Grilec Kaurić, A.: Marketing mode u industriji tekstila i odjeće, Tržište, 21 (2), p 219 – 234, 2009. 11. Hines, T., Bruce, M.: Fashion Marketing: Contemporary issues. 2., Elsevier, United Kingdom, 2007. 12. Kamenidou, I. et al: An exploratory study on the reasons for purchasing imported high fashion apparels, Journal of Fashion Marketing and Management, Vol. 11, No. 1, 2007. 13. Knezevic, N.: Suvremeni pristupi upravljanju marketinškim miksom u području poslovne mode, magistarski rad, Zagreb, 2006, p 75-77. 14. Kort, P.M. et al: Brand image and brand dilution in the fashion industry, Automatica 42 (2006) 1363–1370 15. Kotler, P., Keller, K.L.: Marketing Management, Pearson Education Inc., Upper Saddle River, New Jersey, NJ, 2006. 16. Leiss, W.: The icons of the market place, Theory, Culture & Society, Vol. 1, No. 3, 1983, str. 10-21. 17. Marciniak, R., Bruce, M.: Identification of UK fashion retailer use of Web sites, International Journal of Retail & Distribution Management, 32 (8), 2004. 18. Marinac, A.: Marketing tekstilne i odjevne industrije, Zagreb, 1997. 19. Melin, H.: Consequences of market definition under competition analysis – the luxury fashion market [online]. Faculty of law, University of Lund, 2002., at http://www.essays.se/essay/c4778c34c1/ (10.11.2011) 20. Moore, C.M., Birtwistle, G.: The Burberry business model: creating an international luxury fashion brand, International Journal of Retail & Distribution Management Volume 32 · Number 8 · 2004 21. Moore, M., Fairhurst, A.: Marketing capabilities and firm performance in fashion retailing, Journal of Fashion and Marketing, Vol. 7, No. 4, 2003, str. 386-397. 22. Murphy, R.: The Internet: A viable strategy for fashion retail marketing?, Journal of Fashion Marketing and Management, Vol. 2, No. 3, 1998. 23. Newman, A., Patel, D.: The marketing directions of two fashion retailers, European Journal of Marketing Vol. 38 No. 7, 2004 24. Okonkwo, U.: Luxury Fashion Branding: Trends, Tactics, Techniques, Palgrave Macmillian, USA, 2007 25. Renko, N.: Strategije marketinga, Ljevak, Zagreb, 2005. 26. Stephens Frings, G.: Fashion: from concept to consumer, 9th edition, Pearson Prentice Hall, Upper Saddle River, New Jersey, Columbus, Ohio, 2008. 27. Samanovic, J.: Prodaja, distribucija, logistika, Sveucilište u Splitu, Ekonomski fakultet Split, 2009. 28. Tkalac Vercic, A. et al.: Priručnik za metodologiju istraživačkog rada, M.E.P., Zagreb, 2010. 29. Quinn, L. et al.: Making sense of market segmentation: a fashion retailing case, European Journal of Marketing, Vol. 41 Iss: 5/6, pp.439 – 465, 2007 30. Vignali et al.: Retail Fashion Marketing, Accent, Zagreb, 2006. 31. Zavrsnik, B.,Mumel,D.: The Use of Marketing Communications in he Clothing Industry in Slovenia, Fibres & Textiles in Eastern Europe, January/ March 2007, vol. 15, No. 1(60)

DETAILS OF AUTHORS: PH.D. RUŽICA BUTIGAN, ASSISTANT UNIVERSITY OF ZAGREB FACULTY OF ECONOMICS AND BUSINESS rbutigan@efzg.hr MSC ALICA GRILEC KAURIĆ, ASSISTANT UNIVERSITY OF ZAGREB FACULTY OF TEXTILE TECHNOLOGY alica.grilec@ttf.hr PH.D., FULL PROFESSOR DARKO UJEVIĆ UNIVERSITY OF ZAGREB FACULTY OF TEXTILE TECHNOLOGY darko.ujevic@ttf.hr

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ANALYSIS OF MACROECONOMIC FUNDAMENTALS OF V4 COUNTRIES AND THEIR IMPACT ON BOND RISK SPREADS BOZENA CHOVANCOVA PETER ARENDAS

ABSTRACT Current European debt crisis has big influence on current and future economical development. It particularly affects the V4 countries that represent small open economies. The macroeconomic analysis shows big deterioration of their economic parameters in recent years. Especially deficits of government budgets, government debts and rates of GDP growth have been affected heavily. It has resulted in the degradation of credit ratings. Credit rating is a significant factor for determination of bond risk margins. The objective of this article is to analyze the impact of macroeconomic indicators and credit ratings on bond yields of V4 countries. KEYWORDS: government debt, credit risk, bond spreads. NOTE: This contribution is the result for the project implementation Creating excellence in economic research department for addressing the challenges of civilization in the 21th century (ITMS 26240120032) supported by the Research & Development Operational Programme funded by the ERDF (20 %) and VEGA (1/0613/12) The intensity of the relationship between financial sector and real economy as a source of economic growth of Slovakia in post-crisis period (40%) and VEGA (1/0329/11) Capital market and its role in supporting the real economy of eurozone (40%).

1. INTRODUCTION The financial crisis of 2008 had global character and solving of its problems has resulted in growing budget deficits and government debts. The situation leading to current state and the conditions for emissions of government bonds and the level of government bond spreads will be interpreted using the analysis of evolution of macroeconomic fundamentals of V4 countries (Czech Republic, Hungary, Poland, Slovakia). The V4 countries are the member countries of the European Union and upon of it, Slovakia is the member country of the eurozone.

2. IMPACT OF MACROECONOMIC INDICATORS ON COUNTRY CREDIT RATINGS Rating analyses fundamental quality of a rated subject, security or debt. There are ratings of particular securities and ratings of the issuer as well. This chapter is dedicated to ratings of V4 countries. Rating is a basic aggregate indicator of economic situation of a rated country. Rating is based not only on the economic but also on the political situation of the country. Despite of this fact, rating is generally understood as a result of economic activity of the country. It is important to note that rating doesn`t take into account all the risks that an investor has to face on the capital market. It doesn`t take into account market risks – change of interest rates, change of exchange rate, inflation, etc.. Also it doesn’t`t say whether say whether a security is undervalued or overvalued. On the other hand we can say that positive rating has a significant impact on the position of the country on international financial markets. Rating is an important indicator for potential investors. The rating of the country is also the highest possible rating that can be achieved by a subject that resides in the particular country. Which ones of the economic fundamentals are important for credit rating? We will try to evaluate the impact of particular parameters on positive or negative rating. The solution of debt crisis problems concerns not only the fiscal but also the monetary policy. Because of the common Euro currency, the question of eurozone monetary policy is sensitively followed all around the world. The successfulness of the fiscal-monetary mix, as well as the investor anticipations while investing in government bonds are determined by following macroeconomic factors: GDP growth, inflation rate, interest rate, change of exchange rate.

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Table 1. Main macroeconomic indicators of V4 countries

Slovakia

Czech Republic

Poland

Hungary

2005

2006 2007 2008 2009 2010

2011

real GDP growth (% of GDP)

6,7

8,3

10,5

5,8

-4,9

4,2

3,3

budget deficit (% of GDP)

2,8

3,2

1,8

2,1

8,0

7,7

4,8

government debt (% of GDP)

34,2

30,5

29,6

27,9

35,6

41,1

43,3

inflation rate (%)

2,8

4,3

1,9

3,9

0,9

0,7

4,1

interest rate (%)

3,0

4,8

4,3

2,5

real GDP growth (% of GDP)

6,8

7,0

5,7

3,1

-4,7

2,7

1,7

budget deficit (% of GDP)

3,2

2,4

0,7

2,2

5,8

4,8

3,1

government debt (% of GDP)

28,4

28,3

27,9

28,7

34,4

38,1

41,2

inflation rate (%)

1,6

2,1

3,0

6,3

0,6

1,2

2,1

interest rate (%)

2,0

2,5

3,5

2,3

1,0

0,8

real GDP growth (% of GDP)

3,6

6,2

6,8

5,1

1,6

3,9

4,3

budget deficit (% of GDP)

4,1

3,6

1,9

3,7

7,4

7,8

5,1

government debt (% of GDP)

47,1

47,7

45,0

47,1

50,9

54,8

56,3

inflation rate (%)

2,2

1,3

2,6

4,2

4,0

2,7

3,9

interest rate (%)

4,5

4,0

5,0

3,5

4,5

real GDP growth (% of GDP)

4,0

3,9

0,1

0,9

-6,8

1,3

1,6

budget deficit (% of GDP)

7,9

9,4

5,1

3,7

4,6

4,2

-4,3

government debt (% of GDP)

61,7

65,9

67,1

73,0

79,8

81,4

80,6

inflation rate (%)

3,5

4,0

7,9

6,0

4,0

4,7

3,9

interest rate (%)

6,0

8,0

7,5

10,0

6,3

5,8

7,0

Source: own processing using Eurostat data

The V4 countries came through vast transformation and restructuring processes during the 90`s. Subsequent entry into the European Union has further increased the openness of their economies. Table 1 shows the dynamics of main macroeconomic indicators of V4 countries. As we can see, the V4 countries maintained high GDP growth rates before the global financial crisis. Especially Slovak real GDP growth was very high. It reached 10,5% level in 2007. Economic slowdown of the region began in Hungary that attained approximately 0% growth in 2007. On the other hand, Poland has been the least impacted country in the region. It has retained positive GDP growth during the deepest crisis and in following years as well. Important role has played among others its better developed capital market (especially stock market) and lower rate of openness of Polish economy. The rate of growth is important because high GDP growth increases the interest of foreign investors to invest in the country. While buying the government debt, the investor anticipates lower risk and accepts lower bond yields. Specific attention attracts the inflation rate in mentioned countries. The V4 countries committed to fulfilling of the convergence criteria. The low inflation rate is one of them. Czech Republic is able to maintain the lowest inflation rates in the long term. Although it crossed the 3% inflation limit a couple of times, it had been caused by pro-inflation government policies. The Polish inflation rate used to be in quite a good shape as well, but it has changed a little bit after the crisis. Hungarian inflation rate has been high long term. The reason is expansive Hungarian wage policy in pre-crisis era and the effort to resolve budget deficits by increasing tax burden in the recent years. Hungary will need more efforts from the central bank in order to fulfil the price stability criteria. Slovakia was gradually decreasing the inflation rate in order to adopt Euro currency in January 2009. After the adoption, the impact of the ECB monetary policy has significantly increased. Inflation plays an important role while placing government debt securities on capital markets. The higher inflation rate the investors anticipate the higher yield they demand. Known Fisher formula for real interest rate says: r = i - ΔPe, (real interest rate = nominal interest rate – inflation rate). Investors logically tend to demand positive real interest rate. Thence resulting that the bond yield should be higher than the anticipated inflation rate. But in reality, the real interest rate can be sometimes negative because of nominal interest rate below inflation rate. This situation can be seen on European capital markets these days, although it is caused by a couple of other factors.

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Another important macroeconomic indicator is the level of interest rates. As the table shows, high inflation rates in Poland and Hungary complicate the fulfilment of interest rates criteria. In 2001, the interest rates in Poland were 4-times higher than the eurozone interest rates. Although the Polish interest rates have rapidly decreased, they were still approximately 4-times higher compared to eurozone interest rates in 2012. Hungary has been in a similar situation. Hungarian interest rates reached 7% in 2011. The rates are set on this level by the central bank that has to resist strong inflation pressures. On the other hand, Czech Republic has successfully traced the eurozone interest rates. Czech interest rates were even lower during 2006 to 2008 compared to the eurozone ones. Slovak central bank had to harmonize its interest rates with eurozone in order to be able to adopt the Euro currency from January 2009. The higher is the level of interest rates, the higher yields form the government bonds investors demand. Thence the government has to avoid long term bond emissions in order to avoid too high debt service. On the other hand short term emissions tend to decrease the flexibility of monetary policy that faces the short term emissions barrier. We can see the biggest difference between V4 countries is in the fulfilment of fiscal criteria (government budget deficit and government debt). Table 1 shows that only Slovakia and Czech Republic were able to hold its budget deficits under 3% of GDP in the pre-crisis era. Poland and Hungary pushed their deficits under 3% of GDP only once and upon of it, it was only thanks to a one-shot unsystematic step in the Hungarian case. The situation has dramatically worsened during the global financial crisis when even Slovakia and Czech Republic ceased to hold the 3% border. Paradoxically Hungary managed to fight its deficits more successfully during the financial crisis. The reason was high need of foreign financial help that was conditioned by budgetary savings. All the V4 countries are trying to decrease their budget deficits. But this effort can be diminished by current debt crisis in the eurozone and eventual comeback of recession. In recent years, growing budget deficits have resulted to the growth of government debts of V4 countries. Nevertheless all the countries but Hungary have retained debts under the 60% of GDP level. The growth of government debt was significant after 2008. In the Czech case it grew from 28,7% of GDP in 2008 to 41,2% in 2011. Slovak debt grew from 27,9% to 43,3% during the same time period. But both countries have been safely below the 60% level. On the other hand Poland is only narrowly below this level and Hungary has exceeded it every year since 2005. Government debts can cause huge problems. Growth of internal indebtedness leads to a decrease of free financial sources in the economy that become more expensive. As a result the investors demand higher bond yields. Long term growth of government indebtedness results into the anticipation of growing bond yields. It is highly important to note that in the current situation of low interest rates and growing government indebtedness it is hard to place bond emissions in national or international markets. On the other hand an increase of interest rates would lead to higher costs of debt service. It would subsequently lead to growth of indebtedness itself. But we can`t expect growth of interest rates anytime soon considering the ECB monetary policy. On the other hand the current complicated situation on financial markets supports the growth of risk margins which results into increased costs of bond emissions. An important indicator is also the exchange rate. Slovakia adopted Euro in January 2009 thence independent Slovak currency ceased to exist. High volatility of exchange rates and depreciation of national currency can have various negative impacts. It stresses the investors which may cause outflow of capital from the country. And upon of it the investors demand higher bond yields in order to compensate the currency risk. The evolution of macroeconomic indicators has been evidently reflected in the credit ratings of V4 countries. Credit rating evaluates the probability that the issuer or debtor will be unable to pay its duties on time and in full scope. Credit analysis evaluates various objective and subjective criteria. It results in the credit rating. Credit rating helps the investor with allocating his investments. Table 2 shows credit ratings of V4 countries and Germany. We can see that Slovakia and Czech Republic had to progress from speculative to investment range but Poland has been in the investment range during the whole analyzed time frame. On the other hand Hungary started in the investment range but its rating began to degrade gradually. Hungarian initial positive rating was based on high GDP growth rates and strong pro-export economic policy. But other indicators were signalizing bad outlook for the economy. The decline of Hungarian rating began in 2005 and it is in the speculative range nowadays. Slovakia, Poland and Czech Republic, on the contrary, were gradually improving their credit ratings and they managed to preserve positive ratings during the financial crisis as well. Based on the aforementioned macroeconomic indicators we can say that effort to fulfil convergence criteria has been reflected in positive ratings.

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Table 2. Credit ratings of V4 countries Slovakia

Czech Republic

Poland

Hungary

Fitch

Moody`s

S&P

Fitch

Moody`s

S&P

Fitch

Moody`s

S&P

Fitch

Moody`s

S&P

2001

BB+

Baa3

BBB-

BB+

Baa1

A-

BBB+

Baa1

BBB+

A-

2002

BBB-

BB+

A-

BBB+

A-

2003

BBB-

A-

BBB+

A-

2004

A-

BBB+

A-

2005

A-

BBB+

A-

2006

A-

BBB+

2007

A-

BBB+

2008

A+

A-

BBB

BBB+

2009

A+

A-

BBB

Baa1

BBB-

2010

A+

A-

BBB-

Baa3

BBB-

2011

A+

AA-

A-

BBB-

Ba1

BB+

2012*

A+

AA-

A-

BB+

Ba1

BB+

Source: Own processing using data of rating agencies

3. GROWTH OF BOND YIELD SPREADS Bond yield spreads present the difference of yield levels of two various bonds. It is based on the probability of bankruptcy of the issuer, as percepted by the investors. It is based on a complex of domestic and international fiscal and financial macroeconomic fundamentals that determine the bonity of the country. Determinants of government bond spreads are credit risk, risk of liquidity and risk aversion. The study of the European Commission1 identifies credit risk, risk of liquidity and risk aversion as the main determinants of government bond spreads. Credit risk can be divided into default risk, credit spread risk and rating downgrade risk. Default risk expresses the probability that the issuer will be unable to fulfil his obligations against bondholders. Credit spread risk presents the probability that market value of the bond will decrease more than market value of another comparable bond. Risk of liquidity means potential inability to turn owned bonds into cash as soon as needed. The liquidity is determined by the volume of the emission, national emission policy and existence of futures markets large enough to provide sufficient hedging ability to investors. Germany is the only European country with appropriate futures market that significantly improves demand for German government bonds. Risk aversion is based on the willingness of the investor to undergo some level of risk. During periods of economic uncertainty risk aversion increases therefore the investors tend to be looking for less risky investments. It often means investing in government bonds that are generally considered to be low risk assets compared to other securities. Within eurozone, German government bonds are considered to be the least risky. They are a “safe harbour” and a benchmark of the European bond market. Worsened macroeconomic fundamentals of particular country should lead to increased bond spread against German government bonds.

Barrios, S. – Iversen, P. – Lewandowska, M. – Setzer, R. Determinants of intra-euro area government bond spreads during the financial crisis. . [online] Brussels : European Communities. 2009. 1

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Chart 1. Yield spreads between V4 and German government bonds

Source: Own processing using Eurostat data

A dramatic growth of European government bond risk spreads began halfway through 2009. It has begun in Greece, Ireland and Portugal, it has impacted Cyprus a few months later and subsequently Italy, Spain and to a lesser extent Belgium. A similar pattern can be followed in the case of V4 countries too. As chart 1 shows, bond yields of V4 countries began to grow remarkably compared to German government bond yields in the last couple of years. In 2007, the spread between yields of German and Czech government bonds was around 50 basis points (0,5% yield). Approximately the same numbers apply for Slovak government bonds as well. The spread of Polish bonds was 161 basis points and of Hungarian bonds 265 basis points. The spreads were markedly higher in May 2012. Slovak spreads were 346 basis points, Polish spreads were 407 basis points and Hungarian spreads were 699 basis points. Czech Republic was in the best shape with spreads of only 197 basis points. Thence resulting that government bond yield spreads of all V4 countries have increased. The highest risk is associated with Hungarian bonds.

4. CONCLUSION The risk of debt crisis endangers also the V4 countries. The negative evolvement of macroeconomic fundamentals of particular countries has resulted in lowered credit ratings, which is a bad signal for foreign investors. Growing government debts and the need of new bond emissions has resulted in growing risk spreads and therefore growing costs of debt service. Solving of the crisis in the budget cuts way or supporting of economic growth via various stimulus packages seems to be inefficient. Looking for new solutions is the role not only for politicians but for economists as well.

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

Barrios, S. (et. al.). (2009). Determinants of intra-euro area government bond spreads during the financial crisis. Economic Papers 388, November 2009, European Communities Eichengreen, B. (et. al.) (2011). Public Debts: Nuts, Bolts and Worries. Geneva: International Center for Monetary and Banking Studies. Fabozzi, F. J. (2012.) Bond Markets, Analysis and Strategies. 8th edition. NewJersey : Pearson Education 2012, p. 744. 013274354X. Gagnon, J.E. – Hinterschweiger, M. (2011). The Global Outlook for Government Debt over the Next 25 Years: Implications for the Economy and Public Policy Peterson Institute for International Economics Chovancova, B. (et. al.) 2006. Finančný trh. Bratislava : IURA Edition, 2006. s.610. ISBN 80-8078-089-7. Malacká, V. (2007.) Kreditné deriváty ako produkt globálneho finančného trhu. In: BIATEC – odborný bankový časopis., Bratislava, NBS (2007.) Apríl 2007, roč. 15, č. 4, pp. 18-21. ISSN 1335-0900. Nelson, R.M. (2012). Sovereign Debt in Advanced Economies: Overview and Issues for Congress. http://www.fas. org/sgp/crs/misc/R41838.pdf, [accessed 25.7.2012].

DETAILS ABOUT AUTHORS: BOZENA CHOVANCOVA PROFESSOR FACULTY OF NATIONAL ECONOMY, DEPARTMENT OF BANKING AND INTERNATIONAL FINANCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA BRATISLAVA, SLOVAKIA bozena.chovancova@euba.sk PETER ARENDAS INTERNAL DOCTORAND FACULTY OF NATIONAL ECONOMY, DEPARTMENT OF BANKING AND INTERNATIONAL FINANCE, UNIVERSITY OF ECONOMICS IN BRATISLAVA BRATISLAVA, SLOVAKIA p.arendas@centrum.sk

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BEHAVIOR OF SECONDARY LEVEL EDUCATION STUDENTS IN VARAZDIN CITY ON FACEBOOK – CASE STUDY ALEN DELIĆ MATIJA KAPIĆ IVA GREGUREC

ABSTRACT As we are facing a huge impact of social networks on our daily lives, it is of a great importance to research about how and on which aspects of us those networks influence on. Our paper, which is a result of a continuous research of the subject, shows a case study in which we have research about behaviour of secondary level education students (high school) on Facebook. Results in the paper show what functions/tools students use on Facebook and how often they do it, as well as for which purposes students use Facebook for with regard to their school activities. Comparison between users from different cities is also planned in future research based on this paper. Paper, and shown results, can be beneficial not only for marketing experts in order for them to learn more about behaviour of students as Facebook costumers and educational institutions, but also for educational institutions which can use it for adaptation of current curriculums and ways of communication between schools and students. KEYWORDS: Facebook, education, high school students

1. INTRODUCTION 1.1. Social Networking Sites Since Internet was formed it allows communication between people from very distant parts of the World enabling them to keep in touch with their friends, exchange work results, plan projects or perform some other activities. Internet as medium is different from other media because it gives independence to individuals in choosing information they consume, which is not the case with other, older media, such as TV, radio or newspaper. At the beginning, Internet was viewed as an ideal opportunity for people who are in marketing to communicate with their customers. However, it is clear today that people are approaching each other using Internet as tool which facilitates consumer interconnections (Khammash & Griffiths, 2011). This means that Internet with time became the space where consumers were able to share information about their experiences, about their products or services which they used to assess whether to purchase the product or service, or not. First, before online social networks were introduced as a platform, users had used different channels for dispersing information. According to eMarketer.com (What Marketers Can Learn from Consumers’ Sharing Habits, 2011), 92% of people are using social networks to share the content with their friends, 77% with families and 24% with other colleagues. It is obvious that social networks are very important when it comes to sharing information and this affects purchasing behaviour to some degree. The exchange of opinions is not the only aspect in which online social networks are used. More into details, many cases where identified where social networks played important role in disseminating important information and in which case the social networks were the first place where some information appeared (Lerman & Ghosh, 2010). Newsgroups, which are considered to be the first online social networks, did not have the ability to foster connections between people in a great detail, rather were they superficial in a way that people were using them to share their opinions. The usage of online social networks today is much wider with one of the main purposes to make new friendships or maintain the old ones. (Sheldon, 2008). There is a great number of online social networks today where some support maintenance of existing relationships while others help strangers to connect based on their interests, political views or activities (Boyd & Ellison, 2008). It is important to understand that online social networks are not just the main tool that people use to communicate with each other, but it is an upgrade to communication outside their real life. People are using social networks to expand their social capital in a way where they want to enforce their image through the social networks or where they compensate for lack of their self-confidence. (Ellison, Steinfield, & Lampe, 2007). This is usually done through posting status updates, images, news or some other form of information sharing which online social network supports. When talking about adolescents as users of online social networks, they provide them benefits such as an exercise of self-control, learning tolerance and respect to others’ viewpoints, expressing sentiments in healthy way, engagement in

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critical thinking and decision making (Berson, Berson, & Berson, 2002). However, there are also some concerns regarding the risks for adolescents who spend their time using online social networks. We witness articles in media with stories about violence on social networks such as threats and fights, where sometimes those violent acts end up in real life. This is usually possible due to providing of personal information for which social networks are criticized for. However, Hinduja and Patchin have discovered that the amount of information that adolescents disclose through social networks is not as great as it seems, and they say that despite the benefits offered by online social networks many media have created the negative image in public which resulted in angry parents attacking administrators of online social networks. It is required from an individual to provide basic information about him/herself, such as a date of birth, name and/or email address, to become the user of an online social network. The requested data usually depends on a social network, but basic information are required by most of them. After that, user can start using a network in a way that he/she like. Usually it starts by connecting with existing friends or some other main activity which is supported by the platform. Today, we have different types of online social networks – some are professional as it is LinkedIn, while others are specific. However, one social network has been used by far greater number of people than any other and that social network is Facebook. With a bit less than billion users, it is the largest social network currently and a great number of its users are adolescents. (Facebook Inc., 2012)

1.2. Facebook Facebook, widely used online social network by almost every age group today, enables their users to present themselves with an online profile, accumulate “friends” and post on each other’s profiles. Furthermore, Facebook members can join virtual groups based on common interests to see, for example, what classes they have in common (Ellison, Steinfield, & Lampe, 2007). Facebook was started in 2004, but for some years it was intended for college students in the USA so the user base was not that large. Later, when it became open for users around the World, it was available to anyone, which resulted with many high school students using it. Current statistics show that Facebook is actively used by 955 million users on a monthly basis, out of which 543 million of those use Facebook mobile products (Facebook Inc., 2012). Many of these users are high school students who are using Facebook on a daily basis whether they’re at school or at home. According to research conducted by Hew in 2011, following motives for Facebook usage were identified: (Hew, 2011) • Maintaining of existing relationships; • Meeting new people; • Using Facebook is cool; • To make oneself more popular; • To pass time; • To express or present oneself; • For learning purposes; • Task management tool; • Student activism. It is obvious how people use Facebook for different reasons, as well as how Facebook plays a big role in everyday lives of many individuals. Facebook, as a social network, also provides organizations or individuals with means to promote themselves to Facebook users through different pages or ads. Its aim is to attract advertisers who would be able to find their customers more efficiently and as such, Facebook provides space for advertisers to create pages where they can promote their brand or product. Generally speaking, Facebook is a collection of large amount of demographic data which makes it easier for advertisers to target the type of customers they want. That in particular is the reason why Facebook, with such high costs, can stay free for all users. The growth of Facebook since its beginning was extraordinary. Today, the network provides many ways of communicating among users in form of: • Wall posts – users can share information on their own profile or on profile of another user; • Status updates – users can share information with everyone who is connected with them; • Photo uploading – users can upload photos and share them with other users; • Video uploads – as with photos, users can upload videos too; • Sharing content from other sources – users can pick any URL address on the Internet and share it with other users; • Messaging – users can communicate with other users through messages either individually or in groups; • Chat – users can communicate in real time with other users much like with IM services;

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Groups – users can join in groups based on interest or any other specific topic; Comments – users are able to comment other’s activities; Liking – users can express their approval of the content that others share; Apps – Facebook’s functionalities are greatly expanded with apps which can be published by developers all over the world. If we would consider apps as expansion of Facebook’s functionalities we could say that its functionalities are almost endless.

Although we have a large amount of literature on Facebook, we have decided to do our own research about behaviour of secondary level education students on Facebook. The aim was to see how students in Varazdin (Croatia) use Facebook and what are their habits regarding school activities and obligations.

2. MEASUREMENT We have designed a questionnaire for the purpose of the study. It consisted of 42 items altogether and was administrated among high school students in the City of Varaždin, Croatia. Different schools were chosen in order to have a qualitative sample of respondents. While the first question was used to determine whether the respondent has a Facebook account/uses a Facebook or not, other questions were divided into four groups. First group, which consisted of 6 items, was used to measure general facts about respondents’ usage of Facebook, such as number of friends, functionalities they use, etc. In the second group, where Likert scale was used, 10 items were used in order to measure how often students use different functionalities that Facebook offer. Questions about attitudes towards functions and activities that students use on Facebook which are connected to school obligations and information were in the third group which had 19 items, out of which 12 items used a Likert-type scale where estimates were from “1 = strongly disagree” to “5 = strongly agree”. The final, fourth part, was used to measure demographic data of the respondents (6 items). The alpha coefficient of reliability (α) was 0.78 for 22 Likert-type items of the survey.

3. RESPONDENTS Questionnaire was used throughout different high schools due to our target population that consisted of secondary level students, for which the convenience nonprobability sampling technique was used. Out of around 300 questionnaires that were administrated, 252 students responded, which gave us the response rate of approximately 84.00%, out of which 51.00% of respondents were female (N=128) and 49.00% were male (N=123).

4. RESULTS AND FINDINGS In this study we attempted to find out how high school students use Facebook as social network especially when it come to their various activities related to school. For that purpose we asked students about their habits and on which activities they spend their time during their Facebook usage. Beside already mentioned, the following results have also been obtained: most of students that participated in the study were first (45.2%, N=114) and third graders (31.7%, N=80). Most of them (94.4%, N=238) are Facebook users where 79.0% (N=199) of them are using Facebook on their mobile phones. According to that, we may assume that this part of high school population is using Facebook even when they are in class which calls for additional questions about effects of such use on students’ performance in school.

4.1. Differences regarding grade averages ANOVA analysis was used to find differences in Facebook usage between students with different grade averages. Several statistically significant differences were found. There is statistically significant difference among respondents with different grade averages when it comes to their activity of finding old friends on Facebook (F=7.659, df=4, p<0.001), exchange of homework (F=2.815, df=4, p<0.05), exchange of study materials (F=4.197, df=4, p<0.005) and exchange of information about school obligations (F=3.978, df=4, p<0.005). Furthermore, it was found that statistically significant differences exist regarding the Facebook activities that are connected to school obligations or curriculum (F=2.708, df=4, df<0.05), opinion whether schools should provide more information through Facebook (F=3.128, df=4, p<0.05) and whether it is a good practice to be friends with teachers or not (F=2.667, df=4, p<0.05).

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4.2. Differences regarding number of friends We have performed ANOVA analysis in order to find if differences based on the number of friends exist. The only statistically significant difference that we found relates to average of students (F=4.661, df=12, p<0.001). (Figure 1) Figure 1. Grade averages in relation to number of friends on Facebook

Source: Authors

4.3. Exchange of information We found it interesting to see what kind of information students exchange the most on Facebook when it comes to school activities. The percentages of students who exchange information related to their school was examined. Most of the respondents exchange the information regarding their oral exam agreements (74.88%) and their test terms (70.05%). Also, 47.34% of respondents exchange information related to school schedule and 42.03% related to their curriculum.

4.4. Accessing Facebook regarding location Another interesting finding is related to locations from which students are accessing the Facebook. Figure 2 shows that the respondents are accessing Facebook mostly from home (89.08%) but also from other non-specific locations (67.65%). This is probably due to pervasive use of mobile devices while they are on the move. 34.03% of respondents claim that they access high school students are using for accessing the Facebook from their schools, while 12,18% stated they do it from areas with the access to the internet, such as bars. Figure 2. Facebook location usage of respondents

Source: Authors

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5. CONCLUSION It is necessary to conduct research about how and in which aspects online social networks, such as Facebook, influence our everyday lives. High school students are even more influenced due to their high exposure to online social networks. That was the reason for us to conduct research about their behaviour on Facebook, especially the one connected to their school obligations. Findings that are shown in this paper talk about differences in students’ perceptions regarding their grade averages and type of information that they share over Facebook which are connected to their school obligations. As we are aware that some results may raise additional question, we plan to study those questions in our future research, as well as we plan to expand our research on different cities in Croatia and compare results between different groups of respondents. Results from this paper, as well as from our other papers that are connected to this research can be used for curriculum adaptations, as well as for changing ways of communication between education institutions and students. One school in specific asked for the results of this study in order for them to learn more about their students’ activities on social networks.

LITERATURE 1.

Berson, I. R., Berson, M. J., & Berson, M. J. (2002). Emerging Risks of Violence in the Digital Age: Lessons for Educators from an Online Study of Adolescent Girls in the United States. Journal of School Violence, 1(2), 51-71. Retrieved September 1, 2012, from http://www.tandfonline.com/ doi/abs/10.1300/J202v01n02_04

Boyd, D. M., & Ellison, N. B. (2008, October). Social Network Sites: Definition, History, and Scholarship. Journal of Computer-Mediated Communication, 13(1), 210-230. Retrieved September 2, 2012, from http://onlinelibrary.wiley.com/doi/10.1111/j.1083-6101.2007.00393.x/pdf

Ellison, N. B., Steinfield, C., & Lampe, C. (2007, July). The Benefits of Facebook ‘‘Friends:’’ Social Capital and College Students’ Use of Online Social Network Sites. Journal of Computer-Mediated Communication, 12(4), 1143-1168. Retrieved September 1, 2012, from http://onlinelibrary.wiley. com/doi/10.1111/j.1083-6101.2007.00367.x/pdf

Facebook Inc. (2012). Key Facts - Facebook Newsroom. Retrieved from Facebook Newsroom: http://newsroom.fb.com/content/default. aspx?NewsAreaId=22

Hew, K. F. (2011, March). Students’ and teachers’ use of Facebook. Computers in Human Behavior, 27(2), 662-676. Retrieved September 2, 2012, from http://www.sciencedirect.com/science/article/pii/S0747563210003651

Hinduja, S., & Patchin, J. W. (2008). Personal information of adolescents on the Internet: A quantitative content analysis of MySpace. Journal of Adolescence, 125-146. Retrieved September 4, 2012

Khammash, M., & Griffiths, G. H. (2011, February). Arrivederci CIAO.com, Buongiorno Bing.com’—Electronic word-of-mouth (eWOM), antecedences and consequences. International Journal of Information Management, 31(1), 82-87. Retrieved September 3, 2012, from http://www. sciencedirect.com/science/article/pii/S0268401210001519

Lerman, K., & Ghosh, R. (2010). Information Contagion: An Empirical Study of the Spread of news on Digg and Twitter Social Networks. Proceedings of the Fourth International AAAI Conference on Weblogs and Social Media (pp. 90-97). Washington: Association for the Advancement of Artificial Intelligence. Retrieved September 4, 2012, from https://www.aaai.org/ocs/index.php/ICWSM/ICWSM10/paper/download/1509/1839

Sheldon, P. (2008). The relationship between unwillingness-to-communicate and students’ Facebook use. Journal of Media Psychology: Theories, Methods, and Applications, 20(2), 67-75. Retrieved August 31, 2012, from http://psycnet.apa.org/journals/jmp/20/2/67/

10. What Marketers Can Learn from Consumers’ Sharing Habits. (2011, May 18). Retrieved September 2, 2012, from eMarketer: http://www.emarketer.com/Article.aspx?R=1008395&dsNav=Ntk:basic%7cwhat+marketers+can+learn+from+consumer%7c1%7c,Rpp:25,Ro:-1 DETAILS ABOUT AUTHORS: ALEN DELIĆ STUDENT ASSISTANT FACULTY OF ORGANIZATION AND INFORMATICS, UNIVERSITY OF ZAGREB VARAŽDIN, CROATIA alen.delic@foi.hr MATIJA KAPIĆ VARAŽDIN, CROATIA matija.kapic@live.com IVA GREGUREC TEACHING ASSISTANT FACULTY OF ORGANIZATION AND INFORMATICS, UNIVERSITY OF ZAGREB VARAŽDIN, CROATIA iva.gregurec@foi.hr

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SYSTEMS APPROACH TO MANAGEMENT PROBLEMS STJEPAN DVORSKI VLADIMIR KOVŠCA

ABSTRACT Development of concepts of holistic solutions has long tradition in management of complex problems. In the period after World War II in various parts of the world appeared concepts that indicated growing complexity of business and social interdependence and aspired to integrated approach to solving problems. This approach was soon adapted by the system-oriented management that used principle of open systems in the study of business entities. Since business entities can also be regarded as systems, they are observed as separate set with specific goal and interconnected elements. Generally accepted definition is that business entity is a well known system of converting resources. Taking into account the temporal and situational elements, company process the resources, i.e. inputs (labor, ideas, capital, raw materials) into outputs (products, services, etc.) whose value is larger than total resource value, i.e. inputs necessary for their production, in the eyes of a group environment with which business entities cooperate. The fact that implies complexity is that in business entities observed as systems there are elements that are interconnected, where complexity can be defined with two components: structural and functional. Business entities and their environment are regulated units that operate and interact, while their relationships and positions subordinate their activity to numerous requests. Complexity of business entities and environment requires a systematic managerial approach because managing issues also becomes complex in structural and functional sense and their perception and understanding requires connections in temporal and contextual dimension. In so doing, the managing issue is manifested as issue of asking right questions because it is pointless to seek answers to badly formed questions. The mistake that most commonly occurs in management problems is the attitude how to manage existing business system with known managerial methods. During design of future business activity it is difficult to accept attitude that it will have same or similar decision-making structure, relations of functions etc. The aim of this paper is to show how straight thinking in management philosophy as well as its extensions of the present appear as wrong assumption. Therefore systems approach is proposed as alternative management approach. KEYWORDS: company, management, complexity, systems approach.

1. INTRODUCTION The traditional approach to the studying of a system is known as “reductionism”. It looks at the parts of the system as the ultimate analysis, and strives to identify the parts, so it would be able to understand the whole through understanding of the parts. The whole provides the purpose to the parts. Contrary to the reductionism, the system approach is called “holism”. The holism considers the system to be something bigger than the sum of separate parts which make the system. As a rule, the emphasis is placed upon the connections between the parts, especially upon the connections between the elements of the system. The notion of the system is the foundation of the theory of system, which can be understood as the formal science about the structure, connections and behavior of the system.1 The companies are open systems which operate in certain environment, in a context in which the environment influences the company, and vice versa. Management of the business subjects is marked by the high complexity and dynamics, and the satisfying answer to the question – On the base of which template we should shape the complex social systems, to counter the proliferating environmental complexity with our own adequate complexity – becomes the key for the successful management. This question is directly linked with the question of variability2 and leads to another question – which concepts are adequate for solving the problems in company management. The functioning of the elements of a system should be such to enable the achievement of the goals of the company. If the management is understood as the cybernetic feedback process, every deviation from the set goals requires certain adjustments of the company. The basic goal, especially in the systematic approach, is the long-term survival, and in the conditions of the market economy it is possible only if the company is developing.

1 2

Urlich, H.: Die Unternehmung als produktives soziales system, 2. Auflage, Haupt Verlag, Bern und Stuttgart, 1970, pp.105. Malik, F.: Strategie des Managements Komplexer Systeme, 9. Unveranderte Auflage, Haupt Verlag, Bern, 2006, pp. 191.

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2. SYSTEM AND NON-SYSTEM VIEW OF THE COMPANIES If the understanding of the diversity and the ability of survival of a complex system – like a company – is defined as the goal, then we need to make a shift in the process of decision making and selecting. One way to do this is to cease the practice of forecasting and calculating of the trends, and the practice of questioning the experts, focused upon the events without the system, and to stop viewing the problems within the system as isolated phenomena. Much more appropriate approach is the attempt to achieve such constellations within the system that will reduce the odds for problem appearance. To implement the above mentioned approach in the very essence of a system, we need to make a kind of shift of viewpoints. The concept of network thinking starts with the particular world view. It is the common approach to view the systems from within toward outside, and the attention is focused on the events outside of the system. The issues like the discovering the actions of the competition, the situation on the financial markets, situation and development of the market of products and services, are issues which require answers through the use of questionnaires, market analysis or the estimation through the sampling method, which reveal almost nothing about the observed system. The example of such non-system manner of thinking and approach to the systems of companies is shown in the following image. Image 1. Common non-system approach to the companies Observation approach from inside t. outside

Economy development

Techniques of competit.

Polls Future market posit.

Expected sale rates

Taste and trends

Market analysis

Prognosis

Advertise.

Trend analysis

Image of competition

What others do? How we need to behave ? How to keep step with others ?

Controlling

Prices of competition

Image forming

Industrial espionage

Legal framework

Lobbying Conjucture cycles Sample research Economic development

Source: Adjusted, taken from Vester, F.: Die kunst vernetzt zu denken-Ideen und werkzeuge fur einen neuen umgang mit komplexitet, Ein Bericht an den Club of Rome, Deutscher Tashenbuch Verlag, Munchen, 2002, pp. 101.

Contrary to this, the system approach means exiting the system and observing the system from without; in this, special emphasis is made on the patterns of system behavior. Also, different questions are being asked, like: “Which are the critical areas, and which are the promising areas?”, and “Which mechanisms enable us to manage the system, and which do not?”, and also “What is the flexibility of the system, its self-regulation and ability for innovation?” Here, we can also apply various tools of analysis, like the matrix of influences, policy tests, and simulation models. The main point here is not the speculative forecasts of the wanted on unwanted events oriented toward the external events, but the orientation toward the patterns of behavior of the observed system. The important issues here are the reactions of the system to certain circumstances, flexibility of robustness of the system, and the possibility of improvement of the behavior of the system. In such way, systematic and sustainable strategies are created, which are not made up, but constructed within the system itself. Such strategies are not focused to the strategic objectives like annual increase of traffic, larger profitability of the invested capital, or extraction of the largest possible profit from some future activity; they are focused upon the target question – how to make the system behavior as stable as possible, and resistant to the obstructions and errors in functioning, which undoubtedly means higher economic stability, i.e. better survival ability through higher “cybernetic maturity”.

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Image 2. System approach to the companies What is observed system like? How it behaves? In which way is it connected with envir.?

Observation approach from outside t. inside How information ciruculate

Functioning Simulation, policy tests

Possibility and synergy

Actions and goods harmless for environment

Polls Influence inditions

System studies

SYSTEM Criteria UNDERSTANDING matrix

Critical and promising areas

Images of cause-‐ effect link

Power of innovation

If-‐then Scenario

Pattern recognition

Self-‐regulation Expert systems

Biocybernetic Sensitivity controlling analysis

Network cybernetics

Flexibility, diversificatio n Manageability Active and reactibe elements

The complex and dynamic relations which create the environment of the company need to be discovered and recognized, which is not so simple, because certain circumstances happen in isolated manner. This is the consequence of the lack of knowledge of the relationships between the particular observations. In education process, the emphasis is made to the separate mechanisms and structures, while the holistic observation of the system is more often lacking than not. Also, in the scientific researches, smaller parts are separated from the bigger inter-dependent relations, so we can study the particular cause-effect relations. The cause of such problems is most often the way of thinking which is marked by the simple cause-effect chains, instead the thinking in the complex cause-effect networks. The errors in the patterns of decision making are most often the consequence of the following procedures:3 • Inadequate research of the causes: the main cause of a problem lies in the simplest and the quickest identification of the situation. Other, less visible causes are left out in such mono-causal pattern of thinking. • Inadequate grasp of the whole situation: What follows is the observation of the sections of reality, which requires data gathering; however, the discovery and the grasp of the changeable dynamic inter-dependencies is left out. • Inadequate market setting: Supposed cause of the problem is researched extensively, which leaves fewer resources for identification and overcoming of the other potential causes of the problem. • Inadequate studying of the side effects: Searching for the problem and implementation of the solution is goal oriented, which leads to the inadequate observation and analysis of side effects. • The tendency for the over-management: corrective measures of management are applied, and when the desired reaction of the system is lacking, certain measures are repeated in larger intensity, which leads to over-management of the system; this required further measures with the opposite effect. • The tendency of authoritarian behavior: impression and certainty that the system is mastered and that it is possible to change it, causes dictator behavior of the decision maker, which can be extremely dangerous in the complex systems. In the attempt to understand the behavior of the whole system, it is not enough to divide the system to the separate parts, and to analyze these parts along with their elements.4 It is much more important to observe the network of the inter-relations between the parts of the system, which, beside the material relations, can also be of information or nonmonetary nature. For some systems it is almost impossible to make precise prediction of particular situations, because of the multitude of complex and dynamic relations and influences; however, knowledge of them allows, in certain measure, accurate prediction of the future patterns of behavior, or at least tendencies of behavior, based upon the steps taken. Therefore, for the study of the certain complex systems, the observation of particular elements is less important than the observation of the patterns of relations between the various elements of the system. The picture made in such way is 3 4

Vester, F.: Neuland des denkens, Vom tehnokratishen zum kybernetishen zeitalter, 7. Auflage, Deutsche Tashenbuch Verlag, Munchen 1991, pp. 25. Ackoff, R. L.: Towards a System of System Concepts, Management Science, Vol. 17, No. 11, 1971, pp. 661-671,

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less correct and not completely precise, but it represents the reality, useful enough for human understanding. If the situation develops in unexpected, wrong direction as the consequence of linear, mono-causal way of thinking, it is important not to react again in linear structures. In such case, further wrong decisions lead to the creation of more and more unstable situations, which can be repaired only through additional effort. In such conditions, the decision makers have to relate the newly made situation with the previous actions, instead of blaming the external influences or unpredictable factors which were impossible to influence, as the precondition for gaining the stability and control over the system.

3. APPROACHING THE COMPLEX PROBLEMS AND LEARNING IN THE COMPANIES Within a company, there exist a substantial number of factors which have certain importance for the process of decision making by the management. Most often, these are easily recognizable and measurable factors, like amount of the transactions, profit, investments, capital, sources of financing, and various relevant factors like the indicators of the profitability of transactions, profitability of sale, data about the market size, market potential etc. There are also the values which are expressed by the non-monetary measuring units, like the number of employees, number of work hours, surface of the manufacturing plant or surface of the sales rooms and storages. Of course, there are also the factors which are not so simple to express in the adequate measuring units, because these are the qualitative features of the economic values, like the customer satisfaction, quality of products, status of the technological development of the product or the manufacturing procedures, etc. Many of the above mentioned factors are inter-related in very complex cause-effect networks of influence, where the change of one factor influences other factors. Such cause-effect relations are the consequence of self-regulation and functioning of the system, and most often are not the consequence of intentional formulation. Because of the more efficient management and decision making within the business system, it is important to recognize the patterns which describe the above mentioned cause-effect relations, and their temporal development. Image 3. Entrepreneur attitudes toward the problems

Organization of logistics

New life styles

World markets

Problem solvers

Fulfilling of the client demands

Environment protection

Planning of the work force

Making of the annual budget

Source: Gomez, P., Probst, G.: Die Praxis des ganzheitlichen Problemlosens-Vernezt denken, Unternehmerish handeln personlich uberzeugen, 3. Unveranderte Auflage, Haupt Verlag, Bern, 1999, pp. 14.

Multiple interconnected problem-solving activities are the elements which create the company. Daily activities of the managerial structures in the companies are mostly related to constant solving of the problems, from the simplest to the most complex. This process includes all the employees of the company, and the goal is the achievement of customer satisfaction. In accordance with the central meaning of the problem solving process for any business activity, the question is which activities will yield the satisfying results. There is no universal procedure of problem solving, which is visible from the constant failures present in the business practice. Every process of problem solving is, in fact, process of trials and errors which is taking place in various circumstances. Since there are no completely identical companies, nor there are identical constellations of events which would describe the functioning of the similar companies, we cannot expect to find universal problem solutions.

Dörner D.: Die Logik des Misslingens - Strategisches Denken in komplexen Situationen, Rowohlt Verlag, Reinbek bei Hamburg, 1992, pp. 106.

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The circumstances in which such complex problems are created can be reduced to the following: • Increasing internationalization and networking, with the simultaneous fragmentation of the markets and individualization of needs; • Increasing dynamics of the business activities, followed by the decrease of the amount of available time for management reaction; • Increasing pressures of the cooperates requiring leadership, while simultaneously demanding their own room for action; • Increase of the aspirations for the welfare, with the simultaneous requirements for respecting the ecological and social goals; • Increasing power of innovations, with the simultaneous overcoming of the increasing risks. To be able to cope with the above mentioned challenges, the company management should be able to adopt the skills which differ significantly from the existing skills. Within the context of the above mentioned complex problems, the basic task of the management is the awareness of the existing uncertainties, along with their possible and probable consequences. Therefore, in the process of planning, especially during the consideration of the future events, the action horizon of the company has to be increased. People as the element of the business systems create their own goals within the system, which do not need to correspond with the goals of management, or other company related groups outside of their system. Therefore, social systems have to fulfill more purposes, i.e. goals, and are created according to that.7 Since the goals and the purpose are created as the consequence of human consideration, special attention has to be paid to the various mental models which people ascribe to their roles.8 Such mental models consist of the mixture of understanding and the system of values which the individuals have created through the experience or education. The facts and the values through which the individuals interpret the world can be grasped through the terms of system explanation. Decision making is the result of implementation of certain rules in the process or the implementation of the adequate policy to the information about the world as we see it. These are conditioned by the institutional structures, organizational strategy and cultural norms, but are under significant influence of the mental models9 If the problem solving, i.e. decision making, uses the same, non-changed mental models, we can talk about the learning though the single loop, which does not change out perception of the world, temporal dimension, structure dimension and the limits of the system. Such form of learning is shown in the Image 4. Image 4. Learning through the single loop Real world Information feedback

Decision

Strategy, structure, rules of decision making

Mental models of real world

Source: Author

Because the non-realistic image of reality, which is consequence of leaning on the mental models of decision makers, the learning through the single loop should be complemented by the learning through the double loop.

Jackson, M. C.: System Thinking: Creative Holism for Managers, John Wiley&Sons, Chichester, 2003, pp. 10. The mental models are subject of substantial debates in psychology and philosophy. Mental models are described as the acquired routines or standardization of the operative procedures, a kind of typology for categorization of experience, and as the logical structures for language interpretation etc. More in Axelrod, R.: The Structure of Decision: The Cognitive Maps of Political Elites, Princeton University Press, Princeton, 1976, također vidjeti u Doyle, J., Ford, D.: Mental models concepts for system dynamics research, System Dynamics Review, Vol. 14, No.1, 1998 9 Sterman, J. D.: Bussines Dynamics- System Thinking and Modelling for a Complex World, McGraw-Hill, Boston, 2000, pp 16. 7 8

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Image 5. Learning through the double loop Real world Decisions Information feedback

Strategy, structure, rules of decision making

Mental models of the real world

Source: Author

In this, the information feedback is not used only for the change of the decisions made within the frame of the decision making rules, but also for the change of the mental models, i.e. the image about the real world. By changing the mental models, we change the structure of the system, and apply the new rules of decision making, and implement different strategies. Image 6. Operative and strategic management Desired reality Deviation Customer wishes Operative management

Management exp. Decision making

Reality

Action Strategic management Strategy

Competition Conditions

Organization

Source: Strohhecker, J. Sehnert, J.: System dynamics für die Finanzindustrie: Simulieren und analysieren dynamischkomplexer Probleme, Frankfurt School Verlag, Frankfurt/ Main, 2008, pp. 19.

The development of the system thinking is the process of learning through the double loop, in which the reductionist, short-termed and static worldview is replaced by the holistic, wider and long-termed worldview. When we talk about the companies, learning through the loop, if performed adequately, leads toward the improvement of the operative and strategic decision making. For the operative management, the quick learning through the single loop is extremely important, while the strategic management should be oriented toward the learning through the double loop (Image 6)

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CONCLUSION For the learning from experience to function well and to have quick results, the circular flow of learning should be as quick as possible. However, certain actions do not show the simultaneous result in reality, because of the temporal shifts in which the effect of the certain measures just becomes visible. Beside the problem of the temporal shifts, there are other obstacles to the efficiency of experience based learning, which include the complexity of the company, their own dynamics, environmental influences and the limited rationality of the human participants. Mental models which are used are most often oriented toward the events which ignore the feedback process, and are not capable of estimating the temporal shift between the action and reaction, and the lag in the information reports. Systematic discovery of new knowledge with the goal of establishing the cause-effect relations lead to the creation of the cognitive maps which neglect the feedback, multiple inter-relations, non-linearity, temporal shifts, and other elements of dynamic complexity. Such discovery of new knowledge leads to the problems within the complex systems, where the cause and effect are far away from each other in space and time, where actions have multiple effects, and where temporally shifted consequences are different, and at the same time, less significant than the immediate effects. Multiple feedbacks cause mutual correlations of a larger number of variables, which creates difficulties in the estimation of the real cause. Because of this, there are numerous protocols, like feedback diagram, business policy structure diagram, and the interactive computer mapping, which helps in improving of the mental models, and all with the goal of comprehensive and better quality process of decision making in the companies.

LITERATURE 1.

Ackoff, R. L. (1971): Towards a System of System Concepts, Management Science, Vol. 17, No. 11, 1971, pp. 661-671.

Axelrod, R. (1976): The Structure of Decision: The Cognitive Maps of Political Elites, Princeton University Press, Princeton.

Doyle, J., Ford, D. (1998): Mental models concepts for system dynamics research, System Dynamics Review, Vol. 14, No.1.,

Dörner D.(1992): Die Logik des Misslingens - Strategisches Denken in komplexen Situationen, Rowohlt Verlag, Reinbek bei Hamburg, 1992, pp. 106.

Gomez, P., Probst, G. (1999): Die Praxis des ganzheitlichen Problemlosens-Vernezt denken, Unternehmerish handeln personlich uberzeugen, 3. Unveranderte Auflage, Haupt Verlag, Bern, 1999, pp. 15.

Jackson, M. C. (2003): System Thinking: Creative Holism for Managers, John Wiley&Sons, Chichester

Malik, F. (2006): Strategie des Managements Komplexer Systeme, 9. Unveranderte Auflage, Haupt Verlag, Bern.

Sterman, J. D.(2000): Bussines Dynamics- System Thinking and Modelling for a Complex World, McGraw-Hill, Boston

Strohhecker, J. Sehnert, J. (2008): System dynamics für die Finanzindustrie: Simulieren und analysieren dynamisch-komplexer Probleme, Frankfurt School Verlag, Frankfurt/ Main.

10. Urlich, H. (1970): Die Unternehmung als produktives soziales system, 2. Auflage, Haupt Verlag, Bern und Stuttgart. 11. Vester, F. (2002): Die kunst vernetzt zu denken-Ideen und werkzeuge fur einen neuen umgang mit komplexitet, Ein Bericht an den Club of Rome, Deutscher Tashenbuch Verlag, Munchen. 12. Vester, F. (1991): Neuland des denkens, Vom tehnokratishen zum kybernetishen zeitalter, 7. Auflage, Deutsche Tashenbuch Verlag, Munchen. DETAILS ABOUT AUTHORS: STJEPAN DVORSKI PROFESSOR FACULTY OF ORGANIZATION AND INFORMATICS, UNIVERSITY OF ZAGREB VARAŽDIN, CROATIA stjepan.dvorski@foi.hr VLADIMIR KOVŠCA ASSISTANT FACULTY OF ORGANIZATION AND INFORMATICS, UNIVERSITY OF ZAGREB VARAŽDIN, CROATIA vladimir.kovsca@foi.hr

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ENTREPRENEURSHIP AND ITS LONG ROAD TO DEVELOPMENT IN BOSNIA AND HERZEGOVINA: AN INSTITUTIONAL APPROACH ZIJAD DŽAFIĆ ILIJA ĆORIĆ

ABSTRACT In the last few years, many scientific-research works that deal with determinants of entrepreneurship, barriers to its development and its direct effect on the total development of economy, have been realized. In this paper, authors deal with studying the institutional framework, as an important macroeconomic condition that affects development of entrepreneurship, and through it, the total development of economy and creation of new work positions. In the analysis, the study of the case of historical development of institutions in BiH is used with the aim of determining their key deficiencies for a more significant macroeconomic development. Starting with North, we observe the institutional framework from the aspect of formal and informal institutions. Although the current analysis of formal institutions in BiH is in many ways humiliating, we think that with a more active involvement of the International Community and the support from local authorities, they could change for the benefit of development of entrepreneurship in a short period of time. The real block in the development of institutional framework arises out of the domain of informal institutions, which are the result of historical development and pre-transitional period. Therefore, it is to be expected that new generations, who grew up in the market environment, will be more open for entrepreneurship, lifelong learning, mobility, flexibility and the like, and that through their behaviour they will affect the gradual change of informal institutions, thus creating an ambience for their positive impact on the development of entrepreneurship and the total macroeconomic development in BiH. KEYWORDS: entrepreneurship, formal and informal institutions, historical development, Bosnia and Herzegovina.

1. INTRODUCTION When it comes to relationship and interrelationship between entrepreneurship and development, many researches have come to conclusion that entrepreneurship positively affects economic development.1 Accordingly, the main recommendations to the creators of economic policies went in the direction of raising the rate of entrepreneurship, which would automatically lead to greater economic development. One of the key objections to these empirical researches is that they are largely based on highly developed economies of the West. Studies, which included developing economies and economies in transition, showed that increased rates of entrepreneurship sometimes can have a negative impact on the overall development of an economy. Thus Franičević states that relationships between entrepreneurship and development are complex, insufficiently interpreted, and are not unambigious.2 In his famous paper from 1990 Baumol distanced himself from the standpoint of unequivocal impact of entrepreneurship on the overall economic development, and argued that the level of entrepreneurial activity is given, and that the economies do not differ significantly in that. In what they differ is the allocation of entrepreneurial resources and potential that can go into productive, unproductive and destructive entrepreneurship, each of which differently affects the economic development.3 Gradually, the impact of entrepreneurship on economic development started to be seen with regard to the existing level of development, which means that not every economy needs the same measures of economic policy in various stages of development.4 The main factor in the allocation of entrepreneurial resources is the institutional framework, which has become in the last two decades the key element of economic development.5 See for example. Naude 2008.; Wennekers, van Stel, Carree i Thurik 2008.; Acs 2007.; Hessels i van Stel 2007.; van Stel, Carree i Thurik 2004.; Wennekers i Thurik 1999. 2 Franičević, Vojmir, Poduzetništvo i ekonomski rast u hrvatskom postsocijalističkom kontekstu, Institut društvenih znanosti Ivo Pilar, Zagreb, p. 172 3 Baumol, William J. (1990.) Entrepreneurship: Productive, Unproductive and Destructive, Journal of Political Economy, Vol. 98, broj 5 4 See for example. Aidis, Estrin i Mickiewicz 2007. 5 More on this in Dallago 2005.; Henrekson 2007.; Aidis, Estrin i Mickiewicz 2009.; Sautet 2005.; Sobel 2008.; Estrin and Mickiewicz 2000. 1

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Drawing on Baumol, it is clear that the economy of Bosnia and Herzegovina as a post - transitional economy with highly complex economic and political issues, above all needs a clear and unambiguous strategy for small and medium enterprises, which will also deal with the allocation of potential entrepreneurial potential of economy. Besides an introduction and conclusion, the work is divided into two chapters. The second part of the work analyzes the state of entrepreneurship in Bosnia and Herzegovina as a post- transitional economy. The third part introduces the institutional framework into analysis. In the first part of the third chapter there will be a detailed analysis of the current state of formal institutions with current political and legislative framework which are related to entrepreneurship. The second part of the third chapter is devoted to the analysis of informal institutions as a key barrier for the development of entrepreneurship in this economy. A historical case study method has been used for the development of informal institutions. The fourth section of the paper brings a conclusion together with suggestions for economic policy makers.

2. DEVELOPMENT OF ENTREPRENEURSHIP IN POST-TRANSITIONAL CONTEX OF BOSNIA AND HERZEGOVINA Bosnia and Herzegovina has a population of around 3.8 million people, and working population is estimated on around 67% of total number of population. In July 2012 there were 534 000 registered unemployed (unemployment rate was 40.6%), while in 2007 there were 502 192 unemployed (www.bhas.ba accessed on 29.11.2011.). Compared to other transition countries, the problem of the labor market in Bosnia and Herzegovina is even more expressed because of the fragmented market, which is a result of the constitutional order of Bosnia and Herzegovina. Lack of adequate legislation in this field has resulted in a high degree of the so called gray economy in the labor market, which in Bosnia and Herzegovina is up to 34%.( Medium Term Development Strategy of Bosnia and Herzegovina 2004-2007., The Council of Ministers of Bosnia and Herzegovina, Sarajevo, p 67) Thus, unemployment is one of the most serious problems that Bosnia and Herzegovina is currently facing. The research of the unemployment rate and the analysis of the most influential factors are usually conducted within the framework of macroeconomic theory and aggregate variables. It is known that entrepreneurship often appears as a generator of new products and new workplaces. With opening new companies and hiring people entrepreneurs help in reducing the unemployment rate and also in restructuring of the economy in the country. Therefore, it is very important to investigate what and in what way affects the number of unemployed in enterprises in Bosnia and Herzegovina. The following chart shows the unemployment rate in six countries of the Southeast Europe (SEE6). Figure 1 - The unemployment rate in SEE6

Source: Labor Force Surveys of National Statistical Offices.

In most countries the unemployment rate rapidly decreased until 2008, but after this year it began to grow, for example in Serbia, with 14.4% in 2008 to 20% in 2010. According to aforementioned source, the unemployment rate in Bosnia and Herzegovina in 2010 was 27.2%, and in Montenegro it was 20.1%. Also, it can be concluded that only Kosovo and Macedonia have a higher unemployment rate than Bosnia and Herzegovina. The situation in which the economy of Bosnia and Herzegovina found itself in after the aggression on Bosnia and Herzegovina ended, especially destroyed industry and a large gap in technological development, resulted with gradually accepting the fact that in Bosnia and Herzegovina in the long run, micro, small and medium enterprises (hereinafter SMEs) will have to play a key role in economic development and in creating new workplaces. The so far strategy documents, particularly the General framework of economic development strategies (1999) and the Medium Term Development Strategy (2004-2007) emphasized the central importance of SMEs for the recovery and development of Bosnia and Herzegovina, but also the necessity to create a suitable environment and conditions for their successful growth. Activities

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to support the development of SMEs were led at the entity level, with very substantial financial support and technical assistance from international donor organizations, but without proper coordination. In order to better utilization of existing resources, but also to fulfill requirements required for access to additional development resources - primarily EU Structural Funds, it is necessary to improve this coordination. According to our survey, the number of SMEs in Bosnia and Herzegovina is 129 155, while in Croatia it is 182 010 or 29% more than in Bosnia and Herzegovina. These data indicate that there is a small number of registered SMEs in Bosnia and Herzegovina in relation to population, so the entrepreneurial sector realistically represents a potential generator of opening new SMEs, and therefore new jobs. The introduction of cluster policy in BH development policy, which would encourage the development of certain types of internationally competitive products and services, can contribute to strengthening the competitiveness of BH entrepreneurship and the BH economy and strengthening macro-economic stability.

3. ROLE OF THE INSTITUTIONS AND ITS SIGNIFICANCE IN THE DEVELOPMENTAL DISCOURSE Recently, the scientific discourse increasingly studies the term and emersion of institutions, which is closely connected with the concept of economical development of national economies. Although critics of this type of research mostly claim that it is “current trend”, there are significant implications of immeasurable contribution of the institutions to the economical development.6 In accordance with neoliberal economical doctrine, in the last two to three decades the concept of entrepreneurship initiative was also accepted, which leads towards innovation and changes, and thus creates the development of complete economies. It is also the importance and number of those authors, which see the contribution of institutions to development mainly through their influence on entrepreneurship.7 Relying on Baumol, who argues that the amount of economic initiative in the form of entrepreneurship is mostly given or in other words that entrepreneurship potential does not differ significantly between individual economies, author Frederic Sautet in his work The Role of Institutions in Entrepreneurship: Implications for Development Policy8 also accepts the concept, according to which the offer of entrepreneurship activity is not limited. However, if the offer of entrepreneurship activity is not limited, and if we accept that entrepreneurship is the main mechanism for creating economical development, the question is, why are some economies developed, and some are not? Exactly the institutions make the starting point for answering this question. In fact, every economy is made of institutions, that create the so called “rules of the game” within the economical environment. Therefore the institutions can definitely be seen as the creators of economical development through its mediate influence on entrepreneurship because institutions influence the allocation of entrepreneurship resources, and the type of entrepreneurship activities. Because of that the entrepreneurship in many economies is less dependent on natural resources, and more dependent on quality of institutions that affects the degree of exploiting entrepreneurship opportunities. The key assignment of institutions during this is guiding entrepreneurship into socially producible and useful activities. While analyzing the institutions and institutional changes, and its affect on economical development, many authors usually begin by Douglass C. North’s definition of institutions, according to which the institutions are the rules of the game in a society, or more formally, represent the limitations that man has obtained in order to shape human interactions.9 The key question of difference in development between certain economies necessarily leads to an analysis of institutional development, because many authors conclude that the differences in institutional development represent the main cause for differences in the development of certain economies.10 The above mentioned definitely imposes a question, if the differences in development of institutions between certain economies are the key cause of differences in their total development, where does the difference in institutional development derives from? Why wouldn’t low developed economies simply copy the best possible institutional solutions from highly developed Western economies and in that way contribute to their own development? What are the specific limitations of Bosnia and Herzegovinian economy in this aspect, and why is the country significantly behind advanced transition economies? The answer to this question requires a deeper analysis of the anatomy of the institutions. North in his famous book called Institutions, Institutional Change and Economic Performance speaks of the division of institutions on formal and informal.11 According to this division, formal institutions are written rules, laws, constitutions, conventions, etc., while there are informal constraints, which See for example Rodrick 2000., 2001.; Chang 2005., 2010.; Acemoglu 2000., 2005., 2008.; Hall 1999. See for example Mickiewicz 2009.; Henrekson 2007.; Aidis 2007.; Dallago 2005.; Sobel 2008.; Sautet 2005. 8 Sautet, Frederic, (2005.) The Role of Institutions in Entrepreneurship: Implications for Development Policy, Mercatus Centre, George Mason University, 2005. godine 9 North, Douglass C. (1990.) Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge, 1990. godine, p. 13 10 See for example Acemoglu 2000., 2005., 2008.; Rodrick 2000., 2001. 11 North, Douglass C. (1990.) Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge, 1990, p. 55 - 67 6 7

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are patterns of behavior, norms, customs, and all that which individuals in their daily lives classify as “culture”. That is, formal institutions are written limitations which can be affected quickly, and theoretically speaking they can be changed “overnight”. In contrast, you cannot so easily influence on the informal sphere, nor can it be changed in the short term because it depends on a number of economic, social, political, and historical factors, which intermingle over time. There is interaction between the formal and informal institutions in everyday life. There, where this interaction is greater, cost of conducting formal, legal system are lower. Informal institution are much more important in the short term because costs of implementing formal institutions are higher if the consisting informal institutions, that is, informal constraints are not taken into account. The basic limitation of informal institutions is that they cannot be affected in the short term. It is here that comes to clarification which is the reason why less developed economies cannot simply apply the formal institutions from the highly developed economies. The problem is in the fact that the so called “blueprint” solutions from the developed economies during the implementation do not take into account the limitations of the existing informal economy receiving these measures, which creates enormous resistance when implementing them. This also explains the reasons for the failure of many economic programs and policies in less developed and transition economies in the last two decades. So the key points of the famous Washington consensus have experienced a failure mainly because of inability to adapt to local conditions in the economies which supposed to implement these policies. In accordance with the paragraphs above, one might conclude that the specific problems of the economy of Bosnia and Herzegovina are related to two main causes, namely the situation in the fields of formal and informal institutions. In order to investigate the exact cause of the problem, to find its intensity, and give suggestions to improve the economic policy, it is necessary to carry out specific analysis of case study.

3.1. The structure of formal institutions in Bosnia and Herzegovina As determined by the Dayton peace agreement, Bosnia and Herzegovina is an independent sovereign state with a decentralized administrative structure. We can see that in the following table: Table 1 – Bosnia and Herzegovina–Administrative structure Level of government

Jurisdiction State

Central

Entity

Federation

Total RS

1 1

Canton

Municipality

148

Autonomous district Totall

Brcko

162

Source: http//www.worldbank.org.ba

Institutions are all those bodies without which it would not be possible to implement the restructuring activities. This shows the complexity of (un) business environment in which we need to develop entrepreneurship. The legal system of the country, with one state, two entities (Federation of Bosnia and Herzegovina and Serbian Republic), Brčko District, ten cantons in Federation and municipalities, created a very specific political and legal framework for the development of economy and entrepreneurship. In accordance with the Constitution, the state is in charge only for foreign trade and customs policy, and all other jurisdictions are on the entity or lower levels of government. Due to this specific structure of the state, institutions to support the development of entrepreneurship that do not have a pivotal institution at the state level to plan, coordinate and guide the development of entrepreneurship and the work of other institutions, are being introduced on various levels. Several institutions which directly affect or should affect the development of economy and entrepreneurship are worth noting: the Economic Council of Ministers, the Ministry of Foreign Trade and Economic Relations, Foreign Trade Chamber and the Agency for the Promotion of Foreign Investments. Fostering an entrepreneurial mentality with creating the regulatory framework implies liberalization, particularly of administrative regulations, with eliminating barriers but also with clearly defined rules of competition.12 The following table provides an overview of the laws that have a significant impact on the operations of SMEs and the laws that regulates the establishment of legal bodies, the tax system, customs system, the protection of market competition.13 Razvoj malog i srednjeg poduzetništva u Federaciji Bosne i Hercegovine, Vlada Federacije BiH, Ministarstvo razvoja, poduzetništva i obrta, Inžinjerski biro, Zagreb, 2008., p. 147 13 http://www.mvteo.gov.ba (access on 23.04.2010.) 12

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Table 2 - Laws that define business activity of small and medium sized enterprises Law

Special notes

Official gazette of BiH

Establishment of legal entities Framework Law on Registration of Business Entities in Bosnia and Herzegovina

62/04, 8/05, 72/05

General Law on Co-operatives

18/03, 55/06

42/04

The tax system Law on Accounting and Auditing in Bosnia and Herzegovina Law on Indirect Taxation System in Bosnia and Herzegovina

In terms of this law, the term "indirect tax", refers to the import 44/03, 52/04, and export duties, excise taxes, value added tax and all other taxes 32/07, 34/07 charged on goods and services, including taxes and tolls

Law on Indirect Taxation Authority

89/05

Law on Value Added Tax

Tax rate of 17% is not too high.

09/05, 35/05

Law on excise duties in Bosnia and Herzegovina

Excise products are considered: - oil derivatives, - alcohol and alcoholic beverages, - tobacco products -beer and wine, - non-alcoholic drinks, -coffee (raw, roasted, ground and its extracts)

62/04, 48/05,72/05

The Customs System Law on Customs Tariff of Bosnia and Herzegovina

01/98, 05/98, 07/98, 31/02, 19/03, 32/04, 48/05, 76/06

Law on free zones in Bosnia and Herzegovina

03/03, 13/03

Protection of market competition Law on Competition

The law defines the rules, measures and actions for the 48/05, 76/07 protection of market competition, the scope and operation of the Competition Council on the protection and promotion of market competition. The implementing body of the protection of the market competition is the Competition Council. In the system of Competition Council, operate offices for competition in Bosnia and Herzegovina and Republic Serbia as organizational units outside the headquarters of the Competition Council. Competition Council is authorized to pass by-laws based on the provisions of the Competition Law and other relevant regulations, which are published in the Official Gazette of the Federation.

Law on Electronic Signatures

There is a law on electronic signature at the state level, but at the Federation level it is an emptiness need to be filled, and the regulation is important for SMEs because that way of business can lead to significant cost reduction. In doing so the European Charter for small enterprises demands: -improvement of electronic access and -successful e-business models and top small business support

91/06

Source: http://www.mvteo.gov.ba

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The previous table clearly shows that SMEs require an environment with certain characteristics to operate successfully, and that the situation regarding legislation and regulations in Bosnia and Herzegovina is very much complicated because of overlapping of the jurisdiction between certain municipality, counties, entities and state. Besides this, most of the laws that affect the business environment and development of MSME has been adopted separately, without adequate coordination and harmonization between the lower and upper levels of government. Development of SMEs and entrepreneurship in Bosnia and Herzegovina is in the initial stage, although this sector of the economy could become the driving force for the development of the state. The government still has no strategy for the development of entrepreneurship and SMEs, and in addition there are obstacles in the development of SMEs and of entrepreneurship set by the government. There is no policy and no initiative for development of SMEs in Bosnia and Herzegovina. There is also a lack of legislation, which leads to lack of measures, instruments and harmonized organization to support the development of SMEs. In Figure 2 are all institutions and their tasks which are directly connected with the development of SMEs in Bosnia and Herzegovina. Figure 2. Institutions that are directly connected with the development of SMEs in Bosnia and Herzegovina BiH razina Vijeće/savjet ministara Vijeće/savjet za razvoj i poduzetništvo Osnivač: Vijeće ministara Finansira: Vijeće ministara Predsjedava: ministar MVTEO Vijeće se sastaje 4 puta godišnje, po potrebi i češće Glavni zadaci: • Djeluje kao inicijator pri donošenju odluka o poslovnom okruženju; • Predlaže aktivnosti i politike poboljšanja okoline za poslovanje; • Predlaže strateške odluke i promjene zakona u BiH i zagovara interese MSP-a (monitoring indikatori); • Pregled godišnjih i višegodišnjih izvještaja, programa i strategija Sektora MVTEO za MSP i iniciranje novih programa.

Ministarstvo spoljne trgovine i ekonomskih odnosa – Sektor za mala i srednja preduzeća Osnivač: Vijeće ministara Finansira: Vijeće ministara Rukovodi: Pomoćnik ministra Glavni zadaci: • Prioritetno decentralizovan pristup stimulisanja entitetskih/distrikt/županijskim/regionalnim agencijama za MSP kao koordinator; • Strateški razvoj novih usluga i instrumenata za podršku MSP-a; • Međunarodna saradnja sa regionalnim i međunarodnim agencijama; • Tehnička podrška postojećim entitskim/županijskim/ regionalnim i lokalnim institucijama za podršku MSP-a;

Entitetski i županijska razina Entitetska i županijska ministarstva Fondovi za razvoj MSP-a entiteta i županija

Razvojne agencije entiteta i županija

Regionalni sustav u skladu sa zahtjevima EU integracija

Fondovi za razvoj MSP-a entiteta i županija Osnivač: Entitetske, županijske ili druge institucije/organizacije Financira: Sredstva entiteta, županija i ostalih izvora Upravljačka struktura uspostavljena od strane osnivača Glavni zadaci: • Osiguravanje direktnih i indirektnih pozajmica za razvoj MSP-a; • Garancije za razvoj MSP-a; • Subvencije za fizičke osobe za početak rada biznisa sa inovativnim/visoko tehnološkim programom rada; • Subvencije za razvojne projekte MMSP-a.

Osnivač: Entitetske, županijske ili druge institucije/organizacije Finansira: Sredstva entiteta, županija i ostalih izvora; Upravljačka struktura uspostavljena od strane osnivača Glavni zadaci: • Upravljanje projektima; • Koordinacija razvoja MSP-a i poduzetništva • Promocija poduzetništva; • Implementacija poduzetništva i MSP programa; • osiguranje informacija i konzalting usluga za MSP-a; • Organizacija seminara za MSP-a; • Učešće u međunarodnim projektima od značaja za entitet/županiju.

Osnivač: Financiranje: Glavni zadaci: • Podrška, promocija i koordinacija harmonizovanog ekonomskog razvoja u regiji; • Promocija direktnih stranih investicija; • Izvozna promocija; • Podrška poduzetnicima; • Podrška tehnološkom razvoju u regiji; • Suradnja sa međunarodnim projektima koji su vezani za regionalni razvoj; • Upravljanje regionalnim projektima.

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Lokalna razina Općinski odjeli za gospodarstvo, lokalne agencije i udruženja, sub regionalne agencije Osnivač: Općina, udruženje nekoliko općina, ostale organizacije/ institucije Upravljačka struktura uspostavljena od strane osnivača Financiranje: Budžeti osnivača, ostali fondovi Glavni zadaci: • Osiguranje informacija; • Konzalting usluge za MSP-a; • Suradnja na međunarodnim projektima od sub regionalnog/lokalnog značaja;

Izvor: Strategija razvoja malih i srednjih poduzeća u BiH, 2009. – 2011., Sarajevo, 2009., p. 38

If we look at the Figure 2, in which there is a suggestion to strengthen the institutional capacity of the SMEs, we see that instead of the agency and the fund for SMEs a key role should play a sector that hasn’t been introduced yet. The question is whether the institutions of the Council of Ministers in Bosnia and Herzegovina ever begun with creating the preconditions for the development of quality environment as it is done in our local and global environment. It is widely known that one of the main objectives of economic policy is to improve institutional conditions and economic environment in order to provide more effective support to the SME sector, to create new jobs, increase the level of flexibility and to speed up the economic development of the country. To advocate for the development of SMEs should be the consequence of the belief that their development represents the requirement for faster economic development of the whole country and of solving many social issues. Faced with a slowdown in the implementation of the adopted strategic documents, the Council of Ministers in October 2010 accepted the proposal of the Ministry of Foreign Trade and Economic Relations to form the Department for promotion of entrepreneurship, whose establishment is provided by the “Strategy for the development of micro, small and medium enterprises (MSME in Bosnia and Herzegovina 2009-2011)” within the Agency for Foreign Investment Promotion (FIPA). This Ministry and FIPA will form a working group to prepare a draft law on amendments to the Law on the Agency for the promotion of foreign investment in Bosnia and Herzegovina in order to make the Agency deal also with the promotion of entrepreneurship. Besides the operational responsibilities for the implementation of this strategy (initiation of priority activities, coordination of carrying out activities, monitoring and evaluation, performance), a new sector will also provide useful information and advice to entrepreneurs, connect small and medium-sized enterprises with foreign investors, and coordinate domestic Network for business development and international projects of support the development of entrepreneurship and SMEs. If we consider all above said, we can conclude that all institutions for the implementation of the adopted Strategy of development of small and medium enterprises from 2009 - 2011., could not do the intended implementation of the same, and that this modification will not do much in fulfilling the requirements of the European Partnership. According to the EU definition of SMEs, the most of the companies in Bosnia and Herzegovina are SMEs. EU definition structures SMEs by the number of employees and annual turnover (balance sheet data) and by that definition (Recommendation 2003/361/ EC, Annex, Article 1 - the Company), “The enterprise is considered to be any entity engaged in an economic activity, regardless of the legal form. This includes especially people which are self-employed and family businesses engaged in craft or other activities, partnerships and associations that are regularly involved in economic activities”. Table 3 - The structure of SMEs and individual trades (entrepreneurs) in the Federation of Bosnia and Herzegovina, Republic Serbia and Brcko District Entities B&H and BD

Data on number of MSMEs

Data on the number of craftsmen (independent entrepreneurs)

Number of employees

micro

small

medium

Total

Federation of B&H

23.413

5.081

883

29.377

64,24

51.674

62,51

175.496

52,85

Republic of Srpska

12.049

1.805

412

14.266

31,19

28.228

34,15

140.267

42,24

Brcko District

1.660

410

2.082

4,55

2.750

3,32

16.242

4,89

Total:

37.112

7.296

1.257

45.725

100,00

82.652

100,00

332.005

100,00

Source: Authors estimate

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The presented indicators show that the largest number of companies in Bosnia and Herzegovina falls into the category of micro enterprises (with the number of employees up to 10), and they make about 79% in the Federation of Bosnia and Herzegovina, 84% in Republic Serbia and 79% in the Brcko District of all SMEs, small enterprises up to 50 employees make about 17% in the Federation of Bosnia and Herzegovina, 12% in the Republic Serbia and 19% in Brcko District and average enterprise make about 0.2% in the Federation of Bosnia and Herzegovina, 0.2% in Republic Serbia and 0.5% in Brcko District. Based on recently conducted primary research for the Federal Ministry of Education and Science of Bosnia and Herzegovina, conducted by one of the authors of this paper, it is concluded that the barriers for SME Development in Bosnia and Herzegovina are confirmed. These barriers were previously identified through surveys by the World Bank and the European Commission. It is clear from this research that Bosnia and Herzegovina is lagging behind the neighboring countries in almost all segments, and that there are no concrete institutional and legislative reforms in the establishment of system solutions to improve the environment for growth and development of manufacturing SMEs14. Using factor analysis, the identification of key factors related to external and internal barriers in the development of manufacturing SMEs in Bosnia and Herzegovina is presented. In fact, factor analysis was performed separately for external and especially for internal barriers.

3.2. Informal institutions - the key to development of entrepreneurship in Bosnia and Herzegovina Transition economies are characterized by generally lower rates of entrepreneurship when compared to highly developed economies of Western Europe.15 Moreover, there are significant differences in rates of entrepreneurship within transition economies. Such phenomena are results of different historical developments of individual transition economies, the amount of time spent in socialist economic conditions, the influence of various dictatorships to restrictions in subsequent rates of entrepreneurship, etc. The main recommendation in terms of the implementation of measures by the creators of economic policy has been focused on building a network of formal institutions that would support turning the transition economies to market mechanisms of functioning. After two decades of transition, such formal institutions have been established in all the transition economies, but their rates of entrepreneurship are still unsatisfactory when compared to developed economies. It is precisely here that appears the space and need for the introduction of informal institutions into the analysis, which are also a very important factor that affect the development of entrepreneurship. In addition to the aforementioned definition of informal institutions, it is important to note, that this is about general confidence, and some generally accepted values in society. Therefore, it is very clear that why this type of institution cannot be influened in short term, nor it can be changed over night which is the case with formal institutions. A key question that arises here is why are the informal institutions of particular companies positive and productive in relation to other institutions of informal economy? What causes differences in informal institutions, and why they are a key obstacle to the development of entrepreneurship in some economies? What is the reason because of which Bosnia and Herzegovina is facing with extremely negative entrepreneurial environment, which is largely a result of the development of informal institutions? Given that it is about the patterns of individual behavior, norms, customs and generally accepted value system, it is advisable to search for the answer to these questions in the historical development of this economy. Historical development of Bosnia and Herzegovina from 15th century until today is certainly very dynamic.16 In 1463 Bosnian Kingdom falls before the conquest of the Ottoman Empire.17 Under the leadership of Mehmed II. Conquerer the Ottoman Empire conqueres Herzegovina region also in 1482. Although the Ottoman Empire at that time had occasional clashes with other neighbors, the main direction of territorial expansion led through the Balkans to Central Europe. Conquerors skirmishes with many neighbors, Croatian towns, Hungarian Empire, and later the Austro - Hungarian monarchy lasted until the end of the 19th century. During those nearly 400 years of history, the area of today’s Bosnia and Herzegovina was under constant occupation. The results of this occupation are manifested in drastic changes in the demographic structure the population during the persecution and displacement, war losses, epidemics, etc. The construction of physical infrastructure, the development of the educaDžafić Z, Zahirović S, Okičić J i Kožarić A., 2011, Internal and External Obstacles in Development of Small and Medium Enterprises in Bosnia and Herzegovina, Croatian Economic Survay, Ekonomski institute, Zagreb, Vol. 13: No 1. p. 162 15 Estrin, Saul, Mickiewicz, Tomasz (2000.) Entrepreneurship in Transitional Countries: The Role of Institutions and Generational Change, UCL SSEES, Center for Comparative Economics, Working ppaer No. 106, ožujak 2000. godine 16 Given that in the areas of present-day Bosnia and Herzegovina, lived, and still live, people of different ethnic and religious affiliation, is no wonder that some historical events are interpreted in different ways, from different points of view. Here the presented analysis of the historical development has no purpose to intreprete the historical events, nor should it be a historic contribution to science. Moreover, this case study analysis is based solely on secondary data sources, which are also cited. Since the topic of the analysis are causes of informal constraints for entrepreneurship development in Bosnia and Herzegovina, and that the informal constraints are relatively stable during the time, the historical analysis is levied as a logical choice of the method of scientific research. It is used solely in the economic, scientific - research purposes. 17 The entire case study of the historical development of Bosnia and Herzegovina has been taken from the following sources, which are listed in alphabetical order: beg Bašagić (1994.); Ćirković (1964.); Ćorić (1995.); Hadžihuseinović (1999.); Malcolm (1995.); Mandić (1987.); Pavličević (2000.); Sančević (1998.); Živković (2002.); 14

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tion system, as well as introduction of adequate institutions for the organized functioning of economy of the time were not priority issues. From the mid-18th century Turkish authority in Bosnia and Herzegovina stagnates, and in post - Napoleonic period it rapidly decreases because the Ottoman Empire sapped their demographic, civilization and other reservoirs for the military - territorial expansion, and the Habsburg Monarchy, as most of the West, experienced the rise and growth, thus creating conditions for the occupation of Bosnia and Herzegovina, which took place in 1878. In the 15th and 16 century on the cultural and civilizational level comes to ethnic - religious differentiation between Catholics, Muslims and Orthodox Christians, who make separate national traditions, and gradually crystallize (mostly between the 16th - 19th century) in three separate national - confessional groups, from which will become the modern Croats, Serbs, and Bosniaks in Bosnia and Herzegovina. Austrian authority has been in Bosnia and Herzegovina in the period from 1878. – 1918. At that time comes to reinclusion of Bosnia and Herzegovina in the cultural and political space of Europe, and the fate of its citizens is connected with European ideologies, conflicts and geopolitical plans. A final crystallization of Bosnian Croats and Serbs from ethnicreligious in the modern political parties, from people to nations integrated into national corpus together with their compatriots outside of Bosnia and Herzegovina happens in this time period. From the other hand, Bosniak Muslims took very hard the secession from the Ottoman Empire, and for the first time in their history they were govern by foreign, Christian and Western empire. This kind of a crystallization at the national level with the general backwardness certainly impeded the implementation of planned reforms, among which was the most important agrarian reform, which couldn’t be implemented at that time.18 In this period Bosnia and Herzegovina did not remain unknown to the rest of Europe, but unfortunately only in negative context. Specifically, on 28 June 1914 in Sarajevo under the sponsorship of pro-Serbian organization Mlada Bosna, Gavrilo Princip organized the assassination of Habsburg heir to the throne Franz Ferdinand and his wife Sophie. This event led to the war, which the Habsburg Monarchy had announced to the Serbia, which will soon turn into the First World War. In the end of 1918, the future and the fate of Bosnia and Herzegovina was decided by the collapse the Austro - Hungarian Empire, the Soviet Communist revolution, which took Serbia her main sponsor of Great Serbian aspirations and a mixture of various political games, in which the various factors participated - from the Yugoslav Committee, to the British, American, French, and especially Italian military - political aspirations. The Yugoslav state was founded in December, 1918, and was named the Kingdom of Serbs, Croats and Slovenes and was ruled by the dynasty Karađorđević. Today’s Bosnia and Herzegovina is a part of it. Later, it was renamed in the Kingdom of Yugoslavia. The main characteristics of this period are limited parliamentary system, drastic electoral manipulations, later introduction of dictatorship, state looting carried out by monetary unification over undervalued money out of state, political assassinations and corruption - in short, all the energy was spent on activities related to the intensification of political struggle, which cut short opportunities of activating productive entrepreneurial activities. After years of dictatorship, corruption scandals and violence, the Serbian rulers, faced with the failure of centralization of state, agreed to negotiate and compromise. Finally, in 1939 an agreement was signed and Banovina of Croatia was founded representing about 30% of the territory of present-day Bosnia and Herzegovina. In March 1941, after the capitulation of German forces, the Kingdom of Yugoslavia joined the Tripartite Pact, and Bosnia and Herzegovina became a member of the Independent State of Croatia (ISC). In the area of ISC, and especially in Bosnia and Herzegovina, a war broke out between the three “domestic” forces- on the one side there were military forces of ISC, Ustashe and the Home Guard, on the other royalist forces or the Chetniks, and third side were Communist partisans led by Josip Broz Tito, who will come out of this war as winners. In 1943 the army of Tito’s partisans manages to politically capitalize its military victories on the famous meeting of AVNOJ in Jajce.19 At this meeting Bosnia and Herzegovina was proclaimed a republic, which enters into a new state after the war. It has been defined by the historical boundaries dating back from the Ottoman era. The Socialist Federal Republic of Yugoslavia (SFRY) has been founded in the post-war period, and at the same time the communist totalitarian regime was established. The Constitution was declared in 1946, in which Bosnia and Herzegovina is formally recognized as one of the republics of the new state. Last SFRY Constitution from 1974 defines the state as semi-confederation and the dictator Josip Broz Tito dies in 1980 leaving the county in a very difficult economic and unresolved political state. By the end of the 1980s, ethnic tensions burst which in early 1990s led to the secession of individual republics, including Bosnia and Herzegovina. In FebruIt is estimated that at that time there were less than 15% of the urban population, which is a significant indicator of backwardness compared to other economies in that period. 19 AVNOJ – Anti-Fascist Council of National Liberation of Yugoslavia 18

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ary 1992, a referendum on independence was held in Bosnia and Herzegovina and was mainly boycotted by the Serbian community in Bosnia and Herzegovina. Immediately after the declaration of independence and international recognition in April 1992, Bosnia and Herzegovina had to face with the open military aggression, which ended with the signing the Dayton Accords in 1995. According to the agreement, the state is divided into two entities- the Federation of Bosnia and Herzegovina (covering 51% of territory) and the Serbian Republic (covering 49% of territory). The town of Brcko is later granted the status of neutral entity under the central authority. Military implementation of this agreement was ensured by the Implementations Force (IFOR) and from 1997 the Stabilisation Force (SFOR) under the auspice of NATO, while the civilian implementation of the agreement was shared between more organizations (OSCE, UN, UNHCR) and the highest authority was given to the Office of the High Representative (OHR). This type of formal organization of the state is still in force. The consequences of the aggression on Bosnia and Herzegovina are incalculable from the political, historical, economic and every other level. Even today they are a crucial limiting factor for economic development. According to data of the Research and Documentation Centre (RDC) in Sarajevo, in the period from 1991 to1995 more than 100,000 people have lost their lives in Bosnia and Herzegovina. In 1995, 2.7 million people have been displaced; they were directly endangered by the war operations or affected by other forms of violence according to UNHCR estimates. Reintegration of war-divided economy is still very slow, and significantly hampered due to mutual distrust and conflicting national interests of the population. As this case study shows, Bosnia and Herzegovina since the end of the 15th century up to 1992 hasn’t been enjoying the fruits of independence. Much of this period is related to the service of others’ interests. The construction of quality institutions, physical infrastructure, educational system, etc, weren’t priorities to foreign authorities, but they mainly used their powers for pumping the sources of economic development, from the workforce of domestic population, exploitation of natural resources to using the territory for their military-political activities. A key source of limitations in the sphere of informal institutions of today is the lack of democratic political practices during the past five centuries. The infrastructure is far behind compared to the economies of the region, and the education of population as a key economic advantage of the future is yet in early stage, with no clearly defined strategy for the future. Although it is very difficult to change the informal institutions “overnight”, unlike with the formal, is crucial to start working on healing the historical wounds, especially those from more recent and contemporary history, to influence on creating a general level of confidence, and on generally accepted values in society. Without such a foundation set up any support to entrepreneurial activities will be in vain, because entrepreneurship without clearly defined institutional foundations will be condemned on the wrong allocation of its resources. Considering that learning, upbringing, experience, etc influence on the above-mentioned institutional foundations, it is hard to expect significant shifts from the population, where the majority grew up in systems that were not democratic. Therefore, it is to expect that the new generation, who grew up in the market environment and under the impacts of the modern age, will be generally more mobile and flexible, and that the generational shift will provide a greater openness towards entrepreneurship and lifelong education, which should certainly lead to gradual changes and improvement of informal institutions. Such a process needs to be supported with investing more efforts in education, especially in the education of the young population. In addition, an urgent amendment of previously analyzed formal institutions, along with faster construction of physical infrastructure, is certainly needed.

4. CONCLUSION The economy of Bosnia and Herzegovina is faced with extremely unfavorable indicators of labor market compared to the economies of the region. As stated in chapter two, the number of registered SMEs in relation to population is also unsatisfactory, which means that there is a great entrepreneurial potential which is yet to be developed. It is quite clear that it is this entrepreneurial potential in the form of the opening of small and medium enterprises that should play a key role in starting the overall development of Bosnia and Herzegovina, which this analysis shows convincingly. However, a key for the development of economy is not just in opening new bussinesses but also in their allocation between productive and nonproductive activities. Key role in the allocation of entrepreneurial activity, as well as its quality and long-term strategic direction, is precisely the development of institutional framework, which consists of formal and informal spheres. Analysis of the structure of formal institutions in this category shows an extremely unenviable position of Bosnia and Herzegovina in relation to other economies. Specifically, the large number of formal laws, regulations and rules, with no clearly defined development strategy for the sector of small and medium enterprises do not contribute to the competitiveness of the economy. Considering that this structure of formal institutions is mainly a result of the Dayton agreement and the subsequent unplanned accumulation of state apparatures, we believe that with the previous concensus of politi-

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cal acters a rapid change in far more efficient management system, including the devolopment of this sector, is possible. The main barriers to the development of entrepreneurship lie in the sphere of informal institutional framework, which is hardly affected in the short term. They are mainly the result of unenviable and extremely complex historical development which has derived the most of today’s citizens of Bosnia and Herzegovina of the experience of living in a democratic system. Therefore, it is to be expected that future generations will take advantage of growing up in a democratic environment, and that living in the conditions of market competition will make them more mobile and flexible, and more open for concepts such as lifelong learning, which should ultimately lead to higher rates of entrepreneurship. In order to increase the rate of entrepreunship, which will play a key role in the economic development of Bosnia and Herzegovina, not just political acters and creators of economic policies but citizens also have to work on healing the historical wounds and pave ways for future coexistence of all citizens of Bosnia and Herzegovina.

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

Acemoglu, Daron, Robinson, James (2000.) Political Loseres as a Barrier to Economic Development, The American Economic Review, Vol. 90, No. 2, svibanj 2000. godine Acemoglu, Daron, Johnson, Simon, Robinson, James (2005.) Institutions as Fundamental Cause of Long Run Growth, Handbook of Economic Growth, Chapter 6, Vol. 1A, 2005. godi Acemoglu, Daron, Robinson, James (2008.) The Role of Institutions in Growth and Development, Commision on Growth and Development, Working paper No. 10, 2008. godine Acs, Zoltan (2007.) How is Entrepreneurship good for Economic Growth?, listopad 2007. godine Aidis, Ruta, Estrin, Saul, Mickiewicz, Thomasz (2007.) Entrepreneurship, Institutions and the level of Development, TIGER Working Paper Series No. 103, 2007. godine Baumol, William, J. (1990.) Entrepreneurship: Productive, Unproductive and Destructive, Journal of Political conomy, Vol. 98, broj 5, 1990. godine Beg Bašagić, Safvet (1994.) Kratka uputa u prošlost BiH, Zurich, 1994. godine Ćirković, Šima (1964.) Istorija srednjovjekovne bosanske države, Beograd, 1964. godine Chang, Ha Joon (2005.) Understanding the Relation between Institutions and Development: Some Key Theoretical Issues, WIDER, Helsinki, lipanj 2005. godine Chang, Ha Joon (2010.) Institutions and Economic Development: theory, policy and history, Journal of Institutional Economics, 2010. godine Ćorić, Šimun, Šito (1995.) Hercegovci Hrvati Hercegovine: mitovi, predrasude, zbilja, zagreb, 1995. godine Dallago, Bruno (2005.) Institutions and Entrepreneurship: A Comparative Evaluation of South East Europe, University of Trento, 2005. godine Estrin, Saul, Mickiewicz, Tomasz (2000.) Entrepreneurship in Transitional Countries: The Role of Institutions and Generational Change, UCL SSEES, Center for Comparative Economics, Working paper No. 106, ožujak 2000. godine Hadžihuseinović, Salih Muvvekit (1999.) Povijest Bosne, Sarajevo, 1999. godine Hall, Robert E., Jones, Charles I. (1999.) Why do some countries produce so much more output per worker than others?, The Quarterly Journal of Economics, veljača 1999. godine Henrekson, Markus (2007.) Entrepreneurship and Institutions, 2007. godine Hessels, Jolanda; van Stel, Andre (2007.) The Role of Export - Driven New Ventures in Economic Growth: A cross - country analyses, SCALES, prosinac 2007. godine Malcolm, Noel (1995.) Povijest Bosne, Zagreb, 1995. godine Mandić, Dominik (1987.) Etnička Povijest BiH, Toronto – Chicago, 1987. godine Mickiewicz, Thomasz, Korosteleva, Julia, Estrin, Saul (2009.) Better Means More: Property Rights and High Growth Aspiration Entrepreneurship, Institute for the Study of labor, Discussion paper No. 4396, 2009. godina Naude, Wim (2008.) Entrepreneurship in Economic Development, UNI WIDER, 2008. godine North, Douglass C. (1990.) Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge, 1990. godine North, Douglass C. (1991.) Institutions, The Journal of Economic Perspectives, Vol. 5, broj. 1, 1991. godine Pavličević, Dragutin (2000.) Kratka kulturna i politička povijest BiH, Zagreb, 2000. godine Rodrick, Dani (2000.) Institutions for High – Quality Growth: What they are and how to Aquire them?, Strudies in Comparative International Development, Vol. 35, No. 3, 2000. godine Rodrick, Dani (2001.) Development Strategies for the next centuries, Annual World Bank Conference on Development Economics 2000, 2001. godine Sančević, Zdravko (1998.) Pogled u Bosnu, Zagreb, 1998. godine Sautet, Frederic, (2005.) The Role of Institutions in Entrepreneurship: Implications for Development Policy, Mercatus Centre, George Mason University, 2005. godine Sobel, Russell S. (2008.) Testing Baumol: Institutional Quality and the productivity of Entrepreneurship, Journal of Business Venturing, Vol. 23, 2008. godine Van Stel, Andre; Carree, Martin; Thurik, Roy (2004.) The Effect of Entrepreneurship on National Economic Growth: An Analyses using the GEM database, EIM Business and policy Research, SCALES, veljača 2004. godine Wennekers, Sander; Thurik, Roy (1999.) Linking Entrepreneurship and Economic Growth, Small Business Economics, Vol. 13, 1999. godine Wennekers, Sander; van Stel, Andre; Carree, Martin; Thurik, Roy (2008.) The Relation between Entrepreneurship and Economic Development: Is it U-shaped?, SCALES, prosinac 2008. godine

33. Živković, Pavo (2002.) Iz srednjovjekovne povijesti Bosne i Huma, Osijek, 2002. godine DETAILS ABOUT AUTHORS: ZIJAD DŽAFIĆ, PHD ASSOCIATE PROFESSOR UNIVERSITY OF TUZLA, FACULTY OF ECONOMICS BOSNIA AND HERZEGOVINA zijad.dzafic@untz.ba

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ILIJA ĆORIĆ PHD STUDENT FACULTY OF ECONOMICS, UNIVERSITY OF SPLIT SPLIT, CROATIA ilija.coric@mci.ba

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VENTURE CAPITAL – FORM OF FINANCING BLAŽENKA EROR MATIĆ TOMISLAV GELO

ABSTRACT Small and medium enterprises (SMEs) are faced with the problem of raising initial capital for start-up the business. SMEs represent a high-risk investment for banks and other institutional investors, which therefore prefer to invest in large companies. Loan as traditional and most common form of corporate financing relies on companies that have long business history, which is a major constraint for newly established companies. Because of that, many of the small companies opt for alternative ways of collecting the necessary funds. The most popular types of alternative investments are: venture capital, hedge funds, real estate and commodities. In 2009, approximately 14% of total assets of institutional investors were invested in alternative types. Venture capital appears as an alternative form of investment, especially in technology-oriented small and medium enterprises. Venture capitalists besides financing offer, also, professional support that is very important to young entrepreneurs. In 2009 its share in all alternative investments was about 22%. Advantages of investing in alternative investments are that such investments can bring higher returns than traditional investments. The paper analyzes venture capital and its advantages and disadvantages compared to traditional investments. Paper also highlights the potential of venture capital with respect to its development in the U.S., Finland and Israel, and the possibilities for its increased in the EU. KEYWORDS: venture capital, investment, alternative investment, SMEs.

1. INTRODUCTION Any start-up or development of a business requires money that can be collected by taking loans and indebting, which represents a debt expected to be returned, as well as by selling a part of a company to the investor, which results in the exchange of the capital (ownership percentage) for the money needed or by combining these two actions. It is hard to decide on how much of the debt to accept or what part of the equity to sell due to the fact that the right ratio differs in various sectors. Enterprises usually combine both the debt and equity financing in order to compensate the shortcomings of each particular form. The optimal ratio depends on the type of business, money flow, profit and source of the funding. In any case, the decision is often made on the basis of what a particular source means to the owner rather than of the owner’s actual wishes. Coopers & Lybrand, one of the largest global accountant firms, carried out a survey a few years ago on the sample of 328 fast-growing manufacturing and service companies (Start up Money for Home Based Businesses – Lessons from Success). The survey showed that the majority of them started their business without the help of the outward capital. They found out that these very successful companies usually started the business with their own money as well as with a help of their family and friends (about 71%), investors in equity accounted for 13% and bank loans and suppliers/buyers each for 8%. The survey also showed that, on the average, two out of three companies that survived, after 28 months of running business, were financed from outward sources such as banks or venture capital funds. Significantly, companies that received funding from the equity investors in two or three years from the start-up rised nearly five times more money than those that were financed through bank loans and later, on the average, they generate 30% larger revenue than they survey peers. A similar survey was conducted by the Inc. Magazine on the sample of 500 fast-growing American companies in all sectors with similar results. In the starting phase, most enterprises fail to attract creditors or investors. However, as the company grows and confirms its ability to generate a positive money flow and to operate successfully, their needs and possibilities of financing change. It usually happens in the period of two to three years from the start-up.

2. FINANCING AND ITS FORMS 2.1. Bank loans and other debt-based instruments of financing The core of all debt-based instruments is the loan, the money borrowed from an outward source, which will have to be returned in fixed amounts in a certain period of time. The relationship with the creditor lasts until the moment when the whole debt is returned, after which any relation with the creditor ceases to exist. This may be a short-term (payoff

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up to one year) or a long-term form of financing (longer than a year). Generally speaking, and in a long run, debt-based financing is cheaper than equity and is usually simpler and faster to find. The advantages of debt-based financing is that the amount of the debt is strictly determined and payable in a certain period of time, after which a debtor has no further obligations to the creditor. The disadvantage of this form of financing is that a traditional creditor usually thoroughly analyses the business operation, including how long an enterprise is in business, operating income and costs, and requires a valuable assets as collateral. In addition, a creditor often requires from the owner to guarantee that the loan will be returned with his/her personal property. Another disadvantage is that instalments, which must be regularly paid, burden the money flow of the enterprise, which may cause the shortage of the critical mass of the money needed for the operation, which is especially the case with SMEs. Advantage of the debt is that it does not reduce the owner’s share. A negative side is that a creditor requires regular monthly payments of the principal and interests, irrespective of the profitability of the enterprise. If the business does not improve, one cannot expect from the creditor to downsize his/her demands. The traditional creditor, most often banks, analyses the enterprise in a completely different way than investors in equity would. Bankers are not inclined to take a risk, so their decision to grant a loan will be mostly grounded on the existing indicators of the enterprise’s operation rather than its potentials of future growth. They want to see a strong money flow and valuable property, which is exactly what most SMEs lack.

2.2. Alternative forms of financing As opposed to the creditor, the investor in equity is, almost by definition, likely to bet on the success of the enterprise. In the first phase of the business operation, the investor usually does not expect the return of the investment because he/she is hoping for a big success in three to seven years. Naturally, being the owner, he/she shares the risk of the failure of the project. Investors probably do not expect monthly instalments, but they will check performances to be sure that the company operates as promised. The advantages of equity-based financing are the following: • Repayment of the debt is not at risk and, as long as the enterprise generates revenues, the investor’s costs are covered, • With the help of the investor, the enterprise becomes more reliable and may draw the attention of a creditor and other investors, • Less risky than the loan for it need not to be returned and is a good option if the owner cannot afford to take a debt upon himself, • Enables the entrance to the net of investors, which may enhance a trust in the enterprise, • Investors have a long-term investment horizon and many of them do not expect a short-term return of their investment, • Profit does not need to be directed to the repayment of the loan, • More money is left for the expansion of business, • No obligation to repay the debt in case of the insolvency of the enterprise. The disadvantages of equity-based financing are the following: • The owner of the enterprise loses the full control due to the fact that investors participate in decision making, • Too high a share of this type of financing may be understood by potential investors as owner’s lack of confidence in his own entrepreneurship and his unwillingness to undertake such a risk, • The owner must share the profit with the investor in the equity, • The investor may demand a return that may reach the amount of an interest rate imposed on the bank’s loan, • The investor may demand to take a share in the ownership of the enterprise and a percentage of the revenue, • The owner must consult the investor prior to make key decisions, at which they need not necessarily come to an agreement, • In case of not coming to agreement, the owner is obliged to sell his share in the enterprise and thus grant the investor the permission to manage the enterprise. Alternative investments are, in fact, alternative approaches to investments in traditional assets by using various innovative investment strategies. There are several types of alternative investments (Figure 1).

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Figure 1. The Universe of Investable Assets

Source: RREEF Research, 2007

In 2009, the share of institutional investors in alternative types of assets reached about 14% of the total assets with the trend of the enhancement of this share in several years to come up to 19% in 2012. The venture capital is one of the largest components of alternative investments and, nowadays, it is accepted as a significant type of assets for institutional investors, whose share in 2009 in this type of assets reached 3.1% of the total assets, with the perspective that in 2012 this share will account for 4.9% Investments in alternative types of assets are continually growing and in 2009 they exceeded US$ 5 000 million (Figure 2). Figure 2. Investment size in three most representative types of alternative assets

Source: RREEF Research, 2007 TheCityUK: Private Equity 2010, IFSL Research: Hedge Funds 2010, EPRA Research 2010

The aims of alternative investments are seen through their basic advantages (RREEF Research, 2007), namely: • Diversification – a low correlation with traditional types of assets may result in the improvement of portfolio stability, • Their ability to adjust to the needs of investors, thus providing a possibility of achieving a specific risk-return ratio, • Ability to offer a more effective way in approaching specific markets and types of assets. Therefore, the key reason of investing in alternative assets is that such investments may generate higher returns than the traditional investment. The investment strategy common to all alternative investments should result in generating higher returns per risk unit through the diversification, active portfolio management and permanent surveillance. In order to set an appropriate portfolio structure, it is crucial for the investor to be properly acquainted with characteristics that the investment in alternative assets may yield so he could select the best investment that would achieve the preferable risk-return ratio and realise other expectations as well.

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3. VENTURE CAPITAL The term „private equity“ is used for almost any investment that is not exploited at a formal market and that represents a risk that is not acceptable in the conventional banking system. The private equity market is segmented and provides a wide range of opportunities for money investment. The largest part of the private equity investment includes private companies or small and medium-sized branch offices of large listed companies. In Croatia, there are various translations for the terms „private equity“ and „venture capital“, such as (literal translation): risk capital, entrepreneurial capital, patient capital, entrepreneurs’ capital. Venture capital actually means only the investment in the start-up and development of the business. The early stage includes the investment in the seed and start-up stages of the operation of the enterprise. The venture capital investment means the investment in the early stage, late developmental stage and expansion stage. The private equity investment implies the investment in the venture capital, restructuring, recapitalisation and takeover (V. Cvijanović, M. Marović, B. Sruk, 2008). Various stages of the development of the enterprise are characterised by various levels of risk and various financial characteristics, which impact the most frequent sources of financing. The seed stage is characterised by a very high risk and negative money flow, which makes it unattractive for outside sources of financing. Therefore, this stage is usually financed by own resources or loans from friends or family members, government stimulus programmes and venture capital. The money flow in the mature stage is positive and stable, failure risk is low, which makes such enterprises attractive for outside resources such as banks, portfolio or strategic investors.

3.1. Forms of venture capital financing Venture capital - It can be described as businesses starting up a business since the money invested in enterprises have started to develop their products. This form of financing is suitable for the seed, developmental stage of the business as well as for the expansion stage. Seed stage – Capital for the research and development of the initial concept of the business, before the enterprise enters the start-up stage. Start-up stage – Financing of the product development and initial marketing. This includes enterprises that have just started their business or that have already operated for a certain (usually very short) period of time, but their products are not yet on commercial sale and they still do not generate revenues. Expansion stage – Financing of growing companies and companies in expansion that make zero or insignificant profit. The capital should be used in financing of the enlargement of production capacities, the development of products and markets, and/or providing of supplementary turnover capital. Supplementary capital – Buying of shares from another investor or to reduce the gearing by refinancing the debt. Buyout – The buyout fund is intended for acquisitions and gaining of significant shares or majority control over enterprises that want to change the ownership. These funds invest mostly in more mature, established companies with clearly defined markets and tested business plans that are in need of financing of expansion and consolidation. Therefore, these funds usually mean the exit strategy for venture capital funds. The financing method of these funds may differ considerably, from investing to enterprises in the seed stage to enterprises in the mature stage of business. In addition, while venture capital funds play an active role in the management of the enterprise, buyout funds may play either active or passive role. Mezzanine financing – The characteristic of the mezzanine financing is that it includes elements of both debt-based and share capital. Concerning the payment, it is subordinated to obligations towards creditors, but privileged towards investors in regular shares. In a wider sense, this form of financing encompasses the subordinated debt, the debt convertible to shares and other financing instruments such as the debt with a warrant or preference shares. This form of financing is most frequently used in the buyout financing (LBO, MBO and MBI) and as a source of developmental capital. It is also used in the financing of newly established enterprises with no adequate assets as a guarantee for a traditional loan, in the financing of enterprises that maximally used their capacity of incurring debts, for enterprises whose share-holders do not want for the shares to get diluted and for those that cannot enlarge their basic capital. The mezzanine financing includes elements of both debt-based and share capital. Like a loan, the mezzanine financing must be repaid and most often it has a definite interest rate that is not related to the business operations of the enterprises and that reduces the principal of the revenue tax. It is a long-term investment, very often with a 7 – 10 years maturity data, but it also includes certain elements of yields related to the operation of the enterprise. It makes it more expensive than the traditional debt.

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3.2. Venture capital in the USA and Europe The first venture capital fund in the USA was founded in 1946, but the major catalyst of the development of the venture capital market in Europe and the USA took place in 1970s. In 1971, the Great Britain adopted a new banking policy, which provided larger investment flexibility to the banks. In the USA, a provision called „prudent man“, adopted in 1978, allowed the institutional investors, specially pension funds, to invest in the alternative forms of assets. In a single year, the amount of collected resources increased from US$ 39 million in 1977 to US$ 579 million in 1978. In the decade after 1980, a boom happened primarily in the LBO transactions, stimulated by the financing availability based on „junk bonds“. At that time, the number of venture capital funds grew immensely, the competition was massive, funds emerged that bought enterprises at the secondary market, there was a shift in interests from the seed-stage financing to the mature-stage financing of the development of the enterprise. However, in the mid-1980s, the IPO market cooled and eventually completely failed after the market debacle in 1987. The collapse of the securities market, with high yields in 1989 and 1990, put an end to the LBO boom. The industry matured in the period after 1990. Fund managers focused on the long-term development of companies they took over. They oriented to the development of enterprises they bought rather than to continuously search for new opportunities for investments. This is how the perception of entrepreneurs towards this form of funds gradually changed. In 1980s, the takeovers of enterprises by venture capital funds were seen as the act of hostility. However, in 1990s, owners and managers in enterprises hoped to include this type of funds in their ownership structure. It stimulated a new ascendant cycle of this market and went on until the internet stock collapse in the early 2000s. The recovery took several years, after which the strongest growth ever of this industry took place. The growth was induced by the reduction of interest rates and regulatory changes in publicly listed companies due to the scandal with Enron, WorldCom, Tyco etc. Even many large companies held that it was more attractive to have the venture capital funds in their ownership structure than how they are listed on the stock-exchange market. The growth of costs of entering the stock market almost disabled the IPO of small and young enterprises and forced venture capital funds to search for the solution in finding strategy partners for enterprises in their portfolio. The decrease in interest rates made the capital cheaper and provided for the venture capital funds with many large acquisitions. The interest towards junk bonds grew again as well as towards all types of alternative investments that offered high profits despite being high risk ones at the same time. In this period, first associations for the management of the venture capital funds were listed as well as funds themselves. As a consequence, both were subject to regular reporting demanded by stock markets. This ascend went on until the loan crisis of 2007, which caused, during 2008, the failure of many already agreed sales of companies from portfolios of the venture capital funds. The American industry grew from US$ 568 million in 1980 to US$ 30 billion in 2007. Figure 3 presents the changes in the number of VC companies and the size of VC investments in the USA and Europe in the 20-year period. No doubt, though, that nowadays this kind of financing of the entrepreneurship plays a significant role in the American economy, especially in the field of innovations. Almost all important American IT companies are financed by the venture capital. To mention just some of them: 3Com, AMD, Apple, Applied Materials, Cadene, Cisco, Google, Intel, Oracle, Netscape, Seagate, Silicon Graphics, Solectron, Sun Microsystems, Yahoo. The following biotechnological companies are also financed by the venture capital: Amegen, Biogen, Cetus, Centocor, Chiron, Genetech and many others. Among nonbiotechnological companies, these are also financed by the venture capital: Federal Express, jetBlue, eBay, HomeDepot and Office Depot. Many of the above mentioned companies changed the manner of human labour and we can without hesitation use the phrase of Steven Jobs „they changed the world“. In recent times, enterprises such as Facetime, MaSpace and YouTube continue with these changes. Approximately 85% of the total assets in the USA is invested in high-tech enterprises, half of it in software, medical instruments and appliances, and in the biotechnological sector. The investment is evenly allotted according to developmental stages of enterprises so that 35% is invested in the seed stage, 31% in the expansion stage and 34% in the mature stage. The last two decades saw the expansion of the venture capitalism from America to the global level.

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Figure 3. Investment size in Europe and USA

Source: EVCA, NVCA

Today, American venture capital enterprises invest in at least 40 various countries all over the world. Moreover, the number of enterprises that launch their affiliates at the global level constantly grows. The British venture capital market is the largest and the most developed in Europe. In 1971, the new banking policy provided banks with a wider investment flexibility. In addition, experienced fund managers, who gained their experience in American funds, played the key role. In the continental Western European countries, this type of investment did not appear until 1980s. The catalyst for the development of this industry were gradual structural and legal changes in Europe, such as the change in the legislature relating pension funds and insurance companies, which liberated their investment opportunities. In addition, the development was stimulated by the taxation reform, which made the capital gains more attractive. Stimulated by the low inflation rate, 1990s saw the redirection of investments from fixed-income securities to ownership securities and other similar products. In the mid-1990s, the venture capital market expanded to the Central and Eastern Europe countries. Naturally, in countries with well-developed capital markets, this industry grew faster (primarily in Great Britain and Sweden). Most countries in the continental Europe have a bank-centred financial system and enterprises are primarily oriented towards loans. This is why only the government was able to stimulate the development of the venture capital financing by its direct supports and creating a favourable regulatory and taxation environment. Luxemburg holds the European record in the size of the drawn venture capital, where the share of GDP in investments of the venture capital funds in 2011 reached 0,237%. Croatia is at the end of the row among all European countries with the share in GDP of only 0.012%, which shows that there is a lot of space for this market to develop (Figure 4). Figure 4. VC Investments as % of GDP in European countries in 2011

Source: EVCA Yearbook, 2012

Over 50% of all resources were invested in high-tech companies, such as biotechnological and software/IT ones as well as in fast-growing sector of pure technologies (Table 1).

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Table 1. VC Investment by sectors in 2011 in Europe Sector

Sector

Life sciences

31,09

Business & Industrial services

2,74

Computer & consumer electronics

17,79

Chemicals & materials

2,08

Communications

17,64

Transportation

1,24

Energy & environment

11,38

Unclasified

0,58

Consumer goods $ retail

4,51

Construction

0,51

Business & Industrial products

3,82

Real estate

0,33

Consumer services

3,26

Agriculture

0,21

Finanicial services

2,81

Source: EVCA Yearbook, 2012

Reviewed by developmental stages of enterprises, investments are not evenly allotted as it is the case in America. To be precise, even about 70% of all investments are allotted to enterprises in their mature stage and only about 15% in the seed and start-up stage. No doubt that it is also the result of the structure of investors, in which only government agencies and families are ready to take a high risk of launching an enterprise.

4. IMPACT OF GOVERNMENT ON VENTURE CAPITAL DEVELOPMENT 4.1. Reasons for government intervention The existences of an incentive business environment and the approach towards financing are important for all enterprises, especially for small ones, which cannot be financed from own sources (The Commission’s Green paper): Entrepreneurship in Europe, chapters HM Treasury and Small Business Service). The creation of a financing infrastructure for support of innovative small enterprises is a complex process, depending on many enabling conditions and requiring efficient allocation of capital. (United Nations Economic Commission for Europe: Financing Innovative Development, New York and Geneva, 2007). Inaccuracy and asymmetry of information are the key characteristics of the financial market in the case of small enterprises, which, consequently, meet difficulties in the approach to outside financial sources (Lerner, 2002). Many private investors are not willing to invest in early-stage small enterprises due to small amounts of investments, high transaction costs (costs of analyses, due diligence etc.), higher risk, long-term investment horizon and difficulties concerning the exit (Lerner, 2002). Private investors are willing to invest in later developmental stages of enterprises. Figure 5 presents where the problem of SMEs in finding financing sources and financing sources in various developmental stages of the enterprise. Figure 5. Stages of equity financing

If the financial market cannot provide enough capital for the early-stage financing of small enterprises, it is the government that should compensate for the shortage (Lerner, 1999 and 2005). The vindication of public financing became the subject of

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academic research as well (Lerner. 1999, 2002; Bottazzi, Da Rin, 2002; Gilbert, et.al, 2004), as well as the analysis at government levels (European Commission, 2006a; Maula, Murray, 2003; The Commission’s Green paper). The aim of the government is the industrial development and the development of the capital market. Therefore, the government’s priority is the financing of young technological early-stage companies and it should intervene in the case when it is obvious that the existing private sources of financing are not sufficient, when there is a lack of entrepreneurial atmosphere and when there are no signs that situation could be changed in the recent future. Well directed government intervention plays a significant role in the development of the national market of the venture capital, which is a key factor in providing of the financing of the early developmental stage of a small enterprise (UN Economic Commission for Europe, 2007). The government also attracts the private capital by its participation and thus contributes to the development of this market. A particularly important role of the government is seen in initiating of risk programmes, providing for the incentive environment for the investments in innovations and their commercialisation. The key factor of the government intervention is the creation of a preferable atmosphere for the development of this market: legal frames, fiscal measures, the creation of an atmosphere that will attract and keep entrepreneurs. Therefore, this includes defining of measures that will help the government to influence both the supply and demand aspect of the venture capital (launching of as many new technological, innovative enterprise as possible). There are also critics of the government intervention who hold that it may have negative effects in the long run by artificially maintaining favourable market conditions (Gilson, 2003; Armour, Cumming, 2006). Especially strong are critics of the direct participation of the government in financing the enterprises, who would prefer the indirect government influence through the removal of market barriers that obstruct the entrance of the private capital (e.g. business angels, venture capital funds or corporate investments). Although it is hard to measure the effects of the government intervention, it can be noticed that not a single venture capital market developed without government supports. All major government interventions are present particularly after the crash of technological shares in 2000. In the time of crisis, there is a pressure on the capital market to reduce the prices of shares with great potential. It causes the reduction in prices of other shares as well. This situation brings to the capital shortage, which will last until the trend changes. However, at first, the capital will be directed to less risky, traditional industries, which means that the capital shortage will still be present in financing of new, small, innovative enterprises. The attraction of the foreign capital will also have no effect, since foreign investors behave exactly like the vendor capital, that is, they first buy a minor share in the company and gradually enlarge it later if the company operates successfully. In addition, this is a slow process that may last for years, which makes the government intervention necessary. Opinions are increasingly heard that stimulative packages to exit the crisis should not be directed only to the support of mature industries, but should also stimulate innovations, which are the foundation for new job posts and growth leverage. In the long run, this process is determined by the situation in the entrepreneurial environment, that is, the quality of administrative structures, labour market and entrepreneurial atmosphere.

4.2. Models of government intervention There are two methods by which the government may compensate the shortage in the capital: direct and indirect. The direct method means that the government itself finds enterprises in which it invests. It provides for the opportunity for a clear defining of the rules for future investments. The direct contact with users also provides for offering the expert support expected from investors. On the other hand, the direct investment requires intensive work. The finding of an adequate project is a demanding process. On the average, 90% of projects are rejected after the first review, and, at the end, only 3 – 4% is found suitable for financing. The management and surveillance during the financing period must also be paid. In this selection process, regional and local funds are one of the methods for the improvement of this process, since they may use local network analyses such as incubators, research parks etc. The disadvantage of this financing method is that it can provoke a negative competition in the private capital if the resources are not strictly allocated to areas where there is a shortage of the private capital. The government may also stimulate the private venture capital market indirectly by creating a good macroeconomic and institutional environment, incentive fiscal measures, and better protection of both enterprises and investors. The government may invest in private funds as well. The indirect financing through private funds is cheaper due to the lower costs of administration, which makes it possible to finance a higher number of enterprises. The increase in the value of the fund makes it possible to finance more expensive projects. This is why this approach offers very clear advantages of the participation of private investors as well, who may be attracted to be a part of these projects. If the interest of the government is the general risk share, then this is a better approach. On the other hand, possibilities for directing of resources to exactly defined areas on the market are limited. The government stimulates the financing of new, innovative, technological enterprises through incentives/subventions, tax reliefs, other fiscal measures and/or investments in various beneficiaries (firms, universities, institutes, ...) under certain conditions (Durufle, 2010).

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There are numerous problems in designing and implementation of the government programmes, which may be broken down in two main categories (Lerner, 2009): 1. Badly designed programmes that are not appropriately adjusted to the economic environment or the situation on the market and underestimated the risks. They usually result in conflict and ineffective aims and limitations as well as in the lack of appropriate capacities for the implementation of the programme. 2. The negative effect of the government incentives, which may be seen when entities, as parts of either the government or the industry, are established with the sole reason to make use of direct or indirect government incentives. Here are some of the instruments of the government intervention (Landström, 2007): 1. Reliefs or other supports are the highest in the countries with strong government agencies, such as the Office of chief scientist in Israel or OSEO u France. 2. Tax reliefs on R & D investments are in recent times introduced in an increasing number of countries, e.g. Australia, France, Great Britain, while Canada is considered a pioneer of this type of the government intervention. Other countries discuss about the defining of acceptable costs. 3. Funds established as public private partnerships may be found in Australia, France, Germany, Israel, New Zealand and Canada. They are considered the best instrument against cycles and as a part of a package in economic and financial crises. 4. Concerning the government investments in venture capital funds, there is a trend of investment in funds under private management. The reason for this trend lies in the wish to avoid political impacts, an increased possibility of attracting the best managers and adopting of tested ways in the selection of investments, which creates a better leverage for drawing the best investors. This has also been emphasised in the EVCA White paper, which invites the governments to create several funds under the private management, and which the government will support with a minor share (EVCA Venture Capital White paper ). 5. Trend towards less restrictive limitations for investments. There is a growing consensus that the government programmes must be harmonised with the situation on the market rather than to act against it. 6. Experiences of many countries show that it is very hard to attract the private capital for the investment in the early stage of the development of the enterprise. There are several government programmes intended to help attracting the private capital, such as: defining of the expected return rate on government resources, which means that the private capital will suffer higher losses if funds are to generate less revenues than expected; on the other hand, if revenues were higher, the private capital would gain the total difference above the expected rate. Another possibility is that the government takes over the losses, should they be generated. There is also an option that the government, after a certain period of time, sells its share to private investors/partners at a defined, privileged rate. Naturally, there are various combinations of the mentioned possibilities. The second option, where the government is to take over all the losses, is the most criticised. 7. The important role of business angels is more and more recognised, especially in creating of the eco-system, since they invest not only the money but also their experience, credibility and contacts, and thus act in offering high-quality enterprises suitable for investments. That is why there are more and more examples of governments supporting these investments with their measures such as tax reliefs (e.g. USA, France), creating of joint funds (New Zealand, Scotland), investments in funds launched by business angels (France, Great Britain). 8. The greatest problem with which almost all countries must face is the transfer of technological inventions to commercial projects. Germany sets an example as a country with the highest number of registered patents and the lowest number of commercial projects. Many countries try to find ways to increase the commercialisation of new scientific inventions by changing (respecting the tradition of a particular country) organisations that are in charge of commercialisation so that they increase the critical mass of new patents and providing for higher and better seed financing. 9. Creating the atmosphere for the development of the venture capital market. The legal infrastructure that would be stimulative for the creation of funds and for the attraction of the foreign capital as well as the participation of the government (e.g. the American SBIR-STTR Program, the British SBRI – NHS etc.). The programme of attracting foreign entrepreneurs may also be included (the American „Start Up Visa Act“). 10. In the last ten years there are more critics heard that the government interventions are directed only to the supply side of the money intended for the financing of risky projects, while the analyses record the importance of the participation of the government at the demand side of the money as well, in the existence of as many quality projects as possible and in developing of the entrepreneurial atmosphere. In this sense, some countries developed special programmes with exactly this purpose, for example: Commercialization Australia, New Zealand - NZTE’s Escalator Program, Alberta Innovation Voucher Pilot Program, France Investissement: „Les Services du Club“. This group of programmes also includes incentives to business angels or their associations in regard to the fact that the education of entrepreneurs is not easy and that only an entrepreneur may communicate with another entrepreneur.

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Example from Finland Finland is the top country in Europe by the size of investments in innovations and education and is one of major „producers“ of new technologies. However, it has a small number of examples of successful commercialisation of inventions. There are several reasons for that: lack of the entrepreneurial atmosphere and shortage in experienced entrepreneurs, poorly developed venture capital market and especially nonexistence of foreign, experienced funds that would invest in the early stage of the operation of the enterprise, and poorly developed capital market that would offer opportunities to exit the investments. Given the fact that investments in later stages of the operation of the enterprise are of more interest to the private capital, the Finnish government directed its resources to the financing of the seed stage. At the demand side of this type of capital, it is important to create a business environment that stimulates new technologies as well as the development of new business ideas suitable for the venture capital financing. The two measures that the Finnish government implements in this area are the financing and promotion of researches and the creation of conditions for the co-operation of enterprises and research institutions. These are the measures the Finnish government undertook for the development of the venture capital market: 1. At the supply side, it opened the market to foreign funds (favourable taxation regimes), stimulated corporate investments (also by tax reliefs), granted higher limits to pension funds for the investment in shares and unlisted companies and launched venture capital funds for investments in seed and early stages of the operation of enterprises (with business angels as partners.) 2. At the demand side, it rendered help to young innovative companies in preparation and designing of projects for the presentation to potential investors and granted tax reliefs to business angels. The Israeli model By the number of newly established companies (start-up), Israel is placed right behind the USA. The beginnings of the venture capital industry in Israel go back to the late 1990s. The first fund was founded in 1985, but the thriving took place in 1990s. In the period from 1991 and 1997, technological venture capital funds amounted to more than US$ 1.5 billion. The Israeli venture capital industry did not start from the scratch, but continued the earlier programme of the investment in R&D, in projects of high technology and innovations. This programme was launched in the early 1970s and offered privileges to enterprises in a way that it covered 50% of the investments in granted developmental projects (granted by OCS). The programme, with certain modifications, has been carried out continuously and is open to all enterprises, irrespective of the sector or technology. The launching of the new national programme in the early 1990s was stimulated by the mass immigration from the former USSR. The government tried to find a solution to employ thousands of engineers who entered the country. At the same time, the army industry fired hundreds of engineers. In addition, the official data showed that many projects launched in the OCS programme failed due to the lack of additional capital needed for the marketing. In spite of significant government incentives in R&D, there were still no notable launching and development of new companies that would commercialise new inventions. The analyses pointed at the shortage of capital and lack of managerial capacities. The Yozma programme was launched in 1992. It was aimed at forming a solid base for the creation of the competitive venture capital industry, learning from foreign partners, creating of a new net of international contacts. The programme was based on US$ 100 million that the government invested in the Venture Capital Fund (state ownership) and which had two functions: • The investment in private venture capital funds (Yozma Funds) – US$ 80 million • The direct investment in high-tech companies – US$ 20 million – through the Yozma Venture Fund. The Yozma funds had to be managed by an authorised national association with the obligation of including foreign partners. By doing so, the programme stimulated the entry of professional managers to this young market. The government offered to invest about 40% (up to US$ 8 million) in every fund that met these criteria. In this way, US$ 100 million of the government resources attracted more US$ 150 million of private money, both domestic and foreign. As opposed to other government programmes, Yozma did not offer incentives at the supply side and did not share the risk with private investors. The German case Germany is an interesting example, being a leading industrial power in Europe, whose institutional system is essentially different from the American one. It tried to improve the venture capital market in 1970s by launching the first German venture capital fund: Deutsche Wagnisfinanzierungsgesellschaft (WFG). By the early 1970s, there was not a single institution to support new enterprises. Since at that time the economic growth slowed down, Germans tried to find instruments for the stimulation of small enterprises. This is how the WFG was founded. The fund generated losses in the first nine years and a very small profit after that. The total cumulative loss generated by the fund during its life amounted to DEM 38.4 million. The government lost DEM 37.7 million, while the bank’s share was less than DEM 1 million of the

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total loss. In 1984, the WFG was restricted, the government exited this project, the number of partners was reduced to five and the decision was made that the fund would not continue with investments but would be directed to the management and graduate liquidation of the present portfolio. Numerous errors and changes that were present in the first operational years of the fund were a significant experience, which may be helpful in analysing of any venture capital market. The analysis of potential errors was offered by R. Becker and T. Hellman (The Genesis of Venture Capital – Lessons from the German Experience”, School of Business, Stanford University, November, 2002). They broke down the reasons of the failure to four groups: 1. The relationship between investors and the financed company – Assumption 1: The failure of the WFG was a result of the inadequate contracting and management of the companies. All provisions of the contract and the manner in which enterprises were managed were in favour of entrepreneurs and to the disadvantage of investors. A part of these provisions is common in the German system. 2. The relationship between the WFG Fund and its owners – Assumption 2: Difficulties of the WFG in establishing a profitable relationship with its entrepreneurs result from the conflict of aims of its owners, the government and banks. 3. Entrepreneurship as a base for venture financing – Assumption 3: The lack of highly qualified entrepreneurs and the entrepreneurial initiative played in the German system the key role in the failure of the WFG and the venture capital industry. 4. Capital market and venture capital – Assumption 4: The existence of active stock market is an important but insufficient condition for the development of the venture capital market. EU programmes aimed at the development of the venture capital market In its Europe 2020 – the Growth Strategy (A strategy for smart, sustainable and inclusive growth), the European Commission defined the growth of the economy that would be based on knowledge and innovations as one of the priorities. The aim is to invest 3% of the European GDP to R&D (at the moment, it is less than 2%, while in America it reached 2.6% and in Japan 3.4%). One of the leading initiatives (of seven in total) is the so-called „Innovation Union“, which is aimed in the improvement of conditions and sources for the financing of the development and innovations so that innovative ideas may become products and services that will stimulate the development and employment. Another initiative that affects the venture capital market is „An industrial policy for the globalisation era“, aimed at the improvement of operating conditions especially for SMEs and at the support of the development of a strong and sustainable industrial basis that would be competitive at the global level. The Commission also suggested activities for the introduction of new financial options to support these aims, as follows: • To increase the efficacy of using existing European funds by defining the priorities and by moderating of fragmented European markets, • To design new financial instruments, especially in co-operation with EIB/EIF and private sector, which will provide for additional resources for the financing of innovative, fast-growing enterprises, • To enhance the efficacy of the European venture capital market in order to ensure for the entrepreneurs a direct access to the capital market and to stimulate private funds for investments in new innovative enterprises. The initiative of the European Union aimed at stimulating the development and deepening the venture capital market can be seen at two levels: direct and indirect impacts. The direct impact is seen in the supply of capital for financing of young, innovative, fast-growing enterprises through the Multiannual Programme for Enterprises and Entrepreneurship for the period from 2001 to 2006 and the Competitiveness and Innovation Framework Programme – CIP for the period from 2007 to 2013. These programmes are realised through the European Investment Fund (EIF), which invests also in other venture capital funds as much as 15 – 20% of the totally collected capital. In its activities to date, EIF invested in 300 venture capital funds, with the assessed effect (leverage) of EUR 23 billion, financing over 3 000 small fast-growing innovative enterprises. These figures confirm the significant impact of adopted programmes to the development of the venture capital market in the European Union. The indirect impact refers to the creation of legislative and fiscal frames aimed at attracting private investors to the venture capital market and the enhancement of the demand for this kind of capital by creating conditions for the development of new innovative enterprises. In this sense, the European Commission took the following steps recently: • Passed the Small Business Act in June 2008, • Passed the Directive on Alternative Investment Fund Managers – AIFM in May 2009, • Made the report on methods of removing the obstacles of the development of the joint venture capital market in the European Union in December 2009 (Cross-border venture capital in the EU, European Commission work on removing obstacles), • Prepares to pass the European Innovation Plan, which is planned to be completed in autumn this year (it was primarily planned to be passed in April).

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5. CONCLUSION Opinions are increasingly heard that stimulative packages to exit crisis should not be directed only to the support of mature industries, but should also encourage innovations that are the basis for new job posts and the leverage of growth, which is included in a part of the European Commission document on the growth strategy 2020 (A strategy for smart, sustainable and inclusive growth). The existence of a stimulative business environment and the approach to the financing are important elements for all enterprises, but in a special way to small ones that cannot finance themselves from own sources. The inaccuracy and asymmetry of information are the main characteristic of the financial market as regards small enterprises, which, for that reason, face difficulties in the approach to outside sources of financing. The venture capital is a resource that could compensate for this shortage. Examples in the countries with a developed venture capital market show that not a single market was developed without the government incentives. Governments should set as their priority the financing of young technological companies in the seed or early stage, and should intervene in the case when it is obvious that the existing private financing resources are insufficient, when one experienced a lack of the entrepreneurial atmosphere and when there are no signs that the situation could improve in the recent future. A welldirected government intervention plays a key role in the development of the national venture capital market, which is essential in providing for the financing of the early stage of a small enterprise. Moreover, by its participation, the government attracts the private capital and thus contributes for the development of this market. Croatia is placed at the bottom of the scale of European countries by its degree of development of the venture capital market. Therefore, efforts should be directed to both the supply side of this type of capital and to the demand side for this capital (by strengthening of the entrepreneurial atmosphere).

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

Armour, J and Cumming D.J. (2006): The legislative road to Silicon Valley, Oxford Economic Papers, 58 (4), 596-635. Avnimelech, G.,M. Teubal (2002): Venture Capital policy in Israel: a comparative analysis& lessons for other countries, The Hebrew University Mount Scopus, Jerusalem. Becker, R., T. Hellmann (2002): The Genesis of Venture Capital — Lessons from the German Experience, Stanford University, Paper presented at a CESifo conference. Bottazzi, L., Da Rin, M. (2002): Venture capital in Europe and the financing of innovative companies, CEPR, CES, MSH, vol. 17(34), pages 229-270, 04. BVCA (2009): Benchmarking UK Venture Capital to the US and Israel: What lessons can be learned?, London. Cvijanović, V., Marović M., Sruk B. (2008): Financiranje malih i srednjih poduzeća, HVCA Zagreb and Binoza press d.o.o. Zagreb. Deloitte (2009): Global trends in venture capital 2009, Global report. www.deloitte.com/us/2009vcsurvey Duruflé, G. (2010): Government involvement in the venture capital industry, International comparisons, CVCA European Commission (2005): Best practices of public support for early-stage equity finance European Commission (2006a): Report of the Alternative Investment Expert Group: Developing European Private Equity, Brussels, Commission of the European Communities. EVCA - European VC Association, Yearbook 2012, www.evca.com Gilbert, B.A. et.al (2004): The emergence of entrepreneurship policy, Small Business Economics, 22(3/$), 313-23. Gilson, R.J. (2003): Engineering a venture capital market: lessons from the American experience, Stanford Law Review, 55(4), 1067-103 Global Insight (2009): The Economic Importance of venture Capital backed Companies to the U.S. Economy, Washington,DC. Landström, H. (2007): Handbook of Research in Venture Capital, Institute of Economic Research, Lund University, Sweden Lerner J. and Shepherd S.(2009): Venture Capital and its Development in New Zealand Lerner, J. (1999): The Government as Venture Capitalist: The Long-Run Effects of the SBIR Program, NBER Working Paper 5753, Cambridge, MA. Lerner, J. (2002): When Bureaucrats Meet Entrepreneurs: The Design of Effective ‘Public Venture Capital’ Programmes. The Economic Journal, Vol. 112, pp. F73-F84 NVCA - National Venture Capital Association, www.nvca.org Romain, A., B. van Pottelsberghe (2004): The Determinante of Venture Capital: Additional Evidence, Discusion Paper, Series 1:Studies of the Economic research Centre No 19/2004. RREEF Research (2007.): Alternative Investments in Perspective, http://www.irei.com/uploads/marketresearch/98/marketResearchFile/rreef_aip9-07.pdf Russell Investments: 2010 Global Survey on Alternative Investing, www.russell.com Start Up Money For Home Based Businesses – Lessons From Success, Undress4success.com, March 9, 2008 The Commission’s Green paper: Entrepreneurship in Europe, chapters HM Treasury and Small Business Service, House of Lords, Session 2002-03, 34th Report. United Nations Economic Commission for Europe (2007): Financing Innovative Development, New York and Geneva. Valtonen, P. (2008): Government’s Venture Capital Policy in Finland, Ministry of Employment and the Economy. World Economic Forum (2010): Globalization of Alternative Investments, The Global Economic Impact of Private Equity Report 2010., Working Papers Volume 3.

DETAILS ABOUT AUTHORS: BLAŽENKA EROR MATIĆ CROATIAN PENSION INVESTMENT COMPANY ZAGREB, CROATIA blazenka.eror@hmid.hr

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FOSTERING SUSTAINABILITY THROUGH ENTREPRENEURSHIP IN SOUTH AFRICA: SELECTED CASE STUDIES FELICITE A. FAIRER-WESSELS

ABSTRACT Sustainable tourism development has political, economic, socio-cultural and environmental dimensions, and is concerned with the protection of the environment, respect for the local community, and long term economic benefits for all stakeholders involved. Within this context the emerging and/or survivalist entrepreneur exists and must be empowered to create partnerships and alliances within South Africa. In both urban and rural areas small entrepreneurs urgently need market access, capital and opportunities to upgrade, invest and expand. To encourage sustainable entrepreneurs the increase of local linkages and partnerships are investigated. Also the sourcing of new networks and suppliers to enhance business; the development of a reliable range of products with a ‘made local’ brand or part of a themed event to increase tourist appeal; the creating of positive destination image; the generating of employment opportunities and synergies in terms of business support; transport, eco-friendly energy sources, and the development of skills are investigated. Focus groups and in-depth interviews from a number of fair trade tourism business enterprises are discussed in terms of enabling entrepreneurs to operate successfully. To foster sustainability within the South African context from an entrepreneurial perspective, it remains imperative to look towards the opening of new markets, both locally and regionally. KEYWORDS: Tourism entrepreneurs, sustainability, South Africa

1. INTRODUCTION Climate change and environmental conservation have been the topics of many debates and discussions, with the various COP conferences since the signing of the Kyoto Protocol in 1997 and enforced in 2005 (-2012), the 18th Global Warming International Conference and Expo in 2007, culminating with the last COP 17 conference in Durban in November 2011. With the world’s human population increasing at a rapid rate and commanding a growing demand for natural resources; greater than which the earth can provide for (Reid, 2006:208), the importance of conserving the earth’s resources is far greater than before. People the world over are more environmentally aware and concerned about their carbon footprint that can be owed to increased media coverage and exposure on this topic (Dickson & Arcodia, 2010:236). Sustainability has become a worldwide concept that addresses the issue of global warming and the degradation of natural resources, and pressure is on organisations, governments and communities to minimise harmful impacts on the environment and increase environmental protection (Dickson & Arcodia, 2010:236). Studies have been carried out concerning tourism, climate change and sustainability (Budeanu, 2005:89-97; Hunter & Shaw, 2007:46-57) and the role of the tourism industry in these as well as in the depletion of the natural environment has been scrutinised (Dickson & Arcodia 2010:236). Within this context the emerging and/or survivalist entrepreneur exists and must be made aware of and empowered to sustainability function within this fragile and constantly diminishing natural and cultural environment. This paper attempts to address ways in which to assist such entrepreneurs with coping strategies and skills to survive in a sustainable manner.

2. DEFINITIONS 2.1. Sustainable development defined A well-known and widely accepted definition of sustainable development is that of the World Commission on Environment Development’s (WCED’s) Brundtland Report in 1987, which states that sustainable development is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED in Queiros, 2003:74). The human population is increasing at a substantial rate, which consequently leads to an increasing demand for natural

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resources; much greater than which the ecosystem can provide for (Reid, 2006:208). This increased demand causes the destruction of the natural environment, exploitation of natural resources, pollution, loss of habitat of fauna and flora (Queiros, 2003:74) as well as the compromising of the authentic existence of intangible cultural heritage. The concept of sustainable development originated from this scenario, as governments, organisations and individuals attempted to start practising development that could potentially avoid or improve the environmental crisis (Queiros, 2003:74), therefore the World Commission on Environment Development’s definition promotes careful use and conservation of the natural environment and its resources. Sustainable development is a process that must be made reliable for, and consistent with future needs as well as present needs (WCED in Wight, 2004:48). Wight (2004:48) argues that there are five interrelated elements of sustainable development, namely: • Economic: The generation of wealth and employment opportunities and the enhancement of material life. • Political: The political stability of a destination, safety and security and human rights. • Social: The well-being of the local community in terms of education, health, nourishment and shelter. • Cultural: The acknowledgment of and respect for heritage and traditions, as well as the support of cultural identity. • Ecological/Environmental: The recognition of the importance of conservation of all natural resources and environmental enlightenment and understanding. Sustainable development therefore has political, economic, socio-cultural and environmental dimensions, and is concerned with the protection of the environment, the well-being of the local community and respect for their culture, and the long term creation of economic benefits for all stakeholders involved. As mentioned, within this context the emerging and/or survivalist entrepreneur exists and must be empowered to form partnerships and alliances with suppliers and networks in South Africa. In both urban and rural areas small entrepreneurs urgently need market access, capital and opportunities to upgrade, invest and expand.

2.2. Sustainable tourism defined Specifics of fashion marketing are express through the features and characteristics of the marketing mix that is defined The tourism industry is largely dependent on the environment and its resources, both natural and cultural. For tourism to occur, tourists must be present at the destination and/or attraction/event and may largely impact on the environment and the host community. To reduce negative impacts and create positive results and opportunities (Queiros, 2003:74), tourism must be developed with the support and for the benefit of the local community, and implemented and managed with the buy-in of relevant stakeholders. In essence sustainable tourism is the application of the concept of sustainable development within the tourism industry. “Sustainable tourism development meets the needs of the present tourists and host regions while protecting and enhancing opportunities for the future” (The World Tourism Organisation in Dickson & Arcodia, 2010:237). The manner in which resources are controlled guarantees the satisfaction of social and economic needs whilst preserving cultural and natural diversities (The World Tourism Organisation in Dickson & Arcodia, 2010:237). According to Queiros (2003:74), sustainable tourism development is tourism that is established and preserved in such a way that it is economically viable over the long-term, while at the same time does not deplete, destroy or change the natural and socio-cultural environments on which it depends. Sustainable tourism development is essential to ensure that the interactions and relationships between the natural, socio-cultural and economic environments are in a constant state of balance (i.e. where the three environments overlap, refer to Figure 2; although these three environments exist within a macro-political environment that is imperative for the continued existence of all the environments. Figure 1. Sustainable tourism development Political environment: community benefits and tourism industry benefits.

Source: Adapted from Queiros (2003:75).

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3.METHODOLOGY 3.1 Problem Statement This research aims to identify and examine the challenges/threats that exist in the marketplace that prevent (selected) emerging and/or survival entrepreneurs from sustainably running their own businesses.

3.2. Research Objectives The objectives of this research project are: • to determine the challenges or threats that exist in the marketplace for (selected) emerging/survival entrepreneurs. • to determine the weaknesses of (selected) entrepreneurs that with hold them from success. • to determine the opportunities for entrepreneurs in the marketplace. • to determine the strengths of selected entrepreneurs. • to determine the needs of emerging/survival entrepreneurs within the marketplace. • to create a checklist/guideline for emerging/survival entrepreneurs to allow them access to the marketplace.

3.3. Target Population And Context The target population for this study are emerging and/or survival entrepreneurs within the South African context that were not able to sustainably run their own businesses. No particular demographic or socio-graphic population parameters exist within the units of analysis. The study includes all individuals that aim to become or are entrepreneurs regardless of age, gender and experience (du Plooy, 2009:56). Cases are randomly selected from a number of Fair trade business enterprises, making use of the Fair Trade website and discussions with their management that are aware of instances where entrepreneurs have initially not been able to operate successfully. For purposes of this paper, (five) cases of emerging/survival entrepreneurial endeavours are discussed in detail, which are the units of analysis, and a few in less detail but with interesting business concepts.

3.4. Data Collection Methods The data collection method used is a qualitative study that involves an in-depth interview schedule. Since the research pertains to emerging/survival entrepreneurs, pre-testing of the interview schedule as a data collection instrument will occur within an environment relevant to the entrepreneurs. Keyton (2011:177) refers to pre-testing as; “...the researcher tries the survey or questionnaire with a small group of participants who are similar to those individuals who form the population.” The pre-testing of the qualitative interview schedule will occur at two emerging/survival entrepreneurs’ businesses which the researcher identified through local street vendors (only two persons were interviewed). However, since the majority of emerging/survival entrepreneurs are previously disadvantaged individuals, and not necessarily proficient in English, a colleague fluent in most African languages assisted throught the study with translation.

3.5. Data Collection Methods And Instrument Two data collection methods are used: • in-depth interviews for sole/individual emerging entrepreneurs of businesses consisting of only one (male) entrepreneur (i.e. SpierLeisure) • focus groups, for enterprises comprising more than one emerging entrepreneur; which was in the majority (i.e. Jan Harmsgat Country House (5 female), Kraalbos (2 male), Heiveld (4 male) and “Working for” (5 female) The data collection instrument was an Interview Schedule with questions that aims to address the research objectives. The same interview schedule is used for both the in-depth interview and the focus group discussions.

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After the pre-test, the questions are refined and reformulated for clarity and simplicity as most of the selected entrepreneurs have a low level of literacy and cannot understand some questions correctly. Care is taken to remove or rephrase sensitive questions, for example, why do you think your business has not been a success, rephrased to: what are the things, do you think, that have not been good for your business. Some questions are repetitive to ensure that the respondents understand what is being asked. No rating scales are included. In terms of demographic profile, the respondents range from 25-45 years of age; seven males and ten females; of black and coloured race.

3.6 Data Analysis For the data analysis, content analysis is used where each category is defined with accuracy to allocate each statement to the correct category. Sub-categories are also defined clearly using thematic analysis to ensure that most applicable statements can be allocated to one category each. If a statement is irrelevant they are added to a diverse category. To ensure validity and reliability in the data analysis, objectivity is maintained during data collection and during data analysis. Accurate categories and clear definitions are important factors.

4. RESULTS AND DISCUSSION For emerging entrepreneurs to sustainably run their businesses, and as stated in section 3, it is essential that from a macro-environmental point of view this is only possible if the four environments: natural, socio-cultural, economic and political are in a state of equilibrium and that where they overlap (see figure 2) is the most conducive context for such an emerging/survival entrepreneur to succeed. Therefore, based on the literature and the empirical fieldwork in terms of the research objectives: • the threats/challenges (research objective 1) identified by emerging/survival entrepreneurs are the lack of partnerships; lack of suppliers and networks; • the weaknesses of entrepreneurs (objective 2), are the lack of product development and lack of specialised skills to function as an entrepreneur within a certain field; • possible opportunities for entrepreneurs (objective 3), are to form partnerships with suppliers; to find local suppliers for sourcing and form new networks; to develop a ‘made local’ brand; to find niche markets for their products; • strengths of entrepreneurs (objective four), are specialised skills (wood carving, beadwork) and creativity to develop new products: • needs of emerging entrepreneurs (objective 4): , coincides with all of the above; • development of a checklist of critical success factors that, should an emerging entrepreneur take heed of them, he/ she should have a fair chance of attaining success and running a sustainable business: Therefore, within the abovementioned environments, the sustainable (and emerging/survivalist) entrepreneur must attempt to:

4.1. Create and form partnerships and alliances Emerging/survival entrepreneurs must be encouraged to develop different types of local linkages, such as procurement from local enterprises/suppliers (i.e. subsistence farmers can be supported and encouraged by entrepreneurs in the food business to plant seasonal vegetables throughout the year, and not rely on only annual harvests of one product); local staffing (‘restaurant’ entrepreneurs can source staff locally; training semi-skilled staff; developing local cultural heritage products (an ‘artistic’ entrepreneur can start by developing local cultural heritage products – e.g. Tintshaba, a Swazi-based group of 800 women creating jewellery from silver and sisal; building local partnerships with non-competitive businesses, such as NGOs to generate business and share customers (e.g. Wildlands Conservation’s “world bicycle relief” project that started with the 2004 Tsunami, and now produces 1,000 bicycles a month, with assembly plants in South Africa, Zambia and Zimbabwe; and by delivering social and economic benefits in a sustainable way. Partnerships can be formed between tourism businesses and local communities for mutual benefit with both partners sharing risks and benefits; with the tourism sector providing a direct market and support for emerging entrepreneurs. Case study: Creating partnerships “Jan Harmsgat Country House” is a 5* hospitality establishment in a rural area in South Africa. All staff are locally recruited from the surrounding deprived areas. The lodge established a partnership with staff to run the Old Gaol Coffee

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Shop, which the owner, Jan Harmsgat owned initially, employing four women. After having gained skills and confidence, the women took a 30% equity in the coffee shop in 2004. This partnership and other aspects of Jan Harmsgat’s local linkages have been based on a substantial investment in training.

4.2. Use new networks and find new suppliers (local sourcing) Emerging entrepreneurs can source new networks and suppliers to enhance their businesses by asking staff to introduce new suppliers from their own networks; by contacting local business associations and chambers of commerce; by tapping into local networks, church networks; and by asking one local supplier to recommend another. Various approaches can be used to increase local sourcing, such as the strategic approach, where top management must revisit procurement policy and procedures; the ad hoc, product-led approach that entails setting up of contracts with one/more suppliers in response to an opportunity; the destination-wide approach, where several companies, and stakeholders working together can help develop new businesses and boost the local economy. Government can arrange expo’s for local suppliers to “meet the buyers’. Travel agents, transport operators and booking agents can procure from local suppliers; and the “appoint a champion/driver” approach, that grasps what top management wants to achieve and having the mandate and resources to implement it. Case study: SpierLeisure: Helping local entrepreneurs enter the supply chain Spier actively went searching for new local suppliers and, when they couldn’t find established ones, sought out potential ones. The facilitator visited townships, community projects, local SMME development agencies, local business associations and craft centres. The process has been intensive, involving a champion at director level, and a part-time facilitator. As much effort has gone into changing how operational staff work, as on developing emerging suppliers themselves. While the demands of the process have been high, the business benefits have also been high, including cost saving and local support. Existing suppliers are reporting to Spier on how they are changing. New suppliers are expanding, and operational staff is looking at procurement options in a new light. When Spier put out a tender for a new laundry service in mid-2004, several operational details were designed to facilitate a new entrepreneur. For example, the tender specified: • the use of previously unemployed people to staff the operation; • an eight hour operating shift period with no night shift to reduce costs relating to transport; • the contractor would receive payment before month end in order to facilitate staff salary payments and payments to creditors; • the contract was based on an anticipated wash volume for which a set fee was to be paid. As Spier owned the equipment, they would take responsibility – on condition of good management practices – for maintenance and servicing. Once the contractor was selected, he was given an extensive service level agreement detailing all expectations, conditions, regulations and procedures. The service level agreement outlined roles and responsibilities of all parties, and formed the basis of all aspects of the supply relationship. Shortly after the opening, one of the machines broke down. There was a risk that this would prove that such a new enterprise couldn’t provide the reliable service required. But, due to the determination of the newly appointed contractor, who “made a plan” the clean items were delivered on time. This success actually reinforced the relationship and reduced concerns over delivery. Informal daily interactions were complemented by regular structured meetings. Over several months, as issues were resolved, and capacity developed, demand from other parts of Spier increased. The business volumes have doubled, and further expansions have been made.

4.3. Develop and repackage products (tangible) Specific local products should be identified that could involve a local supplier. The focus should be on reliability in peak season, identifying products with a theme, and the marketing of several products together, that are likely to succeed; for example, a range of craft or food products with a ‘made local’ brand or part of a themed event. This increases tourist appeal and generates synergies in terms of business support, transport, marketing and skills development.

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Case study: Jan Harmsgat Country House: Invest in training of local staff Jan Harmsgat Country House is located in a very rural area in the Western Cape Province where many local people have never been to school. Through a process of careful recruitment and intensive training, local women now hold key jobs in the enterprise. Apart from the owners, the staff numbers ten – 8 from local farms and 2 from a nearby village (Barrydale). The chef, Lena Verboten, started 17 years ago learning how to make jams. She now creates her own menus and receives rave reviews in the media, and accolades from guests. Training techniques include bringing in visiting chefs for short periods, taking the staff to restaurants in Cape Town, and sending them to workshops at Food Shows.

4.4. Undertake bio-prospecting and become bio-entrepreneurs The importance of biodiversity for our survival has given rise to the notion of bioprospecting. Traditional knowledge has helped to preserve and maintain biodiversity through sustainable utilization and has increased the variety of biodiversity over centuries through the use and specific cultivation of indigenous species for agricultural purposes and food security. Traditional knowledge is of particular value for bio-prospectors or users of genetic resources who use it to guide them to plants and animals that are known to have useful properties. In many instances the same properties that made genetic resources useful to local communities are now used by industry to develop products (e.g. cosmetics, medicines, crop protection). Such companies using biodiversity in their products must abide by the Nagoya Protocol that is a legally binding agreement outlining terms of how one country will gain access to another country’s genetic resources and how the benefits will be shared. The use of and trading in indigenous plants and raw animal material for bio-prospecting by so-called bio-traders or bioentrepreneurs contributes to job creation, poverty eradication, skills development and technology transfer. Case study: Community members harvest Kraalbos (Galenia Africana) in Komaggas, Northern Cape. Kraalbos is known for its medical properties, including an antifungal agent. South Africa ranks amongst the top three in the world’s most bio-diverse countries and is home to about 24,000 plant species with an entire floral kingdom within its borders. These resources underpin a large proportion of the economy and many rural and urban people are directly dependent on them for employment, food, shelter, medicine and spiritual well-being. The WHO indicates that 80% of people in Africa depend on traditional medicines for health care, and that 1 billion people worldwide depend on drugs derived from forest plant for their medicinal needs. Many of these plants are indigenous and endemic to South Africa. Clearly such medicinal plants need to be cultivated on a large scale if wild populations of these plants and biomes where they occur are to be conserved. In Komoggas the opportunity for commercially cultivating indigenous medicinal plants has been taken, in order to meet the increasing demand and pressures from non-sustainable harvesting, as well as the importance of traditional knowledge of medicinal plants that will make a significant contribution to sustainable development. The role of holders of traditional; knowledge as natural resource managers with their skills and techniques provide a useful model for medicinal plants management as evidenced in Komoggas where the provincial government has joined forces with the District Municipality and the Local council to support the community to sustainable manage this important, Kraalbos, a yellow-green soft woody shrublet of one meter, that is a resource for the benefit of all. It grows naturally in the Northern Cape and in Namaqualand. The Kraalbos is an active invader and especially abundant in areas around kraal, along roads and on trampled veld. It is not only an indicator of disturbance, but is also a pioneer plant, being the first perennial to regrow after soil disturbances. A mixture of Kraalbos is used as a lotion for healing wounds in humans and animals by the local communities. Historically the Khoisan people chewed the plant to relieve toothache, skin and eye diseases. Legislation provides for fair and equitable sharing of benefits arising from the Kraalbos Project which is in line with the government’s ‘Green Economy’ objectives of propoor, pro-development and pro-job creation. The first bio-permit was handed over in 2012, and in July 2012, with an additional seven bio-prospecting permits handed over by Minister Edna Molewa of Environmental Affairs to the Komaggas community that comply with various regulations. The product (Zembrin, marketed as Elev8with) that has been developed from Kraalbos has been approved by the Medicines Control Council and reduces stress, elevates moods and improves concentration (Department of Environmental Affairs, 2012). Emerging Komoggas entrepreneurs (tenants and owners) will be reimbursed per kilogram of Kraalbos harvested that will result in an amount of 2 million Rands being paid directly to the access providers as upfront payment. The Khoi Heritage Foundation and its role as holder of traditional knowledge about Kraalbos will receive 1% of all distributable cash reserves after costs at the end of each financial year. Accompanying the permits the applicants will be issued copies of the SA’s Bio-prospecting, Access and Benefit Sharing Regulatory Framework: Guidelines for Providers, Users and Regulators. These guidelines as well as the associated tradi-

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tional knowledge will assist the different stakeholders to understand the legal requirement in terms of the law.

4.5. Create niche markets for biodiversity-compatible products To create markets for biodiversity-compatible products, retailers need to be made aware of them, understand their value and market them appropriately. Procurement advice, consumer awareness campaigns, eco-labelling and certification systems are all tools that can be used to create markets for these products. Eco-labelling and certification can be used to secure market share and price premiums as it is assumed that consumers who are environmentally and socially aware are more likely to purchase products at higher prices that are certified to comply with established codes of good practice as denoted by eco-labels such as Fair Trade. In cases where local producers, such as the wild-harvested rooibos tea sold by communal farmers in the Bokkeveld district of the Northern Cape, have been able to secure such certification, it has enabled them to penetrate international niche markets in which consumers prefer to buy certified products. Where markets are not yet demanding sustainably-produced goods, it is difficult to interest producers in adopting new production or harvesting methods that lead to certification. Although there are many South African business and biodiversity initiatives, the move towards introducing industry-related certification systems for compatible production is still in its infancy. Case study: Sustainable rooibos – The Heiveld case There has been an expanding market locally and globally for tea made from the ‘rooibos’ or red bush plant because of its health giving qualities, which only grows in a small region in South Africa. Wild rooibos has been harvested for domestic use for many generations by rural communities living in the Cedarberg and Bokkeveld regions of the Western and Northern Cape. In an effort to combat desertification and support sustainable agriculture in marginalized communities, the government of the Northern Cape provided assistance to a group of small-scale entrepreneur-farmers in the Heiveld district who produced wild rooibos teas through a combination of cultivation and wild-harvesting. In 2001 the product was certified an organic and in 2002 these farmer-entrepreneurs started marketing wild rooibos as a distinctive product and achieved notable success. In 2004 the product received Fair Trade, Ecocert and Naturland certification as it benefits. Currently the Heiveld Co-operative supplies a niche market of consumers in nine European countries who are willing to pay a premium price for organic, fairly traded products. Forty member farmers are now working with scientists to increase the yields from wild rooibos. A sustainable guideline for sustainable wild-harvesting of rooibos has also been produced although on-going research and monitoring are needed to assess the impacts of harvesting using these harvesting methods.

4.6. Develop intangible cultural products Local traditions and cultures (intangible heritage) should be authentically offered by entrepreneurs to attract tourists. Cultural events that are managed in a sustainable way can create a positive destination image; generate employment opportunities and benefits. Communities should be actively involved in the planning and decision-making of a cultural event, otherwise alienation and cultural disrespect may result. Sustainable event practice can also encourage development of environmentally-friendly transport systems and infrastructure, waste management and recycling, alternative eco-friendly energy sources and potentially enhance the environment. Socio-cultural sustainability: A successful event rejuvenates a destination’s cultural traditions, promotes its characteristics and renews the local community’s pride and confidence (Tassiopoulos, 2005a:3). According to Getz (in Gursoy et al., 2004:171), events play an important role in locals’ lives, as they offer essential activities and spending channels for locals and tourists, and improve the local community’s image. Events are the catalysts of a local community’s well-being and improvement (Getz in Derrett, 2004:32) and the success of events depends greatly on the involvement, passion and support of the local community (Gursoy et al., 2004:171). Therefore, positive social benefits of events must be generated and encouraged. Festivals and events are interactive experiences and build social cohesion and togetherness and strengthen the community as a unit (Gursoy et al., 2004:173). Events offer a chance for cultural exchange, which raises cultural awareness and understanding between event tourists and locals (Gursoy et al., 2004:173). Socially sustainable events establish trust and create a sense of belonging among community members and also help to preserve local traditions and heritage (Allen et al., 2008:64; Bowdin et al., 2006:38; Gursoy et al., 2004:171-175). However, should sustainable event practice not be implemented, crowding, congestion and crime rates could increase, which may lead to a negative event experience for tourists and the local community. Local traditions and cultures may also be exploited

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for the purpose to attract tourists. This could decrease cultural authenticity and cause locals to resent tourists. If communities are not actively involved in the planning and decision-making of the event, they may feel alienated and cultural disrespect may result. Ultimately, the destination will develop a negative image (Allen et al., 2008:64; Getz, 2008:412; Gursoy et al., 2004:175). Environmental sustainability: Events and environmental impacts have seldom been the topic of discussion, and when they have been considered as one topic, only the negative impacts of events on the environment have been examined (Dickson & Arcodia, 2010:237). Events and festivals usually entail a large number of people in a restricted geographical area for a specific period of time, which cause congestion, pollution, wastage of water and resources and noise (Collins et al., 2009:829). If not managed properly, events can negatively impact ecosystems through utilisation of non-renewable natural resources and contribute to carbon emissions and eventually climate change (Collins et al., 2009:829). However, events can also be a medium to promote environmental awareness, responsibility and understanding among event tourists, the local community, and the rest of the tourism sector as well as other business sectors (Collins et al., 2009:829). Also, sustainable event practice can encourage development of environmentally-friendly transport systems and infrastructure, waste management and recycling, alternative eco-friendly energy sources and potentially enhance the environment (Allen et al., 2008:64; Collins et al., 2009:830).

4.7. Make use of alternative revenue models Alternative revenue models can be used to assist emerging entrepreneurs. Volunteers can help at an event, in exchange for the experience; survivor packages can be offered in townships/favellas for tourists to ‘experience” co-creation. Events, conferences and exhibitions can offer services in return for publicity and for trading one service for another. Agricultural goods (food and beverage) make up 30% of tourist expenditure, which, if spent locally could transform the local economy, however problems include seasonality, health and safety regulations, inadequate transport, small volumes, unfamiliarity with the formal market. Alternative business models also exist within the realm of social networking channels.

4.8. Make use of alternative employment models and skills development Over the last few years the South African government’s environmental public works programme has explored models for creating job opportunities at a higher wage over a longer duration to lift more people above the poverty line. Such a model is the “Working For” programme that sets out to create short-term work opportunities for people who have few other opportunities for earning a living, by involving them in paid work associated with maintaining the ecological stability of the country. Case study: The “Working for” programmes These programmes are funded by National treasury and have clear social, economic and environmental gains, making it a ‘win-win-win’ model. These programmes require few skills at entry level, are extremely labour intensive activities and well suited to rural communities who are the beneficiaries of the programmes. The first government-led public employment programme with a specific focus on environmental rehabilitation was “Working for Water”, which aimed to address two political priorities: job creation and water scarcity. The programme uses labour intensive methods to clear invasive alien plants that help with maintaining rehabilitated or restored ecosystems on an ongoing basis. Other “working for” programmes based on the ‘Working for Water model’ include: Working for Wetlands, Working for Land, Working for Coast and Working on Fire, the last that focuses on women. www. workingonfire.org [get online brochure]. With this programme the entry level is: fire fighter>Type 2 crew leader>Type 1 crew leader> Base manager>Regional manager. This programme enables rural women with potential and drive to educate themselves on a continuous basis. Two new programmes dealing with Energy and Waste are currently in development. The “Working for” model makes a conscious effort to benefit the most marginalized communities and to target the employment of women, young people and people with disabilities. Training is provided to programme beneficiaries in the technical skills associated with restoration as well a a range of life skills (also entrepreneurial) that are intended to assist workers with exit opportunities beyond the programme.

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5. CONCLUSION Focus group discussions and selected in-depth interviews from a number of fair trade business enterprises are discussed in terms of enabling entrepreneurs to operate successfully, e.g. Spier Leisure embraced sustainability in 2004 and chose to prioritise local and SMME and BBE, focusing on local procurement; the investment in the training of local staff at Jan Harmsgat Country House in a rural area; Kraalbos, where community members harvest the herb for medicinal purposes; the Heiveld case where wild rooibos is cultivated and harvested for export to Europe; and the “Working for”projects” where the South African government is exploring job creation models; also programmes that are boosting local business and developing a ‘made local’ brand. Most of mentioned businesses have retrained staff and revisited their procurement policy to prioritise local, small, medium and micro entrepreneurs. The research identified a number of critical success factors that emerging/survival entrepreneurs should strive to attain to encourage the success of their new ventures, and that should assist in their sustainable success, namely: creating and forming partnerships and alliances; using new networks and finding new suppliers for local sourcing; developing and repackaging tangible products; bio-prospecting and investigating in becoming bio-entrepreneurs; creating new niche markets for biodiversity-compatible products; developing intangible cultural products; using alternative revenue models; and using alternative models for skills development and employment. Should emerging/survival entrepreneurs strive towards these critical success factors, sustainable success should be within reach. However, sustainability is a double edged sword: on the one hand we are looking at protecting the environment for future generations; but in a poverty stricken society this is a near impossible task to fulfil, as people harvest the land to survive – chop trees for firewood, hunt wild animals for food. The answer lies in education and the empowering of people to learn skills, to create jobs and live a decent life. One cannot expect people living in the poverty cycle at the bottom the of Maslow’s needs hierarchy to be concerned about the environment. To foster sustainability within the southern African context from an entrepreneurial perspective it remains imperative to look towards the opening of new markets, both locally and regionally, and to embrace skills of cross-border entrepreneurs and immerse them locally. Today, society realises the significance of sustainability, and that it is the way of the future. In order to grow and succeed in business and enhance their image and reputation, government on all levels and tourism role players must understand the meaning and importance of sustainability and the great deal of benefits associated with sustainable practices.

LITERATURE 1.

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Bowdin, G.A.J., Allen, J., O’Toole, W., Harris, R. & McDonnell, I. 2006: Events management. 2nd ed. (Events management series). ButterworthHeinemann, Oxford.

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Collins, A., Jones, C. & Munday, M. 2009: Assessing the environmental impacts of mega sporting events: two options? Journal of Tourism Management, 30(6):828-837. [Online] Available from: ScienceDirect: http://0-www.sciencedirect.com.innopac.up.ac.za/science?_ob=

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Derrett, R. 2004: Festivals, events and the destination. In: Yeoman, I., Robertson, M., Ali-Knight, J., Drummond, S. & McMahon-Beattie, U. (eds.) Festival and events management: an international arts and culture perspective. Elsevier, Massachusetts.

Dickson, C. & Arcodia, C. 2010. Promoting sustainable event practice: the role of professional association. International Journal of Hospitality Management, 29(2):236-244.

10. Getz, D. 1989: Special events: defining the product. Journal of Tourism Management, 10(2):125-137. [Online] Available from: ScienceDirect: http://0-www.sciencedirect.com.innopac.up.ac.za/science?_ob=ArticleListURL&_method=list&_ArticleListID=1251288479&_sort=r&view=c&_ acct=C000005298&_version=1&_urlVersion=0&_userid=59388&md5=d8461b1b9600eea4f0623339b2297a3a (accessed 2010-03-04.) 11. Getz, D. 2008: Event tourism: definition, evolution, and research. Journal of Tourism Management, 29(3):403-428. [Online] Available from: ScienceDirect: http://0-www.sciencedirect.com.innopac.up.ac.za/science?_ob=ArticleListURL&_method=list&_ArticleListID=1251338205&_ sort=r&view=c&_acct=C000005298&_version=1&_urlVersion=0&_userid=59388&md5=40e73157e16a90f4380e1898420d8187 (accessed 2010-02-26.)

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12. Gursoy, D., Kim. & Uysal, M. 2004. Percieved impacts of festivals and special events by organizers: an extension and validation. Journal of Tourism Management, 25(2):171-181. 13. Hunter, C. & Shaw, J. 2007: The ecological footprint as a key indicator of sustainable tourism. Journal of Tourism Management, 28(1):46-57. [Online] Available from: ScienceDirect: http://0-www.sciencedirect.com.innopac.up.ac.za/science?_ob= 14. ArticleListURL&_method=list&_ArticleListID=1251336331&_sort=r&view=c&_acct=C000005298&_version=1&_urlVersion=0&_userid=59388& md5=370481e56e0e20d954a283df4d23a375 (accessed 2010-03-02.) 15. Laing, J. & Frost, W. 2010: How green was my festival: exploring challenges and opportunities associated with staging green events. International Journal of Hospitality Management, 29(2):261-267. [Online] Available from: ScienceDirect: http://0-www.sciencedirect.com.innopac.up.ac.za/ science?_ob=ArticleListURL&_method=list&_ArticleListID=1289485754&view=c&_acct=C000005298&_version=1&_urlVersion=0&_userid=593 88&md5=92a7940efbce9026614be2f405036176 (accessed 2010-02-20.) 16. Queiros, D. 2003: The natural resource base. In: Lubbe, B.A. (ed.) Tourism management in Southern Africa. Maskew Miller Longman, Cape Town. 17. Reid, R.E. 2006: A journey to define sustainability: Waterton Lakes National Park. In: Herremans, I.M. (ed.) Cases in sustainable tourism. Haworth Hospitality Press, New York. 18. Salem, G., Jones, E. & Morgan, N. 2004: An overview of events management. In: Yeoman, I., Robertson, M., Ali-Knight, J., Drummond, S. & McMahon-Beattie, U. (eds.) Festival and events management: an international arts and culture perspective. Elsevier, Massachusetts. 19. Tassiopoulos, D. 2005a: Events: an introduction. In: Tassiopoulos, D. (ed.) Event management: a professional and developmental approach. 2nd ed. Juta, Cape Town. 20. Tassiopoulos, D. 2005b: Event role players. In: Tassiopoulos, D. (ed.) Event management: a professional and developmental approach. 2nd ed. Juta, Cape Town. 21. Wight, P.A. 2004: Practical management tools and approaches for resource protection and assessment. In: Diamantis, D. (ed.) Ecotourism: management and assessment. Thomson, London.

DETAILS ABOUT THE AUTHOR: FELICITE ANN FAIRER-WESSELS (PHD) SENIOR LECTURER DEPARTMENT OF TOURISM MANAGEMENT FACULTY OF ECONOMIC AND BUSINESS MANAGEMENT UNIVERSITY OF PRETORIA PRETORIA, SOUTH AFRICA ffairer-wessels@up.ac.za

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MILESTONES OF THE DEVELOPMENT OF HUMAN RESOURCE MANAGEMENT IN CENTRAL AND EASTERN EUROPE SONIA FERENCIKOVA

ABSTRACT The author in the article identifies main milestones of the human resource management development in Central and Eastern Europe during the last two decades. She analyzes the first stage of the developement in the 90’ when the countries of the region started transition and got into deep transformation crisis, and the next stages, such as economic growth at the turn of the centuries and later crisis and recession at the end of the first decade of this century. She deals with the human resource management function and its development in the region (administration, change agent or alignment partner, strategic partner and eventually coordination agent) and impact of the crisis on human resource management. She also focuses on hot topics in human resource management in Central and Eastern Europe, such as talent management and its specifics in the region and the future areas of research in related field and region. Studying these areas requires a completely new and multidisciplinary approach: the autor outlines its directions and intralinkages. KEYWORDS: human resource management, Central and Eastern Europe, talent management, future research in human resource management NOTE: The project is a part of research project VEGA 01/0461/12 Manažérske kompetencie v zahraničných a domácich firmách v SR

1. INTRODUCTION International experience proves that the factors determining whether the company achieves excellent or standard level of performance result from the organization’s ability to work effectively with human resources. External environment volatility and rapid technological progress requires innovative ways to enhance the organization performance and to ensure competitive advantage. Managements of the companies have already understood that human capital is the primary source of competitive advantage and therefore it is necessary more than ever before, to pay particular attention to the human dimension of management.

2. THEORETICAL BACKGROUND 2.1. Development phases of human resources management We can specify different stages of the human resources management evolution based on the circumstances and human activity. Before we talk about human resource management, there were other related activities and steps developed (Amstrong, 1999). Major ones are: 1. Personnel management – phase of development (1940s – 1950s): in this period, a full range of personnel services has been provided. Besides recruitment and staff record keeping, they were the special training and the training of the craftsmen provided. Personnel in charge of the employee care became the workforce management, which gradually engaged in the labor relations. However, workforce management activity remained at operational level. 2. Personnel management – phase of maturity (1960s – 1970s): in this period, the aforesaid services were extended to organization creation, development of managers and management, as well as systematic training and workforce planning. Increasing number of personnel directors became the members of top management. The rising amount of legislation caused that the personnel managers gradually became the labor law specialists. 3. Human resources management – first phase (1980s): The term human resources management has its origins in the works of American authors and later has been used by the business sphere as well. Personnel managers had to cope with the problems of corporate culture and market economy. The main issue was how the human resources management can influence the company results. Strategic approach to human resources management, remuneration according to work performance and development of performance management were gaining momentum in this phase. Power of unions was weakening. 4. Human resources management – second phase (1990s): this phase began as a reaction on the negative features of corporate culture , such as greediness and individualism. Teamwork, strengthening of the powers and continuous improvement in learning organizations were much appreciated. The competencies have been discussed more and

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more, and the approach to processes, such as culture management, performance and remuneration management, performance-based appraisal and the development of managers, has been created. The recession has increased the emphasis on a leaner, more flexible organizations with fewer levels of management and the concept of lifetime employment has ceased to be the norm. Personnel directors were often confronted with excessive redundance or staff reduction. Personnel managers started to use benchmarking to identify and implement the best practices in human resource management.

2.2. Strategic human resources management and growing demands on human resources Within the context of transition from the personnel management to the human resources management, strategic approach becomes notable. This shift means a reorientation to integrated, proactive and strategic approach to company employees. In this context, strategy of human resources management is focused on that how human resources can be used to achieve the company’s goals. (Mustafa, 2005, p. 82) However, it took a more than a decade until the theory and later the practice have moved in the direction of understanding the strategic role of human resource management: according to Armstrong, strategic human resources management is an integrated process aiming to achieve the strategic accord. Strategic approach to the management of human resources, which are vertically linked with corporate strategy. (Amstrong, 2002, p.119). The major proponents of the strategic role of human resource management could be found at the Business School University of Michigan where D. Ulrich and his team created the terms „strategic partner“ for human resource management and wrote many articles and books about the changing nature of human resources (for example Ulrich, Brockbank, 2005) In the meantime strategic role of human resources advocated by D. Ulrich and W. Brockbank, and many others has been moved to the role of human resources as a connector between outside and inside environment of the companies. (Ulrich, 2011). All these processes and changes are of course caused and fueled by globalization. The phenomenon of globalization has created whole new value chains because of multinational corporations’ rising role in world economy. Even the previously safe markets are dramatically changing. Companies are aggressively competing against domestic and foreign competitors for market shares. It is therefore not surprising that the number of companies employing expatriates, and the number of expatriates themselves is rising. Growing number of companies are ”born global” and they employ more and more local people as well. Globalization processes influence the development of organizations’ human resources management. These processes bring new aspects into the development of company’s internal environment, and they also affect the competitive environment in an entirely new way. There are also significant changes in the labor market development as well. Understanding of career development has changed significantly. Personal responsibility of the employees for developing their own individual skills is emphasized. Professional knowledge and skills, not the current position in corporate hierarchy, are important for the employee’s ability to succeed on the labor market. Employers gradually cross the borders to find the experience they need. Multicultural labor force is penetrating to the top management. Globalization forces managers to cope with the questions about that how to achieve and sustain competitive advantage, about that how to face the competition at home and abroad. Recruitment and training of the human resources needed to implement international or global strategy are therefore of crucial importance. The objective of strategic human resources management is to lead the way in this environment to interconnected practices and programs. Human resources and corporate strategy should be integrated. A key aspect is to ensure coherence of human management with the strategic focus of the organization.

3. TRENDS AND MILESTONES IN HR DEVELOPMENT IN CENTRAL AND EASTERN EUROPE More than two decades ago, the former socialist countries in Central and Eastern Europe (CEE) experienced a wave of revolutions as socialism (or communism) in Europe disappeared. The new social and economic order meant turmoil. Among the most significant changes was that these countries opened to foreign investments. One of the first challenges the foreign investors faced on the CEE markets was the need to hire skilled and talented local employees. In the early stages of the transition, their requirement was usually just foreign language fluency – French companies preferred French-speaking local nationals, German companies hired German-speaking employees, and other investors (including those from the USA or Great Britain) looked desperately for English speakers. This was especially true for HR positions – investors needed local liaison officers who could communicate with the local labor force in their native tongues and with foreign expatriates and their headquarters in the investors’ language(s). As such, the first HR positions were taken by those who studied foreign languages or foreign trade (the only economic

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discipline in which students were prepared to communicate with foreign customers) or by talented graduates with engineering, chemical, or technical degrees (depending on the activity of the foreign investor) who had studied some foreign language mostly as hobby or almost as an accident. Almost all of them were in their late 20s or early 30s – the older generation did not have the requisite language skills. This inaugural cohort of CEE HR managers was typically trained by their companies and in many cases mastered their jobs quickly. The first needs of the HR function in CEE were rather administrative. Because there was often not much a career path within the HR department, many HR managers moved to other top management positions in their companies, some of whom even rising to managing director or country manager positions. Those who stayed in the HR field felt driven to improve their skills because they did not get the classical HR education (even though they were over-educated in other areas). This need was later met by the foreign universities opening HR programs in CEE, followed in a couple years by new HR programs offered by local universities. Many HR executives “of Western origin” from headquarters looked to understand the region through the networks . Being “outsiders” from the West, they often had trouble grasping the idiosyncrasies of the CEE region. …”The composition of our membership has evolved over the years, with the changing HR landscape. Our typical member was initially a Western national based in a Western European city responsible for HR operations in CEE. Then it was a CEE national who re-located to the headquarters. These days, many members are CEE nationals based at CEE headquarters located in CEE capitals – some working for an emerging group of CEE multinationals. In other words, our membership base reflects several trends. First, the Western nationals were increasingly replaced in their CEE responsibilities by CEE nationals (the pool of talent in CEE gradually developed and was sufficiently rich to cover these positions). Second, the multinational companies in their search for cost cuts realized that the location of the headquarters in CEE makes sense. Third, some Central European companies formerly run in only one country began operating internationally, primarily in neighboring countries of CEE....” (Ferencikova, Gilett 2010) After the wave of the relocation of headquarters another wave began: CEE has emerged as a popular location for call, shared-service and support centers. These operations sometimes employ thousands of workers. The HR function has changed as well: at the end of the 90´s, the HR function focused on building the basics. In the tumultuous mid to late 90’s, it was oriented towards managing change. It has finally started to focus on strategy. Currently, many HR managers in the region confirm that their strategic role has been developing quickly; however, it is still far from the stage where they would like it. Therefore we have decided to check the progress in HR in a survey.

4. SURVEY OF HR PROFESSIONALS IN CENTRAL AND EASTERN EUROPE 4.1. Questionnaire and respondents The survey results bring the companies´ views reflecting current state and priorities in human resources management in the region of Central and Eastern Europe. We have also examined the involvement of HR into strategic phases and the evaluation of HR performance. The survey was conducted in the form of questionnaire (in English) that was distributed to the HR managers in Central and Eastern European companies. We have addressed 120 managers from 11 countries of the region. The data processing is based on the 67 completed questionnaires (the response rate was 56%) that we received from the 7 countries of the examined region: Slovakia, the Czech Republic, Hungary, Ukraine, Bulgaria, Romania and Slovenia. The survey was conducted at the beginning of 2011 (Krajčíková, Ferenčíková, 2011). Manufacturing (e.g.engineering, food industry) and services (e.g. financial services, consulting) are represented in the survey. More than 70% of the replies were received from companies from Slovakia, but only 22,4% of the firms are of Slovak origin. The remaining 78% of companies are headquartered in other countries. Average number of the surveyed companies´ employees is 855 i.e. majority companies represented in the survey are large entities.

4.2. Priorities of the human resources management in crisis years Although the present-day market is unpredictable and costs have to be closely monitored, employees are still the key performance factor of each company. Rank of the priorities and their comparison in 2010 and 2011 are shown in the table below. The survey shows that the most important priorities in 2010 were an increase in employee engagement, performance management, training and development, employees´ motivation increase. It is interesting that the top four HR priorities in 2011 are exactly the same as in the previous year. Nearly 35% of the companies stated cost reduction as the top priority in 2010 (This year was the year of strong economic crisis and recession). In 2011, increase in employee

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engagement was stated as the top priority by 40% of the companies what may have been connected with the expectations about the end of the crisis. Table 1. Priorities in human resoures management in 2010 and 2011

Source: Author

Results show that HR outsourcing and internal HR marketing were the least important in 2010 as well as in 2011. When comparing the years 2010 and 2011, we can see the biggest difference in the ranking of cost cutting. In 2010, it ranked in the top five. In 2011, respondents ranked it 10th.

4.3. HR and the strategy development Nowadays, there is still a lot of discussion about the need to get closer to business and to create partnership between human resources and business itself. The survey showed that 69% of respondents agree that CEO of their company believes that HR management plays a key role in achieving business results. 66% of respondents stated that HR issues are taken into consideration while planning the business strategy of the company. More than half of the respondents stated that HR managers are able to discuss business topics. This clearly shows that HR is focused on human capital building in order to be consistent with the company´s business objectives. It is noteworthy that 84% of the companies agreed that one of the most important differences between successful and unsuccessful company is the top management´s support of HR strategy, policies and tools. Table 2. Human resources department position

Source: Author

The graph below shows the degree of HR involvement in the strategy development phases. The survey showed that HR is significantly involved in all phases associated with the strategy, e.g. planning phase, development, agreement phase and, of course, implementation phase. The greatest influence of HR can be seen in the implementation phase of the strategy. This fact proves how important is the role of HR management in the companies, however this role is not a creative or proactive one (as it is seen from the graph, the involvement of HR in the planning and development phase is relatively lower compared to implementation).

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Graph 1. The level of participation human resources section on strategic phases

Source: Author

We have also surveyed what are the opinions of the respondents about future development of HR. Nearly two thirds of the respondents think that HR management will play more important role and will cooperate more closely with business. 30% of companies believe that the position of HR will not change in the future and only 6% of companies think that the function of HR will become less important and rather administrative. Table 3. Positioning of human resources section in the future

Source: Author

HR therefore has to be more oriented into the future in the strategic and business way . 82% of respondents agreed that on the behalf of fulfilling future expectations of the organization, HR will have to develop new skills. Table 4: The need to develop new skills for human resources section

Source: Author

We have asked the surveyed companies about the importance and the time given to particular HR activities. Despite the above-mentioned strategic direction of HR, the responses (Graph 2) indicate that it is still more operational than strategic function. In the opinion of the respondents, HR administration is the most time-consuming, but also the least important task. Respondents stated consultations for managers as the most important and also time-demanding task of HR. Graph 2. Activities of human resources department (importance versus time spent)

Source: Author

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4.4. Conclusions HR management has gone through several development phases. The development of HR started from the basic tasks and continued with recruitment, employee development and strategic management to the current position, when HR management have to react on rapidly changing economic environment. Nearly 70% of companies consider human resources management as a key prerequisite to achieve business results. HR issues are taken into account as early as in the planning phase of the company strategy. Performance management, employee commitment and engagement, motivation are the priorities of HR management in 2011 – and also the reason why the current position of HR is a great challenge. If we study the results of the survey, it is visible that the crisis has kept or moved the HR function in CEE more into „implementation role“, and the role of being strategic partner is still on the agenda. The lack of progress is partially due to the economic development of the region: in the 90´s, the region was in a deep transitional economic recession. In spite of this recession, many foreign companies entering the region grew quickly due to the first-mover advantages, lack of local competition, and large, unsatisfied demand. Building the HR basics was a must at that time. Later, many of them needed to re-orient and change (partially also due to the development on the Western market) and HR had become a partner of the top management in the change process. The beginning of this millennium meant unprecedented growth in many activities in the CEE – the region has economically recovered and started to grow much faster than the developed countries of Europe (sometimes called “old Europe”). The HR function became more self-confident and started to move in a strategic direction. The economic crisis in 2008 has halted this process. HR in many companies has reverted to a more transactional role, focusing now on lay-offs, cost cuts, and the need to manage trade union relations. However, the need to be strategic is now much more important than even before. But as our results show, the HR function has to be blamed too because their employees and representatives first need to understand business and then they can be accepted as the strategic partners by the boards and executive management. And where do we see the future of HR now? The European space is becoming more homogenous, with the differences between East and West eroding. Strategic thinking in all areas of business activity, including HR, is essential to survival and growth. The same strategic thinking is needed throughout Europe, from Prague to Paris, Bratislava to Bonn.

5. PHASES OF HR RESEARCH IN CENTRAL AND EASTERN EUROPE AND FUTURE RESEARCH AREAS (MULTIDISCIPLINARY APPROACH) As seen from our previous research and practical knowledge, we can identify following phases of HR research and development in CEE and following topics studied:

5.1. Stage 1 - Entry of foreign investors (outside in) • • • • • • • • •

HR challenges for business success of FD investors HQ – subsidiary HR practices transfer „import“ - influence of foreign investor practices on the performance of local FDI-invested companies pros and cons of HQ HR practices and tools in CEE environment cultural clashes in West-East joint ventures expatriates – „Alice in Wonderland“ approach, cross-cultural communication case studies of FDI-invested companies cross-country comparison of various HR aspects (sometimes within CEE, sometimes West vs. East) „HR spillovers“ to local companies

5.2. Stage 2 - Focus on internal HR issues in local companies (inside) • •

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development of HR function in former socialist countries (communist legacy in organization and behaviour of local management and labor force) selected functions: education and development, development of local management, motivation (values), compen-

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sation, elite and leaders country studies, sometimes comparison of different countries of the region

5.3. Stage 3 – inside out Stage 3 is a current stage in which companies need to think how to use HR getting out and afterwards transferring the knowledge from outside environement into their companies. This stage is also about contribution of HR function to the solutions of major global problems. We believe that the hot topics of the HR research in CEE should be these ones: Big topics: • Migration within Europe (East-West), Europe – USA, migration Asia – Europe • Sustainability of the regional differences in HR in Europe (productivity, compensation etc.) • Trends in demographics as challenges for HR: 1. aging population, missing labor force, diversity issues 2. generation Y and new attitudes towards work, carreer, work-life balance (differences between West and East) 3. future of work and HRM (technology, social media etc.) • Business education (management and crisis, ethics, CSR, compliance...) • Ethics in business Micro-topics: • Talent identification, development and retention • Retention, loyalty, engagement, communication, motivation, changing values • Carrer management, work-life balance • Leadership development, leadership styles and role models • Teamwork, efficiency of cross-cultural and diverse teams, managing virtual teams • HR issues in regional M&As • Expatriation and its limits, redirection (East-East, East-West) • Reverse knowledge transfer – subsidiaries to HQ • HR and corporate social responsibility • HR as strategic partner There is no doubt that the research as well as practical front in CEE face many challenges and bring new topics to our attention literally every day.

LITERATURE 1. 2. 3. 4.

ARMSTRONG, M. 1999. Personální management. Praha : Grada Publishing, 1999. 48 s. ISBN 80-7169-614-5. ARMSTRONG, M. 2002. Řízení lidských zdrojů. Praha : GRADA, 2002. ISBN 80-247-0469 CAPELLI, P. 2008. Talent Management for the Twenty-First Century. In: Harvard Business Review. 2008. ISSN: 0017-8012. EVANS, P. – PUCIK, V.- BARSOUX, J.L. 2002. The global Challenge. Frameworks for International Human Resource Management. New York: Irwin, 2002. ISBN 0-07-239730-6. 5. FERENČÍKOVÁ, S. a kol. 2010. Stratégia medzinárodného podnikania: Investície, partneri a ľudské zdroje. Bratislava: Ekonóm. 2010.s.165 ISBN 978-80-225-3078-1. 6. FERENČÍKOVÁ, Soňa: Human Resource Management in CEE: Past and Future. Research Conference on Business and Management in Central and Eastern Europe. Competence Center for CEE. Wirtschaftsuniversitaet Wien, March 30, 2012 http://www.wu.ac.at/cee/cee_conference/ presentations 7. FERENČÍKOVÁ, Soňa - FERENČÍKOVÁ, Soňa: Outward Investment Flows and the Development Path: The Case of Slovakia. Eastern European Economics, vol. 50, no. 2, March – April 2012, pp. 91 – 120, M.E. Sharpe, ISSN 0012-8775/2012, DOI 10.2753/EEE0012-8775500205 8. FERENČÍKOVÁ, S. a kol.: Stratégia medzinárodného podnikania: investície, partneri a ľudské zdroje. Bratislava, Ekonóm 2010, 318 s., ISBN 978-80-225-3063-7 9. FERENČÍKOVÁ, S. – GILLETT, A. 2010. Towards Single Europe. Two decades after liberalization, a region’s workforce finds its leadership. HRO Europe, Summer 2010, p. 38/39 10. FERENČÍKOVÁ, SOŇA- Krajčíková, Lucia: Two Decades of Transformation and Sustainability in Human Resource Management In: Management Challenges in the 21st Century [Proceedings]. Bratislava, 25.4.2012, Vysoká škola manažmentu v Trenčíne, 2012. - ISBN 9788089306145. – s. 177 - 187 11. FOMBRUN, C.J. - TICHY, N. M. - DEVANNA, M. A. 1984. Strategic human resource management. New York: John Wiley, 1984. ISBN 0-471-81079-7. 12. FELKER, J. 2011. Professional development through self-directed expatriation: intentions and outcomes for young, educated Eastern Europeans. In: International Journal of Training and Development, 15 (1), p. 76-86, March 2011. ISSN 1468-2419.

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13. GUEST, D.E. Personnel management: the end of orthodoxy. In: British Journal of Industrial Relations. ISSN: 1467-8543. 29 p. 149-176. 14. KLEIBL, J. : Vliv globalizace na řízení lidí. In: ACTA OECONOMICA PRAGENSIA. Vědecký časopis Vysoké školy ekonomické v Praze, 4, 2003, Praha : Vysoká škola ekonomická, 2003. ISSN 0572-3043 15. KRAJČÍKOVÁ, L. 2011. Medzinárodné riadenie ľudských zdrojov – vybrané aspekty riadenia ľudských zdrojov v strednej a východnej Európe. (Doktorandská dizertačná práca). Ved. S. Ferenčíková. Obchodná fakulta, Ekonomická univerzita Bratislava 16. LEGGE, K. 1989. Human resource management: a critical analysis. In: Storey, J.: New Perspectives in Human Resource Management, London, Sage, 1989. ISBN 978-0415010412 17. MUSTAFA O. 2005. International Human Resources management: Theory and Practise. Palgrave Macmillan, 2005. 82 s. ISBN 978-0-33399323-1. 18. STOREY, J. 1989 From personnel management to human resource management, In: Storey, J.: New Perspectives in Human Resource Management, London, Sage. 1989. ISBN 978-0415010412. 19. ULRICH, D.- BROCKBANK, W. 2005. The HR Value Proposition. Boston: Harvard Business School Press. 2005. ISBN- 13: 978-1-59139-707-6. 20. ULRICH, D. 2011. On changing nature of human resources. HR Summit, Budapest, October 26, mimeo.

DETAILS ABOUT THE AUTHOR: SONIA FERENCIKOVA PROFESSOR SCHOOL OF MANAGEMENT BRATISLAVA, SLOVAKIA sferencikova@vsm.sk

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PRODUCT PLANNING AS A PHASE OF PRODUCT DEVELOPMENT MANAGEMENT MILAN GAŠOVIĆ DARKO VASELIĆ MARIJA BRDARIĆ

ABSTRACT Planning activity, as a key management function, is an assumption for efficient and effective completion of planning tasks. Product planning is a process which stems from company’s business strategy, but also supports that strategy. Process of product planning precedes the process of project development decision making, resources provision and team development. It also includes activity of considering projects portfolio which has to be realized in the determined time period. Basis of the planning product process consists of marketing research information, technological research information and information on the current products success. Praxis shows the existence of several categories of product development projects. Product planning process, in the most cases, consists of: opportunities identification, projects evaluation and ranking, resources allocation and scheduling, pre-planning activity, analysis of the product development process and its results. KEYWORDS: Product Planning, Product Development, Product Development Project

1. INTRODUCTION Product planning is the primary phase of the product development management. It is a very complex process that requires management of the company to make decisions based on targets, knowledge and careful evaluation. Product development could be characterized as an improvement (modification), adaptation, and creation of entirely new products. The second term, which often is used when it comes to product development, is innovation. Innovation can be interpreted as editing the existing product, as well as, the development of the entirely new ones. Product planning is a prerequisite for making appropriate decisions about specific projects for product development. These decisions have to include formation of the project team, as well as, the ways of providing the necessary resources for product development projects. Selected project teams, must, prior to product development, know the mission of each project in terms of: market segments that need to be explored in order to accordingly design appropriate products, new technologies which need to be involved in new product development; objectives and constraints of new products, financial goals, budget and project timelines. Product development activities are derived from a broader business strategy of the company, based on which development team answers to the following questions: which of the projects will be undertaken, which mix of brand-new products will be made, which platforms or modified products are to be realized, what is the relationship between different projects portfolio and what is the order and duration of individual projects. Product development projects can be classified into four categories: new product platforms; derivatives of existing product platforms; incremental improvements of existing products; and fundamentally new products. New product platforms mean creating product families which are based on the new platform. Those products belong to similar product categories and are designed for similar segments. Product platform is a set of resources (assets), which is shared by a certain number of products. Effective platform allows different products to be designed more quickly and easily, so that each of them has features and functions are required by specific, targeted segments of the market. Derivatives of existing product platforms include projects whose goal is to better meet needs of the market for one or more new products. Incremental improvements of existing products include projects aimed at changing or adding new features to existing products, in order to maintain a given product line competitive. Fundamentally new products assume projects of complete products, technologies or markets innovation.

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There are plenty of problems, risks and uncertainties when it comes to new product development. Those projects are high-risk projects at all stages of their development. This is why the management of the company must undertake all activities in order to reduce risks to a reasonable level and effectively solve problems while the process is taking place.

2. PRODUCT PLANNING PROCESS Different authors consider the process of product planning through larger or smaller number of its phases. Some of them, divide products planning process into the following ten stages: adjustment of the preliminary development goals of the company, predicting future environment of the company, predicting its current state, predicting current state of competitors, extrapolation of existing strategies development, identification of key development opportunities, definition and evaluation of new strategies, finalizing plans for product development, application of development plans, analysis and control of the product development plan. The product planning process precedes a process of a formal decision-making of launching development projects, necessary resources procurement and team formation. Also, product planning process is the activity which assumes evaluation of available product portfolio and selection of project subsets that will be implemented. During the planning process, product portfolio which will be developed by the company, as well as the timing of their launch must be identified. The process of product planning also includes product development opportunities identified by marketing departments, customers and / or consumers, department for research and development or by competition. As a result of the planning process a product plan is being identified. That plan is updated continuously in order to reflect changes in technology, competitive environment, and information on the success of existing products. Product plan is developed taking into account the objectives, capabilities and limitations of the company, as well as the competitive environment. Some companies have a manager of the planning process, who manages the whole process. Starting from the results of marketing research, chances are ranked and a group of promising projects is identified. After that, a resource allocation is performed and a time frame for the implementation of each project is defined. Those particular planning activities focus on the portfolio of opportunities and potential projects, and are sometimes also called portfolio management, aggregate product planning, product line planning, and the like. Product planning process is a complex activity and includes many difficulties, such as, for example schedule or budget constraints. Therefore changes in priorities and additions to potential projects are necessary. In this sense, product plans, are often re-evaluated and changed with new information from developers, research laboratories, production, marketing and service organizations. Experts who wiil later be involved in the process of product planning, are often the first to notice that there may exist an inconsistency, impracticability or obsolescence, when it comes to the overall plan or project mission. Therefore, the ability to adapt the product plan over the time is a key to success in the long term.

3. PHASES OF PRODUCT PLANNING DEVELOPMENT PROCESS Although there is no agreement about the content and the number of stages of the planning process, reputable researchers in this field Lehmann and Winer, sublimate different attitudes and propose the following five phases of product planning process: identifying opportunities for new product development, evaluation and ranking of new product development projects; resources allocation and time frames planning; pre-project planning and analysis of the both planning process and project results.

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3.1. Identification of New Product Development Opportunities Planning process starts with the identification of opportunities for product development. Those opportunities include any of the four types of projects. Ideas for, either new products or new product features, can be found in the external and internal sources. The external sources of ideas include: * Customers and / or consumers * Research institutions * Consulting agencies * Patents and licenses * Marketing research agencies * Government agencies * Technical and other publications * Other companies

* Competitors * Universities * Joint ventures * Industrial Designers * Inventors * Trade journals * Technological shows

* Advertising agencies * Fairs * Exhibitions * Seminars * Suppliers * Acquisitions * Retired experts

Internal sources of new product ideas can be found within companies. These are, in particular: * Research and Development department * Sales personnel * Top management * Personnel from other departments in the company

* Department of Marketing * Production * Technical services

In cases when the company implements an active approach in the ideas collecting process, it achieves continuity, so a chance to develop a new product can arise at any time. The experience of successful companies-innovators suggests that every promising opportunity should be briefly described, that is, shaped as a statement and placed in a database.

3.2. Project Evaluation and Ranking Companies can, by using the above mentioned sources, identify a large number of ideas and opportunities for new product development, during one business year. Some of them are not consistent with other activities of the company at the time, so the company cannot take the advantage of all opportunities at that particular moment. Therefore, it enters into the second phase of the planning process, in which the selection of opportunities and the choice of the most promising ones is being made. During the opportunities evaluation and ranking, it is necessary to consider the following perspective: competitive strategy, market segmentation, technological trajectories, and product platforms. Competitive strategy aims to establish basic access to the company’s markets and products, taking into account competitors. Choice of promising opportunities for the new product development can be made on the basis of that strategy. On that occasion, it is possible to implement a number of strategic alternatives. For example: * Leadership in technology - companies have to invest heavily in basic research and new technologies development, including their application to the new products development. * Leadership in costs - companies compete in the area of production efficiency through economies of scale, by using superior production methods, low labor costs, more effective management of the production process, and so on. * Focusing on customers and / or consumers - the company cooperates with existing and new customers / consumers, in order to make estimates of their changing needs and preferences. Carefully designed product platforms encourage the rapid development of modified products, with new features and functions that are adapted to the special wishes of customers and / or consumers. This strategic option can result in a wide range of products which meet the needs of heterogeneous customer segments. * Imitation - a company closely follows trends in the market, leaving competitors to explore new products that achieve market success. Then, the company quickly launches a new product that imitates the most successful competitor. For the strategy to be successful, the company needs a fast product development process.

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Market segmentation - companies must determine which consumers and / or customers come from different market segments. This division of the market into segments enables companies to assess the competitors’ activities and the strength of existing products, due to the different consumer groups. By comparing its own and competitors’ products which are sold on a particular segment, companies are able to determine which products from a given product lines exhibit most weaknesses and which one uses weaknesses of a competitor. Technological trajectory - in a business, which is technologically intensive, key planning decisions of a company management are those which are made at the time of adoption of new technology for a particular product line. Experience shows that technology evolves from the moment of creation, when their application is relatively small, over the rapid growth in the application based on the experience, and finally reaches a level of maturity and natural obsolescence. Products platform planning - product platform is a set of resources (assets) used by a certain number of products. Components and subcomponents, are often, the most important types of a given product platform. Effective platform allows different products to be designed faster and easier, so that each of them has features and functions required by a certain segment of the market. In addition to new versions of existing products within the product categories, companies are faced with new opportunities in new markets or fundamentally new technologies. Although investing in this situation represents a necessity, but also a risk, such investments are necessary in order to periodically refresh products portfolio. Some of the criteria for evaluating opportunities for new product development are: market size, market growth rate, intensiveness of competition, the level of existing knowledge of the company’s market, compatibility with other products of the company; compatibility with the company’s ability, potentials for patenting or other barriers to competitors, the existence of the product “champions” within a category, and so on. In practice, there are different methods that assist company management in balancing the portfolio of development projects. What is certain is that the choice of competitive strategy should influence the shape of the product development portfolio.

3.3. Resource Allocation and Time Frame Planning The company, which aims at a balanced portfolio, will not be able to use (invest) every chance of product development. When the time and resources allocation to the most promising projects is made, a large number of the remaining projects will, inevitably, have to apply for a small amount of company resources. Some companies run many projects, not taking into account the limited resources for product development. Consequences of these decisions are: a dramatic drop in productivity, prolonged completion of projects, over-commitment of managers and engineers, the delay in the product launch and lower profits. Solution to this problem, companies often find in so-called aggregate planning, which helps to use resources in an efficient manner. The point is to implement only those projects that can be successfully finalized with available budgets. Resource estimation for the implementation of each project, by months, quarters or years, allows company to face the reality related to resource constraints. In the most cases, primary resource that requires careful planning is staff commitment and effort for product development. Other critical resources are: space for designing, product prototyping equipment, pilot production line, space for testing, and so on. All listed resources require careful planning. When determining the length and the sequence of the projects, the following factors have to be included: time frame of product introduction, technology readiness, the readiness of the market, competition, etc. Set of projects selected through the planning process is called product plan. The given plan includes a mix of fundamentally new products, projects, platforms and improved products of different sizes. Product plans are being periodically modernized, usually quarterly or annually, which represents a part of company’s strategic planning.

3.4. Complete Pre-Project Planning Activities of the pre-project planning start once a project is approved, but before most of the resources are provided. Those activities are performed by small multi-functional team of people, which is often referred to as the core team.

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The core teams usually consist of about 30 people who are experts of technical, manufacturing, marketing and service profiles. The next step is to, previously formulated statement of opportunities for new product development, reformulate in a product mission statement. The mission statement includes all or some of the following information: a brief description of the product, product benefits proposal, the target market of the product, assumptions and limitations of development efforts, product stakeholders, etc. Assumptions and limitations of projects may be related to the capacity, capabilities and limitations of the manufacturing process and manufacturing operations, to providing services to customers, as well as to requests from the environment for sustainable development. Activities of pre-project planning include staff management and leadership, as well as providing the available funds.

3.5. Analysis of the Results of the Product Planning Process In the final stages of the planning process, project teams must analyze and review the product quality, both the in the process and its in results. They can do that by providing relevant answers to questions related to: identification of opportunities for the development of new products, identification of product plan position in the competitive strategy of the company, the sufficiency of the necessary resources, level of utilization of opportunities for joint ventures and partnerships with suppliers, the level of acceptance of the product mission by the members project teams, product mission elements consistency, objectivity of the assumptions and limitations of the product development and the possibility of improving the planning process. Since the product development team has a task of defining the product mission, it must be reviewed before the development process is to be continued. Then it is possible to correct any errors or omissions. What is important for the company is the simultaneous realization of some phases, in order to check the consistency of planning decisions, both among themselves and with the goals and resources of the company.

4. CONCLUSION Product planning is bridging the gap between where company is now and where it wants to be. It involves the choice of targets and missions, as well as actions to achieve them. Planning demands decision about alternative, the future course of action. Therefore, plans as a result of the planning process, provide a rational approach to the realization of pre-determined goals. The process of product planning takes place before the formal approval of the project development is made. Planning process, in fact, represents the activity of considering portfolio of projects that are available to a company. The activity must be aligned with the overall business strategy of the company. The planning process includes chances to develop new products that are identified from various sources, such as marketing departments, customers and / or consumers; development (project) teams, competition, etc. Product planning process is carried out through the following successive stages: identifying opportunities, projects evaluation and ranking, resources allocation and time frames planning, analysis of the process and its results. Product development projects can be classified into four categories: new product platforms, modification of existing product platforms; significant improvement of existing products and fundamentally new products. Group of projects selected during the planning process, arranged in the order, represents a product plan. Thus, the product plan is the result of the planning process. Product plan includes a mix of fundamentally new products, projects, platforms and modified products of different sizes. Product plans are periodically refreshed and updated, in order to reflect changes in technology, competitive environment, and information on the success of existing products. The planning process requires effective management and leadership.

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

Baker, M., Hart, S. (2007.) Product Strategy and Management, 2nd edition, Pearson Education Limited, Harlow, UK, pp. 321 Crawford, M., Di Benedeto, A. (2006.) New Product Management, McGraw-Hill, 9th edition De Mozota B.B. (2002.) Design Management, Design Management Institute and Allworth Press, New York Gašović, M. (2011.) Menadžment proizvoda, Ekonomski fakultet Subotica, Subotica, pp. 247-249 Knežević, R. (2000.) Planiranje i razvoj proizvoda, Viša poslovna škola, Beograd, pp. 281 Lehmann, G., Winer, R. (2002.) Product management, 3rd edition, Mc Graw Hill, New York, pp. 155

DETAILS ABOUT THE AUTHORS: MILAN GAŠOVIĆ ASSOCIATE PROFESSOR UNIVERSITY OF NOVI SAD, FACULTY OF ECONOMICS SUBOTICA BELGRADE, REPUBLIC OF SERBIA gasovicm@ef.uns.ac.rs DARKO VASELIĆ REGIONAL MANAGER JOHNSON&JOHNSON COMPANY BOSNA&HERZEGOVINA dvaselic@gmail.com MARIJA BRDARIĆ PHD STUDENT UNIVERSITY OF BELGRADE, FACULTY OF ECONOMICS NOVI SAD, REPUBLIC OF SERBIA brdaricmarija@gmail.com

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PATIENTS’ BEHAVIOURAL INTENTIONS AND THE INFLUENCE OF SERVICE QUALITY PERCEPTIONS AND CUSTOMER SATISFACTION IN THE ALBANIAN HEALTHCARE INDUSTRY ELSA GEGA ZHANINA DAPI

ABSTRACT The primary objective of this study was to measure patients’ perceptions of service quality and customer satisfaction with a private hospital experience and to estimate the effect that each of these constructs will have on future behavioural intentions. More specifically, the present study was an attempt to assess empirically the most important dimensions of service quality and transaction-specific customer satisfaction dimensions that drive both patient loyalty and ‘overall’ or cumulative satisfaction in the Albania private hospital industry. For the purpose of this study, buying intentions was used as a surrogate measure of loyalty as measured by willingness to reuse the hospital and/or willingness to recommend it to others (word-of-mouth endorsements). Initial exploratory research was conducted with the aim of assessing the views of three private hospital stakeholder groups, namely former patients, doctors and management about what the quality of service and customer satisfaction meant to each individual interviewed. The study was conducted nationally at private hospitals owned by one of Albania’s three major hospital groups. Five private hospitals in capital of Albania, Tirana were selected on a non-probability convenience basis to participate in the study. The hospital group’s senior management and the management at each selected hospital gave their full commitment to ensure that the survey was successfully conducted in their hospital wards. Data were collected by means of a quantitative study using a selfadministered, structured questionnaire. Patients had to meet certain qualifying criteria which included being of adult age, in the hospital for an operation and at least one overnight stay. A total of 300 questionnaires was distributed to patients on a random basis in selected wards at the five hospitals by senior hospital staff designated for this task. From this distribution, 285 questionnaires were returned of which a final sample of 300 could be statistically analysed. KEYWORDS: Service quality, Customer satisfaction, ‘Overall’ cumulative satisfaction, Loyalty, Buying intentions, repurchase, Private hospitals, Albania

1. INTRODUCTION Healthcare today has become a competitive industry, not only locally, but on a global level as well. In the Albanian economy the healthcare sector presently offers healthcare seekers two options to satisfy their healthcare needs – either through private business enterprises in the private sector or public enterprises in the public sector. Likewise, in the healthcare sector’s hospital environment, patients can receive treatment from either private or public hospitals. As private business enterprises offering a relatively ‘pure’, but generally unsought-after service, private hospitals compete aggressively to attract patients. Patients are a hospital’s lifeblood and they rightfully expect a high standard of customer service throughout the stay. With today’s consumers being better informed, more sophisticated and more demanding than in the past, experts agree that the key to survival in the service industry today, almost without exception, is the quality of the service. The cornerstone of the service industry is without doubt the ability to deliver superior service quality that results in customer satisfaction. And the healthcare industry is no exception. Most consumers will experience a need for healthcare services at some time in their lives, but in Albania, escalating medical costs in general and private hospitals in particular, have made private healthcare increasingly more expensive for the majority of the country’s healthcare seekers. This situation raises the question of customer service in the private hospital industry and how patients’ perceive service quality and evaluate customer satisfaction after a hospital stay. There studies shows that service quality and customer (patient) satisfaction positively influence patients’ behavioural intentions to reuse the hospital or recommend it to others (word-of-mouth endorsements). However, in Albania, empirical studies to investigate these relationships have not been adequately addressed. This study was therefore an attempt to address the lack of scientific evidence and debate in the area of patient satisfaction.

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2. RESEARCH DESIGN AND METHODOLOGY A study of this nature is comprised of two components, namely primary data and secondary data, the collection of which are undertaken in order to adequately address the research objectives. Primary data are original data collected specifically for the purpose of solving the current research problem (Hair, Babin, Money & Samouel 2003:72; Van Wyk 1996:99). Secondary data, on the other hand, are existing data that have already been collected for previous research purposes, but may be used to help solve the research problem at hand (Hair et al. 2003:72; Van Wyk 1996:99). In order to realise the objectives of the study and test empirically the hypotheses that had been formulated for this purpose, the primary and secondary research will form the two main sources of data. Secondary sources of data A comprehensive literature search was undertaken to collect sufficient information on the influence of the two constructs, namely service quality and customer satisfaction and their influence on future behavioural intentions in the same service industry. The search was initially widened to include generic topics in the general service literature, but subsequently narrowed to the healthcare industry and as far as possible, to patients in private, or at least for-profit hospitals. An overlap with other healthcare providers or public hospitals was unavoidable during the literature search and the information generated was not included in the study unless mentioning it was absolutely necessary. Publications covering academic report writing were consulted as well. Anecdotal literature such as the domain of customer service, customer relationships, branding, selected stories of successful business leaders and managing for the future were also consulted. Primary sources of data Preceding the empirical study to test the theoretical model, information was solicited from three groups of stakeholders primarily to gauge the feelings of different role players regarding their perceptions and opinions of the patient as a customer and their understanding of the concepts quality service and customer satisfaction. Two of the groups were hospital management and medical practitioners and some of these individuals also evaluated the preliminary questionnaire. Feedback offered by these individuals was incorporated into finalising the research problem and questionnaire design. In addition to the informal discussions with all three stakeholder groups, pre-testing of the questionnaire was carried out on the third group, a small number of former, but recent, private hospital patients to determine whether any difficulties existed in understanding the wording of the questionnaire, or in the design itself. No major difficulties were found. The pre-test also estimated that the length of time required to complete the questionnaire took approximately 10-15 minutes. Once the recommendations and minor adjustments from the pre-test had been made, the questionnaire was ready for the next phase of the primary research process, namely finalisation. The sample Five hospitals were selected on a non-probability convenience basis to participate in the study. Each of the five hospital managers served as the main contact person together with the assurance that designated senior staff would take responsibility for the distribution of questionnaires in the relevant wards. Each hospital manager provided suitable dates when the hospitals could be visited to brief staff. Also, it was important that the survey did not lose momentum, as questionnaire distribution had to be spread over several weeks. Weekly telephone calls to monitor progress and offer encouragement were made to each contact person who had been nominated to handle the distribution in the wards. Respondents first had to meet certain qualifying criteria, after which questionnaires were distributed to patients on a random basis in selected wards at the participating hospitals. This was done just prior to discharge. Once the self-administered questionnaire had been completed, it had to be mailed back to the addressee. The package included an outer envelope, covering letter (including incentive-to-respond details), A5 questionnaire booklet and reply-

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paid envelope. From a total distribution of 300 questionnaires, 275 were returned of which 223 could be statistically analysed. Because anonymity of respondents was guaranteed, it was not possible to carry out any telephonic follow-ups to obtain missing data. The measuring instrument The measuring instrument consisted of an eight page self-administered, structured questionnaire divided into three sections which totalled 117, statements in all, including biographical data. It was printed as an A5 booklet. Ten dimensions of service quality related to the patient’s hospital visit were measured using 54 items (statements). For the purpose of this study, the original ten dimensions of service quality conceptualised by Parasuraman, Zeithaml and Berry (1985) rather than its subsequent reduction to five dimensions (Parasuraman et al. 1988) were utilised on account of their being a stronger predictor of customer satisfaction (Green & Boshoff 2002:4). On the other hand, the 48 items (statements) used to measure customer satisfaction were based on a thorough literature review (Bowers et al. 1994; Fisk et al. 1990; John 1991, 1992; Jun, Peterson & Zsidisin 1998; Reidenbach & SandiferSmallwood 1990; Taylor & Cronin 1994; Woodside et al. 1989; Zimmerman et al. 1996). The exploratory research that was mentioned in section 1.6.2 and in-depth interviews conducted with some individuals who had been recent private hospital patients at the time of questionnaire design were also included. Because of the dilemma of not being able to refer to customer loyalty in the private hospital industry in the same manner as, for instance, in the retail industry like the grocery store or the bank, future behavioural intentions of patients, namely buying intentions were used as a surrogate measure for loyalty (Shaw-Ching, Furrer & Sudharshan 2001). Five items (statements) were used to measure loyalty, that is willingness to reuse the hospital or recommend it to others. The 102 items used to measure service quality and customer satisfaction were linked to a 7-point Likert scale, ranging from strongly agree (7) to strongly disagree (1). Overall cumulative satisfaction was measured using three semantic differential-scaled items (statements) containing bipolar ‘satisfaction’ adjectives to describe the hospital experience. The survey was only partly a mail survey on account of the questionnaires being distributed by hand to qualifying patients in various wards. Using the reply-paid envelope, respondents were then required to mail back the completed questionnaires. The data were subjected to an exploratory factor analysis in order to identify the underlying relationships and create a clear factor structure. Cronbach alpha coefficients for each set of factors were calculated to confirm the reliability of the measuring instrument. This was followed by regression analysis to measure the strength of the relationships between the service quality and customer satisfaction dimensions (the independent variables) and ‘overall’ cumulative satisfaction and loyalty (the two dependent variables). Service quality Service quality arose out of the need for a concept which described how customers perceived the quality of a service, with particular reference to the service industry. It was believed that once the service provider knew how customers evaluated the quality of its service, it would be in a better position to not only influence these evaluations in a desired direction, but also to relate the service to customer benefits. In this study, the concept of service quality is based on the early work of Parasuraman et al. (1985, 1988), and refers to the customer’s judgement of the overall excellence or superiority of the service. It is distinct from customer satisfaction in that service quality is a global judgement, formed over a period of time, but nonetheless related to satisfaction since the outcome of incidents of satisfaction over time give rise to service quality perceptions. The perception of service quality by consumers refers to a comparison of customer expectations of a particular service provider with customer perceptions of its actual performance. Furthermore, that only the customer can be the judge of service quality, irrespective of the service provider. Previous research found that customers used the same general criteria to arrive at an evaluative judgement about service quality, regardless of the type of service. The multiple-item scale to measure consumer perceptions of service quality, SERVQUAL, was the result of initial research that reduced the dimensions of service quality to just five dimensions. The ten original dimensions first proposed by Parasuraman et al. (1985) were named tangibles, reliability, responsiveness, communication, credibility, security, competence, courtesy, understanding/knowing the customer and access.

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The five dimensions that remained after the reduction were similarly named tangibles, reliability, responsiveness, assurance and empathy (Parasuraman et al. 1985, 1988). However, several problems and criticisms of SERVQUAL experienced in later studies determined that the original version of SERVQUAL, which measures the ten dimensions of service quality outlined above, would be used in the present study. A further reason not to use the reduced five dimensions was that the original ten dimensions of service quality are a stronger predictor of customer satisfaction. Customer satisfaction Unlike the global judgement of service quality arrived at over a period of time, customer satisfaction is transactionspecific, that is, it is the outcome resulting from a particular consumption experience, such as a hospital visit. In addition, customer satisfaction is viewed as uniquely personal, in other words, satisfaction stems from the interaction of perceptual interpretations of the service and customer expectations of that service. This will result in different consumers having varying levels of satisfaction for an experience, which is essentially the same in delivery. The transactionspecific dimensions of customer satisfaction to be empirically tested in this study. The dynamics that combine to create the service experience – perceptual, evaluative and psychological processes and the unique characteristics of services – suggest that customer satisfaction of a service encounter is more complex than satisfaction after consumption of a physical product. Multiple encounters with the same service provider will result in multiple experiences for the customer, which over time, will lead to an overall level of satisfaction. In the present study, both transaction-specific customer satisfaction at the attribute level and ‘overall’ cumulative customer satisfaction of the hospital stay will be measured. Loyalty Two aspects related to the private hospital/patient relationship need to be considered when attempting to predict patient loyalty. Firstly, since it is often the referring doctor who makes the choice of hospital, or at least strongly influences the choice, loyalty to a particular hospital in the private healthcare environment was considered more difficult to measure than the alternative of willingness to reuse the same hospital again in the future or recommend it to others. And secondly, to have to go into hospital is not normally a sought-after service and in many cases, may not occur too frequently. Nonetheless, even a single encounter with a service provider includes elements by which a loyal relationship can be built (Grönroos 2000:7). Keeping customers loyal is not an easy task (Grönroos 2000:34), yet many hospitals today are increasingly finding profitable opportunities to establish and build loyal relationships with their patients (Schiffman & Kanuk 1994:591-597). In fact, relationships with customers are central to loyalty and loyal customers are normally, but not always, profitable customers (Grönroos 2000:7,131). Thus, the importance of customer loyalty, and in this case, patient loyalty, can hardly be overstated. Consumer loyalty has even been described as the marketplace currency for the 21st Century (Singh & Sirdeshmukh 2000:150). Definitions of customer loyalty point to probability of repurchase to proportion of purchase (Sivadas & Baker-Prewitt 2000:79). Customer loyalty is typically viewed as having a positive propensity toward a certain store or brand on the one hand (East, Hammond, Harris & Lomax 2000:308), and both a cognitive construct (attitude) and shopping behavior on the other (Dick & Basu 1994); Mellens, Dekimpe & Steenkamp 1996). Because customer loyalty to a particular hospital is likely to differ from other service providers or even brand or store loyalty in a retail context, future behavioural (buying) intentions were used to measure loyalty in this study. In particular, willingness to reuse the same hospital in the future or recommend it to others was taken into account. Thus, for the purpose of this study, customer loyalty will refer to two specific repeat purchase behaviours, a private hospital patient’s willingness to reuse the same hospital again in the future (should the need arise), or recommend it to others (positive word-of-mouth endorsements). Regardless of the service industry in question, studies have shown that customer loyalty increases profitability (Heskett, Sasser & Schlesinger 1997; Reichheld 1996); it serves as a barrier to entry for competitors (Aaker 1991) and is a key de-

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terminant in predicting market share (Baldinger & Rubinson 1997; Jacoby & Chestnut 1978). Marketing implications for private hospitals According to Zeithaml and Bitner (1996:21), because services are often produced and consumed at the same time, mass production is difficult if not impossible. Moreover, the authors believe that the quality of service and customer satisfaction will be highly dependent on what happens in ‘real time’. This must be true for the private hospital environment. While surgical procedures for carrying out certain operations might be similar (caesarean section, hernia or heart bypass), no two patients are alike in their conditions for which they sought diagnosis, treatment and in due course, a return to good health, in the first place. This outcome will result from the production process between service provider (private hospital) and customer (patient). In the view of Grönroos (1990:29) it is the visible part of the production activities of the service that matters in the mind of the customer and it is these visible activities that are experienced and evaluated in every detail. For the patient in the hospital, the visible aspect of the service production is particularly relevant. For example, how would the postsurgical removal of tubes, apparatus, sutures, dressings and the like, matter to the patient? The patient is normally awake for these necessary, but sometimes unpleasant, procedures if done by rough hands and which are both felt and evaluated by the patient. REGRESSION ANALYSIS RESULTS The multivariate statistical technique, multiple linear regression analysis, or regression analysis for short, was performed to assess the strength of the relationship between the dependent (criterion) variables and two sets of independent (predictor) variables. Firstly, regression analysis was performed to predict the influence of the service quality and customer satisfaction dimensions (the independent variables) on loyalty and ‘overall’ cumulative customer satisfaction (the dependent variables). And secondly, regression analysis was performed to determine the statistical significance of the independent variables on loyalty and ‘overall’ cumulative customer satisfaction. The results of the regression analysis on the four hypotheses of the present study are presented in this section. From these results, The t-value (also t-statistic) is a measure of the statistical significance of an independent variable in explaining the dependent variable (Levine, Stephan, Krehbiel & Bereson 2005:525). Leamer (1999:2) indicates that in regression analysis, for each independent variable, three sets of numbers, namely an estimated coefficient (beta), a standard error and a t-value are calculated, but it is the t-value that can be compared across all the independent variables. The t-value is merely the estimated coefficient (beta) divided by the standard error (Leamer (1999:6) and measures how many standard errors the coefficient is away from zero (Levine et al. 2005:525). Levine et al. (2005:525) suggest that any t-value greater than +2 or less than -2 is generally acceptable. Alternatively however, Leamer (1999:6) argues that in certain situations, the choice of number as the t-value is entirely a matter of choice. The author suggests that while a large t-value implies a strong inference, ‘large’ should be compared with the other independent variables in the equation. Levine et al. (2005:526) point out that the higher the t-value, the greater the confidence a researcher can have in the coefficient as a predictor on the dependent variable, while low t-values are indications of low reliability of predictive power of the coefficient in question. Service quality and loyalty In this section, the following hypothesis was considered: H1: There is a positive relationship between perceived service quality at the dimensional level (ten dimensions) and loyalty, as measured by patients’ willingness to reuse the same hospital in the future or recommend it to others (buying intentions). Multiple regression results shows the impact of the seven service quality dimensions (the independent variables) on loyalty (the dependent variable). It shows that four of the seven service quality dimensions influence the dependent variable Loyalty, namely Empathy of nursing staff (t-value 5.81 p<.001), Tangibles (t-value 2.97 p<0.01), Assurance (t-value 4.01 p<.001) and Security (t-value -2.15 p<0.05). Having determined statistical significance (F-value = 63.56; probability level = 0.0001), the next step is to evaluate the R2 to determine if it is large enough. It can be seen that the R2 of 58.5% reveals that the modelled independent variables explain 58.5% of the variation in the dependent variable. The direction of the relationship between service quality and loyalty is positive for three independent variables and negative for one variable. Empathy of nursing staff, Assurance and Tangibles impact positively on loyalty as hypothesized. However, the impact of Security on loyalty is negative. The results suggest that the greater Empathy of nursing staff is perceived, the greater patients’ feelings of Assurance and Security are during the hospital stay, and the more positively they evaluate the Tangible elements of the service (i.e. physical environment), the more likely patients are to remain loyal to the hospital, that is, they will be more willing

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to reuse the same hospital in the future or recommend it to others. However, it must be pointed out that the negative relationship between security, both inside and outside the hospital, and the dependent variable, imply that the overt presence of too much security will reduce loyalty. Hypothesis 1 is thus accepted in terms of the independent variables, Empathy of nursing staff, Tangibles, Assurance and Security, but rejected for Communication, Responsiveness of administrative staff and Physician responsiveness. Service quality and cumulative satisfaction In this section, the following hypothesis was considered: H2: There is a positive relationship between perceived service quality at the dimensional level (ten dimensions) and cumulative customer satisfaction. ‘Overall’ cumulative satisfaction was the dependent variable in this case. It is shown the impact of the seven independent variables for service quality on cumulative satisfaction. Only two service quality dimensions influence cumulative satisfaction, namely Empathy of nursing staff (t-value 5.64 p<.001) and Assurance (t-value 0.653 p<.001). The R2 of 60.3% reveals that the modeled independent variables explain 60.3% of the variation in the dependent variable, suggesting that the strength of association between the variables can, as with Hypothesis 1, also be described as moderate. The direction of the relationship between service quality and cumulative satisfaction is positive for the two independent variables Empathy of nursing staff and Assurance. Therefore, the results suggest that the dimensions of service quality most likely to influence patient satisfaction will be that the more patients perceive Empathy of nursing staff and the greater their feelings of Assurance, there is an increased likelihood of ‘overall’ cumulative satisfaction, a better predictor of loyalty, occurring. Hypothesis 2 is thus accepted in terms of the independent variables, Empathy of nursing staff and Assurance, but rejected for Communication, Tangibles, Responsiveness of administrative staff and Physician responsiveness. Customer satisfaction and loyalty In this section, the following hypothesis was considered: H3: There is a positive relationship between customer satisfaction at the dimensional level (seven dimensions) and loyalty, as measured by patients’ willingness to reuse the same hospital in the future or recommend it to others (buying intentions). It is shown that four of the seven customer satisfaction dimensions influence the dependent variable loyalty, namely Satisfaction with meals (-tvalue 4.50 p<.001), Satisfaction with the nursing staff (t-value 11.99 p<.001), Satisfaction with fees charged (t-value 2.77 p<0.01) and Satisfaction with the television service in wards (t-value 2.67 p<0.01). R2 of 68.3% reveals that the modelled independent variables explain 68.3% of the variation in the dependent variable, suggesting that the strength of association between the variables, as with the first two hypotheses, can also be described as moderate. The direction of the relationship between customer satisfaction and loyalty is positive for the four independent variables, namely Satisfaction with meals, Satisfaction with the nursing staff, Satisfaction with fees charged and Satisfaction with the television service in wards. Therefore, the dimensions of patient satisfaction most likely to influence patients’ willingness to reuse the same hospital should they need to return in the future, or recommend it to others, will be the quality of the meals served, the calibre of the nursing staff employed by the hospital and the manner in which they treat the patients assigned to their care, the reasonableness of the fees charged and the provision of television sets in the wards. An important finding emanating from the study is that satisfaction with the nursing staff (estimate 0.386), is shown to be the strongest predictor of loyalty. Hypothesis 3 is thus accepted in terms of the independent variables Satisfaction with meals, Satisfaction with the nursing staff, Satisfaction with fees charged and Satisfaction with the television service in wards, but rejected in the case of Satisfaction with admission process, Satisfaction with ward arrival and Satisfaction with the theatre experience. Customer satisfaction and cumulative customer satisfaction In this section, the following hypothesis was considered: H4: There is a positive relationship between customer satisfaction at the dimensional level (seven dimensions) and cumulative customer satisfaction. As with the second hypoth-

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esis, cumulative satisfaction (the overall assessment) was the dependent variable and the seven customer satisfaction dimensions, the independent variables. Table 8.20 shows the impact of these seven independent variables for the customer satisfaction dimension on cumulative satisfaction. The three customer satisfaction dimensions influence cumulative satisfaction, namely Satisfaction with meals (t-value 3.03 p<0.01), Satisfaction with the nursing staff (t-value 11.00 p<.001) and Satisfaction with fees charged (t-value 5.71 p<.001). R2 of 66.0% reveals that the modelled independent variables explain 66.0% of the variation in the dependent variable, suggesting that the strength of association between the variables can be described as moderate. The direction of the relationship between customer satisfaction and overall cumulative customer satisfaction is positive for the three independent variables, Satisfaction with meals, Satisfaction with the nursing staff and Satisfaction with fees charged. Therefore, the individual dimensions of customer satisfaction will be satisfaction with the quality of the meals served, satisfaction with the calibre of nursing staff and satisfaction that the fees charged are reasonable. Hypothesis 4 is thus accepted in terms of the independent variables Satisfaction with meals, Satisfaction with the nursing staff and Satisfaction with the fees charged, but rejected in the case of Satisfaction with admission process, Satisfaction with the ward arrival, Satisfaction with the theatre experience and Satisfaction with the television service in wards.

3. CONCLUSION The theoretical model proposed to predict future behavioural intentions of private hospital patients based on their perceptions of two consumer-owned judgements, namely service quality and customer satisfaction, were empirically tested by means of the multivariate data analysis technique, multiple regression analysis. More specifically, the study aimed to determine which dimensions of service quality (an overall or global judgement) and customer satisfaction (a transaction specific judgement) would be most likely to improve patient loyalty should a return visit to the hospital ever become necessary. Ten independent variables for service quality and seven independent variables for customer satisfaction were selected to measure which dimensions exerted the stronger influence on the study’s two dependent variables, namely loyalty (measured by willingness to reuse the hospital or recommend it to others) and customer satisfaction (measured as ‘overall’ or cumulative satisfaction. The entire matrix of responses to the service quality and customer satisfaction variables was subjected to an exploratory factor analysis. The empirical results of the exploratory factor analysis revealed that seven distinct factors emerged for each of service quality and customer satisfaction. Thus, the factors most likely to influence loyalty and overall cumulative customer satisfaction are as follows: • Service quality • Communication • Tangibles • Empathy of nursing staff • Assurance • Responsiveness of administrative staff • Physician responsiveness • Customer satisfaction • Satisfaction with meals • Satisfaction with fees charged • Satisfaction with the nursing staff • Satisfaction with the admission process • Satisfaction with the theatre experience • Satisfaction with the television service in wards • Satisfaction with the ward arrival

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

Aaker, D.A. 1991. Measuring brand equity across products and markets. California Management Review, 38(2):102-120. Albrecht, K. & Zemke, R. 1985. Service America! New York: Warner Books. Anderson, E.W. & Fornell, C. 1994. A customer satisfaction research prospectus. In Rust, R.T. & Oliver, R.L. (Eds). 1994. Service Quality: New directions in theory and practice. Thousand Oaks, CA: Sage Publications. 241-268. Anderson, E.W., Fornell, C. & Lehman, D.R. 1994. Customer satisfaction, market share and profitability: Findings from Sweden. Journal of Marketing, 58(July):53-66. Anderson, E.W. & Mittal, V. 2000. Strengthening the satisfaction-profit chain. Journal of Service Research, 3(2):107-120. Atkins, P.M. & Marshall, B.S. 1996. Happy employees lead to loyal patients. Journal of Health Care Marketing, 16(4):14-24. Baker, M.J. (Ed). 1995. Comparison encyclopaedia of marketing. London: Routledge. Baldinger, A.L. & Rubinson, J. 1997. The jeopardy in double jeopardy. Journal of Advertising Research, 37(3):37-49. Bateson, J.E.G. 1989. Managing services marketing: Text and readings. Hinsdale, IL: Dryden Press. Bergman, R. 1994. Are patients happy? Managed care plans want to know. Hospitals and Health Networks, 5 December:68. Berry, L.L. 1975. Personalising the bank: key opportunity in bank marketing. Bank Marketing, 8(April):22-25. Berry, L.L. & Parasuraman, A. 1991. Marketing services: competing through quality. New York, NY: The Free Press. Berry, L.L. & Parasuraman, A. 1992. Prescriptions for a service quality revolution in America. Organizational Dynamics, (Spring):5-15. Berry, L.L. & Parasuraman, A. 1993. Building a new academic field: The case for services marketing. Journal of Retailing, 69(1):13-59. Berry, L.L., Shostack, G.L. & Upah, G.D. (Eds). 1983. Emerging perspectives on services marketing. Chicago: American Marketing Association. Berry, L.L., Zeithaml, V.A. & Parasuraman, A. 1990. Five imperatives for improving service quality. Sloan Management Review, (Summer):29-38. Cronin, J.J. Jr. & Taylor, S.A. 1994. SERVPERF versus SERVQUAL: Reconciling performance-based and perceptions-minus-expectations measurement of service quality. Journal of Marketing, 58(January):125Cronje, G.J. de J., Du Toit, G.S., Motlatla, M.D.C. & Marais, A. de K. (Eds). 2004. Introduction to business management. 6th Edition. Cape Town: Oxford University Press. Crosby, P.B. 1984. Quality without tears: The act of hassle-free management. New York: McGraw-Hill. Customer service is key to hospitals’ long-term health. 1994. Modern Healthcare, http://modernhealthcare.com (Accessed 21 December 2005). Taylor, S.A. 1994. Distinguishing service quality from patient satisfaction in developing health care marketing strategies. Hospital and Health Services Administration, 39(2):221-236. Taylor, S.A. & Cronin, J.J. Jr. 1994. Modelling patient satisfaction andservice quality. Journal of Health Care Marketing, 14(1):34-44. Taylor, S.T. & Baker, T.L. 1994. An assessment of the relationship

DETAILS ABOUT AUTHORS: ELSA GEGA PHD/CANDIDATE ECONOMIC FACULTY ELBASAN Albania elsagega19@hotmail.com ZHANINA DAPI MASTER TIRANA BANK TIRANE ALBANIA

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THE MARKETING OF HIGH-TECH INNOVATION: RESEARCH AND TEACHING AS A MULTIDISCIPLINARY COMMUNICATION TASK RAINER HASENAUER PETER FILO HERBERT STÖRI

ABSTRACT Economically successful high-tech innovation is one of the driving forces for global welfare. Like innovation half-life, break-even time to market or technology acceptance, effective multidisciplinary communication between engineering and marketing is a critical success factor. This paper aims to show the requirements of multidisciplinary communication in B2B marketing of high-tech innovation and methodical approaches in research and academic education: 1. Requirements in high-tech innovation marketing as an ongoing dialogue between technology, finance and marketing. 2. Experimental method of marketing test beds for innovative high-tech start-ups based on a multidisciplinary approach 3. Results of a multidisciplinary education scheme conducted by three universities that cooperate in high-tech innovation marketing by setting up workshops in pharmacy and health, agricultural and bio products, and information and communication technology (ICT). 4. Requirements of a multidisciplinary network spanning the triangle of science – education – business. This paper was funded by the European Territorial Cooperation Frame Program for Cross-Border Cooperation, SR-AUT 2007-2013, project code N00092, Cross-Border Hi-Tech Center. KEYWORDS: High-tech innovation marketing, multidisciplinary communication and education, marketing test bed, student teams, multidisciplinary education, pictures as communication device, CEE universities, topic group

1. REQUIREMENTS OF HIGH-TECH INNOVATION MARKETING AS AN ONGOING MULTIDISCIPLINARY COMMUNICATION Many business decisions in marketing and sales, R&D, purchasing, manufacturing and storing involve different knowledge disciplines. Multidisciplinary research has received increasing attention by bridging and combining the viewpoints of different disciplines [45: p. 11]. The multidisciplinary approach as a cognitive style is analyzed in the case of multidisciplinary creativity [38]. Operational teams and management teams often consist of members from different knowledge disciplines. Each knowledge domain has its own domain language. Multidisciplinary communication (MDC) deals with content and communication partners who belong to different knowledge disciplines (domains), and exchange their views on content from different disciplinary viewpoints (see [25]: fig. 4, The relationship between disciplines and MDC). Although MDC is an everyday phenomenon, the field of MDC in high-tech innovation marketing shows a knowledge map with many blank spots. The purpose of this paper is twofold: A) To show the requirements of MDC in business-to-business (B2B) marketing of high-tech innovation; B) To show methodical approaches in research and academic education to cope with MDC challenges. High-tech innovations are characterized by attributes that require multidisciplinary communication (MDC) [1]; in medicine, for example, see [18: MD rounds in medicine], [26: p. 716]. Marketability strongly depends on the communicability of the innovative features which are demanded by the addressed customer target group. Since high-tech innovations result from natural science and technical engineering disciplines, their linguistic representation uses mostly syntactic forms, semantic meanings and pragmatic patterns originating from the natural science disciplines. Innovations are considered successful if their market entry [10] and their market presence result in a positive commercial yield, usually measured by business ratios such as return on sales (RoS) or return on investment (RoI). Hence marketability is a basic requirement for economically viable high-tech innovation.

1.1. Criteria of High-Tech Innovation Marketability High-tech attitude implies nearness to natural scientific basic and applied research. From a business viewpoint, hightech innovations are judged as a high-risk, high-profit business.

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The criteria C1 to C6 (similar approach in [21]: table 3) of high-tech innovation can be described by the features below: (C 1.)

Innovativeness: The degree of innovativeness can be described by: - the level of invention; - the competitive position of the innovator with regard to the estimated time span of innovation half-life in relation to the best competitor known to the innovator; - the degree of comprehensibility within the MDC.

(C 2.)

Testability: The degree of testability can be described by: - the ability to perceive failures, caused by malfunctions of the innovative system; - the availability of compliant sensors with adequate detection limits to measure the errors; - the ability to understand error causality and to take correcting measures within the required time limit. The performance ratios include mean time between failures (MTBF) and mean time to repair (MTTR).

(C 3.) Controllability: The ability to sustain system stability by efficient failure management. The efficiency criteria expressed by: - minimal amount of system downtime in a specified period of time; - sufficient variety of actuating variables to compensate failures; - temporal functional availability of the system. (C 4.)

Compatibility: The ability of the high-tech innovation to seamlessly interoperate with the existing, functionally designed modules in compliance with industrial standards and legal regulations. The degree of modularity and interface standardization has a direct impact on the quality of multidisciplinary comprehension. Modularization contributes to the reduction of complexity and reduces the risk of poor understanding.

(C 5.)

Implementability: The ability to implement the high-tech innovation in the organizational environment in line with corporate culture, technological requirements, and social and environmental standards.

(C 6.)

Assimilability: The ability to assimilate the high-tech innovation in the working environment, seamlessly understanding its functional behavior, and to work with the sustainable assimilation of the innovation in a specified working environment.

1.2. Innovation Acceptance Innovation acceptance [8], [9] and innovation resistance [29] are drivers of and barriers to an economically successful market entry within George Day’s “window of opportunity” [10] to conquer the market. In the case of technology innovation, the models and methods of technology acceptance may be used to evaluate the degree of acceptance of and the degree of resistance to innovative technology. This paper focuses on high-tech innovation in business-to-business (B2B) marketing. In B2B marketing, the evaluated criteria C1 to C6 heavily influence companies` purchasing decision behavior. The case of B2B marketing requires understanding the purchasing behavior of a buying center (buying group). A buying center can be seen as a cross-functional project team [30]. Cross-functionality is a proven economic success factor in high-tech innovation and implies cooperation between different knowledge disciplines. It means a specific organizational form of multidisciplinary cooperation [30: p. 213] for problem solving, therefore also MDC in a problem-solving context. The buying center is represented by a multidisciplinary buying team, through which the required knowledge for evaluation of C1 to C6 is used for the buying decision. Each member of the buying center shows a domain-specific knowledge and experience profile. The member’s profile of technology acceptance or technology resistance before and after the decision to buy or not buy reveals important information. In general this information is not completely known to the innovator in detail. The available information may be used by the innovator in designing and fine-tuning marketing communication, thereby minimizing the risk of misunderstanding or rejection of the selling offer. The articulated expression of enduring innovation resistance after a company’s buying decision is a steadily growing assimilation gap (see [15]). Technology acceptance [8], [9] is explained by two variables: • Perceived usefulness (PU); • Perceived ease of use (PEoU) Since the technology acceptance/rejection decision is a buying center group decision, MDC communication to evaluate the content of the aforementioned criteria C1 to C6 requires an MDC rule system. From the semiotic viewpoint, the buying/selling process for high-tech innovation turns out to be an articulated MDC process. Since the marketing process deals with buying/selling decisions, perceived usefulness (PU), perceived ease of use (PEoU), and perceived risk, the semiotic dimension of communication (syntax, semantics and pragmatics) play a decisive role in the MDC game between innovator and B2B customer (see Chapter 3: Empirical Results in Multidisciplinary Education).

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1.3. Selected Semiotic Aspects of MDC The predominant aspect of MDC in this context is MDC-data quality. The data quality approach of G. Shanks and B. Corbitt [35: p. 786] also considers the extrinsic characteristics “usefulness” and “usability.” Based on this structural affinity with technology acceptance models, data quality can be defined as “fitness for purpose.” From a risk analysis viewpoint, the five intrinsic data quality problems are: “incompleteness, meaninglessness, ambiguity, redundancy and incorrectness.” The semiotic framework recommended in [14: p. 9] is a valid model to analyze MDC. In addition to the three semiotic layers (syntactic, semantic, pragmatic), it considers the physical layer, the empirical layer and the social layer [14: p. 54, fig. 3.5-2]. Applying this “semiotic ladder” to the analysis of MDC in the technology acceptance context enables us to distinguish different quality layers for efficient MDC. MDC deals with content and communication partners who belong to different knowledge disciplines e.g. [29] and exchange their views on content from different disciplinary viewpoints [25: fig. 4: The relationship between disciplines and MDC]. Content diversity of terminologies implies the risk of communicative non-understanding or misunderstanding [34]. Hence members of multidisciplinary teams incur the risk of non-efficient communication. This fact raises the question “Which strategic options exist to lower the risk of non-efficient communication to the MDC partners?” There are several strategic options:

•

Option A: “Learn how to go into detail in a non-familiar knowledge discipline” Option A is time-consuming and not applicable in the context of high-tech innovation marketing because of scarce time resources within the sub-goal “minimizing time to market!” Taking into account the aspect of competitiveness requires highly specified, multidisciplinary knowledge to convince the early customer to trust in an innovative technology. Option B: “Tentative acceptance of discipline-black boxes” Option B is less time-consuming but entails: (a): The risk of partial non-understanding caused by different semiotic lacks (see [16]: multi-functionality implies multidisciplinary; [43: chapters 3, 4], [44]: “misunderstanding,” “accidental relevance” of “cautiously optimistic hearer”); (b): The chance to focus the communication process on the pragmatic communication target by applying the cognitive principle of relevance (see [44]). (c): The principle of “accepted black boxes”: This communication option entails the temporary admittance of socalled syntactic, semantic and pragmatic black boxes for all communication partners in the MDC process. Those semiotic parts that are pragmatically considered to have less relevance at a specific point in time are suppressed and treated as “accepted pragmatic black boxes”. Knowledge-based engineering approaches (e.g. [7: p. 7340, Design and Engineering Engine] seem to offer a viable framework for MDC and multidisciplinary engineering. The importance of tacit knowledge influence on communication efficiency varies depending on the granularity of distinguishing knowledge disciplines. It seems that the finer the granularity, the higher the knowledge affinity between different but similar disciplines, but this also implies lesser influence of tacit knowledge. Tacit knowledge is only a problem if it is not shared between the communication partners, but nevertheless referenced in communication. Fine granularity in distinguishing disciplines generally will ensure that tacit knowledge is shared within a discipline. For MDC tacit knowledge must be enclosed into the black boxes in order to avoid the problem. Option C: “Decomposition and modular MDC”: Decomposition reduces complexity and therefore increases comprehensibility. We make the distinction between decomposition and modularity [16: p. 5]: “modular systems differ from decomposable systems; while decomposability requires a full decomposition of a complex system into subsystems, modularity requires a system architecture in which subsystems are still connected via interface standards.” We consider the design structure matrix (DSM) approach [3: p. 295] a viable approach to model information flow and communication tasks of multidisciplinary teams in a decomposable, modular organizational environment. The application of the DSM approach to multidisciplinary team building shows sustainable improvement of MDC [3: p. 296: “simply building the Design Structure Matrix encourages disparate people and teams to increase mutual awareness and understanding”]. The selection of modularization criteria is driven by the below-mentioned cognitive and communicative principles of relevance in semiotic research. A modular MDC is communicatively efficient if each module: a) applies the principle of cognitive and communicative relevance; b) supports the communication via interface standards between the modules. There is a strong relation between principles of relevance and multi-criteria decision making. The buying decision for a high-tech innovation is a multi-objective, hence multi-criteria decision task to find a non-empty compromise set over partially overlapping preferences of the participating MD team members (deciders, buyers, users, influencers, gatekeepers).

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Option C reduces complexity by decomposing the MDC object into modules, and by applying the principles of cognitive and communicative relevance to the MDC-process. Modularity lowers the risk of misunderstanding and reduces complexity by offering oversight in multidisciplinary domains. The cognitive principle of relevance [44: definition (15): “Human cognition tends to be geared to the maximization of relevance”] and the communicative principle of relevance [44: definition (18): “Every utterance (or other act of overt communication) communicates a presumption of its own optimal relevance”], which are applied by all MDC partners, result in a pragmatically controlled and efficient MDC process. In an ongoing MDC process the degree of relevance is time-wise non-stationary. It may shift when formerly accepted black boxes transform into currently highly relevant and understood white boxes, requiring additional semiotic capacity of the involved MDC team members. The time-wise, non-stationary attributes of a multi-stage communication process for an entrepreneurial decision of market entry with an innovative high-tech product consist of an increasingly specified degree of precision of questions and answers. However, a non-stationary team structure requires a three-dimensional approach for DMS application [3, p. 295]. Matrix of semiotic dimensions of MDC applied to an example of electrical energy storage using Vanadium Redox Flow Battery Technology: Table 1: Example of semiotic dimensions in the Electrical Energy Storing Development Project Electrical Energy Storage Innovation Project Multidisciplinary Know How

Electrochemistry

Electronics & electrical engineering

Innovation Marketing

Know How Type

B,C

Stoichiometry

IC-Logic, rule set of electrical engineering, non-linear charging rules

Market response function model, social percolation

V2O5: Divanadium pentoxide; electrolyte concentration of sulfur acid, graphite surface attributes, fluid dynamics, etc.

Charging/discharging, electrolyte lifetime, heating behavior, environmental conditions (external temperature, risk of corrosion)

TAM,2 willingness to pay, price model, business model,

Availability > 99,99% Charging time < 3 hrs. DoD1 > x%

Optimize ROI! Optimize ROS! Maximize PU!3 Maximize PEoU!4

Syntactics

Semiotic dimension

Semantics

Self-discharge => Min.! Power density 500mW/ Pragmatics cm3

How to design MDC? How to cope with mutual goal conflicts? There is a trade-off between mutual personal trust between MDC partners and the required degree of semantic specification. The higher the mutual trust the lower the perceived semiotic uncertainties. Tacit knowledge [28] cannot easily be communicated between individuals. Consequently, when black boxes need to be opened during the MDC process (thus becoming white boxes), tacit knowledge gets exposed to other members of the MD team. Given the usual lack of time, tacit knowledge needs to be accepted due to personal trust. The validity of the issue to be decided may never be questioned. Real semiotic uncertainties may be much larger than the perceived uncertainties. Additional risks, which cannot be discussed here in detail, emanate from tacit knowledge during the phase of transfer of knowledge to the customer. Moreover, the communication process itself depends, in addition to a formal framework, as explained above, on communication skills, which are a prime example of tacit knowledge.

Degree of discharge Technology acceptance model 3 Perceived usefulness 4 Perceived ease of use 1 2

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2. DECISION CRITERIA FOR MARKET ENTRY OF HIGH TECH INNOVATION According to Chakravaty [6], the management decisions for market entry in high-tech marketing are positioned in a three-dimensional decision space: Figure 1. Decision Space of Innovation Marketing Speed to market [Marketing/Sales]

Customer focus [Economy/Finance]

Innovation half-life [R&D of technology]

Between these three dimensions trade-offs exist: • The higher the speed to market (= the lower the time to market), the lower the innovation lead. • The higher the speed to market (= the lower the time to market), the lower the customer focus. • The relation between customer focus and innovation lead is ambiguous and depends on the type of customer and on the half-life of the innovation lead [19]. If the customer is a launching customer who is actively involved with the extent of the innovation lead, then there exists a complementary relation between usefulness of innovation, as perceived by the launching customer, and the innovation lead of the supplier. The entanglement of technology, marketing and finance is easily shown by the management ratios expressing the decision stress for market entry projects in innovative high-tech markets. We distinguish, in conformance with the dimensionality of the decision space, three ratios of resource capacity. Each ratio measures the relation between resource requirement to attain the project (sub-) goals and the resource availability. If this ratio >1, then it signals a shortage of capacity, which can be interpreted as a symptom of stress with regard to goal attainment: (1) (2) (3)

Break-even time to market (BE-TTM) = [Required TTM for BE / Available TTM for BE]: If BE-TTM >1 => Break-even time to market stress Competitive innovation lead (R&D-CIL): [Required time for CIL / Available time for CIL]: If R&D-CIL > 1 => Innovation half-life stress Profitability of innovation return on sales (ROS-INN): [Required ROS-INN / Achievable ROS-INN]: If ROS-INN >1 => Profitability stress

The entanglement of the different knowledge disciplines is obvious for each ratio. Enumerator and denominator show the amount of time of technical, commercial, legal or other resources (“man-days,” “man-months”) that are the required (enumerator) or the available (denominator) input for goal attainment. Causal relations for these industrial ratios have multidisciplinary origin. Hence the management communication process in this context shows a quite complex multidisciplinary structure. The conflicts in goal attainment caused by resource shortage must be solved by a multidisciplinary dialogue, focusing on multidisciplinary resource usage.

2.1. Marketing Test Bed: A Multidisciplinary, Experimental Approach to Market Entry of High-Tech Innovation In an ongoing research project [13] on high-tech innovation that focuses on “how to support market entry through efficient marketing mix measures,” we develop an experimental approach by setting up “marketing test-beds (MTBs).” MTB is a methodical support for market entry of innovative high-tech products or services [20]. It differs from a technical test bed (TTB) [e.g. 2] by focusing on customers’ technology and product acceptance in terms of PU and PEoU, willingness to pay (WtP), and formation of marketing mix per market segment. As an experimental approach in B2B marketing, MTB supports the critical phase of market entry in innovation marketing, based on qualitative market research procedures such as problem-centered interviews and focus groups. Only a few MTBs are described, mostly for mobile communication products and services (see, for example, [39]). A comprehensive approach of MTB is given in [21]. In the “Cross-

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Border Hi-Tech Center” research project [13], different aspects of MTBs for high-tech innovation [27] are analyzed and validated using real examples: Example 1: MTB for medical care robot for post-operation rehabilitation: testing a continuous compliant passive motion device for shoulder rehabilitation. Example 2: MTB for hazard detection robot in fire-fighting and underground coal mining. Example 3: MTB for auto-adaptive temperature regulation by phase change material in building materials applications. Example 4: MTB for collaborative computing software in knowledge management. All four MTBs are characterized by a challenging need for efficient MDC [40]. Looking at MDC in greater detail, one finds a hierarchy of disciplines and sub-disciplines of knowledge within natural science, socioeconomic science for example [4: p. 10, with MD discussion] and algorithmic science [41]. A convincing example of multidisciplinary understanding in teamwork can be found in [42: p. 3]: “multidisciplinary team-working requires mutual understanding between professions. Good communication is only one aspect of multidisciplinary interaction.” The following features of MTB show the different aspects compared with TTBs: • Innovation near to market: “functional proof of concept prototype stage”; • Market segmentation criteria, e.g. technological affinity, strain of bottleneck (“economic strain due to lost opportunity to increase productivity”), but also [5] for mobile communication; • Type of scale: qualitative vs. quantitative market research; • Segment-focused specification of marketing mix (McCarthy’s 4Ps). The MTB configuration uses community-based innovation (CBI) and open innovation (OI) approaches [19], and applies technology acceptance/resistance models [15], with PU and PEoU [8], [9], as key variables of the respective technology. In a follow-up MTB stage, the applicability of social anti-percolation [12] as a possible model for technology resistance will be under study. From the viewpoint of European Network of Living Labs (ENoLL) [32], MTBs can play an important role as a multidisciplinary experimental approach of testing the efficiency of community-based innovation and user-driven innovation as manifestation of open innovation, as well as being a feasible source of experimentally controlled MDC.

3. THE CASE FOR MULTIDISCIPLINARY ACADEMIC EDUCATION 3.1. The Starting Point Universities originally covered all fields of knowledge and were usually structured into four faculties. With the rapid expansion of knowledge starting in the 18th century, this system came to be seen as inadequate. Specialized universities were founded, devoted to subjects such as economics, technology, agriculture or mining. In some Central and Eastern European (CEE) countries, universities have moved from their traditional monothematic orientation towards a polythematic system that integrates natural science, technological science and socioeconomic science. Under monothematic-oriented academic education we identify natural science- and human science-oriented universities (Comenius University in Bratislava, Charles University in Prague, and the University of Vienna, even if these universities have a classic structure, covering many fields of science); technological universities (the Slovak University of Technology in Bratislava, the Czech Technical University in Prague, and the Vienna University of Technology); and economics- and social science-oriented universities (the Economic University in Bratislava, the University of Economics in Prague, and the Vienna University of Economics and Business). Other CEE countries, namely Hungary, Poland, and Slovenia, now have multidisciplinary universities offering a combination of natural and socioeconomic science. For example, at the Budapest University of Technology and Economics, formerly known as the Technical University of Budapest, which dates back to 1782, the Faculty of Natural Sciences and the Faculty of Economic and Social Sciences were established in 1998. Slovenia’s University of Ljubljana comprises six different faculties: art, economics, philosophy, medicine, technology, and natural science.

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3.2. Innovation Marketing Aspects Product and technology innovation is the driving force behind current socioeconomic trends, national economic growth and increased competition between enterprises. Exploitation of innovation for economic growth requires the ongoing education of new experts as well as leading-edge management methods that have an impact on the reform of academic education and research. From the viewpoint of industry, the focus of academic education [11] requires multidisciplinary design by applying rules of multidisciplinary teamwork [23], proactive project design and international networking. These trends necessitate the generation of organizational units in the academic environment that can control current social and business processes and stimulate new technological trends and their commercial implementation. This raises the question of whether the conventional catalog of knowledge disciplines at a monothematic university correlates with current business rules and expectations regarding the qualifications of new alumni. Business and commercial units will increasingly work with cross-disciplinary [31] and multidisciplinary management methods [46], professionally mixed teams, and projects [24] that focus on innovative business process concepts. Academic education systems must reflect these trends, which create new challenges for academic structures.

3.3. Multidisciplinary Teaching: The New Challenge Although new teaching methods allow by default the didactic application of teamwork within the learning process (e.g. project seminar or laboratory studies), a new problem arises when searching for multidisciplinary solutions in the entrepreneurial context. Marketing education itself requires multidisciplinary teaching skills that cover different knowledge domains such as psychology, communication, art, mathematics and logic. Even so, marketing today is regarded as mono-disciplinary knowledge. Yet under closer examination marketing is not such an isolated mono-discipline. The conventional 4P marketing shows explicit overlapping with other knowledge disciplines, primarily with information and communication technology (ICT) [22], social media, cloud computing. Moreover multidisciplinary trends like on-line marketing, viral marketing, mobile marketing and neuro-marketing have emerged. Marketing experts now have to be familiar with much more than economics. This emerging reality presents a challenge for a monothematic-oriented economic university which, given the demand for real business marketing solutions, faces a structural mismatch due to self-imposed intellectual limitations on monodisciplinary knowledge. Although the professional background of the teaching staff may be partially multidisciplinary, the most serious problem is that the students probably will not be able to form a multidisciplinary working team. In that case a multidisciplinary education would be confined to theoretical, pencil-and-paper case studies rather than reflecting business reality, and produces inadequately qualified graduates. In addition to explicit knowledge communicated to students, tacit knowledge is formed in seminars, laboratory exercises, etc. Tacit knowledge consists mainly of skills, such as the optimal way to approach a problem or communicate in a professional group. Therefore, the tacit knowledge needed to cooperate efficiently in a multidisciplinary group can only be formed if multidisciplinary group work occurs in the course of the curriculum. We recognize the fact that economic disciplines, particularly in management and business administration, marketing and innovation management, will increasingly have to interface with applied natural science. While many production plant managers claim to be able to turn an engineer into a marketing expert but not vice versa, such transformations cannot be the overall objective of a multidisciplinary education. Multidisciplinary education must be geared to preparing professionally trained students to create and work in and with multidisciplinary teams. The creation of such teams, which are capable of solving multidisciplinary tasks and communicating the solutions to all stakeholders, is the proper target of multidisciplinary education [41]. It is a tough job to create a multidisciplinary education scheme [40] under the current restrictions of monothematic-oriented universities and curricula. We can look enviously across the ocean to Mexico’s Tecnologico de Monterrey (TMU), which is offering a standard education scheme under which attractive projects are successfully assigned to multidisciplinary student teams. At a joint workshop with the Economic University in Bratislava a group of visitors from the TMU presented teaching methods for project management and innovation management. The teacher assigns a project for the development of a new product to a team of students who come from marketing, IT, design and mechatronics. If the multidisciplinary team completes the task within six semester-weeks, its next project is to create a business model for the newly developed product. A similar working design is applied by the new start-up teams, participating in a Start-Up contest offered by Plug-andPlay Ltd. in California. The teams design an ICT product with a realistic business model and defend their results in a five-minute pitch to a jury. The success of a pitch is based on efficient analytics, solid IT and marketing expertise, and

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excellent training in pitch communication. For the past five years a similar education design has been applied by TU Wien and WU Wien for technology marketing. Common introductory education for several or all university curricula, such as the ‘tronc commune’ at France’s ‘grands écoles’, is another approach aimed at narrowing the MD communication gap.

3.4. First Results with Multidisciplinary Teaching at the University of Economics in Bratislava We have carried out several experimental projects at the University of Economics in Bratislava (EUBA) focused on multidisciplinary design in academic teaching. Two of the projects are described below:

3.4.1. The “Creative Business” Project The project brought together EUBA marketing students and design students from the Academy of Applied Arts Bratislava (VSVU), who were assigned to revitalize a health and wellness village in Slovakia [42: p. 2]. This is a problem-solving approach starting from two diametrical viewpoints – art and business – with a very clear assignment from the client: “What measures shall be planned and carried out by the local village administration to ensure the wellness services for new target groups?” During the one-year process, both the advantages of multidisciplinary solutions and significant organizational obstacles became clear. • The advantages lay in the solution procedure: Marketing students analyzed the market potential of the new target group and defined the qualitative attributes and needs for modern wellness services. Based on these results the design students added design concepts of new furnishings, architectural designs for the wellness village, and an internal information system. These design concepts generated an added value because they focused on the needs profile for the new target group which had been worked out by the marketing students. This example shows a successful application of the variables PU and PEoU for health and wellness services. So far the project was successful. • When it came to the project implementation, several obstacles arose as a result of the separated university structure: a) Syntax/semantics. We found that students from the two universities used different terminology for problem solving, and this caused misunderstandings with the local wellness administration at the final presentation. The client’s management used its own terminology, which led to the creation of a “communication dictionary” tool for bridging different semantic content and pragmatic views [37]. For a possible approach, see [33: p. 62]. b) Pragmatics. Design students produced their own solutions without “how to put into reality” implementation plans and relied on the marketing students. The decisive impact came from the available management budget. As a result, some of the design concepts were not applicable due to higher quality levels of material or shortage of regionally available supply of services (missing material, unavailable technology or resources). This reflects the physical and social layer of data quality dimensions (see Chapter 1.3). c) Timing. Each university has its own time schedule for diploma work, which hinders the synchronization of the students’ team work. Some work sections require synchronously working in parallel, while other work sections require serially shifted execution of work. An important organizational and legal barrier is the legal restriction, that a diploma work can be presented and defended only by one student, thus formation of teams impeded and depends on the modularity of the project order.

3.4.2. Multidisciplinary Interegio Project: A Picture as a Means of Communication The multidisciplinary project “Interegio” was carried out by architecture students and economics students to solve the reconstructing of communal infrastructures. In this case the multidisciplinary approach had a very high impact. Local councils show a complex formation of opinion. Representatives of different political parties predominantly defend their own political concerns or even private interests, both of which reduce the chances of finding a political compromise. Whenever we participated with our project management students in communal assembly meetings, we were always confronted with a group of hostile council members who tended to quarrel over a virtual problem due to the lack of a realistic visualization. To accomplish anything in this environment we had to use a new medium for communication [17: p, 9]: “one picture instead of thousands of words.” We tasked the architecture students with developing sketches of possible alternatives for the reconstruction work. At the next communal assembly meeting all the hostile council members were peacefully united because they were confronted with practical pictures. It was no longer about defending political interests. Instead, the discussion focused on “Which of the two pictures is the right solution for the wellness village?” The subsequent steps for implementation were much easier and faster because the improvement and

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further development of the visible, illustrated alternative was the goal. The picture proved to be a highly efficient communication device for solving conflicts, and it also facilitated the budgetary planning argumentation and the allocation of funding in 25 villages.

4. CONCLUSION 4.1. Multidisciplinary Education We base our future conclusions on our numerous experiments with multidisciplinary student teams. We connect the focus of a marketing curriculum with technology-oriented teaching content that would offer our future marketing experts a suitable and realistic environment. To achieve this aim we developed a structure of technical and professional “theme clubs” where the matching between innovation and marketing can take place. The following theme clubs were set up in the summer 2012 semester at the Faculty of Commerce at the University of Economics in Bratislava: • Pharmarket Club. Includes pharmacological and medical R&D of products and technologies, health technology assessment, and micromarketing studies for improved analysis of consumer behavior of prophylactic and therapeutic products and services. • Agro-bio Club. Sets up a special marketing test bed for B2C enterprises by developing a procedure for high-speed sensor-based product analysis of innovations in the food and nutrition sector, as well as marketing studies for a majority of innovations in the agricultural sector, e.g. plant nutrition and plant-protecting agents. • Online Club. A platform for further development and studies of online marketing methods, hardware and software innovation, mobile applications and robotic-oriented studies. • Mat-in Club. For marketing studies of innovative materials predominantly in the B2B market as automotive, electric product and construction material. The club structure offers an open meeting space where experts from the different disciplines can come together and help one another surmount the inherited barriers for MDC in the diversified Slovak university landscape. The next step will be the implementation of multidisciplinary curricula for innovation and marketing at the University of Economics in Bratislava.

4.2 Requirements of a Multidisciplinary Network of Science – Education – Business The network of science – education – business requires multidisciplinary players for generating an added value to MD Innovation Management. The chart below presents one MD approach as a flow system between science, education and business: Fig. 2 Flow System of Science, Education and Business

The first empirical results in MD education in Slovakia and comparable results with Austrian MD academic education at the TUWien and WU-Wien, as well as at Campus 02 in Graz/Austria show the importance of MD projects in the innovation marketing context. The project innovation manager (see Fig.2) is the most important interface between Business, Science and Education. 1

MD = multidisciplinary

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There are weak signals that efficiency in MDC can be achieved by applying at least two of the three MDC options: “accepted black boxes” (Option B) by applying the cognitive principle of relevance, and “modular MDC by applying a design structure matrix” (Option C). Future research will show the applicability of these efficiency criteria in the context of high-tech innovation marketing.

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

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DETAILS ABOUT AUTHORS: PROF. DR. RAINER HASENAUER MARKETING MANAGEMENT INSTITUTE http://www.wu.ac.at/mm VIENNA UNIVERSITY OF ECONOMICS AND BUSINESS AUGASSE 2-6, 1090 VIENNA, AUSTRIA, rh@hitec.at DR. PETER FILO BUSINESS FACULTY, UNIVERSITY OF ECONOMICS IN BRATISLAVA, www.obchodnafakulta.sk DOLNOZEMSKÁ CESTA 1, 85235 BRATISLAVA, SLOVAKIA, filo@euba.sk PROF. DR. HERBERT STÖRI INSTITUTE OF APPLIED PHYSICS http://www.iap.tuwien.ac.at VIENNA UNIVERSITY OF TECHNOLOGY WIEDNER HAUPTSTRASSE 8-10, 1040 VIENNA, AUSTRIA stoeri@iap.tuwien.ac.at

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DISTORTING EFFECTS OF TAXATION ON ASSETS AND SOURCES OF FINANCE: EFFECTIVE TAX RATES IN THE CZECH REPUBLIC IN THE YEARS 2000 - 20101 JAROSLAVA HOLEČKOVÁ

ABSTRACT The objective of this paper is to examine the use of effective tax rates on different types of capital assets and sources of financing and to assess on the base of calculation of the tax wedges the degree to which taxation affects the incentive to undertake investment in the Czech Republic. The precise methodology used to calculate effective tax rates on marginal investments is based on an approach developed by the King and Fullerton methodology (1984), which has become the most widely accepted method adopted to calculating effective tax rates (tax wedges). The tax wedge will vary according to the type of asset: machinery, buildings, inventory (because of different capital allowance rates relative to the assumed true economic depreciation rates) and the type of finance sources: new equity, debt, retained earnings (because the tax treatment of debt, dividends and retained earnings differs). Effective tax rates take into account not only the statutory corporate tax rate, but also other aspects of the tax system which determine the amount of tax paid and profitability of investment, a consideration of personal taxes. Inflation will also alter effective tax rates in various ways, depending on how the tax system calculates taxable profits in the presence of inflation. The appeal is to tax neutrality; that is, to a tax that leaves corporate decisions as to investments or sources of financing unchanged. The tax system that seeks to raise revenue in ways that avoid distortion effects is considered neutral tax system. Keywords: effective tax rates, the tax wedges, tax neutrality, type of asset, type of finance sources, taxable profit, neutral tax system

1. INTRODUCTION The profit taxes in use in the developed market economies distort the types of investment which companies undertake, the way they finance those investments and the overall level of investment. All these problems get worse the higher is the level of inflation, because no corporate tax system adjusts fully for the effects of inflation (Heady – Pearson – Rajah. – Smith, 1993. p. 35). Inflation, important as it can be, is only one issue. Other features of a corporation tax system, particularly its effect on corporate decisions as to investments and sources of finance, matter at any inflation rate (King – Wookey, 1987, p. 6). The tax system that seeks to raise revenue in ways that avoid distortionary substitution effects, as regards decisions on investments or sources of finance, is considered a neutral tax system. This does not imply that the tax system has no impact upon behaviour but instead suggests that there should be an avoidance of high marginal tax rates and that should not be different tax rates on essentially similar activities (Heady – Pearson – Rajah. – Smith, 1993, p. 25). The appeal is to tax neutrality; that is, to a tax that leaves corporate decisions as to investments or sources of finance unchanged. This point is of great importance, for it defines one aim of the current tax system and one criterion by which it may be assessed (King – Wookey, 1987, p. 7). Taxes impose a real cost to the economy inasmuch as they create distortions in the market allocation of resources. However, not all tax systems are equally distortive, and one obviously attractive objective is to minimize as far as possible the impact of the tax structure on behavior. A corporation tax that achieves this as regards decisions on investments or the sources of finance is described as a neutral tax (King – Wookey, 1987, p. 13). Suppose there were no corporation tax, and consider a company appraising an investment project. The company will assess the returns earned on the project after rewarding its suppliers of finance with the required return. To make a profit, the project has to generate at least this return for the company. Now we can measure the effect of introducing a corporation tax in terms of such an investment decision. For it may be that corporation tax raises the pre-tax required return the project needs to earn for the company to be worthwhile, above that needed in the absence of corporation tax. If it does this, the tax drives a ‘wedge’ between the pre-tax return and post-tax required rate of return, and will have a disincentive effect on corporate investment. In other words, it will not be neutral. For a fully neutral tax, this wedge will be zero (King – Wookey, 1987, p. 7). This paper has been elaborated as one of the outcomes of the research project of the Faculty of Finance and Accounting in the framework of Institutional support of the University of Economics, Prague under reg. No. IP 100040 1

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The difference between the pre-corporate tax rate of return earned by companies and the post tax receipts an individual gets is a measure of the total distortion (total tax “wedge”) caused by taxes. The size of the ‘wedge’ can be rather good indication of the degree of neutrality in a corporation tax system. The tax wedge provides an extremely useful tool to investigate this aspect of different tax regimes, and is used in the empirical analysis in this paper. Tax wedge is also one form how to calculate effective tax rates. Effective tax rates are tax rates which take into account not only the statutory corporate tax rate, but also other aspects of the tax system which determine the amount of tax paid and profitability of investment, such as capital allowances and stock relief. Effective tax rates may also require a consideration of personal taxes and the manner (if any) in which the corporate and personal tax systems are integrated (classical, split rate or imputation). Inflation will also alter effective tax rates in various ways, depending on how the tax system calculates taxable profits in the presence of inflation. Effective tax rates (rather than statutory tax rates) can give us an idea of the level of distortion imposed on investment by the tax system. Therefore, it makes sense to consider the effective taxation of different types of capital assets and sources of financing when evaluating the distortiveness of the tax system. Statutory tax rates measure the tax burden as imposed by the government on specified income (or expenditure) streams. These statutory tax rates do not take into account of depreciation or other deduction, nor do they consider the effects of inflation on the actual amount of tax paid relative to the value of the income stream. Effective tax rates are designed to correct for these facts. As noted above, there are various factors that are of essential significance using the idea of the tax wedge: • statutory corporate tax rate • system and rates of depreciation • capital structure • system of personal taxation • manner of the corporate and personal tax systems integration • rate of inflation • capital allowances There are three rates of return that is useful to focus on when discussing the effects of the tax system on investments decisions: • real pre-corporate tax rate of return to companies (p), • real interest rate which is the return that can be earned on a government bond or bank deposit before personal taxes are charged (r – usually 5 %, reflecting a typical real interest rate) and • real post-personal tax rate of return received by the ultimate financiers of the investment (s). The relation between the real interest rate (r), and the post-tax real return (s), can be simply stated:

where: π is the rate of inflation, i is the nominal interest rate, equal to (1+ r)(1+π) – 1. and ti is the personal tax rate on interest income. Given the relationships specified between the pre-corporate tax return (p), the interest rate (r), and the post-personal tax return (s), various effective tax rates or wedges can be calculated (on capital assets – as machinery, buildings, inventories or sources of finance – as new equity, retained earnings, debt). The difference between p (the pre-tax rate of return to companies) and s (the post-tax rate of return to individuals) reflects the overall size of the distortion in the market caused by corporate and personal taxes. There are three relevant measures of the effective tax rates on business: 1. first is the (p) required to get a particular value of (r), 2. secondly is the tax wedge – the percentage difference between (p) and (s), 3. thirdly is the tax rate – the tax wedge (p - s) divided (p). The tax rate is not always a useful figure, because the tax wedge may be similar in two different cases, but (p) may vary, giving substantial differences in the tax rate. The basic aim of the King and Fullerton approach is to derive the difference between the real rate of return required from an investment project pre-tax and post-tax. In the absence of tax these will, of course, be equal to each other and also equal, by assumption, to the prevailing real interest rate (r). However, corporation taxes may cause the pre-tax

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required real rate of return, also termed the cost of capital, (p), to diverge from the interest rate. In addition, personal taxes may reduce the post-tax real return to the individual investor (s) below the interest rate. The methodology and calculations of tax wedges include the corporate tax rate, depreciation allowances, the valuation of dividends, personal tax rates on dividend income, interest income and capital gains, rate of inflation. Three forms of financing the company are considered: • Retained earnings (RE) • New equity (NE) • Debt (borrowings) (D) Investment in three assets that are distinguished in the balance sheet: • Machinery (M) • Buildings (B) • Inventories (I) The precise methodology used to calculate effective tax rates on investments in this paper is closely based on an approach developed by King and Fullerton (1984) that enables complicated provisions of tax codes to be modeled in a rigorous manner.

2. ANALYSIS OF THE TAX WEDGES IN THE CZECH REPUBLIC As noted above, there are various factors that are of essential significance using the idea of the tax wedge. Assumptions and parameters used in the calculation: Sector Manufacturing Sources of finance Retained earnings (RE), new equity (NE), debt (D) Types of asset Machinery (M), buildings (B), inventories (I) The weights used for finance 55 % RE, 10 % NE, 35 % D The weights for assets 50 % M, 28 % B, 22 % I Length of life for tax purposes Machinery 6 years (tax rate 16.66 %), buildings 30 years (tax rate 3.33 %) Economic depreciation rate Machinery 12.3 %, buildings 3.6 % Inventories are assumed not to be depreciated The real interest rate 5% The inflation rate 5 % in the year 2000, 1,5 % in year 2010 Personal tax rates of individual inve stors rate on interest (ti = 15 %), rate on dividends (td = 25 %), rate on capital gains (z = 32 %). Statutory corporate tax rate t 31 % in year 2000, 15 % in year 2010 There is a number of steps in calculating tax wedges. They are as follows: 1. find the nominal rate of interest [i] given by the formula (1)

i = (1 + 0,05).(1 + 0,05) - 1 = (1,05 . 1,05) - 1 = 0,1025 i

nominal interest rate,

real interest rate (5 %, i.e. 0.05),

inflation rate.

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2. find the discount rate for each type of finance [p´] (a) retained earnings: (2) ti

tax rate on interest,

tax rate on dividends,

tax rate on capital gains.

The capital gains tax rate Z, is the accrual equivalent rate applied to the nominal capital gain. To calculate this rate, it is necessary to make some assumption regarding the time at which the shareholder sells his shares, realizes the gain and hence faces a tax liability. The approach of King (1997) is followed in assuming that the shareholder sells a constant proportion α, of his stock of assets in each period is normally taken to be 10 %. In this case, the accrual equivalent capital gain tax rate. is simply the present value of taxes due on a capital gain of one period t, that is: (3)

i . (1 – ti), tj. shareholders discount rate ,

statutory tax rate on capital gains after sale,

proportion of stock of assets realized in each year

0,032⋅(1+0,1025.0,85) 0,04527 = =0,185908 0,1+(0,1025.0,85) 0,187125

(b) new equity: (4)

corporate tax rate.

3. find the present value of depreciation allowances [A]. The formula for the calculation of the present value of depreciation allowances can be used for declining balance and straight line (linear) depreciation schedules. For straight line schedule is as follows: (6) N = number of years for (N = 1 / o),

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tax depreciation rate,

0.166666 for machinery (in ČR),

0.033333 for buildings (in ČR),

p’

discount rate for each type of finance

corporate tax rate

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For declining balance schedule is as follows: (7) In this calculation the straight (linear) schedule (prevailing in the Czech Republic) will be considered according the formula (6). This must be calculated for each of machinery and buildings (inventories do not receive any allowance). In each case, the present value depends on the company´s discount rate, which, as we have seen in step 2. in turn depends on the source of finance. Present value of depreciation for machinery: There are three possible values of the discount rate p´ corresponding to the values given above. We take each in turn:

Present value of depreciation for buildings: The buildings are depreciated over 30 years. Using (6) we again need to take each of the sources of finance in turn:

Thus, in each case the present value of depreciation allowances rises as the discount rate falls, since future allowances are not discounted so heavily. Present value of depreciation allowances depends except from the rate of depreciation on: 1) Discount rate of the company for a particular type of finance. 2) Source of finance Because inventories are not depreciated the present value is not calculated. 4. find the real required pre-tax rate of return (p) There are nine different rates of return to be calculated, corresponding to an investment in the three assets each funded from each of the three sources of finance. Again they are taken into turn. This requires four additional parameters not already used: the economic depreciation rate d for machinery , for buildings and for inventories, which are assumed to be 12.25 % (i.e. 0.1225) and 3.61 % (i.e. 0.0361) and zero, respectively, and the proportion of inventories which are valued using the FIFO method, v, which in the Czech Republic is nearly 100 % (i.e. 1.0). LIFO is not allowed. The calculation for machinery and buildings uses this formula: (9) dm

0.1225 for machinery,

0.0361 for buildings.

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The formula for inventories is as follows: (10) The expression (10) shows the calculation for the cost of capital when the inflationary increase in the value of inventories is taxed. With v=1. the calculations are therefore as follows: If inflation rate is high then it implies the increase of tax wedge for inventories. Now we can calculate the real required pre-tax rate of return (p) that also represent cost of capital. Machinery (according to formula 9): Retained earnings: New equity: Debt:

Buildings (according to formula 9): Retained earnings: New equity: Debt:

Inventories (according to formula 10): Retained earnings: New equity: Debt:

5. find the post-tax return to investors [s] (11)

6. find the average real required pre-tax rates of return [p]: Step 4. yielded nine different costs of capital. These are combined into the weighted averages in the table below. Weights for assets type of 50 % for machinery, 28 % for buildings and 22 % for inventories, and weights for source of finance of 55 % for retained earnings, 10 % for new equity and 35 % for debt. These weights yield in the following table:

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Table 1: Weights yield P

weighted average

Buildings [B]

6,64%

7,73%

3,38%

5,61%

Machinery [M]

5,79%

6,74%

2,94%

4,89%

Inventories [I]

8,43%

9,56%

5,00%

7,34%

Weighted average

6,61%

7,64%

3,52%

Note: Model with calculations in Annex 1. 7. find the weighted average tax wedge [p – s], s = 3,54 Table 2: Weighted average tax wedge year 2000 p–s

weighted average

Buildings [B]

3,10%

4,19%

-0,16%

2,07%

Machinery [M]

2,26%

3,21%

-0,60%

1,35%

Inventories [I]

4,90%

6,03%

1,46%

3,81%

Weighted average

3,07%

4,10%

-0,02%

2,09%

Note: Model with calculations in Annex 1. Table 3: Weighted average tax wedge year 2010 p–s

weighted average

Buildings [B]

1,19%

1,59%

0,67%

1,05%

Machinery [M]

0,85%

1,21%

0,35%

0,71%

Inventories [I]

1,51%

1,91%

0,97%

1,36%

Weighted average

1,09%

1,47%

0,58%

0,95%

Note: Model with calculations in Annex 2.

3. CONCLUSIONS Calculation has been done for years 2000 and 2010. If making a comparison of tax wedges values in the year 2010 with values calculated for the year 2000 that are indicated in the tables above, we can interpret the results. The values of the tax wedges for 2010 can be interpreted as follows: e.g. Line 2 shows, that company which needs to guarantee investments into machinery financed from the combination of retained earnings, of new share and borrowings (debt), must ensure the rate of return of 0,71 percentage points higher than the investor really receives after taxation, in 2000 it was 1,35 (twice more than in 2010) – positive change. The difference will be paid to the government in the form of the taxes. Tax wedge within buildings and other constructions is higher (by 1,05 percentage points, by 2,07 in 2000, also twice more than in 2010) and investments into stocks are being taxed at the highest rate (by 1,36 percentage points, by 3,81 in 2010), the decrease is also positive change. If we look at the sources of financing, we can see that combined investment into machinery, buildings and stocks is taxed both in case of financing from retained earnings and new equity. The difference between these two methods is negligible. In both these cases, company has to ensure rate of return which is 1,09%, resp. 1,47%, resp. 0,58 % higher than the final post-tax rate that the investor actually gets. The analysis in this paper suggests that Czech tax system tends to favor investment in machinery in relation to buildings and, particularly, in relation to inventories. Tax system is also not neutral as between alternative sources of corporate finance. The data indicate that debt finance tends to be favored over equity and retained earnings. On average, total rate of return (total tax wdge) of the company before taxation is 0,95 percentage points higher than rate of return after tax actually received by the investor. This total tax wedge is much lower than the OECD average, which is 2.4 resp. 2.1. as shown in the table below. Even partial tax wedges are similar the values in OECD countries. There are even lower in some cases. Shortening the depreciation period has got a major influence on lowering the tax wedge within the category of machinery and buildings.

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If comparing the values from 2010 and 2000 we can see improvements in the calculated values (decrease both in the values of partial tax wedges and the total average from 2,09 to 0,95 percent). This positive change has been mainly caused by the interaction of following factors (in the table), decreased corporate tax rate, inflation rate, tax rate on capital gains and dividends, as well, in particular bring the tax system nearer tax neutrality Factor

Year 2000

Year 2010

Inflation

1,5 %

Tax rate on capital gains

32 %

15%

Tax rate on dividends

25 %

15 %

Corporate tax rate

31 %

15 %

Number of year for machinery depreciations

6 years

Number of years for building depreciations

45 years

30 years

LITERATURE 1.

Cnossen, S.(1993) “What Kind of Corporation Tax?“ Bulletin for International Fiscal Documentation

Heady, C. – Pearson, M. – Rajah, N. – Smith, S.(1993) “Report on the Czechoslovakian Government´s Tax Proposal,” London : Institute for Fiscal Studies

Hulten, C. R. – Wykoff, F. C.(1981) “The Measurement of Economic Depreciation. In: Hutten, C. R. (ed.): Depreciation, Inflation and the Taxation of Income From Capital,” Washington, D.C. : Urban Institute

King, J. – Wookey, C. “Inflation: The Achilles´ Heel of Corporation Tax,” London : Institute for Fiscal Studies - Report Series, No. 26.

King, M. A. – Fullerton, D. (1984) “The Taxation of Income from capital: a Comparative Study of the US, UK, Sweden and West Germany,“ Chicago, Chicago University Press

Marek, P. – Radová, J. (2002) “Real Moment of Tax Shield Realization,” Acta Oeconomica Pragensia, vol 10 (1)

Norr, M. (1992) “The Taxation of Corporations and Shareholders,” Deventer : Kluwer Law and Taxation Publishers

Sharpe, W. – Alexander, G. (1994) CInvestice“ Praha, Victoria Publishing“

“Taxing Profits in a Global Economy – Domestic and International Issues,” (1991) Paris, OECD

10. Vančurová, A. (2005) “Daňový systém ČR 2005 (Tax System of the Czech Republic 2005)“. Praha, VOX

DETAILS ABOUT AUTHOR: JAROSLAVA HOLEČKOVÁ LECTURER FACULTY OF FINANCE AND ACCOUNTING, UNIVRSITY OF ECONOMICS PRAGUE, CZECH REPUBLIC jahol@vse.cz

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Annex 1. TAX WEDGES 2000 Assumptions and variables of the model Real interest rate Inflation rate

r π

G6 G7

5% 5%

Tax rate on interest Tax rate on dividends Tax rate on capital gains Corporate tax rate Alfa

ti td zr t α

G9 G10 G11 G12 G13

15% 25% 32% 31% 10%

Tax depreciation rate on buildings Tax depreciation rate on machinery Proportion of inventories valued by FIFO

ob om v

G15 G16 G17

3% 16.7% 100.0%

Economic depreciation rate on buildings Economic depreciation rate on machinery

db dm

G19 G20

3.61% 12.25%

Weight for retained earnings Weight for new equity Weight for debt

RE NE D

G22 G23 G24

55% 10% 35%

Weight for buildings Weight for machinery Weight for inventories

B M I

G26 G27 G28

28% 50% 22%

Nominal interest rate Shareholders´ discount rate Length of depreciation of buildings (years) Length of depreciation of machinery (years)

i j Nb

G32 G33 G34

10% 9% 30

G35

Required post – tax return to investors

G37

3.54%

Discount rates

P' p' (B, M, I)

Present value of depreciation allowances

Required pre – tax rate of returns

Tax wedges

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1/15

1/G16

RE NE D 0,095603 0,103773 0,070725 E41 F41 G41

A RE NE D Buildings (B) 0,110766 0,104226 0,136302 Machinery(M) 0,249744 0,245651 0,2631 P Buildings (B) Machinery(M) Inventories (I) Weighted average Wedge (p – s) Buildings (B) Machinery(M) Inventories (I)

D ubrovn i k , C roa t i a

RE 6,64% 5,79% 8,43%

NE 7,73% 6,74% 9,56%

Weighted D average. 3,38% 5,61% 2,94% 4,89% 5,00% 7,34%

6,61%

7,64%

3,52%

RE 3,10% 2,26% 4,90%

NE 4,19% 3,21% 6,03%

D -0,16% -0,60% 1,46%

Weighted average 2,07% 1,35% 3,81%

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Annex 2. TAX WEDGES 2010 Assumptions and variables of the model Real interest rate Inflation rate

r π

G6 G7

5% 1,5%

Tax rate on interest Tax rate on dividends Tax rate on capital gains Corporate tax rate Alfa

ti td zr t α

G9 G10 G11 G12 G13

15% 15% 15% 15% 10%

Tax depreciation rate on buildings Tax depreciation rate on machinery Proportion of inventories valued by FIFO

ob om v

G15 G16 G17

3% 16.7% 100.0%

Economic depreciation rate on buildings Economic depreciation rate on machinery

db dm

G19 G20

3.61% 12.25%

Weight for retained earnings Weight for new equity Weight for debt

RE NE D

G22 G23 G24

55% 10% 35%

Weight for buildings Weight for machinery Weight for inventories

B M I

G26 G27 G28

28% 50% 22%

Nominal interest rate Shareholders´ discount rate Length of depreciation of buildings (years) Length of depreciation of machinery (years)

i j Nb

G32 G33 G34

7% 6% 30

G35

Required post – tax return to investors

G37

4,03%

Discount rates

Present value of depreciation allowances

Required pre – tax rate of returns

Tax wedges

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P' p' (B, M, I)

1/15

1/G16

RE NE D 0,060512 0,063957 0,055888 E41 F41 G41

A RE NE D Buildings (B) 0,072591 0,070227 0,075984 Machinery(M) 0,130163 0,129185 0,131498 P Buildings (B) Machinery(M) Inventories (I) Weighted average Wedge (p – s) Buildings (B) Machinery(M) Inventories (I)

RE 5,22% 4,87% 5,54%

NE 5,61% 5,24% 5,94%

Weighted D average. 4,69% 5,08% 4,38% 4,74% 5,00% 5,39%

5,12%

5,50%

4,61%

RE 1,19% 0,85% 1,51%

NE 1,59% 1,21% 1,91%

D 0,67% 0,35% 0,97%

Weighted average 1,05% 0,71% 1,36%

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PERCEPTION OF PRIVATE LABELS IN THE GROWTH PHASE OF THE PRODUCT LIFE CYCLE SANDRA HORVAT

ABSTRACT Private labels have reached high market share in developed markets, especially in Western Europe. The market share of private labels in emerging markets, like Croatia, remains substantially lower. However, these markets are also characterized by high growth rates, which are partially influenced by recent economic downturn, but also symbolize growing acceptance of private labels among consumers. Nevertheless, further success and development of private labels is highly dependant on how consumers perceive them, especially during the growth phase of their life cycle. The goal of the paper is to explore how consumers in Croatia perceive private labels in general, as well as in different product categories. The results of exploratory research conducted on the Croatian market show that consumers mostly associate private labels with low price, good value and with a specific retailer. Furthermore, lower price is also the main reason why consumers buy private labels on Croatian market. Positive attitudes towards private labels are dominantly based on good value they entail while negative attitudes arise from high perceived risk because producer of private labels is often not specified on the product. KEYWORDS: Private labels, Consumer perception, Growth phase, Croatia

1. INTRODUCTION Private labels have become one of the most important marketing strategies developed over the last 30 years (Veloutsou, Gioulistanis and Moutinho, 2004; Berges-Sennou, 2006). In the last decade they have recorded an exponential growth as a result of the retail concentration, retailers’ marketing strategies, economies of scale, size of national brand market and acceptance of private labels by consumers (Altintas, Kiliç and Senol, 2010). This growth has enabled them to become a powerful threat to manufacturer brands (Bao, Bao and Sheng, 2011) since most consumers buy private labels, at least in certain product categories (Nenycz-Thiel and Romaniuk, 2009). Although private labels are present in most countries, there are large differences in their markets shares in different regions of the world. Large differences also exist in the proportion of private labels between different retailers as well as between product categories within the same market (Hyman, Kopf and Lee, 2010). In general, Europe is the region where private labels are most common and the most developed, although differences among regions exist even there. Countries of Western and Northern Europe have the most developed private label markets characterized by their strong penetration in various categories. Market saturation is high and retailers are increasingly resorting to the development of private labels for different market niches. In addition, retailers base their strategy on three or even four private label levels in relation to their price and quality (from low price/low quality to high price/high quality). In those markets private labels significantly affect consumer loyalty to retailers and therefore retailers are increasingly developing their own private labels (Herstein and Gamaliel, 2004). For example, in Switzerland market share of private labels has in 2009 reached 46 per cent, while in the UK their share was 43 per cent (The Nielesen Company, 2011). On the other hand, in emerging markets of Central and Eastern Europe, such as Croatia, the share of private labels is still much lower and often does not exceed 10 per cent. However, emerging markets are constantly recording the highest private label growth rates, so it is expected that their role in the market will be significant in the next few years. Private labels in emerging markets are characterized by the average quality and low prices (Abe, 1997 in Tiffert and Herstein, 2010). The reason for this strategy lies mostly in economic conditions since emerging markets are characterized by low levels of economic development, institutional turbulence and especially the lack of capital. However, as mentioned before these markets are recording rapid growth rates, primarily driven by economic liberalization and the desire of consumers for better products and services (Bianchi, 2009). In Croatia private labels have, in 2010, reached a market share of 16 per cent (GFK research agency, 2011) with the growth rate of 69 per cent in the first half of 2011 (The Nielesen Company, 2011). Private labels in Croatia are in the growth phase of the product life cycle (Steenkamp, Van Heerde and Geyskens, 2010) which is characterized by the development of selective demand leading to formation of consumer buying habits as a necessary prerequisite for long-term loyalty (Bivaniene, 2010). Using an appropriate strategy for private labels in the growth phase serves as a necessary precondition for their further successful development in other life cycle stages. In order to develop appropriate strategies retailers must get to know their consumers, their characteristics as well as their wants and needs. For that reason, brand

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management should be focused on collecting information about purchasing habits and attitudes of their customers as well as on investment in building brands. However, since private labels are unique brands, it is important to investigate whether brand management strategies for manufacturer brands can be applied for managing private labels, or certain modifications would be necessary. In this context, the purpose of the paper is to analyze perceptions of private labels among consumers in Croatia and discuss implications of their perceptions on private label management by retailers. Remainder of the paper is organized as follows. First, the existing literature on differences in perception between private labels and manufacturer brands is reviewed. Second, the research methodology and the results are shown. Next, conclusions are drawn and the limitations of the research are discussed. Finally, some suggestions for future research are made.

2. DIFFERENCE IN PERCEPTION OF MANUFACTURER BRANDS AND PRIVATE LABELS A successful brand can be defined as a name, symbol, design or combination thereof, which suggests that the “product” of an organization has a sustainable competitive advantage (Kotler, 2003). The brand offers consumers a unique mix of benefits which meet their rational and emotional needs by simplifying product selection based on experience and expectations (Kent, 2003). Since private labels are commonly found only in stores of their owner, consumers compare them with manufacturer brands present on the shelves. In addition, private labels are often trying to mimic leading manufacturer brand by creating a product that functionally and organolepticaly does not vary from comparable market leader with the price lower by approximately 20 per cent (Berges-Sennou, 2006). In order to attract price-sensitive consumers (Berges-Sennou, Bontems and Réquillart, 2003), private labels are positioned on providing value for money with respect to the leading manufacturer brand (Huang and Huddleston, 2009), while manufacturer brands are positioned on providing consumers with hedonic benefits and quality (de Wulf et al., 2005). Differences in objective or perceived characteristics of private labels and manufacturer brands, as well as differences in their marketing activities, lead to different perceptions and consumer preferences which affect the heterogeneity in their selection in individual product categories (Baltas, 2003). Cotterill and Putsis (2000) stated that, in economic terms, manufacturer brands are perceived as luxury goods while private labels are perceived as necessary goods. Therefore, the increase in consumer income will result in higher growth of manufacturer brands compared to private labels, while in the situation of decrease in income, private labels will have a larger market growth. Private labels do not have as much brand recognition as manufacturer brands (Beldona and Wysong, 2007) and they lack a clear association with the manufacturer (Dick, Jain and Richardson, 1996). Besides that, producers often support their brands with advertising campaigns which affects consumer perceptions encouraging them to perceive the difference in quality between private labels and national brands, even if the difference does not exist (Colangelo, 2002). Previous research shows that consumers generally perceive the difference between private labels and manufacturer brands in price, quality, value and risk/trust in different product categories (Nenycz-Thiel and Romaniuk, 2009). The research from Nenycz-Thiel and Romaniuk (2009) showed that, on a general level, consumers perceive differences in private labels and manufacturer brands with price and quality as the main factors affecting those differences. In addition to price and quality, according to aforementioned research, consumers also use value that has a positive effect on the categorization of private labels and the risk/trust as a factor with negative influence on private label perception. Stated elements and their influence on private label perception will be further explained hereafter.

2.1. Perceived quality The notion of quality is wide, but is often narrowed to a general assessment of product characteristics (Previšić and Ozretić Došen, 2007). According to Rosen (1984) quality implies a level of performance, taste and other characteristics that product provides on average. Similarly, Littlefield and Kirkpatrick (1970 in Swan, 1974) suggest that quality includes every feature which affects the ability of a product to provide satisfaction to consumers. Since consumers are the only ones who can make an assessment of the overall quality, perceived quality is often more important than the objective quality. However, perceived quality cannot be objectively determined because it is based on evaluation by consumers who differ in defining important features used in that evaluation. Assessment of perceived quality is even more complex in the case of private labels since, according to Hoch and Banerji (1993), it consists of two dimensions: (1) the average quality of private labels in relation to the manufacturer brand; and (2) the variability in the quality of private labels. From the consumer’s standpoint, perceived quality is, besides price, the key element in making a decision to purchase private label (Dick et al., 1996; Wildner, 2003 in Schuh, 2006; Chaniotakis, Lymperopoulos and Soureli, 2009). Consumers perceive manufacturer brands superior to private labels with regard to perceived quality as was shown in the blind test

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study by de Wulf et al. (2005). Respondents rated the taste of leading manufacturer brand in the orange juice category as the worst, while the same product received significantly better ratings when the brand was shown. Nenycz-Thiel and Romaniuk (2009) believe that this is due to consumer expectations regarding private labels which were shaped by their historical positioning as a lower price/good value brands. This “halo effect” makes it difficult to change consumers’ perception because consumers unknowingly transferred widespread perception of private labels as they once were to the perception of private labels present today. Market changes have led to evolution of “new wave” private labels whose development is based on strategic planning, innovation and new product development in order to respond to consumer demands with regard to higher quality (Veloutsou, Gioulistanis and Moutinho, 2004). In addition to investing in the quality of private labels, retailers develop premium private labels, organic private labels and private labels focused on health what for customers, accustomed to private labels of low quality and lower prices, sends conflicting messages (Nenycz-Thiel and Romaniuk, 2009). Nies (2009), on the basis of her study, reached to the conclusion that respondents perceive private labels as brands of acceptable quality, but they still perceive manufacturer brands as superior in all 10 categories surveyed. These findings confirm that private labels are positioned as a cheaper alternative with comparable quality relative to manufacturer brands, so the consumers who are quality conscious will in general be more inclined to purchase manufacturer brands (Wang, Kalwani and Akçura, 2007).

2.2. Perceived price Price is the element that most consumers use when they perceive the differences between private labels and manufacturer brands, regardless which brand they prefer (Nenycz-Thiel and Romaniuk, 2009). In emerging markets price is even more important as a critical factor in the purchase decision, due to lower purchasing power of the population compared to developed markets (Schuh, 2007). Perceived price can be defined as the “evaluation of the average price offered by one provider in relation to its competition,” created as a result of positioning through marketing communications or actual consumer experience (Wood and Pierson, 2006). On one side, price is the indicator of sacrifice needed to obtain a product, while, on the other side, price can be used as an indicator of quality (Hoch and Banerji, 1993). Unfavourable private labels’ perception in relation to manufacturer brands may also be explained by a tendency of consumers to assess product quality based on its price (Tiffert and Herstein, 2010). Private labels are offering consumers lower prices resulting from lower production costs, cheap packaging, minimum investments in advertising, and minor overheads. Lower cost of distribution is also achieved through planned buying, maintaining minimum inventory levels and the efficient use of transportation (Fontenelle, 1996). Low price is often the dominant variable highlight by retailers in brand management as opposed to manufacturer brands which use complex system of values based on the product characteristics (Webster Jr., 2000). Research done by Sethuraman and Cole (1999) showed that about 30 per cent of respondents believed the private labels quality is comparable to quality of manufacturer brands. Nevertheless, only 7 per cent of respondents were prepared to pay for private labels’ price equal to or higher than the price of manufacturer brands.

2.3. Perceived value In the last decade of the 20th century perceived value has become a strategic imperative for manufacturers and retailers, and it is expected that its importance will continue to grow (Sweeney and Soutar, 2001). Zeithaml (1988 in Sweeney and Soutar, 2001) defines perceived value as an overall assessment of the utility gained from a product (service) based on perceptions of what is obtained in comparison to what is given. In accordance with the definition, perceived value is commonly expressed as ratio of price and quality or through „value for money concept“ which means that some consumers perceive a higher value when the price is low while others perceive a higher value when price and quality are in balance. It is important to make a distinction between perceived value and satisfaction as two separate concepts. Perceived value is multi-dimensional construct that can be operationalized in prepurchase as well as in afterpurchase phase because consumers do not need to buy a product in order to assess its value. On the other hand, satisfaction is one-dimensional construct that is operationalized after the purchase and use of the product in relation to the perceived value (Sweeney and Soutar, 2001). Perceived value directly affects the willingness to buy private labels (Dodds, Monroe and Grewal, 1991), private brand loyalty and retailer’s image with regard to total portfolio value (Anselmsson and Johansson, 2007). Research conducted by Anselmsson and Johansson (2007) showed that consumer’s loyalty to a specific retailer and their private label proneness is primarily motivated by the value private labels provide. The authors have therfore concluded that perceived

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value is more important for customers than perceived quality of private labels. According to global research, 40 per cent of consumers believe that private labels typically offer extremely good value for money (The Nielsen Company, 2011.) what is encouraging information for retailers who usually base private label marketing strategy on premise of value.

2.4. Perceived risk Since the level of (dis)satisfaction with the product can be known only after the act of purchase, consumers will inevitably be faced with uncertainty and perceived risk (Mitchell, 1998) which can manifest itself as a financial loss, society disapproval or product underperformance (Sheinin and Wagner, 2003). Perceived risk of private labels can be related to the product itself or the retailer as a brand owner. On the product level perceived risk depends on the type of private label but it can also be viewed in relation to available manufacturer brands (Mitchell, 1998). The level of risk associated with private labels is crucial in determining consumer preferences, because the perception of private labels as risky alternatives in relation to manufacturer brands has a negative impact on the consumer attitudes and purchase intentions (Sinha and Batra, 1999; Erdem et al., 2004.; Gonzalez Mieres et al., 2006a). Zielke and Dobbelstein (2007) distinguish three components of perceived risk, namely financial risk, operational risk and social risk. Financial risk in a certain product category can be defined as potential financial loss incurred as a result of wrong purchases and, as such, depends on the level of prices in each category so the greater financial risk is associated with the more expensive category. Functional risk can be defined as the potential loss arising from inadequate product quality and is particularly evident in the non-food categories in which consumers buy products that fulfill a specific function. Finally, the social risk refers to the loss of image or prestige following the use or consumption of certain products. Social risk is particularly significant in product categories that are used/consumed in public or offered to guests. According to the results of an empirical study, all three components are reducing consumers’ intent to purchase private labels but social risk has the most pronounced negative impact, followed by operational risk and financial risk (Zielke and Dobbelstein, 2007) what is logical giving the prices of private labels are typically lower than the prices of manufacturer brands.

3. EMPIRICAL RESEARCH AND RESULTS The goal of empirical research conducted for the purpose of this paper is twofold: (1) to analyse the perception of consumers in Croatia about private labels; and (2) to explore which elements do consumers assess in making brand decision. The exploratory research was conducted through in-depth interviews as a second most used method of conducting qualitative research (McDaniel and Gates, 2008), which is also used in the research of private labels (Herstein, Efrat and Jaffe, 2010). A total of 20 semi-structured, in-depth interviews were conducted on a convenience sample of consumers. Despite the fact that convenience sample was used, researcher selected respondents which portray different demographic characteristics (gender, age and level of education). Interview guide, as a research instrument, was used to guide the interview, which allowed a researcher to achieve a certain level of structure despite securing the free flow of consumers’ thoughts to collect as much information about the research problem as possible. The semi-structured interviews were carried out during October and November 2011. After the introduction, in which respondents were given a brief summary of the methods and goals of the research, followed questions related to private labels in general. Although all the respondents said they were familiar with private labels, in some cases it was necessary to give a brief explanation of the term to ensure the quality of answers. When asked to describe private label to someone who is not familiar with them, respondents cited the following definitions: • “product of guaranteed quality at an affordable price in one of the supermarkets” • “the brand that is within a certain store the cheapest” • “products manufactured by the consumer goods store” • “cheaper alternative product of similar quality to manufacturer brands”. In addition to the above stated definitions, other association to the term „private label“ most often mentioned were “direct control of the retailer,” “manufacturer is not specified”, “visually inferior product packaging”, “low price and low quality” and “large representation in the retailers assortment”. Only one respondent stated that he does not buy private labels, while others buy them, at least occasionally in some product categories. As the main advantage of private labels almost all respondents mentioned low price. Other benefits of private labels mentioned by respondents are: guaranteed quality or quality that is comparable to the quality of manufacturer brands, easy selection due to the wide product range and a higher value through the ratio of price and quality. The main disadvantages of private labels according to the respondents are lower quality, the degree of risk associated

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with a particular product category, fear that retailers sell “recycled products which have expired” under its own brand name and the fact that manufacturer of private labels is not well known company. Most respondents were not loyal to only one retailer and they buy private labels from various retailers, but interestingly are often loyal to private labels at the individual product categories level (e.g. Balea in preparative cosmetics category). Regarding the quality of private labels in relation to quality of manufacturer brands, respondents felt that the quality was at medium or low level. In some categories, according to the respondents, private labels offer comparable or slightly worse quality than manufacturer brands. When asked whether they think that buying private labels gives them a good value (good quality compared to the amount of money spent) 17 out of the 20 respondents gave confirmative response. Respondents which reported that private labels do not provide good value stated it is because of their poor quality which forces them to „throw those kinds of products in the trash“. All respondents believe that prices of private labels should be lower than the price of manufacturer brands, but their opinions about the price gap vary in the range of 10 per cent to 50 per cent. However, respondents also noted that the price of private labels should match their quality, so in the categories in which retailers offer premium private label price difference should not exist. The aim of the second part of the interview was to comprehend category characteristics which affect the success of private labels in Croatia. When asked in which categories they usually buy private labels, respondents indicated toilet paper, paper towels, liquid soap, dishwashing detergent, cleaning products, pasta, chocolate, soft drinks, candy, snacks, yogurt, cheese, cured meats and powdered juices. As reasons for the selection of private labels in the above mentioned categories respondents said that those are categories in which the quality can hardly vary and they assess that the quality of private label is comparable to quality of manufacturer brands so they buy them due to lower prices. Since this are a low-priced product categories respondents perceive less risk in buying private labels because if the product disappoints they can throw it away without losing a lot of money, and if the product meets their expectations they can save money on subsequent purchases. When asked in what categories would they never purchase private label respondents did not give uniform answers, even though many said they would not buy private label food products. As the specific product categories respondents indicated facial products, hair care products, perfumes, dairy products, meat and cured meat products, eggs, beer and baby food. The most common reason for not buying private labels in these categories is doubt about their quality or poor quality as evidenced by the following quotes “I am afraid that private label facial care products can harm my skin” and “K plus cosmetics is diluted and of no quality,” “for cosmetics it is not specified who the manufacturer is, so there is greater health risk”. In addition to inadequate quality as reasons why they never buy private labels in certain product categories, respondents indicated the importance of the category wherefore they stay loyal to manufacturer brands in order to avoid risk. This behaviour is especially pronounced in categories like cosmetics, milk and meat products. Respondents were also asked about quality variability with regard to private label product and their answers indicate that to be another issue. One responded said “I tried NTL cheese and the first time it was great, but when I bought it a second time it was not of adequate quality. I think that retailers only want to attract consumers so initially the quality is good and subsequently it deteriorates.” Product categories in which respondents noted that the quality of private labels was inadequate or that the quality of the same private label was different after repeated purchase were jam, fish sticks, juice, dishwashing detergent and laundry detergent. When asked if they would use private labels in front of other people, serve them to guests or gave them as a present, the respondents also had diverse positions. Fewer respondents use private labels in front of other people, especially products such as paper towels, and would also offer private labels to guests or give them as a present. Those respondents indicated that they were not ashamed to use private labels, and to give them as a gift because “if good for me, it’s good for them” and “in gift-giving, the good intentions are the most important”. One of the respondents pointed out that he would serve private labels to guests, but he “would feel better serving the manufacturer brand”. Another group of respondents use private labels in front of other people and they are going to serve them to guests, but they would never give them as a present because they do not want people to think they are “giving them cheap products” and in gift giving “manufacturer brand is important because it represents a status symbol”. The last group of respondents had a very negative attitude towards private labels and would not use them in front of others, serve them or gave them as a present because „that is embarrassing“.

3. CONCLUSION Literature review, as well as primary exploratory research conducted for the purpose of this paper, show that in the growth phase of the product life cycle consumers still perceive differences between manufacturer brands and private labels. Manufacturer brands are considered to be „luxury products“, which besides functional benefits, also provide hedonistic benefits to consumers. Giving their traditional positioning as cheaper products of low or medium quality, private

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labels in the eyes of consumers are perceived as inferior products associated with higher levels of perceived risk. In order to overcome existing stereotypes regarding private labels, the primary focus of retailers in the growth stage of the product life cycle is to increase their perceived quality, which would allow them to offer consumers more value compared to manufacturer brands. Retailers are investing more and more resources into the quality of private labels because they are aware that private label is not just another product in the assortment, but it is the brand which they are responsible for and therefore represents them in the eyes of consumers. The goal of every company, including retailers, is to ensure consumer loyalty which cannot be achieved if the products they sell are of substandard quality or the quality varies as is sometimes the case with private labels. Variability in quality occurs because of frequent change of manufacturers who, despite the detailed specification, cannot achieve identical product quality. This is especially common in the introduction phase of the life cycle when retailers are primarily focused on achieving the lowest price so they change manufacturers after receiving a better offer. This type of practice can be one of the reasons for the negative perception by consumers who have expressed concern about the general quality of private labels in later stages of the product life cycle and with regard to their variability over time. Given that a large number of interviewed consumers have expressed their concern regarding the quality of private labels, retailers focus on increasing their perceived quality is certainly an adequate business strategy. Investment in improving private label packaging and development of premium private labels can affect the reduction of risk associated with the purchase of private labels, both at the functional and social level. Although consumers believe that private labels offer good value for money, the majority will not buy private label as a gift; they fear they will be condemned by other members of society since private labels still represent „cheap products“. Analysis of consumer responses regarding the category characteristics which affect the success of private labels, shows that they will be the most successful in the basic food categories in which the brand itself is not important, so consumers do not show a high degree of loyalty to manufacturer brands. For the respondents it is especially important that the perceived quality of private labels in a certain category is adequate and that the level of purchase risk is low. Private labels are also more successful in product categories where there is a possibility of reaching a larger price gap between private labels and manufacturer brands which will encourage consumers to try private label in order to save money. However, it is very important to stress that the low price should not be based on the low quality of the product, since negative perception will be linked to other categories where private labels are present, as well as with the retailer itself. Consumers also fear that private labels in some product categories may endanger their health or even that retailers repackage products past their expiration date to make a profit. Consumers often do not know who produces private labels or, as is the case in Croatia, private label manufacturer is not a well known company which certainly increases the perceived risk and reduces their likelihood of purchase. It is important for retailers to become aware of such attitudes, and to inform consumers about the process of private label development, actions taken to ensure the product is of appropriate quality, despite the fact that they do not have their own manufacturing facilities. The primary activity of retailers is not production, so it is difficult to expect that consumers will immediately have confidence in the products under their brand name. But investing in quality of private labels, private label development strategies based on value and not solely on price, in addition to ongoing consumer education, can be very important for their future success. Such a strategy requires a large investment in design and product development, quality control and development of long-term relationships with suppliers to ensure the consistency of private label quality and development of innovative products triggered by market needs and modern trends. By applying these strategies, private label will become brands in the true sense of the word and to the consumers it will no longer matter who is the brand owner because all brands will be evaluated on the basis the value they offer to the consumer. Alongside the research findings it is also necessary to discuss research limitations. The main limitation of this research lies in the size and type of the sample used. Convenience sample used in the research is not based on probability, which certainly reduces the possibility of generalization of research results. However, in order to get more reliable results, in the sample selection demographic variability of respondents according to gender, age and level of education was taken into account. Also, while sample size was quite small, it still offered an insight into the consumer perceptions about private labels in general and on product category level in Croatia. In future research it is important to further explore the impact and intensity of perceived risk on the perception of private labels in different product categories. Research findings revealed that private label proneness differs with regard to product categories so further research in this area of private label management is necessary. Also, it would be interesting to see results of descriptive research on relationship between private label attitudes and perceived value of private labels. That kind of research would with greater statistical validity give the necesary guidance to retailers in private label management strategies formation.

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LITERATURE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42.

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González Mieres, C., Díaz Martín, A. M., Trespalacios Gutiérrez, T. (2006.) Influence of perceived risk on store brand proneness. International Journal of Retail & Distribution Management, 34(10), pp. 761-772. Herstein, R., Efrat, K., Jaffe, E. D. (2010.) The enigma of private brands in the emerging Mediterranean countries – The case of Israel. EuroMed Journal of Business, 5(1), pp. 5-19. Herstein, R., Gamliel, E. (2004.) An Investigation of Private Branding as a Global Phenomenon. Journal of Euromarketing, 13(4), pp. 61-63. Hoch, S. J., Banerji, S. (1993.) When Do Private Labels Succeed?. Sloan Management Review, 34(4), pp. 57-67. Huang, Y., Huddleston, P. (2009.) Retailer own-brands: creating customer loyalty through own-brand products advantage. International Journal of Retail & Distribution Management, 37(11), pp. 975-992. Hyman, M. R., Kopf, D. A., Lee, D. (2010.) Review of literature – Future research suggestions: Private label brands: Benefits, success factors and future research. Brand Management, 17(5), pp. 368-389. Kent, T. (2003.) 2D23D Management and design perspectives on retail branding. International Journal of Retail & Distribution Management, 31(3), pp. 131-142. Kotler, P. (2003.) Marketing Management, 11th edition, Prentice Hall, Upper Saddle River, New Jersy, USA. McDaniel, C., Gates, R. (2008.) Marketing Research Essentials, 6th edition, John Wiley & Sons, Hoboken, NJ. Mitchell, V-W. (1998.) A role for consumer risk perceptions in grocery retailing. British Food Journal, 100(4), pp. 171-183. Nenycz-Thiel, M., Romaniuk, J. (2009.) Perceptual categorization of private labels and national brands. Journal of Product & Brand Management, 18(4), pp. 251-261. Nies, S. (2009.) Do investments in private label quality really pay off? The Impact of Private Label Quality on Store Image and Patronage”, Proceedings of the 38th EMAC Conference, Nantes, France. Previšić, J., Ozretić Došen, Đ. (ed) (2007.) Osnove marketinga, Adverta, Zagreb. Rosen, D. L. (1984.) Consumer Perceptions of Quality for Generic Grocery Products: A Comparison Across Product Categories. Journal of Retailing, 60(4), pp. 64-80. Schuh, A. (2006.) Determinants of the market penetration of private labels in Central and Eastern Europe – A cross-country comparison, EIBA Conference Proceedings, Fribourg, Schwitzerland. Schuh, A. (2007.) Brand strategies of Western MNCs as drivers of globalization in Central and Eastern Europe. European Journal of Marketing, 41(3/4), pp. 274-291. Sethuraman, R., Cole, C. (1999.) Factors influencing the price premiums that consumers pay for national brands over store brands. Journal of Product & Brand Management, 8(4), pp. 340-351. Sheinin, D. A., Wagner, J. (2003.) Pricing store brands across categories and retailers. Journal of Product & Brand Management, 12(4), pp. 201219. Sinha, I., Batra, R. (1999.) The effect of consumer price consciousness on private label purchase. International Journal of Research in Marketing, 16, pp. 237-251. Steenkamp, J.-B., E. M., Van Heerde, H. J., Geyskens, I. (2010.) What Makes Consumers Willing to Pay a Price Premium for National Brands over Private Labels?. Journal of Marketing Research, 47, pp. 1011-1024. Swan, J. E. (1974.) Price-Product Performance Competition between Retailer and Manufacturer Brands. Journal of Marketing, 38(3), pp. 52-59. Sweeney, J. C., Soutar, G. N. (2001.) Consumer perceived value: The development of a multiple item scale. Journal of Retailing, 77, pp. 203-220. Tiffert, S., Herstein, R. (2010.) The effect of individualism on private brand perception: a cross-cultural investigation. Journal of Consumer Marketing, 27(4), pp. 313 – 323. Veloutsou, C., Gioulistanis, E., Moutinho, L. (2004.) Own label choice criteria and perceived characteristics in Greece and Scotland: factors influencing the willingness to buy. Journal of Product & Brand Management, 13(4), pp. 228-241. Wang, H. D., Kalwani, M. U., Akçura, T. (2007.) A Bayesian multivariate Poisson regression model of cross-category store brand behavior. Journal

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of Retailing and Consumer Services, 14, pp. 369-382. 43. Webster Jr., F. E. (2000.) Understanding the Relationship Among Brands, Consumers and Resellers. Journal of the Academy of Marketing Science, 28(1), pp. 17-23. 44. Wood, L. M., Pierson, B. J. (2006.) The brand description of Sainsbury’s and Aldi: price and quality positioning. International Journal of Retail & Distribution Management, 34(12), pp. 904-917. 45. Zielke, S., Dobbelstein, T. (2007.) Customers willingness to purchase new store brands. Journal of Product & Brand Management, 16(2), pp. 112121.

DETAILS ABOUT AUTHOR: SANDRA HORVAT SENIOR ASSISTANT FACULTY OF ECONOMICS AND BUSINESS, UNIVERSITY OF ZAGREB ZAGREB, CROATIA shorvat@efzg.hr

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STRATEGIC DECISION MAKING AND STRATEGY IMPLEMENTATION IN SMALL AND MEDIUM ENTERPRISES IN CROATIA DOMAGOJ HRUŠKA TOMISLAV BAKOVIĆ MARIJA JURČEVIĆ

ABSTRACT Small and medium enterprises (SME) are major drivers of today’s developed economies. This paper investigates how managers of these companies can make better decisions and implement them in turbulent economic context. We propose that in their strategic management process SME should use different strategic tools than in large companies. Primary goal of the paper is to investigate major differences between usage of balanced scorecard tool of strategic decision making in large companies and in SME. Focal point is on major disparities between individual and organizational differences in sense-making processes. KEYWORDS: strategic decision making, sense-making SME, balanced scorecard.

1. INTRODUCTION Organizations are social systems. People in these systems have their own personalities, relations, communities, attitudes, feelings and division of responsibility. When such a system is about to be changed, all these parts of the organization also have to be changed. Successful strategic decision making is primarily concerned with members of the organization, or the members of the industry on a larger scale, and their interpretation of reality. Small businesses embody the principle of freedom and decision-making in the economic sphere. Due to the high complexity of the decision-making process and a large number of effects that can occur in such a way, they have developed various methods and techniques of business decision making. Modern business environment emphasizes the role of strategic thinking and management, and thus strategic controlling. Business strategy stems from the vision and mission of the company and must be clearly defined, with the goals and objectives that are recognizable and conductive. In the current environment has shown that it is not enough to rely only on financial indicators, and other indicators of the value and success of an organization. Starting from the vision, mission and strategies Balanced Scorecard was developed as a tool taking into account the company’s value goes beyond the main problems of the organization: The effects of a successful enterprise, monitoring and use of intangible assets and the successful implementation of strategy.

2. COGNITIVE PROCESS OF STRATEGIC DECISION MAKING Decision making is complex cognitive process. If decision in question would significantly influence fundamental underpinnings of the organization or one of its parts it is strategic decision and it consequently brings strategic implementation and strategic change. Primarily obligation of top managers in any type of organizations is to make decisions and implemented them. Sometimes these decisions bring significant changes in fundamental issues of organizational system. Such decisions are usually followed by resistance in their implementation. Research of organizational change heavily depends on concepts of managerial and organizational cognition (Gioia, 1986., Weick, Bougon, 1986., Gioia, Chittipeddi, 1991). Decision maker has his own perspective on the decision situation and within it place of all members of the organization. This kind of interpretation we call mental model of the decision making situation (Johnson-Laird, 1983). Decision makers work within frames which form thinking and activities of all members of the organization. In effort to accent cognitive and active side of the phenomena we use term enactment. This term is used to apostrophe the fact that in organizational life people usually create part of reality with which they have to deal with (Weick 1995, Weick 2001). Enacted organizational environment is medium in which all organizational decision are taken and implemented. If decision maker is to construct mental model which influence significantly mental model already enacted within organization or an industry it would be strategic decision.

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3. STRATEGY IMPLEMENTATION IN THE ENACTED ENVIRONMENT Strategy implementation is action directed toward certain strategic goal set in the strategy formulation moment. Action causes change, within organization, inside organization or both. Constant changes influence nature of society, economy, industry, business functions and personal attitudes. Change management implies set of actions needed to ensure flexibility in such business environment. Focus of the paper is exactly the investigation of nature of strategic change that influences fundamental determinants of the organization. Specifically the paper addresses two key questions concerning the relationship between ideas and action that make it important for managers to deal with issue of implementation of strategic change. First question concerns with adequate pace of strategic change in small and medium companies and second with approach to the change process. For implementation of strategic change it is not enough to change structures and systems, change is also needed in the way of thinking that produced these organizational elements. Most change initiatives are faced with problems which are rooted in existing management system. For instance managers look for changes only if they do not influence their work which leads them to neglect deeper, more systematic causes of organizational problems (Senge, 2003). Major source of organizational resistance to change derives from the normative embeddedness of an organization within its institutional context. According to Follet instead of term “resistance to change” it would be better to use term “confrontation with the environment” (Folett, 1924.). We do not have to in advance guess judgment of the environment. There can be resistance, but word “confrontation” also leaves possibility of integration as a means of reconciliation of differences in question (Weick, 1995). In an organization or in the society numerous interpretations of reality can harmoniously coexist (Gardner, 1996). Within organization there is continuous drive of individuals to form areas of security which will serve them as footing for activities that follow. In comprehension of organizational interpretations it is crucial to find answers to several questions. Firstly, how organizations structure processes of sense making and how are they structured throughout these processes? Secondly, how differences in organizational goals, which are immanent for every organization, influence process of sense making? Thirdly, with which means individuals in organization can influence affirmation of their interpretations? And fourthly, how process of sense making can be transferred to all members of organization?

4. FOCUSING THE SENSEMAKING PROCESS TROUGH THE TOOLS OF STRATEGY IMPLEMENTATION The nature of factors that influence implementation plans are embedded in experience, culture and context what mean that it would be realistic to suggest that they can be overcome or removed by means of rhetoric. If sense-making and learning are social as well as individual processes, and dialogue is seen as critical in effective change interventions, then a shift of focus in relation to evaluation may be called for (Weick, Quinn, 1999). Rhetoric of implementation of strategic change can come out of focus on what people do, not only from what they believe in. On contrary, sense making process usually origins in activities and not beliefs. Organizational members cannot ignore activities because they are responsible for it. Activities can be foundation of sense making on the same premises which we described for argumentation and expectation. It is the connection of belief and action what defines conceptual frame for sense making as adequate tool for description of complex world (Weick, 1995). Explicit behavior as well as irrevocable decision defines area around which cognitive apparatus must be activated. Once when it becomes harder to change behavior than it is to change belief about that behavior, belief is selectively turned on in order to justify behavior. With beliefs we build sense out of irrevocable activities and circumstances within which those activities take place. Main idea is that people do most work to find sense in activities which have strongest fulfillment commitment. In other words, commitment is element which focuses sense making towards activities. Hence, good way to approach the problem of focusing sensemaking process in small organizations is trough tools of strategic implementation such as balanced scorecard. The capability to continuously develop and implement strategy is key to long-term success. The challenge is to perform strategy processes, turn the strategy into business improvements and implement these changes in the operative business to improve results. The improvement of the effectiveness of companies’ strategic management process will be maintained by eliminating the disconnection between the formulation of strategy and its effective implementation throughout the organization. Companies that succeed in making this “strategic translation” into their measurement system are far better able to ex-

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ecute their strategies because they can better communicate their directions, focus on the critical drivers and align their investments and actions. In contrast to traditional, financially based measurement systems, tool such as the balanced scorecard solidifies an organization’s focus on future success by setting objectives and measuring performance from four distinct perspectives. Besides financial and customer focus there is the learning and growth perspective which directs attention to the basis of all future success - the organization’s people and infrastructure. Adequate investment in these areas is critical to all long term success. The development of a true learning organization supports success in the next balanced scorecard perspective, the internal perspective. The internal perspective focuses attention on the performance of the key internal processes which drive the business. Improvement in internal processes now is a key lead indicator of financial success in the future. In their many articles and books, Kaplan and Norton advocated the balanced scorecard as a management system designed for organizations to manage their strategy. Specifically, the scorecard was a way to (1) clarify and translate vision and strategy; (2) communicate and link strategic objectives and measures; (3) plan, set targets, and align strategic initiatives; and (4) enhance strategic feedback and learning (Kaplan Norton 1996a, 1996b, 1996c, 1996d).

5. PROBLEM ANALYSIS – ORGANIZATIONAL COMPLEXITY AND TOOLS OF STRATEGIC IMPLEMENTATION Interpretative approach that we use in the research comes from the perspective that human understanding and activities are based on interpretation of information and events out of which human experience is formed. Understating of organizational action, therefore, depends on the sense that we contribute to agglomerate of events (Daft, Weick, 1984.). Sense making, however, is socially constructed phenomena (Weick, 1979.). According to that, sense making is not only subjective, but also determined by context that defines goals which organizational members are trying to achieve (Gioa, Chittipeddi, 1991.). Research consists of three fundamental phases. First one is background research phase which included theoretical underpinnings of sense making, enacted environment and change in small enterprises. Second phase was pilot research, in which fundamental questions were discussed with academic experts in strategic decision making. Finally, third part of the research consisted on main research with decision makers. Theoretical sample was made of out managers that make strategic decisions in small and medium companies in Croatia. In the research we conducted in-depth interviews with 14 decision makers. Interviews were conducted in the period in July and August of 2012. In the case of strategic decisions there is change in existing mental models. In that process members of organization show wish to keep existing, obviously more comfortable, mental models. If the new governing metaphor is viewed as way to balderdash, that is events that cannot be controlled, resistance is axiomatic. From another point of view, if the metaphor means higher level of control for organizational members, in other words if it makes sense for them, strategic decision is perceived as challenge and resistant to them is diminished. Small organizations have limited number of mental models and therefore its sense-making process includes less difference in interpretation and less negotiation, however the research has showed that it is not always so. Even small number of interpretations does not mean that the organizational context is stable and simple. On the contrary, the research results that significant complexity can be found even in organizations with limited number of members. Therefore, even in small organization strategic tools that define responsibilities and focal points of decision making is of great value for organizational success.

6. CONCLUSION This paper aims to show that the in depth understanding of sense making processes in small business can bring equally good results as well as in large organizations, mostly by increasing the quality of the strategic management and thus the quality of strategic decision-making. On the basis of the findings from qualitative case study research this article explores both the strategic decision making process from the cognitive perspective and the process of strategy implementation in the environment enacted by members of the industry. All together, the research showed how successful implementation of strategic decisions is enhanced in the case of usage of tools, such as balance scorecard, that would focus mental models of members of the organization.

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The research results give insight to the fact that size of organization is not crucial in determination of the potential problems in strategic implementation that steam out of differences in interpretation of organizational enactment. The main issue in this respect is complexity of the organization that can be defined as differences in pivotal point of mental models of organizational actors which can have big gap in large as well as in small and medium size organizations.

LITERATURE 1.

Daft, R. L., Weick, K. E. (1984). Toward a Model of Organizations as Interpretation System. Academy of Management Review, 9, 284-295.

Gardner, H. (1996). Leading Minds: An Anatomy Of Leadership. New York: Basic Books.

Gioia, D. A. (1986). Symbols, Scripts, and Sensemaking: Creating Meaning in the Organizational Experience. In H. Sims & D. A. Gioia (Eds.), The Thinking Organization (pp. 49-74). San Francisco: Jossey-Bass.

Gioia, D. A., Chittipeddi, K. (1991). Sensemaking and Sensegiving in Strategic Change Initiation. Strategic Management Journal, 12, 433-448.

Johnson-Laird, P. N. (1983). Mental Models: Towards a Cognitive Science of Language, Inference and Consciousness. Cambridge: Harvard University Press.

Kaplan R. S. , Norton, D. P. (1996a). The Balanced Scorecard: Translating Strategy into Action, Boston: Harvard Business School Press;

Kaplan R. S. , Norton, D. P. (1996b). Linking the Balanced Scorecard to Strategy, California Management Review 39, no. 1 (1996) 53-79

Kaplan R. S. , Norton, D. P. (1996c). Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review 74, no. 1 (1996), 75-85

Kaplan R. S. , Norton, D. P. (1996d). Having Trouble with Your Strategy? Then Map It, Harvard Business Review 76, no. 1 (1996): 167-176

10. Senge, P., Kleiner, A., Roberts, C., Ross, R., Roth, G., & Smith, B. (2003). Ples promjene. Zagreb: Mozaik knjiga. 11. Weick, E., Karl (1995). Sensemaking in Organizations. Thousand Oaks: Sage Publications. 12. Weick, K. E. (1979). The Social Psychology of Organizing. Reading MA: Addison-Wesley. 13. Weick, K. E. (2001). Making Sense of the Organization. Oxford, UK: Blackwell Publishers. DETAILS ABOUT AUTHORS: HRUŠKA, DOMAGOJ, PH.D. ASISSTANT, UNIVERSITY OF ZAGREB, FACULTY OF ECONOMICS ZAGREB, CROATIA dhruska@efzg.hr BAKOVIĆ, TOMISLAV, PH.D. ASISSTANT PROFESSOR, UNIVERSITY OF ZAGREB, FACULTY OF ECONOMICS ZAGREB, CROATIA dbakovic@efzg.hr JURČEVIĆ, MARIJA ASISSTANT, UNIVERSITY OF ZAGREB, FACULTY OF ECONOMICS ZAGREB, CROATIA mjurcevic@efzg.hr

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EDUCATION FOR ENTREPRENEURSHIP IN PUBLIC ADMINISTRATION MLADEN ILIĆ

ABSTRACT European Union strategy “Europe 2020” states that Member States should implement reforms aimed at “growth driven by knowledge and innovation.” The reforms should aim at improving the quality of education / training and ensuring access for all, and to strengthen the transfer of knowledge in general. In addition, it was stressed that the funds provided in the ESF (European Social Fund) and other funds should be directed where it is possible to realize the goals envisaged by the Strategy. Implementing Civil service human resource development strategy 2010. to 2013. year, and the Action Plan, set strategic goals including conducting ongoing training for civil servants and is defined and specific objective of main importance which refers to the adjustment of existing programs and developing of new training programs in accordance with present and future needs of the civil service. The European Union 2006th adopted the recommendation on key competences for lifelong learning. These are the eight key competences and one of them is the initiative and entrepreneurship, which refers to an individual’s ability to turn ideas into action, and includes creativity, innovation and risk taking, and the ability to plan and manage projects in order to achieve objectives. For the preparation and running of projects for all components of the IPA, the Structural Funds and the Cohesion Fund, state officials must begin to think strategically and project work and that they can learn by attending seminars for businesses and make it in the last few years. KEYWORDS: strategy, training, civil servants, entrepreneurs, European Union, National School of Public Administration, Center for Professional Training and development of staff. Note: Author to speak their opinions and viewpoints that are not necessarily those of the Ministry of public Administration.

1. INTRODUCTION European Union strategy “Europe 2020” states that Member States should implement reforms aimed at “growth driven by knowledge and innovation.”1 The reforms should aim at improving the quality of education / training and ensuring access for all and to strengthen the transfer of knowledge in general. Among other things, great emphasis is placed on lifelong learning and training at all levels, thus ensuring the mobility of human resources and facilitate employment in line with labor market needs. In addition, it was stressed that the funds provided for in the ESF (European Structural Funds) and other funds should be directed where it is possible to realize the goals envisaged by the Strategy. In its first report on the work (February 2002.), The working group adopted a framework of eight key competences with appropriate knowledge, skills and approaches related to these areas. The recommendation of the European Council in Barcelona to promote the European dimension of education is repeated in the joint report of the Council and the Commission in 2004. on the progress of the work program “Education and Training 2010”.2 Act on Organization and Scope of Ministries and Other Central State Administration Bodies (Gazette 150/2011 of 22.12.2011.) States that the Ministry of Public Administration, among other tasks performed and / or cares about “the Training” and “encourage scientific and professional development of public administration.” In the Croatian Government to mandate 2011th to 2015th in paragraph 20)3 says that New Public Management for one of the key elements is taken: “Developing the system of continuous education of civil servants, which will be built not only the expertise of staff in the civil service, but also encouraging changes in behavior and ways of doing business civil servants. “In the same paragrap it is stated that “The government persists in improving labor and mandatory education programs for civil servants in the State School of Public Administration. The objectives are, inter alia, “trained and competent civil servants.” Zaključci predsjedništva, Europsko vijeće u Lisabonu od 23-24 ožujka 2000, točka 26. Radni program Obrazovanje i izobrazba 2010 uključuje sve akcije na području obrazovanja i izobrazbe na europskoj razini, uključujući strukovno obrazovanje i izobrazbu («Kopenhaški proces»). 3 http://www.vlada.hr/hr/naslovnica/sjednice_i_odluke_vlade_rh/(year)/2012/(month)/1). Strategija razvoja ljudskih potencijala u državnoj službi usvojena je Zaključkom Vlade Republike Hrvatske od 30. prosinca 2009. godine. http://www.uprava.hr/UserDocsImages/Dr%C5%BEavna%20 slu%C5%BEba/Akcijski_plan_RLJP.pdf 1 2

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Implementing Civil service human resource development strategy 2010. to 2013. year, and the Action Plan, set strategic goals including conducting ongoing training for civil servants and is defined and specific objective of main importance which refers to the adjustment of existing programs and developing of new training programs in accordance with present and future needs of the civil service. Continuous education and professional training of staff is a key prerequisite for the modernization of public administration and fulfillment of its elementary purpose, a quality and timely services to citizens and entrepreneurs. Training employees is aimed at improving their independence, competence, efficiency, horizontal and vertical mobility and motivation, thus contributing to increased efficiency and flexibility of public administration in general. Civil servants for perform their duties must be competent in order to meet the needs of the citizens that they should provide the public administration. The European Union in 2006. adopted the recommendation on key competences for lifelong learning. These are the eight key competences and one of them is the initiative and entrepreneurship, which refers to an individual’s ability to turn ideas into action, and includes creativity, innovation and risk taking, and the ability to plan and manage projects in order to achieve objectives. For the preparation and running of projects for all components of the IPA, the Structural Funds and the Cohesion Fund, state officials must begin to think strategically and project work and that they can learn by attending seminars that equip them for entrepreneurial activity. Last 5-6 years important steps have been taken, but it is still insufficient for the needs that exist at the moment, especially for the Croatian entry into the European Union. In this review emphasis will be given on the development and implementation of programs in the field of competence for entrepreneurship in the state administration. The first part presents the key competencies and competencies for Entrepreneurship and Implementing Civil service human resource development strategy 2010. to 2013. The second part of the article deals with core competencies in the civil service and the providers of training for civil servants. At the end there are recommendations for further action.

2. WHAT ARE THE KEY COMPETENCIES? According to the definition of PMI Zagreb, competence is “a set of related knowledge, attitudes, skills, and other personal characteristics that affect a major part of one’s job (or one or more key roles or responsibilities) . Competence is related to work performance and can be measured using generally accepted standards and improve training and development. These competencies are the components of knowledge: 1. Communication in the croatian language - refers to the ability to correctly and creative oral and written expression and interpretation of concepts, thoughts, feelings, attitudes, and facts and to interact linguistically in a number of different social and cultural situations: education, work, leisure and everyday life, including also raise awareness about the impact of language on others and use appropriate language in a positive and socially responsible manner. 2. Communication in foreign languages refers to the ability to understand, oral and written expression and interpretation of concepts, thoughts, feelings, attitudes, and facts in a foreign language in a variety of cultural and social situations. A significant component of this competence to develop skills intercultural understanding. 3. Mathematical competence and basic competences in science and technology - mathematical competence refers to the capacity of students to develop and apply mathematical thinking to solve problems in a variety of everyday situations, natural science competences refer to the ability to use knowledge and methodologies that explain the natural world in order to establish questions and conclusions based on facts; technological competence is understood as ability to apply scientific knowledge and methodology in response to human needs and desires. 4. Digital competence - refers to the ability to secure and critical use of ICT for work, in personal and social life and in communication. Its key elements of basic ICT skills and abilities: the use of computers to retrieve, assess, store, create, display and exchange of information and developing collaborative networks via the Internet 5. Learning to learn - including training for learning and persistence in learning, organization of learning, including the effective management of time and information to the independent learning, and learning in a group 6. Social and civil competence – includes training in interpersonal and intercultural cooperation.

Za PMI ogranak Hrvatska pripremio Nikola Cikač, 2012., Zagreb, Croatia - http://pmi.cikac.com/glossary.aspx?w=kompetencija/21.08.2012.

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7. Initiativete and entrepreneurship – refers to an individuals ability to turn ideas into action, and includes creativity, innovation and risk taking and the ability to plan and manage projects in order to achieve objectives. It is base for managing every day, proffesional and social life of the individual. 8. Cultural awareness and expression – reflects an awareness of the importance of the creative expression of ideas, experiences and emotions in a series of art and media, including music, dance, theater, literature and visual arts. It also includes the knowledge and awareness of local, national and European cultural heritage and their place in the world

3. COMPETETION FOR ENTREPRENEURSHIP For entrepreneurial competence5 one could say that it is willing to innovative thinking, and the ability to support innovation brought by external factors. Includes a positive attitude to change, taking responsibility for one’s actions (positive or negative), the identification of goals and their achievement and motivation for success. However, we could define entrepreneurship competence in the narrow sense, so it’s readiness, leadership businesses to sustainable development in the market. Entrepreneurship has an active and a passive component: it includes the propensity to induce changes and the ability to accept, support and adapt innovations external factors. It should not surprise that the main objectives of the “Enterprise Learning Strategy 2010-2014:”6 the need to sensitize the public about entrepreneurship and the development of a positive attitude towards lifelong learning for entrepreneurship and the need to introduce a learning and training for entrepreneurship as a key competence in all shapes, types and levels of formal, non-formal and informal education and learning. Necessary skills and competencies for entrepreneurship are:7 • The skills of planning, organizing, analizyng, communicating, executing, reporting and assessment: • The skills of creating projects and their implementation • Ability for cooperative work and flexibility within the team • Ability recognize their own strengths and weakness • Ability to work proactively and positively respond to the changes • Ability to assess and risk-taking when it is justified Attitudes that develop entrepreneurship education are: • Propensity initiative • Positive attitude towards change and innovation • Willingness to identify areas where we can show a whole spectrum of entrepreneurial skills – eg. at home, at work and in community IRA MARUŠIĆ8 from the Centre for Educational Research and Development, Institute for Social Research in Entrepreneurship Competence presentation concludes that the term implies a simplified “ability to convert ideas into concrete action.” Towards a European competence framework core components include: • Introduce and support innovations • Show initiative and take the risk • Taking responsibility for one’s actions • Act proactively and positively respond to changes • To set goals and achieve them • Act like a team • Be motivated for success Characteristics of enterprising people have a good sense of usefulness to their work contributes to the overall efficiency (the organization where he works), creativity, originality, respecting others.

http://www.selectio.hr/content/view/83/101/lang,hrvatski/13.08.2012. u 09,40 (Recommendation of the European Parliament and of the Council of 18 December for lifelong learning (2006/962/EC 6 http://www.seecel.hr/UserDocsImages/STRATEGIJA%20VLADA.pdf 7 http://www.zivotna-skola.hr/kompetencije.html 8 http://www.cepor.hr/news/pod-kompetencija/CEPORIris%20%20poduzetnistvo.pdf 5

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4. STRATEGY OF HUMAN RESOURCE DEVELOPMENT IN STATE SERVICE 2010. to 2013. Recognizing the need to further strengthen human resources in the civil service and thus strengthen staff competencies, the Croatian Government has adopted its conclusion strategy for human resources in the civil service 2010-2012 (hereinafter: the Strategy) in late 2009. year. The purpose of the Strategy is the development of human resources by improving the educational system and the system of recruitment and retention of quality employees. The strategy has 5 general and 30 specific objectives, 129 activities, and performance indicators, the beginning and the end of the implementation of activities and implementing bodies responsible for each activity in the development and management of human resources in the civil service. The intention of the business practices of the authorities in the Republic of Croatia to do this to fully function as a modern and efficient state government that provides quality services to its customers through: • improved system of training civil servants and installation competence framework in all key functions of human resource management, • development and implementation of training programs for trainers in the field of fight against corruption and the increasing availability of these and all other types of training at central and regional level, • simplify and shorten the process of engagement • development of methods to attract and retain professional civil servants • development program for employees who do not have the necessary competence to perform work in public administration • encouraging greater openness in the public administration, • extend and further define the evaluation criteria of performance and efficiency, • establishment of a single database on the structure and competence of civil servants Strategy Action Plan9 as a strategic objective 1 is set to “Identify and develop key competencies of civil servants”, which will be implemented through activity “definition of a list of key competencies that should be part of the job description for senior civil servants. Indicator of performance as specified in the attached table - crafted catalog of key competencies by category jobs senior civil servants. The deadline for implementation is clearly stated and it is 30 June 2013. year. In this sense, the Croatian Government has also passed a conclusion for the implementation of measures by the Ministry of Public Administration. To measure could successfully implement the State School Public Management is responsible customize existing training programs for senior civil servants with the theme of a competence framework / core competencies to the civil servants. In this sense, it is necessary to amend the curriculum and curriculum and instructional materials for students. Creating a model of key competencies is to define those characteristics - knowledge, skills, abilities, attitudes, motives that all employees must possess in order for the organization to achieve their goals in the desired manner. Key competencies are those competencies that an organization must possess in order to provide you a competitive advantage and long-term survival. The aim of developing a model of key competencies is a clear definition of the difference between excellence and mediocrity, and the desired “how to” achieve their goals. Assessment of key competencies possession indicates: • specific educational needs of holders of certain functions • readiness to take on more complex tasks, which include components other than professional and managerial • “how to” get the job done, or the way the employee lives the values that the organization develops and defends • talents that are not used enough in the current workplace or are not represented in a particular team, and could significantly contribute to the quality of work The objective assessment of employees’ competence is transparent planning employee career development.

5. KEY COMPETENCES IN PUBLIC ADMINISTRATION10 Bearing in mind the need to work in the administration officials who should have the knowledge, skills, abilities and appropriate behavior in the Ministry of Public Administration was conducted in December 2010 “Research on the evaluation and ranking of the necessary competencies of civil servants.

http://www.uprava.hr/default.aspx?id=11827

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Questionnaire along with instructions for filling forwarded to all state bodies and the completed questionnaires were returned to the Ministry of Public Administration that are processed. The result of the research was to assess the competence of civil service and separated nine required competencies: 1. Innovation and creativity 2. Orientation towards citizens / customer 3. Organizational abilities, skills and knowledge 4. Orientation towards results 5. Leadership 6. Team work 7. Skills of communication 8. Change management 9. Ability to make decisions Respondents were asked to evaluate the importance of key competencies for efficient business operations for the categories of jobs senior civil servants (junior manager, manager, senior manager and chief executive) and ranked the importance of competence according to the civil servants in general (regardless of the category of the job). The conclusion is that every organization needs to employ different knowledge, abilities and skills (competencies) with associated autonomy and responsibility because diversity brings fresh, new ideas and perspectives on reality in order to prevent high and constant level of dissatisfaction of employees in the work environment. In late 2010. in the Ministry of Public Administration held a number of workshops on the theme “Establishing core competencies in the civil service” with the participation of senior civil servants. Based on the proposed competence, senior civil servants lined up for the next five competencies (knowledge, attitudes, skills that is desirable properties) as the key to successfully perform the work of managers in the civil service 1. Organizational abilities, skills and knowledge 2. Leadership 3. Ability to make decisions 4. Orientation towards results 5. Team work Conducted workshops led to the conclusion that the officers should have the following skills: 1. Professional / technical skills - an expert in your field of work, well educated and willing to learn new things in the profession. 2. Problem solving and decision making - it is necessary that they can identify problems, create alternatives, evaluate them and make a good decision 3. Interpersonal - Social skills (“soft skills” - they know a good listen, give feedback, resolve conflicts etc.) From the above it can be concluded that the necessary balance of all three of these skills. Competence approach can be used in human resource management: eg recruitment, evaluation, promotion and reward. When employees know what competencies are required to be assigned to such a position, and that they themselves would have to remain very clear direction. All we can do for ourselves assessing potential investment / potential obtained and assess the degree of motivation for certain actions. Then there are clear expectations on both sides, the employer and the employee. This allows a better understanding / communication within the organization and by the organization to the public. Competence approach directs us to outcomes / results / expectations set by the goals based on that we want to accomplish. Most state employees do their job competently, conscientiously, quality, honest and professional and all that in order to secure and protect the public interest, legal action and provide services in the rights of citizens and Croatian companies. However, one should always encourage the development of civil servants and officials through training and education for the majority of competencies and thus for entrepreneurship. Only constant development, implementation and training programs that develop and improve skills can improve public administration. Qualification structure11 employees in state administration and other governmental agencies in the last few years shows an improvement, but it can still be said that in the still unsatisfactory with respect to the scope and meaning of work performed in the public administration.

10 11

http://www.uprava.hr/UserDocsImages/Državna%20služba/2012/IZMJENE%20AP%202012_2013.pdf http://www.poslovniforum.hr/eu/eu23.asp

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It is important to note that at this time there does not exist Degree in Public Personnel required, including public and state administration. On the basis of Article 120 Paragraph 2 Law on Science and Higher Education, Article 14 Paragraph 1 Law on Academic and Professional Titles and Academic Degrees and the Rules on the Equalization of professional titles, at the request of persons who have completed an administrative program for a period of three years and those who have completed an administrative program for a term of three years and gained professional title administrative lawyer, issued the new instrument which will determine that based on studies completed and acquired professional title have the right to use the professional title Bachelor (Bachelor) or Bachelor of Arts (baccalaurea) public administration and all rights to the professional title under the regulations belong. The question is do we at this point, less than a year of formal entry into the European Union, take enough care of training for key competencies of civil servants in particular related to entrepreneurship? By the end of 2011. as an organizational unit of the Ministry of Public Administration acted Civil Service Training Centre (CSTC) as an institutional framework for a system of horizontal training of civil servants. CSTC was the result of the CARDS 2001 – Reform of Public Administration - Development and strengthening of human resources through training of the civil servants. Based on the results of the assessment of training needs (TNA), one of the recommendations of the project was to create a lasting and sustainable system of horizontal training for state servants in the Republic of Croatia, with the appropriate central institution that will devise, organize and implement appropriate training programs required. The Croatian Government has accepted the above recommendations of the project, and as part of the then Central State Office for Administration formed CSTC which officially started in the 2005th year. After securing all necessary legal, organizational and financial requirements and complete staffing laid the foundations of a new system of training of state servants in the Republic of Croatia and the CSTC 2007th had began to organize independently developing and implementing training programs. Assessment of training needs was made every year the Department of Human Resources, Ministry of Public Administration based on the collected survey forms for all state servants. Government brought the execution plan for the training of civil servants every year, taking into account the needs, resources foreseen budget, space and human resources CSTC. The most active 2010th year CSTC were performed 116 different training programs in 484 activities attended by 8348 participants. With a head CSTC were employed 11 staff, of which six coordinator of the implementation of training programs. Apart from these activities were held and seminars ReSPA spending programs of the Ministry of Foreign Affairs and European Integration, CFCA, CODEF etc. Based on the expressed needs and the Regulation on the forms and the training of civil servants (gazette 10/07) in the CSTC be implemented following categories of programs: 1. Introductory programs 2. Specialized programs intended for different groups of civil servants; 3. Personal improvement training programs; 4. Career development training program; 5. Management training program; 6. Other programs. With the implementation of mandatory programs by annual training plan that sought active participation in seminars and workshops, which is part of the participants listed in the table as possible acquire key competences. RB

Key competence

Educational programs

Communication in the Croatian language

Croatian language in the workplace

Communication in foreign language

Courses in English, German and French (beginner, intermediate and advanced)

Mathematical competence and basic competence Key figures of the business plan, financial management, conand basic competences in science and technology trol and audit

Digital competence

Basic and advanced courses ECDL - verified online test center

Learning to learn

Training of trainers, pedagogical and didactic workshops, time management, etc.

Social and civil competence

Interpersonal relations and communication, Legal Protection of National Minorities, Presentation skills, etc.

Initiative and entrepreneurship

Program for senior civil servants, contents of the business plan, business plan development, strategic planning and management

Cultural awareness and expression

Mutual relations and communication

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CSTC the end of 2011. was formally ceased to exist by the discontinued the entry into force of the Regulation on the internal organization of the Ministry of Public Administration (Gazette 28/12 of 05.03.2012.) of professional training in public administration over the National School of Public Administration.

7. STATE SCHOOL FOR PUBLIC ADMINISTRATION State School for Public Administration12 (SSPA) was created by the Croatian Government Decree of December 2010. as a “public institution whose activities are education and training of civil servants, officials in local and territorial (regional) self-government, and legal persons with public authorities with the aim of continuing to raise the level and quality of their knowledge, skills and abilities to form a professional , effective and efficient public sector that will provide timely and high-quality public services, in accordance with generally accepted standards of the best.” Besides, SSPA the central institution for planning and coordinating needs assessment for professional education and training, development and implementation of training programs for employees in the public management and support of government agencies, local and territorial (regional) self-government, and legal persons with public authorities in the organization and implementation of training programs in accordance with their needs and resources. Making training needs analysis (hereafter TNA), ie. planning and coordinating needs assessment for education and training of staff is a very complex process. The Ministry of Public Administration, a training plan for next year is already starting to make during May and June of this year. Senior civil servants proposed plan for the training of its organizational units manufactured in collaboration with the staff, and the priority programs that are in compliance objectives and tasks of the state body in which they are employed. Completed forms are submitted to the training coordinators, and finally the process ends in December, the adoption of the budget and implementation plan for the training program for the next year. The MPA encompasses the service for the management and development of human resources in the civil service, which among other tasks “coordinate the development of plans for civil servant training needs assessment and implementation of training of civil servants.” For SSPA will be a real challenge to work on coordinating the evaluation of training for officials of local (regional) selfgovernment, knowing that in Croatia there are 20 counties, 127 towns and 429 municipalities. In the assessment of training needs and in particular the implementation of the Plan of training programs, it is necessary to achieve good cooperation with the Academy of local democracy (the ALD). On the website of ALD was published Decree on the Establishment of Local Democracy Academy, which is defined by the activity that is “permanent training of local elected and appointed officials and employees of local and territorial (regional) self-government, with the aim of improving professionalism in the local and regional (regional) governments, reaching standards that will enable the application of national legislation and the positive changes that the legislation may be necessary in order to comply with the acquis communautaire. “ALD should also make an analysis of the need for professional training for the staff of local (regional) self-government with three employees and projected budget will be difficult to meet the expectations of anticipated activities of the Regulation. SSPA coordinate activities with the same legal persons with public authorities in accordance with their needs and resources. SSPA is as stated in the Action Plan, Strategies for the development of human resources in the civil service planned for 2010 -2013 implementing No.1 goal, “Identify and develop key competencies of civil servants”, the activity, “adapt existing training programs for senior civil servants with the theme of competence development of key competencies for civil servants” but also to increase the availability and increase the number of implemented training programs (objective 3). Besides the analysis of training needs officers and program implementation due consideration should be given in conjunction with the Ministry of Public Administration and completing the catalog of key competencies of officials who will be the foundation for the development of training programs and training. According to the catalog in the future, officials directed to vocational training to them is necessary for the quality of all assignments, and career development. SSPA the realization of technical, human, organizational and financial preconditions for the implementation of the program began in April 2011. Priority objectives 1. The establishment of a uniform system of training of all employees in the public sector 2. Improve information on the possibilities of training 3. Increase the availability of training programs 4. International cooperation 5. Enhance national capacity for training and development 12

www.dsju.hr

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During 2011, the program was implemented by the civil servants (all modules) and the same commenced in the county (Istarska, Vukovarska-srijemska, Zadarska, Šibensko-kninska, Primorsko-Gorska and Međimurska), which is notable step towards the implementation of the decentralization program. Many seminars were held in the field of the European Union, which is in seven different program ended nearly 420 officers. Among other programs should emphasize training in the field of fight against corruption and coaching, aimed at strengthening business (management) competency. In 2012, the implementation program for executive officers and programs to strengthen the entrepreneurial competencies, such as: “Change Management” and “Conflict management”. Planned to implement a dozen EU programs and programs in public leadership and management, establishment and management of public policies and programs to meet students with the constitutional protection of human rights and civil liberties, gender equality and the protection of national minorities. One of these training programs, implemented in the program CSTC to the civil servants who strengthens competencies for entrepreneurship senior civil servants:

8. MANAGEMENT TRAINING PROGRAME FOR CIVIL SERVANTS13 With the implementation of the program began in 2008. CSTC in the Ministry of Public Administration and was developed in cooperation with the Danish School of Public Administration under the project of Danish bilateral assistance. Program during the period 2008 - 2010, when it was applied in CSTC successfully completed 224 senior civil servants. SSPA program implemented by the beginning of 2011, and up to now it has completed 47 participants. The implementation of the program for the three groups of participants. Topics cover all relevant areas of governance - including leadership and management, strategic planning, policy development, financial management and control, management and human resource development. The program lasts one year and is divided into three semesters and is designed for managers in public administration, which thus become competent developing and upgrading of knowledge, skills and abilities in the field of entrepreneurship. Participants are divided into 3 groups of minimum 20 people. In the first semester, students participate in workshops from 6 different areas depending on the area of interest and, in the second semester, the students are divided into thematic groups (Leadership and Management, Policy development, strategic planning and management, development and human resources management, financial management, control and audit) and choose a topic for the study of the case studies (case study) .. Each student has a mentor who helps him in making the final paper, which is a requirement for successful completion of the program. All mentors, coaches and trainers have years of experience, most of them in the public sector. Pedagogical approach is modern and encourages the active participation of all students in discussions and exercises. From senior officers are expected to have, in addition to the knowledge related to the exercise of their own workplace and competencies related to strategic planning and management, human resource development, financial planning, participation in public policy, identifying and preventing risks. Many of them are listed knowledge and skills are acquired through the cracks so it is necessary to provide them with continuous training and development. SSPA capacity will not be able to meet the increasing need for the implementation of this and similar programs are planned and additional financial resources. Unfortunately, although the program is made up of the more interesting, successfully merged entity, it may end up a small number of senior civil servants. Should highlight efforts SSPA who organized the program and regionally, however, needed to work on training trainers in the regions for the implementation of this and other programs (Osijek, Rijeka, Split). Without competent managers and other officials who know they have the skills, ability and motivation to work professionally and for the benefit of the public service has no real professionalization of the public service, there is no longterm quality and efficiency of the functioning of any organization. SSPA as provided by the Foundation conducts training programs intended for the public administration. At the moment, there are 6 SSPA officers including director who do not have sufficient financial resources for the anticipated tasks, personnel are vacant, there are no classrooms available and it will be difficult to fully fulfill the purpose of its founding.

http://www.dsju.hr/index.php/Programi

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9. SUGGESTIONS FOR FURTHER ACTIVITIES Over 2011 years SSPA began with the implementation of commitments and the development of new training programs were completed in 2012 by the offer seminars on the implementation of the EU as one of its priorities. As an independent institution, based on the needs assessment conducted training seminars, courses and workshops but should initiate further training in key competencies, including competency in entrepreneurship. Suggestions for further action SSPA: 1. Achieve by the end of the defined role of the central place of professional education and training of civil servants, officials in local and territorial (regional) self-government, and legal persons with public authorities with the aim of continuing to raise the level and quality of their knowledge, skills and abilities to form a professional, effective and efficient public sector that will provide timely and high-quality public services. Administrative and Professional Council shall be to support the achievement of goals. 2. Develop and implement programs for the development of entrepreneurial competencies officials, and incorporated as a “policy” of the need for lifelong education as specified in the policy documents 3. Continue to collaborate with institutions / organizations and participate in special interest projects 4. Spend quality external evaluation of the implementation of training programs and, if necessary, adjusted in accordance with changes 5. Conduct certification and recertification of trainers / lecturers (every two years) - for example, if the coach / trainer regularly teaches, recertification would involve a certain number of hours of seminars and / or attend seminars on methodology and suggest making a licensing Ordinance. 6. Conduct complex assessment of training needs servants taking care of job descriptions in the public administration and the available competences officers who perform individual tasks (career development) and in cooperation with the Division of Human Resource Development in the civil service and other relevant institutions / experts 7. Devise and implement a subsequent evaluation at the workplace - survey with the participants and their superiors in the extent to which the training effect on the quality of the jobs after training. 8. Include a maximum of the Croatian Qualifications Framework, to identify the key competencies needed servants in the public administration and customize the programs, if it’s known that the key competences: communication in the mother tongue, communication in foreign languages, mathematical competence and basic science and technology, digital competence, learning to learn , social and civic competences, sense of initiative and entrepreneurship, cultural awareness and expression in culture is needed in this regard to determine priorities for the implementation of the training program (possibly scoring through continuous training helps in directing the career servants and quality monitoring its execution and ultimately evaluating 9. Create the conditions for the implementation of programs readily available in regional centers (eg Split, Rijeka and Osijek) to all officers approached the training and develop a regional network of trainers. Analysis of training needs assessment showed that most participants in the seminars organized by either CSTC from ministries (80-90%) 10. Participate actively in the IPA and the Structural Funds and other programs of the Croatian and EU 11. Develop and implement e-learning programs where possible. Include Ministry of Public Administration, division for e-Croatia

10. CONCLUSION It is extremely important to educate officers to be professional and competent in their job that will contribute to the efficiency of public administration with the aim of providing quality services to the citizens. Furthermore, possessing key competencies or at least most of them allows officials in the public administration more competitive in the labor market. Last few years of the crisis, the fall in employment in all sectors will not even state officials and staff of the public administration to guarantee job security. Last negotiations the Government and the Union of state and local officials and employees led to a new collective agreement and reduced material rights officials. That is why it is necessary to systematically promote entrepreneurship education and thus the development of skills of civil servants, such as planning, organizing, project work, teamwork, ability to identify and risk-taking. From my own experience of trainers and mentors to the “Management training program for senior civil servants “ and “ Career development training program “ most officers possess traits that allow them to develop into enterprising people. Senior civil servants are ready to accept an entrepreneurial spirit and apply it in their daily work, they should be encouraged. Senior civil servants are ready to adopt the entrepreneurial spirit and to apply it in their daily work, but need to be encouraged to do so. State officials and senior civil servants should encourage and support all civil servants, but first and foremost the most creative and enterprising ones. Financial reward is not necessary as there are different forms of

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intangible rewards, development monitoring, promotion, etc. It is necessary to systematically stimulate entrepreneurial competence through continuous introduction of an entrepreneurial mindset, encourage creativity and strengthen confidence. All of this can be achieved any environment, and one way is definitely entrepreneurship education. Furthermore, we need to encourage tighter links between departments, sectors, services and directorates within state administration bodies as well as communication and coordination among all state administration bodies. The best way of interconnection (within and between SABs) is joint work on projects, which will produce visible results. All activities will be affected by a change in ways of thinking about entrepreneurship but also to entrepreneurs so that they can begin to see as a key element in the creation of new values. Small and Medium-Sized Enterprises in Croatia is 99.5 percent of the total economy, the share of small and mediumsized companies in the GDP is above 50 percent, employment accounted for 64 percent and 42 percent of exports.14 Vitomir Tafra CEO of educational group “Zrinski” and advisor LLP, one of the initiators of entrepreneurship education throughout the lifespan. It’s noted that: “Learning about entrepreneurship should be introduced in all the training of formal and non-formal education in order to establish knowledge about entrepreneurship as a key competence for success in the labor market.” The Ministry of Public Administration said in his vision that he wants a “modern and user-oriented public administration.” This assumes the saying educated and competent officers. “Powerful Vision inspires action to major changes. It uses a powerful, simple concepts that clearly express what needs to be done today, that the organization would be different tomorrow. While the internal structure better accept those changes that are compatible with the declared values of the organization. By creating a climate of mutual trust, cooperation, teamwork and honest communication, employees are encouraged to highest achievements. Course and to their need for permanent training. On the impact of the crisis, investment in knowledge is seen as the first category, which is trying to reduce. One of the first moves they pull the organization is reduced allocation of funds for education. It’s wrong and it needs to accept the fact that investments in new knowledge, skills and behavior provide new achievements that are not achievable if we act in the same way as before.15 DETAILS ABOUT AUTHOR: MR.SC. MLADEN ILIĆ SENIOR ADVISOR MINISTRY OF PUBLIC ADMINISTRATION milic@uprava.hr

14 15

http://www.minpo.hr/default.aspx?id=120 03.07.2012. u 14,03 Connection between purpose, concept, measurement and goal of change, prof.dr.sc. Davor Perkov, Jasna Genzić, str.spec.oec, Matej Perkov, bacc.oec

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JAYSTUDENT EXPERIMENTS IN HIGHER EDUCATION KATALIN JÄCKEL ZOLTÁN VERES

ABSTRACT There is a strong relationship between buyers’ perceived risk and their satisfaction in out-of-standard situations of services. The customer-specific feature of these situations has been modelled as jaycustomers, i.e. customers of nonstandard behaviour. In education - due to students’ expectations - the control of different situations is of high importance. The purpose of our research is to study administrative staff’s behaviour when they find themselves face-to-face with so called ’jaystudents’. To solve the problem of research, an interdisciplinary approach of psychology and marketing is needed. As far as methodology is concerned a basically qualitative experimental design has been selected with some quantifiable elements. The research process starts with a series of mystery callings followed by post-experimental focus group discussions. In service research mystery calling is usually applied for testing standards. As a new methodological approach of our research, the application of experimental techniques in exceptional service frontline situations can be mentioned. From managerial aspects the results can provide the management with realistic information on the weaknesses of frontline personnel and of frontline standards. They can serve to improve human resource management in higher education. Based on the results we are going to extend the investigations to face-to-face contexts. KEYWORDS: higher education, jaystudent, experimental research

1. THEORETICAL BACKGROUND It is assumed that there is a close relationship between judging the quality of services and the quality of frontline since an direct message about the culture and values of the service-provider is conveyed to the customer by the behaviour perceived in the frontline (Veres, 2009). In an educational context, the service-provider (frontline) and the users (students) get involved in sorts of interaction. In best cases this happens according to the expected standards, but conflicts are rather frequent. Conflicts may be caused by the non-standard behaviour of the provider as well as unexpected user attitude (jaycustomer/jaystudent misbehaviour). For the sake of customer- satisfaction, particular stress has to be placed on handling disturbing factors and conflicts. Constantly monitoring education and administration as well as maintaining and raising the standard of quality level in the service sector are a prerequisite for their smooth running. Quality assurance in higher education is required although it cannot properly be created if in this process students and their future employers do not play a decisive role as quality cannot adequately be stressed in higher education (Polónyi, 2007). Of course even in this sector competition is getting stronger, which should prioritise quality considerations. As a consequence, checking on the expectations and satisfaction of users is a must for the institutions that would wish to keep their positions in the long run. Assessing satisfaction is one of the possible ways of measuring the quality of providing services. Satisfaction is determined by the difference between perceived and expected performance. If the extent of satisfaction, i.e. assessing quality indirectly can be interpreted, then the strong and weak points which characterise the service can also be identified. The market position can be ensured for the institutions of higher education that results in competitiveness and the loyalty of the students who make use of services by eliminating weaknesses and improving as well as preserving strengths. It is important for many considerations. On the one hand, satisfied students can generate and spread a positive image of the institution - assisting in acquiring new users and on the other hand, they themselves can rebuy, i. e. continue their studies in e.g. MSc courses (Rekettye, Szűcs, 2002). Quantitative satisfaction analysis is descriptive. Its critical point is that neither the expectations nor the point of reference of the assessor can be known so although weaknesses can be identified, no information is provided on the factors in the background. Satisfaction with the services is rather subjective that depends on the psychological characteristics of the assessor, i.e. the student in the present case (preliminary experience, expectations, personality) and the impacts perceived during the examined period (personal interactions, environment). From a socio-psychological point of view assessing satisfaction is an expression of an attitude, i.e. the expression of such an opinion or view on the attitude subject that can be a person, a thought, a situation or a problem.

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The present research includes managing administrative tasks in education as well as the behaviour of the front-line staff and activities in connection with the services provided by the institution. Attitudes can be examined on three components: 1. cognitive component (beliefs, opinions, ideas): it includes e.g. experience of managing one’s own affair in the Office of the Registrar, information gained from acquaintances and expectations for the different aspects of administration; 2. affective (emotional, evaluating) component: the attitude object is accompanied by positive or negative feelings; and 3. conative (intention, behaviour) component: the expression of attitude, behaviour and communication that is observable in a given situation. In the perceived standard of quality parameters that are regarded important by the institution communication between the students and the representatives of the institution is decisive as attitude is expressed there. In this way it can be examined together with the situations where the emotionally negative students’ attitude can be observed with all the three components that deviate from standard situations of administrative tasks. The out-of-standard behaviour that breaks the rules, standards and norms in terms of the service sector are labelled by the literature as misbehaviour, dysfunctional behaviour, nonstandard behaviour, jaycustomer. The research topic must be approached from a multidisciplinary point of view where the different areas of service marketing, psychology, sociology and quality management contribute to a deeper analysis and also the present study can make use of these points of view both in methodology and in data analysis. The term used in our research is jaystudent in the case of institutions of higher education as a refinement of the typology worked out by Jäckel (2010) which derives from the jaycustomer types of Lovelock (2007) and Wirtz (2008). The objective of the research is to compare the perceived with the expected behaviour of the front-line administrative staff in the case of different forms of ’jaystudent’ behaviour. The following so-called jaystudent types were differentiated:

• • • • • •

VIOLATORS tend to push their own interest the most by arguing and making up excuses to be treated in a special way that differs from the standard way of rules. DOUBTERS doubt every word of the service provider. If regulations do not meet their interests, regulations are questioned. GRABBERS, EXIGENTS want to reach success without making any efforts. They continuously thrive to be treated in a preferential way to take advantage. ARGUERS know everything even better than others, have heard about everything and have an opinion about everything. Make references to the Code of Academic Studies and Examinations. Are better aware of rules and legal possibilities than the front-line staff. IDEA ORIGINATORS can come up with a much better idea in every situation. Always make suggestions and revolutionary innovations. Prepared with ready-made suggestions to solve problems. AGITATORS are offensive, hot-tempered, emotionally controlled, too much personal and threatening.

Nonstandard student behaviour can also generate different types of behaviour off the expected standards and patterns from the part of the front-line staff, which results in conflicts. One of the reasons for dissatisfaction is the conflict not resolved between the front-line representative and the students and the collision of different interests where both parties hold on to their own points of view. There is a significant gap between expectations and the perceived situation.

2. THE CONFLICT MANAGEMENT MODEL According to the model of Kiesler (1983) in the psychological approach of dyadic conflict two basic dimensions can be separated: dominant-subordinate behaviour and agreeing-arguing communication. Zhenfeng Ma and Laurette Dubé (2011) also applied this model in their research on observing front-line interactions. Based on the results the subordinate behaviour of the service user generates dominance on the partner’s side and hinders their being subordinated. In the case of domineering behaviour both reactions can be triggered. If both parties show subordinate behaviour repeatedly while the service is being provided, the user’s satisfaction decreases and the same holds true for domineering behaviour. In the case of complementary behaviour, satisfaction changes in a positive direction. Restricting the situation to domineering-subordinate dimension the systematic model of the ways of conflict management in practice by Kenneth W. Thomas and Ralph H. Kilman (1974) was used in the research simulation. The thrive for dominance can be described as a high level of promoting one’s own interests that gives a priority to satisfying own needs in a conflict. If it harms the other party’s interest, it can be defined as rivalling behaviour. Subordination or conformity is emerging in high-level cooperation. Standard student behaviour, i.e. set as a benchmark by the service provider, can be described by obeying all rules, regulations even by subordination so they conform to the domineering expectations of the institution. If there are no guide-

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lines or behaviour does not meet the regulations ’avoidance’ can be opted for, which means avoiding confrontation and not meeting their own needs. If no assistance is required in case of a problem, things just happen and the student can get stuck in the educational process, drop out of school or even dismissed when the relationship is also complementary. As a result of such a threatening situation the level of promoting one’s own interest can be raised and they can act as jaystudents while thriving to meet their own requirements, which results in rivalling attitude while in the meantime the level of cooperation is low. This confronting form of behaviour even aggravates the situation accompanied by negative emotions and if both parties stick with their own points of view in interaction, rivalry is coupled by dissatisfaction from the side of both parties. According to the standardised expectations front-line staff must be capable of controlling the situation on both socio-emotional and task level (Bales, 1999). In such cases the proper ’problem solving’ and ’compromising’ behaviour and emotional control can suppress emotions and increase the satisfaction of both parties. Neither extremely rivalling behaviour, quick emotional reactions nor blackmailing can make front-line staff break the rules but they may be unable to follow the patterns of behaviour expected and can also be involved emotionally. To avoid this, breaking up the relationship (avoidance) is acceptable together with transferring the problematic student to a higher managerial level (conformity). In our research model the high level of promoting one’s own interest was set as one of the criteria of jaystudent behaviour as its marked involvement in out-of-standard behaviour is inevitable in generating a conflict. To simulate a situation as realistic as possible volunteers were selected on the basis of the questionnaire by Thomas-Killman when at least 60% of the total number of points was gained in medium or high level of promoting one’s own interest. The conflict management ways of the model were utilised in describing the behaviour of the administrative staff. Figure 1.

Source: Thomas Killmann (1974)

3. THE OBJECTIVE OF THE RESEARCH The risks of the users perceived in the extraordinary situations of providing services are strongly related to the stability of quality. The consumer-specific nature of the situations is modelled by the typology of services marketing as jaycustomer, i.e. the consumers of non-standard behaviour. In the perceived standard of quality parameters that are regarded important by the institution communication between the students and the representatives of the institution is decisive as attitude is expressed there and in this way it can be examined. In higher education quality management administration is of primary importance as routine tasks are mainly acted out there. The objective of our research is to compare the perceived behaviour with the expected behaviour patterns from the part of the front-line administrative staff in the case of different ’jaystudent’ behaviour at phone encounters. Solving the research problem requires both marketing and psychological approaches.

4. THE STAGES OF THE RESEARCH During the research the front-line, or more precisely, administrative staff were tested in the state-owned higher education by means of telephone calls. Such a procedure was worked out to evaluate administrative processes that helped analyse the components of satisfaction in such situations when the student (client) behaved in a non-standard way in order to have a picture how administrative staff deals with students in problematic cases.

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Phase I: Paving the way for mystery calling research 1.

A qualitative examination served as the first stage of the procedure within the framework of which focus group interviews were carried out. The basic objective of the four focus group analysis was to found the following quantitative research phase and outline the questions of the standardised questionnaire. The second step of the procedure consisted of standardised questionnaires between April and May 2012 with the participation of 145 students at a business school in Budapest. The objective of the research was to survey how many times in general per term the Office of the Registrar or administration is visited and also in what ways (in person, by phone, e-mail) they are contacted and how long it takes. Afterwards students were asked to evaluate the staff of the Registrar’s Office on the basis of different points of view (rapidity, readiness to help, well-preparedness, knowledge of the Code of Academic Studies and Examinations etc.)

Phase II: Mystery calling research The research is based on standardised questionnaires, in 62 simulated cases with the participation of 15 researchers on the administrative staff of different higher education institutions of business studies. Defining simulation The volunteering students had to turn to one of the colleagues of the administrative staff with a problem made up by having chosen one of the predefined jaystudent forms of behaviour in the form of mystery calling to the higher education institution selected. The interaction was evaluated on the basis of the points of view formed during focus group discussions in the form of an observation sheet distributed beforehand. Dealing with matters on the phone was selected for several reasons. The respondents marked dealing with matters on the phone as one of the areas to be improved during the focus group discussions. Communication restricted to the vocal channel helps students in acting out a role as fewer paraphernalia of acting are necessary than in the case of direct, face to face interaction. Ethical issues Dysfunctional consumer behaviour poses a great challenge for researchers both in terms of methodology and ethics (Fisk et al 2010). In evoking, imagination or simulation participants are asked to perform such socially undesirable illegal form of behaviour that can cause trouble, stress psychologically and in extreme cases, even physically, which is in contrast with the principle of the research according to which all safety precautions must be taken so as not to do any harm to the participants of the research. Due to observation on the spot behaviour can temporarily be modified to meet the expectations of the observer so data can be distorted. In the case of field experiment (Jäckel 2010) participants must be notified afterwards and their consent is necessary while anonymity is guaranteed. Also consent must be obtained if a confidential data is to be recorded or analysed afterward. Such methodological problems those concerned in the research can act out the situation as a role-play, which can be analysed. However, this differs from the natural situation and also distorts behaviour. Our research uniquely mixes methods to simulate the most realistic situation possible under controlled circumstances so that those concerned would not know about the examination, which would otherwise have altered their ’natural’ behaviour. Students contacted the administrative staff of different higher education institutions with such matters in which they had their own experience, interested them or heard about them from others. The present research does not analyse the content of the situation. Selfpromoting behaviour resulting in conflicts was not far from them on the basis of the preliminary selection. Ethical issues were discussed in details. During the preparatory training session instructions stressed that creating tension must be avoided. This made the situation authentic and lifelike so deceit was excluded. Data were used anonymously and such general results, conclusions are drawn that are independent of any institutions and do not necessitate feedback. Due to ethical issues the analysis of secretly recorded calls was excluded from the research methods. The participants of the research signed a statement of secrecy. Preparing the students for simulation Undergraduates were prepared in person on a training course held one single occasion for the simulation and all of them were experienced in arranging matters. Beforehand, only the students whose level of promoting self interest was high on the basis of the Thomas-Killman model were selected. All the points of the data collection procedure for the thorough documentation of the process were interpreted. The content and application of the structured system of observation points worked out beforehand were reviewed together with the conflict managing model. Ethical issues were also discussed.

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5. RESEARCH RESULTS I. The results of the research paving the way for mystery calling research 1. Focus group interviews on four issues: Q 1/1. Alongside what parameters can problematic academic study administrative situations be examined as events to be measured? Which areas are suggested for further improvement? Primarily it is telephoning and writing e-mails that are practical to be improved for faster administration. Therefore, the professional preparedness of the staff has to be improved. The proper tone and manners must be stressed when dealing with the clients. Q 1/2. What key behaviour patterns must be observed in the front-line staff which play a role in satisfaction? By applying brainstorming technique ideas were collected, which led to the creation of the principal factors. After they were operationalised a structured list of behaviour forms was created with five main components on a fourpoint Likert scale. In this way neutral answers were excluded. Q 1/3. What irregular forms of student behaviour were experienced that created a conflict with the front-line staff and contributed to dissatisfaction? Same as in Q 1/2. After they were operationalised, six jaystudent behaviour forms were identified. Q 1/4. Control. Interpreting and clarifying the structured list of behaviour forms created beforehand as well as jaystudent types. There were no relevant changes made to the previous version. 2. The results of the standardised questionnaires 145 students took part in the survey between the end of April and the beginning of May 2012. Seventy per cent of the students who filled in the questionnaires were full-time students and 30% of them correspondent (part-time) students. Most of them (95 students) contact the Registrar’s Office in person fewer than five times a year. The most typical is also 5 occasions per year in the form of phone calls or e-mails while a contact made more than 10 times annually only characterise a few students. The students described the length of a typical process as follows: Discussing matters usually takes 5-10 minutes with the Registrar’s Office and only 12-12 students mentioned half an hour or a longer period, respectively. Several forums were listed to be marked as a place to turn if a problem has arisen. The most typical form was to contact teachers and lecturers from the department (83 and 83 students), the next most popular form is Facebook and contact the students from the higher classes/years. The last two options were given together so these options can be interrelated as the senior students may provide information on the social facility website (simple and a fast way of contacting them). The possible reason for popularity is that in this case students can receive a personal answer to their tailor-made problems in this way. The official websites of the institutions are also visited in great numbers to gather information. (They also contain official documents- that is why they are popular). The fewest students contact the Modulo (on-line application) system for information.

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Figure 2. RESOURCES OF ORIENTATION

Teachers and lecturers

Facebook

Students from the higher classes

Modulo system

Source: Own research 2012 N: 145 persons

The satisfaction of the students was examined from several points. They could express the level of their satisfaction on a 4-point scale regarding either the process of administration or the competencies and personal characteristics of the front-line staff. In general 24% of the students are dissatisfied. The level of dissatisfaction is striking in the areas of problem solving, friendliness and accuracy. Twenty per cent of the students consider administration satisfactory while 18% of them think it is acceptable and only 12% are satisfied. This is the lowest value. They were most dissatisfied with the readiness to help and being up-to-date. Most of them regarded opening hours acceptable. The majority thought the rapidity of administration changeable. Most of them also considered phone calls and e-administration changeable or of a lower standard. Positive and negative features in the work of the Registrar’s Office: Students said it was a positive feature that all programmes have a person in charge at the Registrar’s and they also appreciated the system of having a ticket with a number while queuing. These two factors were mentioned by others, too. Many of them also noted rapidity and being nice – most of them among the correspondent students. It is more typical that in general correspondent students depicted a more favourable picture of the Registrar’s Office. As a negative feature, unfriendly behaviour, being underinformed and being transferred to other departments were mentioned. Figure 3.

Scale of students’ satisfaction

Dissatisfied 24 %

Problem of solving

Problem of friendlyness

Satisfactory 20 %

Problem of accuracy

Problem of the readiness to help and being up-to-date

Acceptable 18%

O pening hours

Satisfied 12%

Changeable 26 %

Phone calls and eadm inistration

Source: Own research 2012 N: 145 persons

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Figure 4. F EATURES IN R EGISTRAR ’ S O FFICE

Positive features

Person in charge System of having a ticket with number

Negative features

Unfriendly behaviour

Being underinformed

Being transferred to other departments

Source: Own research 2012 N: 145 persons

Correspondent students More favourable picture

1. 2.

Rapidity Being nice

They lacked working in line with the departments and a lot complained about the bad communication between the Registrar’s and the departments. They would welcome transforming even the electronic surfaces and a lot of them would be happy to find all information on one single internet site as well as improving the Neptun (university-student interface) functions. Many of them mentioned that they would like to receive all messages /notifications in time (1 week). Moreover, filtering the messages by programmes/fields of study, years would be necessary. Many of the students also complained about the efficiency of the telephoning system while expecting a smoother running. A significant number of suggestions were made about more flexible and frequent opening hours and also the option of making an appointment via the Internet was mentioned. Some of them expressed radical opinions (secretly recorded administration, performance-based salary system). Figure 5.

Improving Neptun site

Revise efficiency of the telephoning

Receive all messages in time

B EST SOLUTIONS

Transforming electronic surfaces

Filtering the messages of study

Source: Own research 2012 N: 145 persons

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II. The results of Mystery Calling research Researchers (15) acted out all jaystudent types (6) during the research in 62 cases in total. Two colleges and two universities were contacted in different situations. In most cases the Office of the Registrar, Marketing Department, Department of Foreign Languages and Methodology were called. The situations were the following: calling off an application to an exam, asking for information, the sum of the tuition fee to be paid during internship, and also contacts were made to ask about acknowledging credits, student grants, internship, optional subjects, dropping a subject, exam results etc. The descriptive statistics of the answers is the following: How many calls were unsuccessful? In 35% of the cases several calls were made as no one answered the phone call. A positive result is that in three-quarters of the cases the first call was successful to establish contact. How many times did it ring? 80% 20%

3 – 5 rings 15 – 20 rings

Did the front-line staff introduce themselves? Figure 6.

Source: Own research 2012 N: 62 callings

Did they name the institution? Figure 7.

Source: Own research 2012 N: 62 callings

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Did they identify the student (in the case of a personal problem)? Figure 8.

Source: Own research 2012 N: 62 callings

In what percentage was the problem solved? Figure 9.

Source: Own research 2012 N: 62 callings

Were they transferred to somebody else said to be more competent? Figure 10.

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How many minutes did it take for the person observed to perform a non-standard form of behaviour? Figure 11.

Source: Own research 2012 N: 62 callings

How long was it conflict-free? Figure 12.

Source: Own research 2012 N: 62 callings

How many conversations did it take to solve the problem? Figure 13.

Source: Own research 2012 N: 62 callings

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Structured list of behaviour forms to examine front-line staff The behaviour of the administrative staff targeted was evaluated as follows (Q: Please evaluate the behaviour of the front-line staff following the conversation on a four-point scale. 1 means dissatisfaction while 4 expresses satisfaction.): Style of communication:

average

Std. dev

•

friendly: creates an intimate relationship, congruent

2.79

1.14

•

courteous: deals with the student with respect following the social standards

3.07

0.95

•

clarity: clear what they say, well articulated

3.44

0.67

•

ready to help: takes care, deals with the student as a peer, does not expect them to be 3.05 well informed in academic matters

1.09

•

ironic: (evaluation: 1.formal 4. ironic)

1.45

0.81

•

loyalty to institution: (evaluation: 1 not loyal 4 loyal)

3.41

0.85

Sensitivity to problem •

listens to the problem: the student can talk about the entire problem in details

3.43

0.76

•

asks for information: asks questions, asks for clarification

2.36

1.12

•

understands the problem: the problem is entirely or partly repeated, checks if the partner is aware of it and asks for feedback

2.45

1.11

•

understands the situation: states the background and factors of arising problems

2.55

1.14

Problem solving ability •

well-informed: knows rules, possibilities, similar cases

2.82

1.14

•

suggests constructive, common brainstorming: makes and asks for suggestions

2.78

1.51

•

explores interests: focuses on common interests, objectives by separating the person from the problem

2.76

1.10

•

shows alternatives: considers the needs and the opportunities of the student

2.84

1.03

Decision making ability •

argues for the best alternative: helps in selecting the most favourable solution

2.82

1.07

•

suggests an action plan: the selected solution is broken down into steps

2.72

1.11

•

bears responsibility: shows personal attachment, suggests further contact in problem solving

1.80

0.94

•

directs communication: gets back to the point

2.97

0.91

Frustration tolerance •

reacts with cold blood: patient, balanced, calm and does not allow to be provoked emotionally

3.11

1.02

•

empathy: understands the extreme feelings of the students and calms them down, does not them off or despise them

2.87

1.12

•

realises and analyses the conflict: deals with the student as a peer

2.98

0.96

•

firm: not aggressive and not subordinate

3.05

0.90

Which conflict managing group of the model below does the person observed belong to (Thomas Killman model)? Figure 14.

Source: Own research 2012 N: 62 callings

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We can stress that clarity and loyalty to the institution were given the highest number of points when communication style was evaluated. When it comes to examining sensitivity to the problem the best result was given to listening to the problem and the worst to examining the problem by means of further questions. In the case of problem solving nearly similar values were assigned and answers are spread to the greatest extent here. Regarding decision making ability on the list of behaviour forms the weakest link is bearing responsibility from the administrators’ part as respondents stated. Relatively similar values were assigned to the questions on frustration tolerance, as well. What else did you expect from the employee of the institution? Who were not satisfied with the services provided would have expected the following: ’showing interest and a positive attitude’, ’not telling off rather giving information’, ’if he does not know the answer offer to find it out and inform later’, ’a normal tone’, ’readiness to help’, ’suggestions about what to do’, ’greater preparedness’.

6. SUMMARY On the basis of the results of mystery calling the areas that must be improved by all means can be identified. In the exploratory research students complained that the administration is difficult to be contacted, which did not show up markedly in the present research results. Another problem is that when answering the phone the employees of the administrative department do not name either the institution or themselves and only a few of them identify the student. (However, to tell the truth highly confidential situations affecting privacy were not simulated during the research). In contrast with the qualitative research results and those of the preliminary questionnaires the present results did not justify the problem of the students, namely, that the departments and the Office of the Registrar plays ’table tennis’ with the students by referring them to the authority of others. Another positive result is that there were very few conflicts although this can be due to simulating the experiment. The motivation of the student was not the solution of the problem, rather, the proper way of conducting the research, which can be seen as a moderating factor by all means.

7. PRACTICAL APPLICABILITY The objective is to prepare front-line staff for managing all different types of jaycustomers, stabilise the quality and standard of the work of the front-line staff by continuously monitoring them as well as improve their performance at all time. According to the opinions, criticism and expectations the task of the service provider is to make the front-line processes more perfect. Nevertheless, the objective of our research was not the evaluation of the single front-line staff, rather the exploration of the possible forms of behaviour in non-standard situations. The results can be applied in practice e.g. in the quality management of higher education on the one hand. On the other hand, they can serve as a basis for further research on front-line based services. Moreover, as a by-product of the research new points of view in the human resource management of services when selecting and controlling frontline staff are also provided. This research will be practically applicable because it can help to develop proactive provider behaviour. If conflicts are defined in an inappropriate manner, it may cause further conflicts. Exploring conflicts will make it possible to focus quality development procedure there where defects occur.

8. LIMITATIONS OF THE RESEARCH To carry out the research such students were involved who are motivated and interested in being acquainted with the research process. Although the selected jaystudent type met their attitudes in all cases, it does not mean that they were able to act out the selected experimental problem/situation realistically. Their communication is rather motivated by role-plays than problem solving. However, chances are that different data would have been gathered had students interested in solving their own problems been included.

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LITERATURE: 1.

Fisk, R.- Grove S.- Harris, L.C.- Keeffe, D.A.- Daunt, K.L.- Russel-Bennett, R.- Wirtz, J.(2010): Customers behaving badly: a state of the art review, research agenda and implications for practitioners Journal of Marketing, Vol. 24. Iss: 6 pp. 417-429. 2. Hewstone, M., Stroebe, W., Codol, J.-P. és Stephenson, G.M. (szerk.) (1999), Szociálpszichológia. (Social-psychology). Közgazdasági és Jogi Könyvkiadó, Budapest, 95. p. 3. Jäckel, K. (2010): Frontvonal audit a felsőoktatásban- A felsőoktatás konfliktushelyzeteinek feltárása (Frontline audit in higher education – Exploring conflict situations in higher education), PhD. Értekezés, BGF KKK. 4. Lovelock, Ch. - Wright, L. (2007): Services Marketing, People, Technology, Strategy,(sixth edition) Pearson Prentice Hall, Upper Saddle River, New Jersey 5. Polónyi, I. (2002): Az oktatás gazdaságtana (The Economy of Education), Osiris Kiadó, Budapest 6. Rekettye, G. - Szűcs, K. (2002): A szolgáltatásminőség mérése – hallgatói elégedettség a Pécsi Tudományegyetemen (Measuring service quality – student satisfaction at the University of Pécs), in: Hetesi, E. (2002): A közszolgáltatások marketingje és menedzsmentje, SZTE GTK Közleményei 2002. JATEPress, Szeged, 152-167. 7. Veres, Z. (2009): A szolgáltatásmarketing alapkönyve (Foundations of Services Marketing), Akadémiai Kiadó, Budapest 8. Wirtz, J. (2008): Future Research Opportunities Related to Jaycustomer Behavior, AMA SERVSIG International Research Conference 2008, Liverpool, UK. 9. Thomas, K. W – Kilmann, R. H. (1974): Thomas-Kilmann conflict mode instrument. New York: Xicom. 10. Zhenfeng Ma & Laurette Dubé: Process and Outcome Interdependency in Frontline Service Encounters, Journal of Marketing, Vol. 75 (May 2011), 83–98. 11. Kiesler, Donald J. (1983), “The 1982 Interpersonal Circle: A Taxonomy for Complementarity in Human Transactions,” Psychological Review, 90 (July), 185–214.

DETAILS ABOUT AUTHOR: JÄCKEL, KATALIN ASSISTANT PROFESSOR BUDAPEST BUSINESS SCHOOL, FACULTY OF INTERNATIONAL MANAGEMENT AND BUSINESS 22-24 DIÓSY LAJOS STREET, BUDAPEST, HUNGARY jaeckel.katalin@kkfk.bgf.hu VERES, ZOLTÁN PROFESSOR BUDAPEST BUSINESS SCHOOL, FACULTY OF INTERNATIONAL MANAGEMENT AND BUSINESS 22-24 DIÓSY LAJOS STREET, BUDAPEST, HUNGARY veres.zoltan@kkfk.bgf.hu

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THE KEY SPECIFICITIES OF BRANDING IN AREA SERVICING RATIMIR JOVIĆEVIĆ

ABSTRACT By this subject matter we would like to highlight the problem of branding in area of servicing. Modern approach to this problem is based on the fact that the essence of the brand is intangible. That is brand’s main characteristic – intangibility. When it comes to the brand, value for the customer is grounded on a number of subjective and intangible benefits, both for services and products. In the context of services brand has been increasingly used as a promise given to consumers by company. In this sense brand is defined as “a promise of set of attributes bought by customer – attributes that make the brand real or illusionary, rational or emotional, visible or invisible”. Gap in promises for service brands is minimized by eliminating gaps in GAP quality model. In this sense we want to emphasize the key specificities of service branding: • Major role of internal dimensions of service branding; • Need for overcoming the intangibility of service and for its visualization, materialization and personalization; • Focus on creating long term relationships with consumers is far greater than in the classical approach to branding; • Greater role and importance that a corporate brand has. Thus, effective branding strategy for services must have in mind not the consumers at first place, but primarily front-line service workers. Delivering the value to the consumer takes place right in the interaction between the service company representative and consumers that occurs co-producers. In this paper, these problems will be presented in detail, especially in terms of practical valuation. KEYWORDS: brand, defining brand, brand of service, internal dimension of service branding.

1. INTRODUCTION Service industry is developing quickly and at the same time is influencing development of the other industrial departments as well as influencing employment, gross domestic product, improving quality of life and increasing overall standard of society. They are characterized by certain specificity and represent important part of the national economy, and in recent times they represent multinational exchanges. Development of some service industry departments are different in many developed countries and developing countries, and their perspectives of the further development will be influenced by strong changes which will be expected on the national and global level. Modern development of society, in overall, is characterized by “revolution of area servicing”, particularly visible through the primary development of service industry and expansion of area servicing, in accordance with the needs of consumers and corporations. There are different factors which are causing expansion of services and service industry: period of general prosperity in the world for the long term which contributed to the growth of living standard of society through employment and earnings ,increased amount of funds designated to services, changes in peoples lifestyles, changes in families, changes between genders, changes in population structure, strong technological changes and similar, trends on the business markets especially helps in developing services. Fascinating improvement in the area of accounting, informational technologies and communications helps and encourages demand for the services and encourages changes in the service department. Number of other factors related to environmental awareness contribute to the development of services, as well as, development of the new urban centers and regions, international mobility and traveling, globalization of businesses, more complicated life of the people and maintenance of the businesses, media, creation of global culture and global consumers, many different kinds of international law on the local level and on the international level. As a result of the above we have faced appearance of new services and at the same time improvement of existing services. Services are characterized by great heterogeneity which is difficult to unite, such as , traveling, transport of goods and travelers, postal services, phone and satellite services, construction, financial services, it services, operational leasing, technological and professional services, cultural services, and government services. Thus, services are determined by the development of the primary and secondary sectors as they provide the necessary inputs for production, to work and adequate human resources, as well as the services that generally affect the business.

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There is a direct correlation between the development of an economy and the tertiary sector participation in relation to the primary sector. (see: Dennie K.,(2008),Nation Branding, Butterworth-Heinemann, Oxford ). Therefore, for instance, at the beginning of the 21 century, service industry participated in undeveloped countries below 50 % of added value; in middle developed countries between 50% and 60 % and in developed countries above 70 %. World trading organization helped and significantly contributed to the international liberalization within department of services. It is more than obvious that in recent times we face lager demand for the international exchange of services, in the form of: cross-border cooperation, consumption of services while abroad (tourism and education), presence of international companies through foreign direct investments. , financial department and insurance department, transfer of employers from one to the other territory (doctors, auditors) etc. Cross bordering means the movement of one function and supporting jobs to another part of the world. Globalization is not only the story about jobs which are moving to the other country, but it is about fundamental reorganization of work in which the various tasks are performed by different persons at the different locations. It is not only about choosing the cheapest location, but about gaining access to the best combination of resources and local markets. (see: 8. pg. 4-5.) With regard to that , that in EU countries, almost 70% of GDP is created in tertiary sector, the dynamic development of these services in the Western Balkans during the last decades is considered as expected and desirable. However, there are differences between each country, and sometimes the growth was not stimulated by those sectors of services which have export potential, thus this growth should be marked as non sufficient and simple. Therefore, some of the current data shows that the biggest growth was noticed in trading industry , transport sector and financial intermediation Parallel with the growth of these services , there is a strong inflow of the foreign investments, so in the telecommunication industry bigger part is owned by foreign investors, which is expectable in the trading sector. When talking about finance department, it is dominant presence of foreign banks. There was a strong impact on the service industry which has growth tendency and it is measured as 62% of overall employment. However, as the crises are felt, the stated date is still not stabilized. Also, a strong impact on the growth of service industries of the national economy and quality of life is also defined, but it must be noted that excess in employment in state bodies may affect the slowing of employment growth in these areas. We should pay special attention on service industry , because in domestic department of services highplaces are taken by unproductive services as state bodies, health bodies, education and social institution. On the other hand, with the more work and less technology, services are usually more expressed. Therefore, we can conclude that apart from classical services, where there is still a lot of space for improvement, we should develop many different business, professional, technological and it services. From the above it can be concluded that the structural adjustment of some types / kinds of activities in the service sector is the potential for their dynamic growth in the future, because the crisis is not typical but untipical phenomenon.

2. BRANDING IN AREA OF SERVICES – SPECIFICITIES There are certain specificities in branding services, even though the essence of branding services and creating value is the same as for the physical products, conditioned by the specificity of service itself. As already known, the key specificities of services about which there is a consensus among experts and which present the key factor for business strategy and strategy of branding in area of services are: intangibility and heterogeneity (variability) of the service, simultaneity (inseparability) of production and consumption of services and perish ability (impermanence) services. Although it is partially contained in the previously given specificities, we should single out one more specificity - inability of owning the service. All of the previously mentioned characteristics influence various aspects of managing the offer of service oriented company. Area of services is the most heterogeneous work, since there are many services with additional specificities that need to be taken care of in service marketing and especially in branding service. Due to the specificities of services, which distinct those from physically tangible products, some authors suggest to introduce additional specificities for financial services for positioning them with regard to physical products and other services. Those additional specificities are: responsibility towards clients / creditors, duration of service consumption (for insurance) and service contingency. We would like to underline one more additional specificity in brand consideration in area of services. As most of the scientists say that the essence of the brand is actually the consumers perception and the image created in their mind, we come to the conclusion that the essence of the brand is actually intangible, just as services and the

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value for the customer rests on a series of intangible and subjective benefits, independently of the fact whether it is a product or service. For that reason the listed differences have influenced that brand, in context of services, is increasingly seen as a company’s promise given to consumer and because of that it could be defined as “a promise of series of attributes bought by someone; attributes which make the brand real or illusionary, rational or emotional, visible or invisible”. Thereby the gap in promises for service brands minimizes by removing the already known gaps in model of “Service Quality Gap Model”. (see: 5. page 281) We do not intend to paraphrase definitions of trademark and brand, especially because a numerous literature about that has been issued lately. We would like to point out some essential differences between the trademark and brand. For a long time term trade name which presents the name, logo, symbol and form, or combination of these, was used, with the intention to identify products or services of single seller or a group of sellers and to differentiate them from competitors products and services. The purpose is considered to be completely missed if a company treats trademark only as a name. For that reason the original term brand is used more often recently in order to show all dimensions of development of relation between consumer and certain product or service trademark. Brand brings with itself the deep set of opinions and associations and it needs to give some additional value to the consumer. The extension of definition trademark is more operational, with addition of certain elements, which practically keep a trademark successful on the market. Brand presents the way how consumer sees, observes and understands the certain trademark in all its dimensions. It is of crucial importance what kind of image the brand gives, or how it is positioned in consumer’s mind. Besides the complex concept of the brand, which comes from its multidimensionality, we need to take care of the different forms of brand appearance. Generally speaking, brand can come in the form of product brand, service brand and corporative brand. Private trademarks become increasingly important and known, with unavoidable observation of the country of origin, whereas the country itself or the region could be branded (everything can be branded). The concept of brand is hard to differentiate for products and services. However, there are differences with strategies focused on established forms, which are conditioned by specificities of services and the most important are: • Key role of internal dimension of service brand; • Need for transcendence of service intangibility and its visualization, materialization and personalization; • Focus on creation of long-term relations with consumers is much higher than in classical approach at physically tangible goods; • Bigger role and significance which corporate brand provides;

3. INTERNAL DIMENSIONS OF SERVICE BRANDING When it comes to services that have a higher level of contact, in other words, services that are more affected by human factors, including a greater share of the consumer dimension, internal branding becomes very important for the brand. Unlike physical products, it almost does not matter to the consumer, where, how and by whom it’s made. However, branding the service companies and service personnel are equally important for services with a greater degree of physical contact. It’s shown in the following table: Table 1. The service companies and service personnel Brand types

Work intensive (pictures, handmade things)

Capital Intensive ( goods for big markets)

Work intensive as service (restaurants, airlines companies....)

Capital intensive as service (telecommunications internet...)

Focus of brand The basic source of use

product product and people

product product

company or person product , service, people, equipment

company equipment, sometimes people

Level of quality

variable

unchangeable

variable

mostly unchangeable

Experience with brand

few people

lost of people

few people

The place of produce

rare

never

always

sometimes

Source: (no.5. ,page.282 ) Berry l.,Lampo S., Branding labor intensive services”, Business Strategy Review Vol.15

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Since the employees themselves make a part of a certain brand of services, it is important to promote the brand to the employees and to be preferred and accepted by them. In the services sector, the focus is increasingly shifting to the corporate brand and the internal dimension of the brand, in other words - to the employees, since they exert direct communication with the client in the first service line - although the classical theory of branding developed in the manufacturing sector and they include developing and communicating the functional and emotional benefits that the brand is giving to its consumer. The appreciated value of a product, its delivering value, is engaged, precisely, in the interaction between the representative of utility company and consumers in the first service line, where the consumer has the role of coproducer. A clear brand value must be presented to the employees, by a good internal communication system so that the promises that were made through the service brand can be fulfilled. Some ways of building internal brand include: training programs, seminars, implemented corporate culture and values of the company, etc. In what consists the success of wellknown companies in the service sector, as in catering companies, the world’s airlines and others in the service sector? The role of the staff and management of the brand in such a service organization is presented in the following picture:

Source :( no.5, page 371. )King C., Grace D.,” Exploring managers perspectives of the impact of brand management strategies on employee roles within a service firm” Journal of serves Marketing, Volume 20, Number 6, 2006., str.377.

4. THE NEED TO OVERCOME THE INTANGIBILITY OF SERVICES Based on the fact that the service is usually invisible, branding has a role to make something that is difficult to conceive, pointless and undefined, presented in a way that gives it sense, and also shape and form-identity. The most representative part of the service is the identity of a brand. The identity of a brand represents a set of elements for which the utility brand becomes recognizable. Basic elements out of which an identity consists, that identify and differentiate the brand are: name, URI, logos, symbols, characters / mascots, slogans, jingles, packaging / service atmosphere, labeling, etc.. The basic elements of a brand that need to be dismembered, improved and connected in the right way, so that they can create a synergistic effect are images, color, shape, style, language, behavior, service, tradition, ritual and navigation. (See Lindstrom, Building powerful brands through the senses of touch, taste, smell, hearing and sight, Mass Media, International, Belgrade, 2007, page 24). It should be noted that many companies are neglecting some of the senses, and given the characteristics of services, that problem is strongly emphasized. Based on the above conclusions regarding the role of employees, serving process and visual elements of service brands, it might be interesting to broach a view of an author who by adapts the basic model of the brand identity by looking at the brand in the context of services, through the following range of features: the brand as a service product (meaning 5P out of 7P of the service marketing mix, product utility and accompanying elements such as pricing, distribution channels, service and ambience promotions), brand as an organization (the starting point is the organizational culture and the people as a service marketing mix), the brand as a process (set aside a special dimension service process precisely because of the role of consumers in the process of service delivery), the brand as a person (personification of the service brand), and as a symbol of the brand (as a marker of a service company / services). (For more details see: Moorthi, YLR, An approach to branding services Journal of Services Marketing, 2002, Vol. 16, No. 3)

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5. DEVELOPING LONG-TERM RELATIONSHIPS WITH CONSUMERS • • • • •

Successful relationship between brands and consumers are primarily being built as follows: The brand is unique; in other words, differs from the competition and offers a service innovation rather than imitation Service offering pack are created in a way to provide value to the consumer, because the brand differentiation from competitors is not in itself sufficient unless it carries a value for the consumer; Creating emotional ties, where you are going to overcome the logical and rational component of the brand, and to create a sense of trust, liking and closeness; When you are building long-term relationships between brands and consumers of the service it is essential that there is the same kind of relationship between the brand and its employees - in other words, there’s the need for a developed internal marketing. (Read: Gronoos, Christian, Menagement Service and Marketing, 3rd edition, John Wiley and Sons, Ltd, England, 2007, pages 338-339.)

6. THE IMPORTANCE OF CORPORATE BRANDING When it comes to brands, a very prominent feature in the service sector is far greater role played by corporate branding in relation to production companies. When it comes to consumers, a strong corporate brand and a stabile corporate brand assures and guarantees that the service process and quality of services will be at the appropriate level. Lack of manifestation when services are in question, generally strengthens the role of a brand in a service sector. That it why it is so very common in the sector of financial services. It doesn’t mean that, in these kinds of services as well, there do not occur certain branded service packages, as additional program to basic brand. In order to increase the adjustability to the target segment and to achieve easier positioning in this segment, there are advantages of an adequate expansion of service portfolio of brands. Then, for different service packages there are set different target segments that are especially emphasized with creative solutions and messages. What is typical for all portfolios of brands is that a corporate brand is mutual for all creative solutions of the company. Unlike consumable goods, where there is a focus on creating brand merchandise and brand management organizational structure occupy a prominent place, when it comes to sevices, even if it’s not essential, corporative brand is dominant and bold. A whole number of factors have an impact on the process of creating and positioning a corporate brand, where, as a rule, the number of notably internal factors is much bigger than in single branding. That’s why, in the above sense, the corporate image of a company is so very much important. Corporate image and the service reliability of great companies guarantee a better image of their brands and the overall portfolio. (See beyond: Chernatony, L., Segal-Horn, S., “Building Services on Characteristics to Develop Successful Brand Sevices” Journal of Marketing Management, n.17, year 2001). Every year, in cooperation with Business Week, which has developed a special methodology for evaluating the brand, a list of most valuable brands on the market is being published. Brand valuation, according to this methodology, is based on determining profit cash-flow of the brand and using the discount factor to reduce the given value down to the present, present net worth. How much a strong brand is worth? Top ten world’s leading brands, (Source: Best Global Brands 2008, Interbrand publication) on the list are worth over $420 billions and they are companies that provide: computer services, hardware and software, telecommunication services, restaurants and entertainment, internet. In recent years, there’s a notable growth in the number of service companies among the largest brands. Among ten shown companies, four are dominantly service brands, and if the list gets expanded to 50 companies, it will sow that services make a 1/3 of it, and their value is often estimated at several billion dollars. The biggest losers are financial service companies - out of 13 financial service brands among the top 100, 11 reported a decrease on the list for 2008 as a result of the financial crisis. This was taken as an example and for each year it is custom to make such valuation of brands. Naturally, the list would be refreshed if our goal or topic was the brand valuation - that is why we felt that this is enough to illustrate.

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7. CONCLUSION It is believed that the greatest progress in the last few decades in the branding was made in the services sector, despite the fact that for years there were established service brands: McDonanld’s, Hilton, British Airways, American Express etc. Service activity is primarily labor-intensive, with high levels of subjective factors engaged in the manufacture and provision of services. Therefore, variations in manufacturing the service are very often present, and they largely depend on the staff in the front line of providing a service. Professional branding provides contribution to the conceptual formalization and standardization of services. Identity conceptualization of a brand provides concretization of the abstract service offer. In this way, for the consumer it’s easier to detect the specialty of services ptrovided by a certain company, it’s more obvious distinguishing it from other competing services. Finally, it should be noted that when it comes to the creation of specific branding strategy in the service sector, it is desirable to stick to some general principles, as: to predominantly maximize the quality of services through dimensions of dominant influence on the perception of the customers, to increase brand recognition and its individualization, should be used a large number of elements of an emerging brand that, furthermore, signalize the brand in a tangible and visible manner; communicating and creating strong association with the organization in terms of personnel who represent the corporation related to the services provided by the same (reputation, trust, expertise and professionalism) and using a variety of means of promotion and communication with the targeted market segment (to pay attention to the information that is given to the consumer and not to the classic advertising) all represent the creation of integrated campaigns of communication. Subsequently, establishing an appropriate portfolio of brands, aiming a strong corporate brand, with the combination of specific brands of service packs, and in that way to attract customers from different market segments, and to achieve good market position and the position in the minds of consumers.

LITERATURE: 1.

Hading T., Knudtzen Ch., Bjerre M.(2009)Brand management- research, theory and practice, Routledge, New York

Keller, K.L., Aperia T., Georgson M.(2008)strategic Brand Management-A European perspective, Pearson Education Limited, Harlow, England

Kenedi R.,Sharma A,(2010) Deploying of services, using optimal border policy, MATE, Zagreb

Kotler Ph.,Keller K.L.(2009),Marketing Management,13th edition, Pearson International Edition, New Jersey

Rakita B.,Mitrović I.(2007), Brand Management, Beograd

Veljkovic S.(2010), Brand management, Faculty of economics, Beograd

Veljković S.(2009), Marketing of services, Faculty of economics, Beograd

Vranašević T.(2007), Brand Management, Accent, Zagreb

DETAILS ABOUT AUTHOR: RATIMIR JOVIĆEVIĆ PROFESSOR MONTENEGRO BUSINESS SCHOOL, UNIVERSITY MEDITERAN, PODGORICA, MONTENEGRO ratkojovicevic@t-com.me

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ALBANIAN BRANDS- A TOOL TO INCREASE COMPETIVENESS OF LOCAL PRODUCTS - CASE STUDY OF SASA PROJECT IRIS KAZAZI BLEDI HOXHA ILIR ELMAZI

ABSTRACT “I am happy to see people interested in Albanian products. I am” - This is what we heard once from a lady who was trying to select carefully in the green market Albanian products. Working in the consultancy sector for many development organizations and projects inspired us to conduct a rapid market assessment in the domestic market aligned with agribusiness and food industry. Main findings were very interesting and capitalized the positive Albanian consumers’ behavior toward local products. Following this logic, we implemented PMCA methodology (Participatory Market Chain Approach) to further identify and analyze this trend and suggest potential market oriented solutions regarding Albanian products. This paper aims to explain how local brands can help Albanian products positioning and competitiveness in the local market compared with imported products. The methodology used is Participatory Market Chain Approach (PMCA), which is a participatory R&D method for promoting pro-poor market chain innovation together with market chain actors and supporting R&D organizations. This methodology was first developed and applied in Peru and Bolivia by Papa Andina Initiative together with its local partners as a means to contribute to sustainable poverty reduction in rural potato producing areas. Based on a structured and facilitated participatory process, PMCA gradually generates interest, trust and collaboration among market chain actors and supporting R&D organizations, as a mean to stimulate pro poor innovations. With its three 3-phase structure, PMCA has proven to be flexible and applicable in different contexts, having great impact potential in settings where crops grown by poor households are targeted and boosted through different type of innovations, including the development of new products, new technologies, and new institutions. In order to ensure optimal impact with tangible out-comes—adding value to both consumers and actors involved in the PMCA process—excellent process facilitation is required from R&D staff trained in the method and having good social skills, research and marketing knowledge. At the end of this research work we found that development of Albanian brands may help producers to differentiate their local products, create competitive advantage in the market, arising from consumers demand toward these brands. As a final result of this research work a new local brand named “Albanian guarantee” was developed. This brand promotes Albanian products from different regions of the country through respective labels. Albanian Guarantee is a labeling system with clear rules for production and marketing, ensuring consumers to access high quality products from different regions of Albania. Albanian Guarantee helps consumers to access products that generate important income in rural areas of the country, thus contributing importantly to rural development and the safeguarding of typical values. Although, this research has been applied in Food and Agribusiness industry, we believe that these finding can be very useful for other industries that are base operations in local production. KEYWORDS: PMCA, SASA, local brands, competitiveness, research;

1. INTRODUCTION Albania is located in the southeastern Europe. The country’s total land area is 28,748 sq km. Its terrain primarily consists of mountains and hills with some small plains along the coast. Of the total land area, 20 percent is utilized for cultivated crops, while another four percent supports permanent crops such as fruit- and nut-bearing trees. As in many countries, the incidence of poverty is highest in rural areas, where an estimated 57 per cent of Albania’s people live and where most of them depend on agriculture for their livelihood. Poverty is 66 per cent higher in rural areas than in Tirana, the capital, and it is 50 per cent higher in rural areas than in other urban centers. Poverty in Albania weighs particularly on women and young people. Almost half of the poor people in Albania are under 21 years of age. Larger families tend to be poorer. Fifty per cent of families with seven or more members live below the poverty line. Rural, northern and mountainous areas are the poorest areas in the country. The incidence of poverty is highest in the north-eastern districts of Kukes and Dibra, where almost half of the population is poor and 80 per cent of families’ income comes from social protection schemes, economic assistance and disability payments.

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Despite recent years of economic growth, poverty persists in Albania as a result of continuing low employment and low-income levels, particularly in rural mountain areas, and it reflects the unequal pattern of economic growth. Many small-scale farmers lack access to market outlets for their produce, particularly in mountain areas. Without outlets, farmers cannot increase their incomes and standards of living. Their problems are compounded by a scarcity of market information, lack of compliance with food hygiene and safety standards and inadequacies in packaging and labeling, which make their products uncompetitive. Many farmers, asserting reactive, post-communist individualism, are skeptical of the potential benefits of more formal business collaboration, such as member-run marketing and trading associations (co-operative scar). SASA (Sustainable Agriculture Support in Albania) is a development project financially supported by Swiss government and implemented by FiBL research institute in Switzerland through a local office in Albania. Main purpose of the project was to improve economic situation of rural population in the country. From 2009 to 2011 the focus of the project were organic and typical Albanian products in agriculture, with an orientation from market to production. At this period a new implementation methodology was introduced, named PMCA (Participatory Market Chain Approach), which completely changed project’s organizational setting and roles of previous project’s actors. It enabled developmental and actor driven approach to the intervention limited a role of partners and FiBL to the back-stopping one and replaced classical PMU with PMCA Unit. Lack of necessary infrastructure, small scale agribusiness sector, lack of marketing tools and policies have influenced on low prices received by local producers, non competitiveness, and limited export opportunities. One of the first issues that had to be considered was focusing on the products values transmitting tradition (Albanian consumers are very sensitive toward their tradition and history), typical elements, quality etc. Referring to the consumers’ preference, all these elements should be visualized using best marketing models and promoted to consumers. To achieve this, all rural actors had to work together according to one of the Market for poor (M4P) approach: PMCA methodology. As a result were developed two regional brands representing values of north and south Albania.

2. APPLIED METHODOLOGY The Participatory Market Chain Approach (PMCA) is a participatory R&D method for promoting pro-poor market chain innovation together with market chain actors and supporting R&D organizations. It was first developed and applied in Peru and Bolivia by the Papa Andina Initiative together with its local partners as a means to contribute to sustainable poverty reduction in rural potato producing areas. Later it was applied in Uganda to validate its concepts and consolidate the methodological guidelines developed so far in the Andes. Currently it is being applied in Indonesia and Columbia. Based on a structured and facilitated participatory process, PMCA gradually generates interest, trust and collaboration among market chain actors and supporting R&D organizations, as a mean to stimulate pro poor innovations (see figure 2.1 below). With its 3-phase structure, PMCA has proven to be flexible and applicable in different contexts, having great impact potential in settings where crops grown by poor households are targeted and boosted through different type of innovations, including the development of new products, new technologies, and new institutions. In order to ensure optimal impact with tangible outcomes—adding value to both consumers and actors involved in the PMCA process— excellent process facilitation is required from R&D staff trained in the method and having good social skills, research and marketing knowledge. Phase 1: Identification of actors and market opportunities Phase 2: Analysis of market opportunities Phase 3: Implementation of joint innovations During the first phase are identified main actors including traders, retailers, producers, development agencies and consumers. At the end of this phase a qualitative research study is presented to all actors. Research tools used include: face to face interviews, selection through impact filters, market chain sketch. The second phase consists on tools such as rapid market appraisal, quantitative market research and focus groups research. The third phase tools are related more with marketing concepts development and business plans.

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Figure 2.1. Participatory market chain approach methodology: Structure and objectives of the 3-phases of PMCA1

3. DEVELOPMENT OF REGIONAL BRANDS The objective of first phase was to capture the market chain and its actors, together with their interests and problems, and to identify the market opportunities based on the interest of the stakeholders involved and interviewed. In order to achieve this, a rapid assessment of the market chain was conducted. As a first step taken was the identification of the crops, areas and labeling schemes. Results of this assessment have shown that on the domestic market the biggest impact on the objective achievement could generate vegetables and typical (traditional) products, while opportunity in the export would be highest for medical herbs and mushrooms. In addition, the findings from this activity are used to define which actors of the value chain should be interviewed. As a second step taken was the identification of actors to be involved in the interviewing process. The objective of conducting the interviews was to identify the market chain actors with their activity, interests and problems as well as identifying opportunities for each market chain. Adopted sample (39 interviewees list) consisted mainly of traders and processors since they are the nearest actors to the market, followed by producers and institutions supporting the agriculture and marketing development field. Sampling and survey took a regional character and was more general, in order to represent the Albanian market in whole. Results of the survey and Phase 1 in generally are presented on the final event, on which attended 79 representatives of the most important market chain actors, major stakeholders and partners, as well as of the governmental institutions, other projects and different development agencies that support agriculture and food-processing sectors. The main purpose of the gathering was to indentify real market opportunities through joint brainstorming process and to create synergies among the actors for future thematic group work. It was result of the survey’s main findings, which clearly opted for typical regional products as an opportunity on the domestic market and organic products as a main export opportunity. Because of that, it was suggested to create three Thematic Groups (Typical Products from North, Typical Products from South and Organic Export) for further development of above mentioned opportunities. The objective of second phase was to discuss and analyze market opportunities in each Thematic Group (TG). There have been organized nine meetings for each Thematic Group, having a variable participation according to the specifics of each meeting. Out of total 49 actors involved in a work of North TG, an average number of meeting participants was 15, while of 60 members of South TG on the meetings participated average 19 actors. As there are different products identified with market potential for north and south, thematic groups have been divided into smaller working groups, common market opportunity oriented. Issues discussed in the meetings relate mainly to identification of needs, problems and bottlenecks for each value chain; elaboration of a common label for north and south region respectively; elaboration of marketing concepts for different products; sharing information on market researches, promotion activities such as fairs, open days, focus groups and cost analysis effectuated by PMCA facilitators on demand of TG actors themselves and as a Bernet T., Thiele G. and Zschocke T., 2006. Participatory Market Chain Approach (PMCA) – User Guide.International Potato Center (CIP) – Papa Andina, Lima, Peru

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consequence of common decisions taken in respective groups. As a result of these performed activities, many products with market potentials were selected coming down then to a products’ short list for each TG: • For North TG: home-made pasta (jufka), goat cheese from typical goat, forest fruit (hazelnuts, chestnuts), honey, fruit jams, mushrooms, teas, dried fruits & vegetables, olives. • For South TG: seasonal and winter vegetables, dairy products (cheese, butter, milk), olives and olive oil, fruits. • For both groups: the concept of a traditional restaurant, offering traditional cooked dishes. Through the work of the Exporters TG, circa 50 actors have been directly involved in PMCA process, but there are hundreds of farmers who have been affected from the process through other activities and from the increase of quantity of raw material demanded from the exporters. Organic Exports TG had in total 8 meetings, where were discussed different opportunities common for the whole TG like, preparations for trade fairs (such as Biofach), promotional activities website for the exporters, participation and presentation in other activities (such as Summer Day in Elbasan) etc. Since this TG was also divided on different working groups based on market opportunities, other meetings are held based on specific opportunities analyzes like chestnuts, olive oil, medicinal herbs, special herbs etc. On May 2010, PMCA held the second Final Event Final Event which was corresponding the second phase of PMCA methodology. During this event, participants have presented all analyzes and research conducted during this phase respectively for three thematic groups North, South and Organic Exports. This phase was aimed to the implementation of market opportunities and innovations identified and analyzed in the previous phases. The objective of Phase 3 of the Participatory Market Chain Approach was to implement the work plan formulated in PMCA Phase 2, developing the proposed innovations proposed by each thematic group. These innovations are presented and launched in the Big Final Event 3. Through joint work of the PMCA team and respective Working Groups, have been developed concept documents related with specific products, which aimed to stimulate implementation of market innovation and opportunities by minimizing identified weakness through value chain. Other important activities held during second phase have been related with promotion of organic and Albanian typical products (KASH fair, Biofach, Summer Day etc). During the third phase about 160 actors (60 actors in North TG, 58 in South TG and 40 in Exporters TG) have been involved in different improvements in production and marketing of more than 26 products. Main common issue for local thematic groups of North and South was drafting of Albanian Guarantee standard. Based on different surveys and researches conducted by the PMCA team during the phase 2 and 3, it was noticed high consumer preference toward Albanian typical products. During the Phase 2 are elaborated regional labels for North and South. On the phase 3, the efforts are concentrated more on the development of the technical standard Albanian Guarantee. In the working group have been involved national experts supported technically by the FiBL expertise. Part of the common work of all thematic groups was the establishment of the new Healthy Corner in Mercator. In addition, the PMCA team itself has implemented another market innovation. As a new promotion and sales instrument was introduced a van that functions as a mobile food shop in Tirana. The van was presented first during summer day event in Elbasan, on March 14, 2011 and resulted very attractive for consumers and media. Furthermore, promotional activities on events such as KASH fair in September 2010, Summer Day in Elbasan on March 2011, Biofach 2011, Fair in the USA Embassy during different times etc. have been of a great importance for PMCA actors regarding collection of relevant information, consumers preferences, market trends and demand etc. Findings generated through these activities are in the focus of PMCA and actors common work. Only in BioFach 2011, total business contacts were approximately 138, and 35 of them are considered from Albanian companies as serious potential importers and expected financial impact is calculated on 450.000 Euros, based on the expected business contracts and agreements during the fair. One of the most important events of the third phase was the Big Final Event held in April 15, 2011 in Tirana International Hotel. PMCA team invited about 98 persons, but it resulted that participation in event was much higher to 168 persons and institutions. The main objective of this event was to present the joint innovations resulting from the process to a wider public, with a important message that PMCA actors are real owners of all innovations. Development of the Albanian guarantee standard with both labels Alpe Albania and Prodhime Jugu provided many opportunities for more than 160 actors all over Albania. Currently the branded products are sold in supermarkets chain (Mercator, Carrefour, etc), healthy food shops, widely promoted by governmental and development institutions, etc. The table below provides examples how the usage of label identification and changes in packaging and labeling have affected the revenues in the period under review.

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Table 3.1. Effect of regional labeling on revenues Label identification

Region

Products applied Approved by the to the standards audit committee

Improvement in Packaging and Labeling

Changes in revenues

Prodhime Jugu

Saranda

Lamb Meat

Yes

Same

Vlora

Cheese

Yes

Increased

Lushnja

Fresh Fruits & Vegetables

Yes

Increased

Olive oil

Yes

Increased

Jufka (pasta homemade)

Yes

Increased

Honey

Yes

Dried fruits

Yes

Increased

Kukes

Patato

Same

Shkoder

Olive

Yes

Increased

Alpe Albania

Dibra Tropoja Puka

Increased

4. RESULTS Main economic and quantitative results of PMCA application in Albania are shown below: Objectives Hierarchy Indicators Indicator’s value 2011 Impact Improved economic situation of the population of rural and remote areas, where SASA is intervening, through environmental friendly production practices and market-oriented efforts that foster quality production of Albanian agricultural products for the domestic and export market.

The economic situation of at least 1000 persons is directly or indirectly improved at the end of the project, thanks to SASA activities.

3700 direct actors, without household members and indirectly involved actors (370% of planned)

Outcome Commercial, technological and institutional innovations, all contributing to take advantage of existing and new market opportunities in the segment of quality production, including organic and regional products with corresponding labels, are triggered.

At least 50 different market chain actors and staff from R&D organizations are part of a successful participatory process that generates at least 5 different tangible innovations.

168 market chain actors (336% of what was planned in the beginning) 19 tangible innovations introduced

Important results of PMCA methodology implementation are as well the following shifts: • from the production focused to the market focused interventions; • from the “sustainability of institutions” to the “sustainability of services” request; • from the donor/implementer driven to the actor driven (PMCA) approach; As an actor driven approach to the implementation, the PMCA enabled a realistic needs assessment, identification of priorities, trough establishment of an informal platform for consultation, peer learning and co-operation between market chain actors. Having in mind that market skills and knowledge had been based mainly on the “market end” of chain, gain in a majority of cases during the education/working abroad, a participative and actor driven implementation method such PMCA is, enabled utilizing and further development of an existing knowledge base and its spreading all along a market chain.

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Majority of actors involved in PMCA implementation pointed out that the main benefits are: • developed market models, which could be further replicated with or without donors’ support; • market and production innovations (labels, packaging, etc.); • established network/co-operation with other market chain actors; • appropriate form of a joint work (PMCA platform); • new knowledge and skills, gained through a joint work; • necessary market services; • business development and income generation;

5. CONCLUSIONS Implementation of PMCA methodology can be considered in other contexts by grouping connected industries such as agriculture, eco tourism, environment etc, including establishment of new geographically closed (limited) brands but with a wider participation of actors. Referring to the results presented in this paper, such regional brands supported further developments of different regions and areas in Albania and this initiative can be strengthened involving new areas to increase their competitiveness and benefit out of potential synergies. The SASA 2009-2011 was a case of the PMCA implementation in a field of agriculture and food-industry market, for the exit stage of an intervention with the aim to consolidate results of its previous stages, in a medium developed beneficiary country (candidate for EU), and it led to the significant impact made by a mid-sized action. Having in mind these findings, in a further practice of the PMCA application could be reasonable to test its efficiency and effectiveness for options listed in Table below. The case of the SASA 2009-2011 project gives a ground to establish the hypothesis that the well applied PMCA based method of a project implementation guaranties not just a result, but also an impact. All listed testing should be conducted in order to clear whether it guaranties “just” results or an impact too. Sectors

Project cycle stages

Contexts (countries/regions)

Ranges of projects

• • • • •

PAR education/VAT health local development development of different economy branches, etc.

• •

•

• •

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• • •

different development frameworks priorities economy structures institutional and legal frameworks, etc.

different duration different total amounts

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Annex 1. Albanian statistical data Total population

3,2 millions

Urban population

48%

Agricultural population

Including forestry and fisheries 1 324 000

Labor force

1.1 million (2010 est)

Labor force by occupation

Agriculture: 47,8% Industry: 23% Services: 29,2% (Septembar 2010 est.)

Unemployment rate

12,7% (2010 est.)

GDP – per capita

$3.716 (2010 est.)

GDP – real growth rate

3.1% (2010 est.)

GDP – composition by sector

Agriculture: 21,2% Industry: 19,5% Services: 59,3%

Current account balance

-$1.245 billion (2010 est.)

Export

$1.548 billion (2010 est.)

Exports – commodities

Textiles and footwear; asphalt, metals and metallic ores, crude oil; vegetables, fruits, tobacco

Value of agricultural exports

US$65 millions

Share of agricultural exports

4,8 % of total exports

Exports – partners

Italy 50,8%, Kosovo 6,2%, Turkey 5,9%, Greece 5,4%, China 5,5% (2010 est.)

Imports

$4,59% billion (2010 est.)

Imports – commodities

Machinery and equipment, foodstuffs, textiles, chemicals

Imports – partners

Italy 28%, Greece 13%, China 6,3%, Turkey 5,6%, Germany 5,6% (2010 est.)

Value of agricultural imports

US$846 millions

Share of agricultural imports

16,1% of total imports

Investment (gross fixed)

29,8% of GDP (2010 est.) (country comparison to the world: 19)

Agriculture – products

What, corn, potatoes, vegetables, fruits, sugar beets, grapes; meat, dairy products

Industries

Food processing, textiles and clothing; lumber, oil, cement, chemicals, mining, basic metals, hydropower

Industrial production growth rate

3% (2010 est.)

Land use

Land area: 2 740 000 ha Arable land: 610 000 ha Permanent crops: 87 000 ha Pastures: 484 000 ha Irrigated land: 365 000 ha Forest area: 776 000 ha

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Annex 2. Statements from PMCA actors „It (PMCA) influenced on the Albanian family model – people are gradually becoming open minded“ Mercator representative „Behavioral change is the biggest and most important impact“ AgroPuka Director “We are not making here something fashionable for just one season, but rather something which will last…” Peshkopia Diary owner „We do not need any longer a financial support, but good opportunities” Tomadhea Company owner „We have been blind, but they (PMCA) gave us a sight“ Zus olive growers’ representative „For 20 year after Hoxha nothing happened in this region, and now everything exploded” Zus olive growers’ representative “Region makes a profit of the production based on its own resources” Dushk olive growers’ representative

LITERATURE (alphabetical order): 1.

Bernet Thomas & Kazazi Iris S., (2012), Organic Agriculture in Albania –Sector Study 2011, Swiss Coordination Office in Albania, Research Institute FiBL & Ministry of Agriculture, Food and Consumers Protection in Albania, Tirana 2012.(Book)

Bernet Thomas, May 2011, Horizontal Evaluation of the application of the Participatory Market Chain Approach (PMCA) in Albania’s agricultural sector. (Workshop report)

3. 4.

Dylan Barclay, 2010, Study on quality products linked to geographical origin in the Balkans carried out for FAO. (Publication)

SASA Project, Project Implementation Unit, PMCA Phase 2, Phase 3, Phase V Reports, September 2009-May 2010, June 2010-December 2011, Project Document

Marija Sijan Mitrovic, Best Practice Case Study, the Participatory Market Chain Approach, Application on the Project “Sustainable Agriculture Support in Albania” 2009 to 2011. (report)

DETAILS ABOUT AUTHORS: IRIS KAZAZI PHD CANDIDATE TEAM LEADER, SASA PROJECT TIRANA, ALBANIA iriskazazi@msn.com

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BLEDI HOXHA PHD CANDIDATE UNIVERSITY OF TIRANA, FACULTY OF ECONOMY, DEPARTMENT OF MARKETING TIRANA, ALBANIA hoxhabledi@gmail.com

ILIR ELMAZI PHD CANDIDATE SIGMA TIRANA, ALBANIA

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ECONOMIC IMPERIALISM AND LACK OF WILLINGNESS FOR BETTER COOPERATION WITH OTHER SCIENTIFIC DISCIPLINES ALEKSANDAR KEŠELJEVIĆ

ABSTRACT The unity of introductory economics textbooks, academic programmes, articles in reputable professional academic journals and the increasing influence on the key economic policy decisions illustrate the high level of domination of the neoclassical school within economics. Author argues that neoclassical school has consolidated its monopoly position within economics mainly by dictating strict methodological rules. Institutional divisions in the scientific community and especially the desire for application of neoclassical methodological approaches led also to strong intrusions of economics into other traditionally non-economic fields (economic imperialism). Author believes that neoclassical economics, with its positivistic methodological apparatus and uncompromising forays into other fields, is effectively destroying the foundations for more fruitful cooperation with other scientific disciplines. With such uninvited advances into other scientific fields, economics clearly and unambiguously presents its lack of interest in more interdisciplinary approaches that would allow deeper understanding of today’s problems and the real economy. KEYWORDS: methodological normativism, economic imperialism, postmodern holism

1. INTRODUCTION Modern neoclassical theory centers the attention on the workings of the market, prices, and equilibria which compels heavy use of mathematics and objectification of knowledge. Neoclassical school has consolidated its monopoly position within economics mainly through strict methodological rules, unity of introductory economics textbooks and academic programmes. However, the crisis that erupted in 2007 has significantly intensified controversy about the status of the mainstream economics because of its failure to adequately grasp it. The global financial and economic crisis raises the question of how this should be reflected in the education system of today’s economists and their curriculum. The main purpose of the article is threefold. I argue that neoclassical school has consolidated its monopoly position within economics and in the broad framework of social sciences mainly by dictating strict methodological rules (1). I seek to point out that self-sufficiency and uncompromising forays into other fields are effectively destroying the foundations for more fruitful cooperation with other scientific disciplines (2). I pledge for more holism in economics curriculum for better understanding of the real economy and today’s problems (3). These aspects have not been simultaneously addressed in the literature so far. Several authors have discussed mainly the lack of pluralism within economic scientific community (Mearman 2007; King, 2004; Freeman, 2010; Soderbaum, 2008; Fernández and Pessali, 2001; Dow, 1990, 2008; Goodwin, 2008), and less the lack of holism regarding the cooperation of economics with other scientific disciplines. The pledge for a change in the education system has been addressed on one side by academians (Becker, 2004; Soderbaum, 2008; Barone, 1991; Goodwin, 2008; Mearman, 2007; Freeman, 2010; Hodgson, 2011) and on the other by students (Post-autistic movement). The article is structured as follows. In section two domination of the neoclassical school within economics is presented. The aim of section three is to stress the desire for universal application of neoclassical methodological approaches even in traditionally non-economic fields. The aim of section four is to point out the misunderstanding of the real world by the neoclassical paradigm. In section five, I pledge for more holism in economics. The last section concludes by summarizing the main findings.

2. NEOCLASSICAL METHODOLOGY AS AN IDEAL FOR THE MAJORITY OF CONTEMPORARY ECONOMISTS In the economic scientific community the domination of the neoclassical paradigm is often asserted (Johnson, 1983; Dow, 2008; Goodwin, 2008). The unity of introductory economics textbooks, academic programmes and articles in reputable professional academic journals illustrate the high level of domination of the neoclassical school within economics. It has also succeeded to elevate its reputation by the increasing influence of neoclassical economists on the key economic policy decisions.

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Paradigm is understood as a conceptual and methodological core that is common to all members of a particular scientific community. It is understood as a set of adopted scientific achievements which a scientist can employ to resolve the problems in a certain way without having to clarify the basic assumptions (Kuhn, 1998). However, economic theory boasts a rich and often controversial history of theoretical orientations. In addition to periods of strong consent and unity, there were also periods in the history of economic thought when the flow of ideas in economics was not as consistent. Before 1750 when economics had not yet been established, individual views were predominating. The second major period (1750–1870) was that of the classical political economy in which economics strongly favoured internal pluralism. A revolution came about in 1871 with the breakthrough of the marginalists (third period). The word revolution pertains to the use of mathematical methods that allowed logical analysis in economics. The fourth period in the direction of Marshal’s neoclassical microeconomics and Keynes’s macroeconomic ideas which were forged together in the middle of the 20th century by Paul Samuelson to form the neoclassical synthesis in which economics has reached a high level of methodological unity. The neoclassical school consolidated its monopoly position within economics mainly by dictating strict methodological rules (methodological normativism). Neoclassical methodological approach is a combination of positivism, deductive method, instrumentalism and operationalism: • Due to the need for objectification of knowledge, the economy found itself in the grip of scientific deductivism, deriving from economic axioms (e.g. rationality) logical conclusions by employing mathematical methodology to maintain consistency. • Instrumentalists stress that economic theory must be verified by the forecasts derived from it. Most instrumentalists characteristically employ econometric techniques, while mathematization provides objectivity and coherence. The main goal is to submit hypotheses and the central test of their validity is the comparison between a forecast and experience; based on this comparison, a theory is adopted or rejected. • Operationalism puts forward the notion that it is very difficult to foresee the changes in response variables caused by the effects of the explanatory variables; therefore, econometrics should provide the answer regarding the algebraic sign for each parameter otherwise it can be subject to constant rejection. The methodology employed by the mainstream starts with economic axioms (e.g. rationality) from which equilibrium as the solution of agent maximization problems is inferred through deductive logic. Neoclassical methodology is mostly based on deductive reasoning, bold testing of hypotheses, and checking the hypotheses against empirical facts. With its extensive use of mathematical formalism and statistical techniques the neoclassical school has adopted the methodology of natural sciences in order to prove its scientific character by providing objectivity and coherence (Blaug, 1992; Hassard, 1993; McCloskey, 1994). Neoclassical school has developed such a methodology in order to specify certain standards on which achievements in economics are evaluated. It seems that mathematics, a discipline that represents the apex of scientific purity, has become the “lingua franca” of modern economics. McCloskey (1983), Phelps (1990), and Dow (2008) maintain that most economists accept this methodology regardless of whether they may belong to the mainstream camp (neoclassical school) or whether they are their main opponents (heterodox school). As early as in the nineteen thirties, Lange (1936) paradoxically presented in the debate on socialist calculation, by employing the neoclassical methodological arsenal, proof that an economy based on central planning was at least as efficient as a capitalist one. Thus, it may be viewed as a paradox that neoclassical ideas, unacceptable to many in terms of contents, were perfectly acceptable from the aspect of methodology. Obviously the neoclassical methodology is an ideal for the majority of contemporary economists. This leads not only to domination of the neoclassical school within the economic scientific community but also fuels its drive to conquer other non-economic fields.

3. ECONOMIC IMPERIALISM OF THE NEOCLASSICAL PARADIGM Kuhn conceives of normal science (1998) as science within a paradigm with tripartite structure: significant facts, matches of fact with theory, and articulation of paradigm with its proliferation to other fields. If the purpose of normal science is not novelty, then the only sensible direction is research into the depth of the paradigm, and focus on other scientific fields, which is also characteristic of the neoclassical paradigm. Its economic imperialism is manifest in its drive to conquer other scientific fields, due to four reasons. Firstly, objectification of knowledge at the epistemic level allows a systematic and transparent organization of theoretical knowledge; thus, the rationality is extended to the very theory of science as well (Kovač, 2001). Economics is unusually (un)lucky to be able to combine rationality in economic theory and rationality in the general theory of science. Rational science is thus connected with the economic models of rational behaviour of economic agents, which allowed the economic theory to a great extent to break to other non-economic fields.

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Secondly, divisions and institutionalization of science within particular scientific communities created the circumstances for the venture of economics into other, traditionally non-economic fields. Neoclassical theory argues that rationality can be applied to all fields of human life where scarce resources and problems of choice appear (Becker, 1976). Application of rationality to new fields (such as study of family, fertility, human capital, criminal, history, politics, law) has led many to recognize in economics an universal science (Eichner, 1983; Fukuyama, 1995). Thirdly, neoclassical paradigm succeeded to develop its competitive advantage due to the influence of orthodoxy economists on the adoption of key decisions in the society. Expansion of economics to new fields runs parallel to increasing prominence of economic approaches in today’s society. Fourthly, neoclassical paradigm succeeded to develop its competitive advantage due to the unity of economic textbooks and academic programmes. Economic theory is one of the rare, if not the only social science that has reached the level of paradigm, characterized by a high level of internal coherence. For example, the sociological theory has never reached such consent regarding the fundamental issues to be understood as a single paradigm (McKinley, Mone, 1999). A high degree of plurality within sociology has led to conclusions that are often contrasting and mutually exclusive. Without prior internal consent in a particular scientific community, it is impossible to form uniform starting points for a dialogue with economic discipline; hence enabling more easily its articulation to other fields. All this enables greatly neoclassical economic theory to win the status of universality not only in economic theory, but also in the broad framework of social sciences. Economics assumed the leading role among social sciences and thus has even been dubbed the “queen” of social sciences. With its scientific language, application of rationality to new fields and uncompromising forays into other fields, neoclassical economics is effectively destroying the foundations for deeper cooperation with other scientific disciplines. With such “uninvited” advances into other scientific fields, economics clearly presents its lack of interest in more interdisciplinary approaches that would allow economics deeper understanding of today’s problems.

4. MISUNDERSTANDING OF THE REAL WORLD BY THE NEOCLASSICAL SCHOOL The neoclassical language is not just a surface phenomenon, since it had effect on how we understand reality (Dow, 2008; McCloskey, 1990). Blaug (1992) asserts that neoclassical economics has relatively weak forecasting power since it has failed most conspicuously when attempting to provide practical advice. Similarly, Goodwin (2008) and Freeman (2010) argue that neoclassical school has neglected the consistency between theory and reality. The crisis that erupted in 2007 has significantly intensified controversy about the status of mainstream economics (Blinder, 2010; Helbing, Balietti, 2010; Kowalski, Shachmurove, 2011; Colander et al., 2009; Hodgson, 2011). The antiglobalization movements demonstrate failures of the Washington consensus, in which elite in academic economics supported political-economic elite in providing theoretical basis for the spread of neoliberalism. Obviously, on the one hand the neoclassical school uncompromisingly forays with its methodological apparatus beyond economics; on the other hand the economic orthodoxy has drawn increasing criticism from all sides for its social irrelevance. It could be maintained that obsession with rigorous methodology prevents neoclassical economics from efficiently resolving certain problems. Economic scholars today face a choice between addressing the real world problems and publishing papers in the top journals. Many economists facing the urge to publish adopt the neoclassical methodology mainly because this makes it easier for them to publish. The concession required for publishing papers in the top journals is usually more restriction of freedom1 and more deficiency in addressing real world problems. I believe that reality has a strong influence on science especially when a growing divergence between reality and theory can no longer be denied. Self-sufficiency and uncompromising forays into other fields are effectively destroying the foundations for more fruitful cooperation with other scientific disciplines. Thus, I believe the origins of social irrelevance of the neoclassical paradigm can be found primarily in the lack of holism in education system of today’s economists, which could enhance a better understanding of today’s problems.

The neoclassical dominance leads scientists into intellectual imbecility argues McCloskey (1983) and into intellectual slavery (Eichner, 1983). Similarly, Goodwin (2008) argues that the neoclassical increasing reliance on highly mathematized modelling techniques means that fewer economists can participate in an ever more obscure and less relevant debate. 1

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5. A PLEDGE FOR MORE HOLISM IN EDUCATION OF TODAY’S ECONOMISTS On the one hand, use of a scientific language within the neoclassical paradigm reduces the diversity of methodological approaches and opinions within economic theory; on the other hand, it impedes better cooperation with other scientific communities in order to understand and solve today’s problems. The results are verified within the economic scientific community and interpreted mainly within the dominant neoclassical paradigm. The postmodern holism views the problem of divisions in the scientific community as synonymous for partial analyses of problems and mutual exclusion of ideas. Feyerabend’s (1999) methodological pluralism certainly allows the most open and intellectually free model of understanding of knowledge at the epistemological level in order to foster intellectual openness. The key goal of post-modernism is to move beyond paradigmatic approaches, as well as to promote cooperation between different scientific disciplines in order to reap mutual benefits. However, parallelism of scientific communities in the study of the same issues is not a sufficient condition for deeper understanding due to two reasons. Firstly, attention of different scientific communities is focused on different problems and the use of different scientific languages impedes the mutual communication (Hassard, 1993; Cooper, Burell, 1988). Secondly, a higher level of mutual communication, tolerance and cooperation between different scientific communities should be developed, since only such an interactive process will allow understanding and resolving the emerging problems and puzzles (Caldwell, 1984; Pheby, 1988). The key goal in education of today’s economists should be to move beyond the neoclassical paradigmatic approach in economics and to promote deeper cooperation between different scientific disciplines in order to foster intellectual openness. Looking at the same problem from different scientific communities improves the student’s understanding of the problem. Thus, the reading materials should be a combination of different theoretical traditions in order to bring out cooperation between different scientific disciplines (e.g. sociology, politics, philosophy, psychology). For example, we do not know whether the present crisis is best understood by neoclassical or heterodox theories (e.g. institutional, post-Keynesian, Austrian, Marxian) or even from sociologist perspective. It is simply impossible to establish since there is no absolute set of appraisal criteria by which to judge the theories (incommensurability problem). Pluralism also encourages students to think more critically and originally since particular theoretical schools and scientific communities too often teaches passive acceptance of their ideas. I believe that only such education process will foster understanding of the emerging problems and contribute meaningfully to their solutions.

6. CONCLUSION Neoclassical school has developed a fairly straightforward and closed system based on rationality, equilibrium, and methodological individualism. The unity of introductory textbooks and academic programmes clearly illustrate the high level of domination of the neoclassical school in economics. Its monopoly position is mainly perpetuated through the education process as strict methodological rules are dictated which have become an ideal for the majority of contemporary economists. Use of rigorous language al