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Management Studies

Volume 2, Number 1, January 2014 (Serial Number 2)

Contents

Project Management

An Empirical Study of the Content Characteristics of Social Projects

(According to In-depth Interviews) 1

Larisa Nikitina, Maria Tabachnikova

International (Business) Management

Dimensions of the Internationalization-Performance Relationship: Applied to Euronext 100

Multinationals 10

Samia Belaounia, Mehdi Nekhili

Marketing

A Strategic Perspective to Small Firms in Relationship Marketing: A Case Study of Francistown 21

Rodreck Chirau, Sumburani Sigauke

Inconsistency Quality Products (on Six Sigma Programs) Effect on Customer Loyality:

Case Study of Industry “Tahu” 35

Ayi Tejaningrum

Knowledge Management

Meta-synthetic Strategies for Digital Recordkeeping and Knowledge Utilization:

International Trends 43

Xiaomi An, Judith Ellis

Administration Management

Reform of Financial Institutions—Getting it Right 53

Matjaz Nahtigal

Information Management

Using MWD: A Business Intelligence System for Tourism Destination Web 62

Aurkene Alzua-Sorzabal, Jon Kepa Gerrikagoitia, Fidel Rebón

Management Studies, ISSN 2328-2185 January 2014, Vol. 2, No. 1, 1-9

An Empirical Study of the Content Characteristics of Social

Projects (According to In-depth Interviews)

Larisa Nikitina, Maria Tabachnikova

Voronezh State University (VSU), Voronezh, Russian Federation

This paper specifies substantial characteristics of social projects at the present stage of development of the Russian

civil society. A social project is considered as a project system based on a set of measures of social orientation; has

specific objectives; and is located in space and time-restricted. The sample data of 25 in-depth interviews with

representatives of the business community, public authorities, and civil society institutions, all active participants in

community development in the Voronezh administrative region served as an empirical basis for this paper. The

analysis of respondents’ views on the importance of social projects has enabled to define their descriptive and

normative features. The main descriptive features include the following: overcoming specific urgent problems in a

society; implementing state social policy; quantitative changes in the material life conditions of an individual or a

social group; creating labor markets; implementing social innovations; two-way influence of the quality and

quantity of social projects and the level of socio-economic structure (company, region, country). Normative

features include: encouraged development of state institutions; stability of the environment; balanced

socio-economic development; formation of a community of reasonable individuals; development of human

potential. Conclusions have been made about the nature, characteristics, and goals and objectives of social projects

and their role in social and economic development of the region, spheres of social projects implementation

significant for Russia, about active participants, success and failure factors of social projects, prospects and

intensity of social engineering in the Voronezh administrative region and Russia as a whole. Soft systems

methodology has been used for stating and structuring the empirical data. The results obtained have enabled to lay

the foundation for finding the concepts and mechanisms to coordinate the participants in community development.

Keywords: social project, project management, project system, community development, root definition, goals and

objectives of social projects

Introduction

Social projects’ development and implementation is an essential element in managing sustainable

development in any country. In this regard, it is of vital importance to carry out both theoretical and applied

research in social engineering as a form of social activity of the economic entity and as a process of

implementation of social innovations.

A contradictory situation in the regions of Russia has occurred due to imbalance between the potential and

Larisa Nikitina, Doctor of Science, Full Professor, Economic Department, Voronezh State University. Maria Tabachnikova, Candidate of Science, Associate Professor, Economic Department, Voronezh State University. Correspondence concerning this article should be addressed to Maria Tabachnikova, 20-Let VLKSM, building 54A, apt. 64,

Voronezh, 394036, Russian Federation. E-mail: [email protected].

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AN EMPIRICAL STUDY OF THE CONTENT CHARACTERISTICS OF SOCIAL PROJECTS

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the results of social and economic development. Outstanding innovative ideas come about which can provide

an effective solution of social problems, state structures with a fixed social functionality are formed, there is

proven experience in project implementation by the business elite. An example is the positive dynamics of

social projects implementation of the largest Russian companies during the period from 2004 to 2010 (see

Table 1).

Table 1

Social Projects Implementation by Russian Companies

Availability of projects Proportion of the total number of companies (%)

2004 2005 2006 2007 2008 2009 2010

Projects targeted at employees and their families 70 71 80 79 77 77 79

Projects targeted at population at the companies’ location 53 53 60 65 75 67 65

Projects for the companies’ contractors 17 11 18 26 32 31 29

Note. Source: Survey of corporate governance in Russia: A comparative analysis of the results 2004-2010 (Retrieved from http://rid.ru/wp-content/uploads/2012/06/1CG-research-2004-2010.pdf).

The development and implementation of social projects is a system of multilateral and multi-level

cooperation of representatives of business structures, government and civil society, permanently altering their

role in social welfare and solving social problems under the influence of a number of trends. The latter include

low susceptibility of a number of social problems to the traditional measures of influence, deepening

inequalities between social groups, expansion of the social needs of the population, and others (Moskovskaya,

2011).

However, a clear interaction between the key participants in the social and economic processes is missing,

thus not allowing to reach the full potential of each participant. Actions of public authorities, business

structures, and civil society institutions are often spontaneous, causing short-term isolated effects not related to

the general concept of the strategic development of the region and the country as a whole.

The need to study the characteristics of social projects is caused by a profound structural transformation of

all social relations associated with the post-industrial transition. A number of structural changes that have a

major impact on social practices should be highlighted.

First, social needs and development priorities undergo changes. According to researchers, today the most

significant social priority is not prosperity, but equal access to healthcare and education for all population

groups (Grigorieva, 2011).

Second, the methodological context of understanding social phenomena (practices) changes. Today it

includes such concepts as nonlinearity, chaos, multi-purposefulness and others (Castel, 2009). Thereby, the

criteria for validity of social knowledge shift towards the multiplicity of possible explanations for the processes

under study (Yadov, 2009).

Third, new challenges, such as social ecology, social security, and super-intensification of migration

processes, grow urgent, and relevant (Bogomolov, 2010).

Fourth, the essential characteristics of social services change in a way that they become continuous,

individualized, and global (Mau, 2012). A modern man continuously increases his/her cultural and educational

level, uses healthcare services, chooses a pension plan. The trajectories of choice of services become more

individualized, and they become global and competitive.

Fifth, social processes, like all modern practices, become more dynamic and technologically advanced.


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Such forms of effective interactions appear as social networks, communities of practice, crowdsourcing, etc..

The above-mentioned structural changes are bound to affect the substantial characteristics of all

contemporary social practices, including social projects.

In the context of post-industrial changes, provisions of the new system paradigm proposed by Kleiner

(2011) are brought into focus. In this paradigm, all social and economic phenomena are considered in the light

of the creation, interaction, evolution, transformation, and elimination of economic systems. Under this theory,

a social project is seen as a project-type system based on a set of measures of social orientation, which has

specific objectives, is located in space and restricted in time.

Data Description and Research Methodology

The major problem of any socio-economic survey is the availability of empirical data (or the possibility of

obtaining it). In other words, the researcher is faced with the problem of quality and reliability of the sample

data. Good quality of the empirical data is related to their amount, necessary, and sufficient for adequate

representation. In turn, reliability of the data is provided by choosing the right methods for data collection and

processing methods.

During the period from July to October 2012, 25 in-depth interviews were conducted with representatives

of business structures, civil society institutions, government and management authorities actively engaged in

the development and implementation of social projects in the Voronezh administrative region. The respondents

from the business structures included owners and managers of the enterprises operating in Voronezh. Among

representatives of the civil society were social projects proponents, founders of movements and non-profit

organizations, heads of the largest universities in the region, and actors of youth organizations and journalists.

On the part of government and management authorities participated in the study were heads of departments,

divisions and sections of the government of the Voronezh administrative region.

The questionnaire included three sets of questions on the nature of social projects, the mechanism of social

project management, and personal participation in social projects. This article presents the results of research

into the nature, characteristic features, objectives of social projects and their role in socio-economic

development of the region, spheres of project implementation significant for the current Russian reality, on

active participants, success and failure factors of social projects, prospects and the intensity of social

engineering development in the Voronezh administrative region and Russia as a whole.

First of all, the study found that from a business perspective a social project is a project of public relations

development, social organization, performing an external organizing function. In addition, the study

demonstrated that in business structures actively implementing social projects the functions of ownership and

control are combined, so the second most important aspect of social engineering is a businessman’s (owner’s)

need for self-fulfillment, according to 70% of the experts.

For representatives of civil society institutions a social project is inextricably linked with the improvement

of the quality of life of the whole population or its certain groups and thus benefits the society. Most experts

(65%) associate social projects with improved quality of life, and 35%—with the solution of specific problems

for the benefit of the society or individual social groups.

From the point of view of the representatives of public authorities, a social project is an instrument of the

state social policy whose main distinguishing feature is implementation of social innovation.

Most representatives of business community associate social projects’ objectives with material support,


4

quantitative changes in the conditions of the life of an individual or of certain social groups, and to a much

lesser extent with the change in qualitative characteristics of an individual. Thus, only one of the business

experts points out that “a social project should change something in people’s minds”.

One-third of the representatives of the civil society perceive the project objectives as something specific,

they do not have an abstract view of a social project only in reference to a particular quantitative social issue.

Fifty-five percent of the experts distinctly point out that the project objectives are linked to external improved

quantitative indicators of the living conditions, i.e., to social environment features which people consider

external. Only 22% of experts in this group denoted the inward goal of social projects, i.e., a qualitative change

in the human condition.

All representatives of public authorities qualified creation of a comfortable environment and fight against

anti-social phenomena as social project objectives. One of the experts associates the project objectives with

implementation and dissemination of social innovation, “A social project is not just about the implementation

of standards and government regulations. It is characterized by a novelty value—new forms of service, new

types of activity”. None of the representatives of public authorities associates the project objectives with the

development of self-awareness. Thus, the problems of individual people are not considered in general

goal-setting.

It should be noted that even at the stage of defining the essence, nature, and goals of the project the

experts’ opinions fall into three groups of binary oppositions: quantitative-qualitative, external-internal, and

action-process. External goals include changing conditions of the environment and overcoming the problems

that have already emerged in a society (reactive goals). Internal goals include changing societal needs

corresponding to structures of the social reality of the project initiators (proactive goals). Quantitative changes

mean changes in the material life conditions of a particular person, group, or society. Qualitative changes mean

a change in an individual’s, group or society consciousness. An action is a single procedure of implementing a

social project, a process is the implementation of the long-term projects with a common social purpose.

Most business people pointed out that the hallmark of a social project is absence of commercial orientation.

Besides, experts believe that social projects and business projects differ radically at all stages of their life-cycle,

including the stage of accomplishing all the goals or objectives. Only one of the experts in this group

mentioned the interrelation between the two, noting that “a social project is always a part of a business project

in terms of the problems of employment, self-fulfillment, and education”.

Civil society representatives identified two distinctive characteristics of a social project: first, the

complexity of measuring goals and objectives in financial terms (55%), and second, cost and need for external

financing (45%).

Among the distinguishing characteristics of social projects representatives of state bodies named the effect

of projects in a social sphere (67%) and absence of profits (33%). One of the experts pointed out that “the

concept ‘social’ is absolutely incompatible with the concepts of ‘business’ and ‘politics’”.

It should be noted that such a polarization of expert opinions (i.e., to see a social project as part of the

business project and, conversely, to completely exclude business and politics from the social aspects) clearly

illustrates a mutual mistrust of key actors in the process.

In response to a question about the role of social projects in the socio-economic development of the

country, the region, a company, and an individual, almost all business representatives were unanimous. Most

experts agreed that high-quality system social projects at any of the above levels make the process of


5

socio-economic development balanced and sustainable, form relationships significant to the economy,

contribute to the stability of the environment.

Civil society representatives identified more practical aspects of the role of social projects, such as

creation of labor markets, maintaining balance and social equilibrium, formation of a community of reasonable

individuals, development of human potential.

The majority (65%) of public authorities’ representatives noted that social projects stimulate growth and

development of public institutions, other experts pointed to a cause-and-effect relationship between the level of

social and economic development and the quantity and quality of social projects implemented.

The analysis of respondents’ views on the importance of social projects has enabled to define their

descriptive and normative features. The descriptive features include the following:

overcoming specific urgent problems in a society;

implementing state social policy;

quantitative changes in the material life conditions of an individual or a social group;

creating labor markets;

implementing social innovations;

two-way influence of the quality and quantity of social projects and the level of socio-economic structure

(company, region, country).

Normative (standard-setting, desirable, target) features include:

encouraged development of state institutions;

stability of the environment, balanced socio-economic development;

formation of a community of reasonable individuals;

development of human potential.

In response to the question on priority and importance of community development areas (healthcare,

education, culture, and sports), 70% of the representatives of the business community emphasized the need for

equal and harmonious development of all areas, 30% of them pointed to the importance of implementing

projects in one of them.

Most representatives of the civil society (63% and 54%, respectively) considered education and healthcare

as priority ones, and only a third of experts believed that the above-mentioned social spheres are equally

important.

Similar comments were received from the representatives of the state, who considered education and

healthcare as priority (half and half, respectively), while 33% pointed to the importance of all the spheres.

Overall, more than a half of the experts been surveyed (56%) shared the same opinion on the matter and

considered social projects in education as priority. Almost all of the experts believe that the situation in the

Voronezh administrative region, in general, is no different from the nationwide practice of social engineering.

In response to the question of the role of the government, business and non-profit organizations in social

engineering, all business representatives pointed out that the state has a key responsibility in social

development, personality formation, his/her values and ideals. At the same time, 70% of the respondents

mentioned that the government should encourage businesses to participate in social projects, not imposing any

unusual functions and not interfering with the business processes, and noted untapped and underused business

potential in social projects. Only 40% of experts emphasized a creative role of non-profit organizations in


6

social engineering.

Over a half of the civil society representatives (55%) see non-profit organizations as the initiators, insiders

and monitors of the process, 45% of them think that the state plays a key role in social engineering. A

significant proportion of experts (55%) refer to the role of business in financing projects, however, half of them

mention that in a negative context.

All government officials underline the key role and responsibility of the state. “Vector, regulatory

frameworks, standards, algorithm and goals are all set by the state, all the rest can join. We have very weak

non-profit board practices”, according to an expert. Only one representative of public authorities mentioned the

need for public-private partnerships in implementation of social projects.

It is obvious that such a spread of experts’ opinions on these issues emphasizes mistrust and disagreement

of the participants’ opinions on various aspects of social projects. At the same time, it is quite symptomatic that

all the experts noted the leading role of the state.

In response to the question on active participants in social projects, most business representatives defined

them as devotees—people with a proactive approach to life, the leaders, that is, individuals. Almost half of the

respondents (42%) reported an active role of the state and business in social projects implementation.

Representatives of the civil society (80%) consider community organizations, volunteers, and people with

their everyday concerns and unresolved questions as active participants in social projects. Only 20% of

respondents indicated an active role of the state and business, and one of the experts stated that “a social project

can only be inspired by an individual’s personality”.

All representatives of public authorities consider state structures as active participants in social projects.

Only 30% of the experts mentioned business structures alongside with the state ones.

The responses to a set of questions related to the key actors of the process highlight the need for their

cooperation, information exchange, creation of a concept of social projects customers, support and

encouragement of devotees and volunteers.

The question “Who is most interested in the results of social projects?” caused quite a wide range of

opinions among the business representatives. One third of the experts reported that all participants in the

process are equally interested, but from different perspectives. According to one of the experts, “The state is

interested in increased power and influence, customers are interested in the regularity of social projects and

support, business structures pursue an objective of better public relations and motivation of personnel, since

employees are proud of their enterprise participating in social projects”. One third of respondents believe that

customers are those mostly interested for the sake of stability and productivity; 28% emphasized that target

users of a social project are those most interested in its implementation. One expert noted that it is an individual

personality who is most affected by a project.

Most of the civil society representatives responded that target users are affected, since “their problems of

security and social guarantees are resolved”; 27% of the experts stated that everybody should be interested in

an effective project. According to one of the experts, “Everyone living here who believes this to be their

country. There should not be any contradiction. As soon as we start to make distinctions, social problems come

up”. The same percentage (27%) of experts believe that they project initiators and implementers of the process

are those most interested in results, since they gain “the capitalization of a human personality”.

Half of the representatives of public authorities noted that the results of social projects are of most interest


7

to the citizens, the population. One third of the experts believe that everyone should be interested; two experts

mentioned that the main interested party is the state. According to one of them, “The state is the most

concerned as all the effects of social projects are large-scale, long-term, and global. The result is often

postponed”.

Differences in the contextual definition used by different groups of experts seem worth emphasizing. Thus,

business representatives name target users as those most interested in social project results, civil society

representatives mention the society, beneficiaries, individuals, and the representatives of public authorities’

report of the citizens, the population.

In response to the question “What determines the success of a social project?”, the majority of business

representatives pointed out three factors, clear goals and objectives, the right selection and formation of

instruments, and adequate resources. Many experts (42%) highlighted the role of the individual leader and

implementer of the project. Two of the experts drew their attention to the readiness and maturity of the project

consumer (target user). One expert pointed out the importance of a systemic vision and actions in the field of

social engineering.

Most civil society representatives consider personal characteristics of the initiators, leaders, project team,

and project partners as the key success component of a social project. According to one of the experts, “Success

of a project depends on the initiator persistence, the strength and power of the first intention”. Most experts

stress the importance of coordination and resource management skills, while 35% believe the “right goals” are

a significant success component. Two experts noted the importance of the information component, social

project publicity.

What stands out in the survey is the diversity of opinions of the representatives of public authorities on the

components of success of a social project. Half of the surveyed experts stress the importance of the project

timeliness and its focus on a specific category of citizens. One third of the respondents believe the key success

factor is the interaction between all project participants, another third consider financing as a significant

measure of success, one of the experts emphasizes a proactive leader’s position, and another one notes the

personnel and management competence.

The final question in the essential set was the one on the factors that affect the intensity of development of

social projects in Russia and the Voronezh administrative region. Most representatives of the Voronezh

business structures believe that the intensity of development is directly related to the activity and demands of

civil society, and 42% of respondents believe that it is essential to create effective institutions for social projects

preparation and implementation. However, most experts emphasize that it is the state structures which are

responsible for the creation of such institutions.

Most civil society representatives associate the development of social engineering with the development of

a society, citizens’ initiatives, and preservation of the democratic trend. What stands out in the survey is the

analysis and inclusion of the own civic position in development factors. Thus, according to one of the experts,

“For many involved in social projects it is a form of internal emigration, civil immunity, a meaningful existence

in this paradoxical world”. Over one third (36%) of respondents relate the intensity of development of social

projects with governmental support and initiatives.

Most representatives of public authorities associate the development of social engineering with

government agencies, government support, and gubernatorial initiatives; and only one of the experts links

community development with the development of the civil society.


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Results and Conclusions

It is advisable to use the structure of “root definitions” from the Soft Systems Methodology (SSM) by

Checkland and Scholes (1990) as a tool to organize and record the empirical data. A root definition reflects a

particular point of view on the process, the vision of the system by a party or parties. This is a clear and concise

description of the process vision, through the mandatory structural elements. Information structured with

consideration of all the foregoing elements, on the one hand, make the report concise, and on the other hand,

quite amply reveal the position of the process parties (see Table 2).

Table 2

Substantial Characteristics of the Structural Elements of Social Projects

Structural elements Representatives of business structures

Representatives of civil society institutions

Representatives of public authorities

Clients (benefit from social projects implementation)

Society ready to accept a social project

Specific users, beneficiaries, whose problems of security and social protection are solved

Citizens, population

Actors (key participants of the process)

Active people, the state as a regulator of the relations, business leaders establishing the level for social responsibility

Public organizations, volunteers, people with long-standing unresolved problems

State structures, business structures

Transformation (description of the nature of social changes)

Development of public relations, quantitative and qualitative changes in living conditions

Solving specific social problems, quantitative and qualitative change of the living conditions

Creation of a comfortable environment, elimination of anti-social phenomena, introduction of social innovation

Outlook (basic assumptions about the significance of the results of social projects)

Stable, harmonious and balanced socio-economic development

Creation of labor markets, preservation of social equilibrium, human development, formation of tastes, rituals, social criteria, consumer culture

Stimulate the development of the state, region, accelerate economic growth

Owners (people who seriously affect the launch and implementation of social projects, able to dramatically change the effectiveness of their implementation)

Public authorities, major business

Society, public authorities Public authorities

Significant environmental factors

Development of the civil society, social project customer institutionalization, promotion and popularization of social activity

Social landscape of the region, personal activity of citizens, civil society development, government support

Government support, governor’s initiatives

The empirical evidence derived from this study has enabled to identify the sore points of the process:

(1) Mistrust and lack of coordination of participants, search for options for cooperation, distribution of

responsibilities;

(2) The need for creation of stimulating public policies (regulatory, legislative, tax regulations, and

procedures);

(3) Lack of social order, customers not ready, lack of consumers’ interest;

(4) Absence of effective institutions for social projects preparation and implementation, need for training

personnel;

(5) Lack of awareness, lack of promotion and popularization of social activity, ideas, project initiatives.


9

References Bogomolov, O. T. (2010). Non-economic facets of economy: The unknown interference. Moscow: Institute of Economic

Strategies. Castel, R. (2009). Metamorphosis of the social issues: Chronicles of wage labor. St. Petersburg: Aletheja. Checkland, P., & Scholes, J. (1990). Soft systems methodology in action. New York: John Wileys Sons Inc.. Grigorieva, I. A. (2011). Current social policy: Opportunities and limitations. St. Petersburg: SU named after Alexander Pushkin. Kleiner, G. B. (2011). System resource of economy. Problems of Economics, 1, 87-114. Mau, V. A. (2012). Economy and politics in 2011: Global crisis and search for a new growth model. Problems of Economics, 2,

7-30. Moskovskaya, A. A. (2011). Russian and global social entrepreneurship. Moscow: Publishing House of the Higher School of

Economics. Yadov, V. A. (2009). Modern theoretical sociology as a conceptual framework. St. Petersburg: Intersotsis.


Dimensions of the Internationalization-Performance

Relationship: Applied to Euronext 100 Multinationals

Samia Belaounia

Neoma Business School, Mont-Saint Aignan, France

Mehdi Nekhili

University of Reims Champagne Ardennes, Reims, France Neoma Business School, Mont-Saint-Aignan, France In spite of the extensive literature regarding the relationship between corporate internationalization and performance, questions still remain due to conflicting empirical results. Is this due to the diversity of the conceptualization of international profile? The results of statistical non-parametric tests obtained from a sample of 68 Euronext 100 companies over the period 2005-2009 point to a different relationship, between internationalization and performance, depending on whether the extent of international activities or their dispersion is considered.

Keywords: internationalization, performance, multinationals, Euronext

Introduction

Since the beginning of the 1980s, globalization has been introduced as a hegemonic phenomenon. An

abundant literature focuses on the impact of internationalization strategies on performance, with fields as

diverse as international management, financial theory or industrial organization. Beyond the diversity of the

functional graphs testing for the internationalization-performance relationship (in U, J, inverted-J or even

S-shaped forms) that lead Allen and Pantzalis (1996) to make it endogenous, the inverted U-shape dominates.

In other words, an increase in the degree of internationalization boosts performance, but only up to a specific

threshold, beyond which the influence of internationalization becomes unfavorable. The curve’s inflexion point

could coincide with intermediate levels of the degree of internationalization, along a continuum. Empirical

results, however, appear contradictory, leaving the internationalization-performance relationship dangling.

Approximately 40 years of research has given rise to more questions than answers, pushing Glaum and

Oesterle (2007), to highlight this point in their article’s title. Could the diversity of the conceptualization of

internationalization explain the differences in results, leading us to believe that it is merely an apparent

contradiction? Indeed, research does not prioritize the same dimension of internationalization. A case in point,

dispersion can both target geographic markets seeking to qualify international positioning without accounting

for the fact that production or other links of the value chain are relocated; or be apprehended by the

contribution level of foreign subsidiaries to group activity overlooking positioning diversity. In each case,

Samia Belaounia, Associate Professor, Finance Department, Neoma Business School. Mehdi Nekhili, Professor, Finance Department, University of Reims Champagne Ardennes; Affiliated Professor, Finance

Department, Neoma Business School. Correspondence concerning this article should be addressed to Samia Belaounia, 1, Rue du Maréchal Juin, 76130, Mont-Saint

Aignan, France. E-mail: [email protected].

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distance and location were not crossed-checked. For instance, pure exporters are not identified; and when

location is accounted for, international profiles are not ranked by the cultural or spatial heterogeneity of

geographical zones, which could be used to characterize positioning.

This point, therefore, justifies studying the internationalization-performance relationship by connecting

each internationalization dimension to performance as a means to better define internationalization. Moreover,

the corollary provides a richer characterization of the international profile, accounting for both distance and

location. Another reason for this study lies in the fact that most studies focus on either American or Asian

companies. Yet, the non-neutrality of the country of origin (Glaum & Oesterle, 2007) reinforces this question

for European multinationals. Our method evaluating the degree of internationalization is based on a typology of

geographical zones which are richer than the Triade, and commonly used in empirical studies.

Our article is structured as follows. In part one, we review the literature on

internationalization-performance relationship and showcase the merits of a multi-dimensional approach to

internationalization. In part two, we assess our methodology (sample, variables, and statistical methods). In part

three, we show and provide a discussion of our results.

Internationalization and Performance: The Relationship Remains Ambiguous

Internationalization: Advantages, Costs, and Risks

The benefits of internationalization are numerous, with each management field emphasizing a specific

dimension. Internationalization, for instance, pushes business beyond domestic frontiers by using its surplus

strategic assets. Indeed, these assets cannot be bartered due to the importance of transaction costs (Rugman,

1981). Pooling the use of specific assets across different geographic zones also yields economies of scale on an

international level, which are also idiosyncratic. Providing a distinctive perspective, the asset management

theory emphasizes lowering risk by taking positions across geographical zones whose economic parameters are

inversely correlated (D. J. Denis, D. K. Denis, & Yost, 2002). Another means of reducing risk lies in

transferring mature products towards markets which are in the growth phase of the product life cycle (Vernon,

1966). Finally, by internationalizing, the company leverages market imperfections to establish itself in host

countries, taking advantage of tax systems, operating costs and access to financial resources (Dunning, 2001).

In terms of the learning process, internationalization helps build the skills providing better operational

flexibility compared to solely domestic entities (Kogut, 1985).

Nevertheless, leveraging these advantages also triggers costs that found the U-shaped form of the

internationalization-performance relationship. Literature distinguishes two types of costs, which borne at the

beginning of the internationalization process, due to a certain ignorance of local markets with different cultural,

institutional, and economic codes. These are required costs to reunite local market information to adapt

products to the targeted zones. Costs can also arise from the stigma foreign companies which are subjected to

by state authorities of host countries or simply due to the economic patriotism of local consumers (Zaheer,

1995). More, beyond a certain degree of internationalization, the company bears a second type of costs. They

are viewed as transaction costs, and are linked to costs borne to coordinate culturally diversified sets, for

example, multicultural teams at operational or management levels (Hill, 1988). Costs borne to manage

information increases with the degree of internationalization and the distance between operational units, when

conceived multi-dimensionally based on a Ghemawat (2001) approach. Coordination efforts may saturate

management capacity.


12

While most of the works converged towards an inverted U-shape to characterize the

internationalization-performance relationship, empirical results diverged. Several factors explain this point.

First, strategic motivations may vary with the stage of internationalization. For instance, Prange and Verdier

(2011) showed that at the beginning of the process, the company primarily seeks commercial efficiency and

seeks to strengthen its local establishment, which does not necessarily mean optimizing its return on investment

(ROI). Results of the Ruigrok and Wagner (2004) meta-analysis back this interpretation. Drawing on 62

empirical studies taken from 10 academic reviews, recognized as references in management, the studies point

to an enhanced relationship between the degree of internationalization and performance, impacted by the

contextual parameters which are linked to strategic aims. The authors highlight the differential impact of

increased internationalization on performance according to the dimension accounted for performance. Like

many empirical studies, impact is significantly higher when a pure operational performance (via cost cutting) is

accounted for as opposed to a synthesized profitability indicator based on accounting data.

Internationalization, a Multi-dimensional Concept

Diverging results were also found in the diversity of the dimensions of internationalization considered by

the studies. Internationalization must be considered as a multi-dimensional concept (Sullivan, 1994). As such, a

scope of geographic zones are defined by the degree of foreign market penetration and production relocation,

these two dimensions respectively overlap the width and depth of internationalization. Few studies postulate a

different impact regarding the performance of the dimensions of internationalization. Goerzen and Beamish

(2003), for instance, postulate that the depth of internationalization plays positively on performance (by

prioritizing economic advantages in terms of experience and flexibility). Nevertheless, width (via the number of

targeted countries) generates the opposite effect due to the complexity fostered by managing units overseeing

diverse environments (Kostova & Zaheer, 1999). This leads to the necessity to provide locally-adapted answers

to the strategic and management issues confronted in these environments. For subsidiaries, there may be

internal translation costs to comply with local demand, creating differences between local practices and that of

the centre. When standardization is global, the company also bears high translation costs to satisfy the host

country’s expectations. These are two types of costs linked to the diverse environments the company addresses

(Goerzen & Beamish, 2003).

Allen and Pantzalis (1996) also observed the highest levels of operational flexibility, a privileged

dimension of performance, for key international networks which are moderately deep and scattered. Allen and

Pantzalis (1996) characterized the multinational’s network as the result of an arbitrage between width and depth,

without postulating a defined direction on how these dimensions influence performance. Operational flexibility

represents a multinational’s capacity to optimally transfer resources among its operational, research, marketing,

and financial units. As such, one of the advantages the multinational draws on versus a domestic company, is

the availability of an internal market to optimize resource location and transfers and thus provide greater

flexibility. Consistent with this perspective, authors conceptualize operational flexibility as a portfolio of

material and financial options which have been withdrawn from multi-nationalization.

Research Methodology

The Sample

The sample includes non-financial companies, from the Euronext 100 during the period 2005 to 2009. The

sample contains 68 companies (see Table 1). Financial, real estate, and insurance companies were excluded.


13

Companies which did not provide sufficient data on the geographic dispersion of their activities were also

excluded.

Table 1

List of the Sample Companies Ab Inbev, Accor, Ahold, Air France-KLM, Air Liquide, AkzoNobel, Alcatel-Lucent, ALSTOM, ASML, Belgacom, Bouygues, Brisa, Capgemini, Carrefour, Casino, Guichard, Christian Dior, Colruyt, Danone, Dassault Systèmes, DELHAIZE, DSM, EADS, EDP, Essilor, France Telecom, GDF Suez, Heineken, Hermes, Imerys, JCDecaux, KPN, L’Oréal, Lafarge, Lagardère, LVMH, Michelin, Mobistar, Pages Jaunes, Pernod Ricard, Peugeot, Philips, Portugal Telecom, PPR, Publicis, Randstad, Reedelsevier, Renault, Safran, Sanofi, Schneider, SES, Shell, Sodexo, Solvay, St Gobain, ST Microelectronics, Suez Technip, TF1, Thales, TNT, Total, UCB, Unilever, Veolia, Vinci, Vivendi, Wolters Kluwer.

The Variables

The variables were calculated using the consolidated financial statements of the sampled companies (see

Table 2).

Table 2

Summary of Parameters and Calculation Methods

Parameter Definition Calculation methods

ECAt Entropy calculated for year t revenue Geographic dispersion of revenues via the entropy index calculated using the structure of regional foreign sales

EEFt Entropy calculated for total employees for the year tGeographic dispersion of employees via the entropy index calculated per regional structure

ETAt Entropy calculated for total sector-based assets for the year t

Geographic dispersion of assets via the entropy index calculated for its regional structure

ROAt Rate of economic return for the year t Net income/Total assets

ROEt Rate of financial return for the year t Net income/Shareholders’ equity

Q Tobin t Q Ratio for the year t Total market capitalization and debt over total assets

The degree of internationalization and its dimensions. Literature speaks of two types of indicators used

to operationalize the profile of internationalization: corporate revenue share or capital equity invested in foreign

subsidiaries; the geographic dispersion of revenues via the entropy index calculated on its structure per region,

using the following formula:

Entropy (E) = ∑pi * ln(1/pi)

where pi is the weight of zone i in revenues or in total assets.

The disadvantage of the first variable lies in its failure to account for the distance between the

geographic markets targeted, since this parameter interferes with the company’s capacity to sell its products

and its potential exploitation of centralizing resources. Nevertheless, the second indicator integrating

distance does not account for the geographic setting. Nor does it allow us to differentiate pure exporters from

players who relocate a part of their value chain. It might, however, impact the organizational complexity

associated with structure, coordination costs, and the economic advantages yielded from internationalization.

Moreover, the geographic dispersion of employees displays the interest, unlike sector-based assets

(including tangible capital assets), of not being influenced by the degree of materialization and its capitalistic

intensity.

As such, we apprehend the international profile by the entropy index calculated for the geographic

distribution of revenues, division-based assets and employees on the basis of consolidated financial statements.


14

Employees, for instance, refer to the group of consolidated entities and not just (like some studies) subsidiaries

in which their participating stakes exceed the 50% threshold.

Our characterization aims to cross-check distance with location.

Finally, due to its characteristics, the entropy index increases based on the number of zones in which the

company operates. For example, entropy associated with an equi-distribution of revenues for two different

regions is weaker than when associated to three regions. This is not inconsistent with our characterization of the

international profile, since the number of zones on which the company positions itself constitutes a dimension

of the geographic diversification which should be considered on a per company basis.

We consequently define three indicators linked to a dimension of internationalization:

The depth of internationalization is based on the degree of geographic dispersion alternatively with

revenues, assets, and employees at group level. This is calculated using the entropy index, and allows us to

cross-check distance (because sales, assets, and employees are divided on a continental basis and the criteria for

aggregation accounts, to some extent, for spatial and cultural homogeneity);

The width of internationalization is based on the number of continents where the company has operations,

and emphasizes the diversity of environments which the multinational firm faces with lesser or greater

management issues.

We do, however, underline that in practice it is difficult to differentiate a depth indicator from a width

indicator. Indeed, accounting for entropy’s properties, its value is impacted by the number of geographic zones

to calculate it, and which corresponds to our width indicator. This explains why we have integrated the number

of continents as an explicit variable.

Ultimately, the international profile is apprehended through the following four indicators:

ECAt: calculated entropy (for year t) from the revenue structure per geographic zone (i.e., by continent);

EEFt: calculated entropy (for year t) from the employee structure by geographic zone;

ETAt: calculated entropy (for year t) from the structure of assets by geographic zone;

NB: number of continents.

Typology of geographic zones. Financial data at our disposal covers the four geographic zones: Europe,

Americas, Asia-Pacific, and Africa-Middle East. By specifying Africa and the Middle East, the typology

appears richer than in most studies using the Triad as a sole reference like Rugman and Verbeke (2008) or

Rugman and Oh (2011)1. Our study uses a continent-based typology. Perhaps less sharp than Hofstede’s (1980)

typology, we consider, like Kwok and Tadesse (2006), that this strategy reflects cultural differentiation,

although it does not eliminate intra-continental heterogeneity. Indeed, each continent would encompass several

specific geographic zones through pre-cited typologies, each being homogenous in terms of identified cultural

dimensions2. Moreover, a continental typology would create subsets of countries within the same geographic

region, capturing, for instance, the spatial distance, another significant dimension in the localization decision.

Geographic distance may impact the location decision since companies tend to prioritize activities within their

immediate environment (Angué & Mayrhofer, 2010).

Performance measures. Three parameters are considered to measure performance: Return on Assets

(ROA), Return on Equity (ROE), and Tobin’s Q ratio. The first parameter, ROA calculates the firm’s stock

1 Indeed, the Triad does not separate Africa and the Middle East. 2 Thus, for example, South East Asia and “Confucianist” Asia, Latin Europe, and Northern Europe are highlighted, although available data does not yield the possibility of going as far as cultural differentiation.


15

market valuation (firm’s total market value over total assets value), defining the level of economic

performance. The second performance parameter is ROE and defines the financial returns in terms of

shareholder investment. This parameter is calculated as the ratio between the net income and the level of

shareholder equity. The final parameter, the Q ratio measures the firm’s stock market value in relation to its

total assets, and measures the replacement costs of a firm’s assets. In several empirical studies, the

accounting value constitutes an approximate measure, but it is regarded as satisfactory in terms of the

replacement costs of assets.

Statistical Method

We use the Kruskal Wallis (KW) test, a non-parametric test which can be used to rank more than two

independent samples from the same population. It is particularly recommended when considered parameters do

not follow a normal distribution. Measuring data dispersion is not required for non-parametric tests when

samples originate from the same distribution. Too significant results in sample dispersion do not point to a

natural variance. Our population comprises European multinationals ranked on the Euronext 100 from 2005 to

2009. Since these companies were not economically linked to one another, we consider them to be independent

subgroups.

The KW test, therefore, helps establish a ranking by analyzing the samples two by two. These are

represented in our case by the quartiles constituted for each internationalization dimension. Two dimensions

are defined and operationalized through four parameters which are, respectively, the number of continents,

the degree of dispersion associated with the international structure of sales, employees, and assets. First, and

for each year, the companies are ranked in ascending order per indicator and internationalization degree,

leading to the constitution of four quartiles. Then, quartiles are paired and compared in terms of the sum of

average ranks which they respectively correspond to. Companies are ranked by using one of the performance

parameters.

In our study, four sample groups are compared, with the number of comparisons totaling six. These

comparisons cover quartiles of same group (except when internationalization is identified by the number of

continents), the critical value z is equal to 2.638 and the critical median (with a threshold risk of 5%) is 17.89.

Moreover, tests are carried out on an annual basis, to analyze year-on-year change and to identify cyclical

events, as well as to observe extraordinary events.

Results and Discussions

Table 3 displays the annual descriptive statistics of all our study parameters. We notice that apart from

assets (ETA), for which we expect the international deployment to be relatively static, the degree of

geographic dispersion of sales (ECA) and of employees (EEF) tends to increase over the period. More than a

focus, these figures translate intensified internationalization and a greater experience in this area from the

sample companies. Calculated entropy, however, for total assets (ETA) decreased in 2008 and in 2009

compared with the past figures and did so until 2007. Yet, this phenomenon is neither observed for the

geographic dispersion of employees (EEF) nor for the geographic dispersion of revenues (ECA). In terms of

performance parameters, the ROA and the ROE showed a sharp downwards trend for the same period

2008-2009. We may assign it to the cyclical context, by interpreting this as an after effect of the 2007-2008

crisis, whose impacts were registered a year later. The Q ratio weakened in 2008, but renewed with growth in

2009.


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Table 3

Descriptive Statistics of the Sample

Descriptive statistics Minimum Maximum Average Standard deviation

nb_continents 1 4 2.93 0.982

ECA2005 0 0.8813 0.5010 0.2130

ECA2006 0 0.8957 0.5153 0.2059

ECA2007 0 0.8908 0.5239 0.2030

ECA2008 0 0.9018 0.5295 0.2029

ECA2009 0 0.9176 0.5363 0.2005

EEF2005 0 0.8923 0.4222 0.2401

EEF2006 0 0.8874 0.4442 0.2335

EEF2007 0 0.8985 0.4575 0.2273

EEF2008 0 0.9102 0.4646 0.2325

EEF2009 0 0.9146 0.4637 0.2318

ETA2005 0 0.8635 0.4348 0.2276

ETA2006 0 0.8487 0.4440 0.2241

ETA2007 0 0.8854 0.4639 0.2151

ETA2008 0 0.8738 0.4453 0.2196

ETA2009 0 0.8768 0.4319 0.2409

ROA2005 -0.0571 2.3361 0.1180 0.2821

ROA2006 -0.0094 2.7871 0.1294 0.3383

ROA2007 -0.2709 2.3310 0.1311 0.3123

ROA2008 -1.3200 2.1704 0.0782 0.3173

ROA2009 -0.3433 2.5491 0.0982 0.3336

ROE2005 -0.3961 0.6413 0.1806 0.1328

ROE2006 -0.1437 0.5668 0.1799 0.1177

ROE2007 -0.2960 0.8411 0.2036 0.1746

ROE2008 -0.9902 1.5165 0.1537 0.2518

ROE2009 -0.1863 1.5201 0.1237 0.2152

QRATIO2005 0.0232 56.5664 2.7497 7.0994

QRATIO2006 0.0236 53.3832 2.9953 7.0760

QRATIO2007 0.0388 51.5979 2.9839 7.9984

QRATIO2008 0.0297 35.4948 2.1130 5.2122

QRATIO2009 0.0302 54.2598 3.1269 8.0640

The multi-variance analysis should enlighten us on the nature of the relationship between the degree of

internationalization and the performance. As such, let us note that our observations consolidate our interest in

analyzing this relationship annually and on an individual corporate group level. The observation of minimal and

maximal values, as well as the standard deviation of the group of variables, points to strong data dispersion,

justifying the recourse to non-parametric tests. The multi-variance analysis uses the KW test by

operationalizing the intensity of internationalization by its depth (entropy) and its width (number of continents).

Table 4 presents test results carried out on average companies with different performance indicators for each

category of entropy in our study. Let us recall that each time we move from one quartile to the next one up, the

degree of internationalization increases.

Apart from the year 2009, the only relevant results were obtained when the geographic locations were

compared in terms of ROE and the Q ratio, with a different effect on internationalization depending on the

performance parameter used. Table 4 shows relevant results for the ROA. Moreover, the key relevant


17

comparisons are highlighted when the depth of the internationalization was operationalized by the geographic

dispersion of material assets other than employees (ETA). Indeed, results are neither relevant with geographic

dispersion of revenues (ECA) nor with that of employees (EEF).

Table 4

Results of Comparative Tests Considering the Depth of Internationalization (Entropy)

2005 2006 2007 2008 2009

ECA EEF ETA ECA EEF ETA ECA EEF ETA ECA EEF ETA ECA EEF ETA

ROA

Q1-Q2 -3.29 7.47 -7.8 7.23 7.94 -0.41 7.53 4.76 1.64 5.82 2.47 -1.35 2.17 -2.82 -3.35

Q1-Q3 -16.8* 1.41 3.06 7.47 -0.47 -2.94 8.11 0.35 7.76 9.64 6.3 -8.59 10.23 6.11 9.17

Q1-Q4 -13.5 -6.06 -4.53 0.23 6.76 -3.82 5.94 6.35 1.53 3.47 11.35 3.94 11.7 6 6.06

Q2-Q3 -9.2 10.53 10.9 10.17 -8.41 -2.53 -0.59 -4.41 6.11 3.82 3.8 -7.23 8.06 8.94 12.53

Q2-Q4 -5.9 3.06 3.3 2.94 -1.17 -3.41 -1.59 1.59 -0.12 -2.35 8.9 5.3 9.53 8.82 9.41

Q3-Q4 7.64 9.11 -7.6 2.7 7.23 -0.88 -2.17 6 -6.23 -6.17 5.06 12.53 1.47 -0.12 -3.11

ROE

Q1-Q2 6.59 5.29 -14.06 4.24 8.12 -4 6 2 -5 4 -1.24 -13 2.18 -3.41 -9.23

Q1-Q3 14.12 1.65 5.35 14.94 4.12 7 10 2 7 8 3.12 -7 11.94 0.94 7.05

Q1-Q4 11.53 11.76 2 11.53 11.65 4 6 6 3 10 13.53 6 17.06* 10.82 10.05

Q2-Q3 7.53 -3.65 19.41** 10.71 -4 11 4 0 12 4 4.35 5 9.76 4.35 16.29*

Q2-Q4 4.94 6.47 16.06 7.3 3.53 8 0 5 8 6 14.76 19** 14.88 14.23 19.29**

Q3-Q4 -2.59 10.12 -3.35 -3.41 7.53 -3 -4 5 -5 2 10.41 14 5.12 9.88 3

Q ratio

Q1-Q2 -8.29 -7.06 -13.41 -17.47* -1.35 -15 -16* -7.53 -14.6 -15.7 -1.9 -17.7* -20.9** -6.9 -16.3*

Q1-Q3 -25.65** -23.23** -31.58** -34.82** -23.53** -31** -34.9** -29.5** -32.3** -34.1** -22.9** -31.9** -30.1** -14.3 -32.9**

Q1-Q4 -26.41** -35** -48.06** -43.6** -32.41** -48** -44.3** -34.4** -47** -45.3** -31.5** -47.7** -43.2** -32.8** -48.8**

Q2-Q3 -17.35** -16.17* -18.17** -17.35* -22.17** -16* -18.3** -21.9** -17.7* -18** -21** -14.2 -9.2 -7.4 -16.5*

Q2-Q4 -18.12** -27.94** -34.64** -26.11** -31.06** -33** -27.8** -26.9** -32.4** -29.5** -29.5** -30** -22.2** -25.9** -32.5**

Q3-Q4 -0.76 -11.76 -16.47* -8.76 -8.88 -17* -9.4 -4.5 -14.6 -11.2 -8.5 -15.8 -13.1 -18.5** -16

Notes. * Relevant at 10%; ** relevant at 5%.

For instance, in 2005, 2008, and 2009, from the second quartile, the growing depth of internationalization

(via the geographic dispersion of assets—ETA) is accompanied with a deterioration of the ROE, independent of

crisis effects. Furthermore, in 2005 and in 2009, companies of the second quartile distinguish themselves from

the third quartile, this advantage is also expressed as an entity constituting the fourth quartile of 2009.

Moreover, for this final year, when the degree of internationalization is operationalized by the geographic

dispersion of sales (ECA), the advantage of weak internationalization also takes the lead, but only for the

“extreme” quartiles (quartiles 1 and 4), with a threshold risk of 10%.

When financial performance is measured using accounting data (ROA and ROE), results reflect the

superiority of a relatively weak internationalization strategy, and given a specific threshold and only for the

geographic dispersion of assets (ETA). Considering market performance (Q ratio), we observe, unlike past

results, a growth relationship between the degree of internationalization and performance. Moreover, relevant

comparisons concern a larger share of the sample and are convergent for the three depth-based parameters. For

companies in the second half of the sample (quartiles 3 and 4) and representing the more internationalized

groups, market performance (Q ratio) appears superior to the ratio recorded respectively for the first two

quartiles. Moreover, when considering revenues, assets, or employees on an annual basis, we can rank three

quartiles out of four. What justifies the favorable impact of internationalization on market performance could

be the stock market’s perception of a lower risk factor for the more internationalized entities (Morck & Yeung,


18

1991). Indeed, our geographic typology is continent-oriented, the higher levels of entropy should be congruent

with a significantly high degree of internationalization. This interpretation helps explain geographic zone

positioning whose economic parameters are inversely correlated, hence a weaker risk. This reading also

explains the difference in results whether we consider the return on assets (for which none of the quartile

comparisons seem relevant) or the return on equity. An explanation is that internationalization favors the use of

debt leverage, benefiting return on equity. As such, and for the entire sample, the average ROE seems to exceed

that of ROA, which should illustrate the existence of leverage (see Table 3) on shareholder equity profitability.

Yet, this remark is valid for most of the companies taken individually. As such, the most internationalized firms

have more debt due to the geographic diversification of their activities, allowing them to reduce their

operational risk (Shapiro, 1999).

Table 5 displays comparative tests of the ranks based on the width of internationalization (operationalized

by the number of continents3). It shows that the width of internationalization does not maintain the same

relationship with performance as with depth. Furthermore, the impact on performance is conditioned by the

considered dimension of this latter parameter, i.e., assets (ROA), equity (ROE), or market valuation (Q ratio).

Indeed, the number of continents in which the company has activities negatively impacts performance, it should

be financial or economic. This remark is valid for the entire period due to the statistical nature of this parameter.

Multinational firms, for instance, established on one continent generate returns on assets and shareholder equity

which are greater than companies with a presence across four continents, result that may induce difficulties

linked to the management of a strong spatial and cultural heterogeneity. However, this result is only for

“extreme” profiles, companies with entities across two or three continents are neither set out from the latter nor

amongst themselves by their financial performance. Beyond the differences in how the width of

internationalization is operationalized, this result seems coherent with that of Goerzen and Beamish (2003).

Table 5

Results of the Comparative Tests by Considering the Width of the Internationalization (Number of Continents)

Results of the non-parametric tests ROE ROA Q ratio

Type 1-Type 2 17 17 -8

Type 1-Type 3 16 16 -28.5**

Type 1-Type 4 23** 23** -26.4**

Type 2-Type 3 1 1 -20.5**

Type 2-Type 4 6 6 -18.4**

Type 3-Type 4 7 7 -2.03

Notes. ** Relevant at 5%. Type 1: companies established on one continent; Type 2: companies established on two continents; Type 3: companies established on three continents; and Type 4: companies established on four continents.

Conclusions

Results of our empirical study show that the complex relationship between internationalization and

performance depends on the considered dimensions of internationalization and performance respectively.

Indeed, whether the first one is conceived through the geographic dispersion of sales, of employees or of assets,

we know that internationalization has a negative influence on performance or neutralizes it. So, the majority of

relevant results are observed for the depth of internationalization identified by the geographic distribution of 3 Let’s note that it is useless here to proceed with tests for each year, the number of continents remaining stable for each group for the entire period.


19

assets. A negative impact linked to the expansion of internationalization’s width (with less conclusive results

however) is also observed for the ROI parameters.

More, regardless of whether performance is based on accounting data or integrates the stock market price,

the effects of internationalization are different. When performance uses historical data, the growing balance in

the intercontinental distribution of activity seems neutral regarding the return on assets. So, contrary to the

dominant theory argument, it would not be accompanied by more complex management, additional adaptation

costs and/or a loss of reactivity attributable to coordination requirements. It does, however, negatively impact

the return on shareholder equity, at a given degree of internationalization. Nevertheless, when the performance

indicator integrates the stock price, we observe a growth relationship. Would this represent an advantage in

terms of risk? Let’s note that this hypothesis seems strengthened by the observation of a favorable influence of

internationalization on financial profitability which disappears when economic profitability is assessed. Our

operationalization of economic and financial performance, therefore, raises the interpretative hypothesis of how

debt leveraged is optimized. This could be based on investors’ perception of a weaker risk for profits below a

defined internationalization threshold.

Ultimately, our study tends to consolidate the importance of a multi-dimensional conceptualization of the

internationalization to optimally identify their impact on performance. This could also contribute to strengthen

the thesis according to which the contradiction of obtained empirical studies would only be apparent, linked in

part to a different conceptualization of the international profile between the different studies.

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Management Studies, ISSN 2328-2185 January 2014, Vol. 2, No.1, 21-34

A Strategic Perspective to Small Firms in Relationship

Marketing: A Case Study of Francistown

Rodreck Chirau, Sumburani Sigauke

Botho University, Francistown, Botswana

This paper seeks to advance the strategies which can be employed by small-scale retail outlets as they normally

fight for survival. Many small firms face a number of challenges in terms of technology, economic strength,

geographic expansion, human resources, and relationship marketing. These challenges emanate duly from the

untrained and inexperienced workforce that knows little about the tools needed to market products and services

successfully. Not only that, but even many small-scale retail service providers are pushed into their business with

very little or actually without any marketing knowledge. They are driven some by seeing small niches in the market

or just they have enough capital to start a small business. Little focus is actually made on the longer-term customer

lifetime value; hence most of them fail and close down. This paper shall merge the literature review with the

practical situation of what is currently happening on the ground. Questionnaires were designed and handed to

small-scale retailers in Francistown, and follow-up interviews conducted to a randomly selected number of these

retailers. The small retail outlets considered had less than 30 employees, meaning between one and 30 employees.

This was done to ensure that effective strategies are put in place not only to help new start-up retailers and existing

ones, but also big firms that might have been neglecting the importance of relationship marketing. This paper

reframes and redefines the strategies for winning small-scale retailers that will compete locally and globally.

Keywords: relationship marketing, small retail outlets, strategies

Introduction

Relationship marketing became dominant in the 1980s and was exclusively applied to large firms. This

study attempts to explore possibilities that can be derived from its full exploitation. Most small firms in Africa

are facing mounting pressures to contain costs and improve quality given the dumping of mostly cheap Chinese

products on the market. China’s expansion and ascension as the second largest economy after United States of

America, has greatly affected the growth and sustenance of most small firms in Africa. So much pressure has

been mounted to both small and big firms in most developing countries. Overnight, customers have so many

different brands to choose from. This situation has also been compounded by the technological expansion and

improved technologies. Most firms are left without choice but to impose survival strategies. The irony of it all

is that survival is hugely depended on improved technologies. The solution now lies on an integrated delivery

network that involves customers/suppliers partnering and or any kind of alliances. Some authorities argue that

Rodreck Chirau, MBA, MSc., BA (English and Communication Studies), Business Department, Botho University. Sumburani Sigauke, MBA, Bachelor of Business Studies, Accounting Department, Botho University. Correspondence concerning this article should be addressed to Rodreck Chirau, P. Bag F451, Francistown, Botswana. E-mail:

[email protected].

DAVID PUBLISHING

D

A STRATEGIC PERSPECTIVE TO SMALL FIRMS IN RELATIONSHIP MARKETING

22

partnering may be a solution as firms may utilize the facilities and expertise of other service providers.

This paper tends to present the findings on how the level of education impacts on the relationship

marketing (RM) strategies used by a small firm. Small firms in Africa in general are seen as the future power

houses of development. Industry development in Botswana has been limited to government institutions and

only recently the government has responded to the calls by the Bretton Woods institutions to give space to

private companies. The impact of world recession and modern theories of how small firms can be a good

source of employment has since seen the government of Botswana with one policy or the other. Recession has

also eaten into the government reserves and as such, the government is no longer guaranteed of future earnings

from diamonds. This is especially so during the current Euro zone crisis where the traditional markets of

Botswana diamond have been heavily curtailed. This has naturally prompted a search for diversifying the

economy and further stroke the local market into action. As such, there is need to promote growth of the local

economic activities to kick-start the ambitious program of diversifying the economy.

We intend to advance the strategies which could be employed by small-scale retail outlets as they

normally fight for survival by enhancing relationship marketing. Many small firms face a number of challenges

in terms of technology, economic strength, geographic expansion, human resources, and relationship marketing.

These challenges emanate duly from the untrained and inexperienced workforce that knows little about the

tools needed to market products and services successfully. Not only that, but even many small-scale retail

service providers are pushed into their businesses with very little or actually without any marketing knowledge.

Some have barely enough capital but are mere survivalist entrepreneurs who are more driven by the immediate

need to feed the family and may not be called opportunity driven entrepreneurs (Venter, Urban, & Rwigema,

2008). Little focus is actually made on the longer-term customer lifetime value; hence most of them fail and

close down. So the question is, how can they strategise for long term benefits in their relationships?

The researchers address this issue by firstly defining RM and briefly touching on the discourse of RM

which will show that RM has traversed many terrains, which then brought together fully explains the concept of

RM. This is followed by a brief discussion of small firms so that the reader fully understands that our area of

concentration is small firms in Francistown. Research questions are addressed and the methodology follows.

Results, analysis discussions follow and we draw the conclusion. Finally recommendations follow.

Defining RM

Relationship marketing is a highly mature discipline, which originated mostly from mature markets in the

industrialised countries. It is observable that little evidence and applications of RM come from the micro-firms

in developing countries. Generally, RM is a discipline which has got an evolutionary impact on the general

marketing. Some authorities view it as a mere splitting of the hair and view it as a mere extension of marketing

put in some difficult language. Various labels have been put forward. RM has been labelled by Berry (1983) as

“... attracting, maintaining and—in multi service organizations—enhancing customer relationships”. Sorce

(2002) echoed these sentiments and said it creates “mutually beneficial exchange between business partners”.

Fitchett and McDonagh (2000) effectively captured the impact of RM on marketing and conclude that,

“Relational marketing has come to dominate the (r) evolutionary imagination of marketing thought”.

Gummesson (1999, p. 24) extended the concept of RM to “total relationship marketing” and maintained that it

still remains a domain of marketing “based on relationships, networks, and interaction”. Gummesson (1999)

concluded that “RM has given recognition to collaboration as part of the market economy”. This is a very


23

crucial contribution to marketing. This recognition carries a lot of weight especially after a lot of debate of

marketing tools. Previously these tools were not recognized as contributing anything to a firm but have been

accused of siphoning a lot of resources and lacked measurement. RM, as a discipline, attempts to measure the

contribution of RM to a business entity.

Discourse in Research Marketing

With so many varied definitions of RM, it is more effective and efficient to capture and summarize the

various phases of RM. A good summary has been advanced by Fitchett and McDonagh (2000). Table 1

summaries the discourse.

Table 1

Historical Development of the Discourse of RM Industrial Emphasis References Industrial marketing and purchasing group Business to business Channel relations Buyer-seller relationships Relational resources

Mutual interdependence consensus and collaboration closeness trust and satisfaction Resource-advantage theory

Hakanson and Ostberg (1975) Ford (1980) Gummesson (1987) Spekman et al. (1997) Nielson (1998) Selnes (1998) Hunt (1997)

Services Emphasis References Service markets Small groups Selling services Forming relationships

Coined term RM Respect Trust Situation characteristics

Berry (1983) Gupta (1983) Crosby et al. (1990) Gronroos (1990) Barnes (1995)

Consumers Emphasis References

Quality service Implementation Advanced technology Intrusion or intimacy Definition confusion Structure Co-operation Social networks Consumer behaviour Consumer marketing Consumer survey Rhetoric vs reality

Consumer retention Database use Customer retention Privacy Value relations Content analysis and concept categorization Interpersonal vs. commercial Customer as collaborator Guanxivs RM Equity of relations Interaction and network approaches Inappropriate metaphoric transfer Review of business-customer relationship BCR

Reicheld and Sasser (1990) Petrison and Wang (1993) Patterson et al. (1996)Pine et al. (1995) Cova (1993) O’Maalley et al. (1997) Tzokas and Saren (1996) Harker (1999) Iacobucci and Ostrum (1996) Zineldin (1998) Arias (1998) Szmigin and Bourne (1998) Pels (1999) O’Malley (1999) O’Malley and Tynan (forthcoming)

Note. Source: Fitchett and McDonagh, 2000.

For a long time, now, many authorities have been dealing with different facets of RM in an uncoordinated

manner before it was developed as a fully fledged discipline. This previous approach to the discipline has

generated a lot of weaknesses. However, these weaknesses are not the subject of discussion in this paper.

Small Firms

Small firms in this study refer to organizations with less than 30 employees. This figure has been chosen

for convenience and is close to the definition proposed by small, medium, and macro enterprise (SMME)

taskforce of 1998 who say a small enterprise makes an annual turnover of between BWP 60,000 and BWP 1.5

million and employ not more than 25 people (Republic of Botswana, 1999).

Benefits Enjoyed by the Firm in the Relationship

Generally there are many benefits that can be enjoyed when a firm is in relationship. Fitchett and


24

McDonagh (2000) put forward the following benefits:

Terms of reference: The organization defines the interaction that it has with its consumers as a relationship

only if it is considered to benefit organizational interests (e.g., secure growth, increase repeat consumption);

Relational basis: The organization defines and regulates the terms and conditions of the relationship.

Consumers have little opportunity to specify their own terms and/or can alter them only if sanctioned by the

organization;

Opportunity to vary relational terms: The organization, due to the relational basis, can adapt, modify, and

change the terms of a customer relationship without negotiation. Consumers are tied to relational terms;

Relational conflict: When disagreement in the relationship emerges or either party fails to comply with the

agreed relational basis, organizations have a greater opportunity to arbitrate on the resolution arrangements and

have a greater capacity to improve penalties.

Questionnaire Development

The study was largely a descriptive research. The researchers trained six students to help in collecting data

by using a questionnaire instrument coupled with a systematic observation during the administration of the

questionnaire. The students were expected to write individual reports concerning their experiences during the

data collection.

The assistant researchers moved street by street administering the questionnaire randomly selecting retail

shops to administer the questionnaire. They were basically looking for volunteers who were prepared to

administered the questionnaire. Each student had 15 questionnaires which he/she administered in a period

between 09:30 and 17:00 hours.

The questionnaire instrument had 24 questions on a Likert scale of 5. The responses were ranging from

strongly disagree to strongly agree (see Appendix Table A1). The population of the establishment was “all

small firms in Francistown whose business ranges from small clothing/boutique (15), engineering (8),

construction (2), finance/cash loan (5), entertainment (4), electrical/Chinese shops (16), grocery shops (9), hair

saloons (6), car rental/filling stations (3), agriculture (4), health/opticians (4), car wash (4), furniture (5), café (4)

and couriers (1)”. Figures in the bracket are the actual number of firms in each category where the

questionnaire was administered. The range covered fairly represents the many small firms that are in

Francistown. The population of registered small firms in Francistown is about 400. The sample size represents

22.5% of the total small firms in Francistown. This is a fair representation. The researchers got 100% return on

the questionnaire since the respondents were met during their normal working hours and the assistant

researchers only administered only 15 questionnaires. They were persuading the respondents to fill in the

questionnaire in their presence so that they would give them assistance since majority of the respondents have a

language problem. Chinese nationals were responding to the questionnaire with the assistance of their shop

assistance. The local business people were asked the questions through our trained assistants (who are students)

at the Botho University and are also local citizens of Botswana.

The questionnaire was post coded to enable easier analysis on Statistical Package for Social Scientist

(SPSS). Cross tabulation technique was used to cross one’s level of education with all the 24 questions that the

respondents were subjected to. The questionnaire design was made with the consideration of the following

research questions.

(1) How much is technology being used by small firms?


25

(2) What are the levels of management involvement of small firms in their business operations?

(3) To what level are the employees and management trained in small firms?

(4) What are the motivational levels practised in the small firms?

Sample Characteristics

Observation shows a lot of generation and death of small firms around Francistown. The rate of creation of

small firms is almost equal to the rate of death of the small firms. This problem has been compounded by the

world recession which has affected the buying power of customers. The growth of small firms in some areas of

Francistown came about due to economic crisis that has reduced the neighbouring Zimbabwe to a basket case.

In a way which has opened a lot of opportunities for most people with entrepreneurial minds such as Chinese

nationals and Indian trophy hunters. The Indian communities have taken full residence of the country unlike

their Chinese counterparts who are only starting to venture into mainstream Africa.

Indian nations seem to be pursuing business in many different sectors and have mostly started businesses

in construction, education, retailing (especially hardware and electronic gadgets). Chinese individuals are also

into retailing, especially clothing items and electronic gadgets. Nigerian nationals have invaded the car and

pharmacy industries and Zimbabwean and Zambians expatriates are largely employees. It will be interesting to

find how businesses are owned according to nationality. However, this is not a subject of study in this research.

Manufacturing Firms

Generally, manufacturing in Francistown is limited to small manufacturing plants which are hardly

comparable to most world class manufacturing plants. Botswana generally imports most goods from

neighbouring countries, largely South Africa. The manufacturing is limited to the production of school

uniforms, overalls for mine workers, poultry producers. There is no wide variety of these producers.

Money Lenders

Money lenders play a major role in the economy of Francistown. Most small businesses get their capital

requirements from these expensive sources. These financing sources have in a big way also contributed to the

winding up of most small firms when they fail to pay back the expensive rates. In some cases, people lose some

of their capital goods such as vehicles because they are usually used as some form of collateral when borrowing

money from “Matshonisa” (Micro-lenders).

Construction Firms

There is quite a lot construction going on in Botswana and more especially in the town. This construction

is being done by Chinese companies. Most local companies are outsourced, and this affects the relationship

marketing since the Chinese are not there to stay and the locals remain. Even so, the local firms are not local in

the “real sense” but are foreign companies that are using local fronts. The nature of these fronts is basically

politicians. It will be exciting to find out how these relationships can affect RM. So far construction industry is

one of the major employers of most local people. However, the surprising part in the industry is that most

employees are foreigners and the local people are muscling their way into the industry as they begin to

appreciate the benefits of indigenization and empowerment programs that have been introduced by the

government. In this area “malemasky” or “tenderpreneurs” (concepts explaining how the local people through

their connections through political power become masters of tenders and generally make their money by being

merely “omang” holders) (local people/empowered by their national identity cards) rule the roost. Very few

people are genuine business people.


26

Results, Discussion, and Analysis

This section summarises our results. We combined some of our findings, discussion, and literature review

to present and analyse the results.

Regular Communication With Customers

All categories (100%) indicated that they communicate with customers regularly. This is consistent with

the spirit of RM. Gummesson (n.d.) emphasised the importance of networks. He argued that “if we dissolve the

social networks or relationships, the earth is left with five billion independent and self sustaining hermits” (p.

75). Business people in Francistown are generally recognising the need to engage customers. Maybe the

challenge is that you may “step on partner’s toes” (p. 75). Working with customers may be described as some

form of dance. It requires the dancing skill and the ability to manage what is communicated. This study did not

cover “what is communicated” but rather how to “get into the dancing arena”. Communication is a prerequisite

of successful RM.

Usage of Technology

Generally business people in Francistown are sceptical about the use of technology. It appears that they

rely more on traditional technology and are suspicious of the more recent technology. Telephone usage is high

in all categories. This finding appears to be inconsistent with Cook (2011) who says “yet telephone contact is

now being challenged by increasing use of the internet by consumers as a preferred method of interacting with

businesses” (p. 24). Business people in Francistown appear to be going at a tangent with the trends in consumer

requirement development. Modern social networks like Badoo, tagged, LinkedIn, have not been generally

accepted. Figure 1 shows higher percentage of the diploma holders (55.6%) compared to certificate holders

who do not use email. This is a surprising finding taking into consideration that diploma holders are likely to be

exposed and more likely to accept new technologies due to their level of education.

Figure 1.Usage of social networks by the level of business education.

0

5

10

15

20

25

30

35

Usage of Social Networks by Educational Level Certificate

Usage of Social Networks by Educational Level Diploma

Usage of Social Networks by Educational Level Degree

Usage of Social Networks by Educational Level Masters/Doctorate

Usage of Social Networks by Educational Level No qualification


27

Failure to adapt to technology keeps the business stagnant as the business is likely to maintain the old

customers and fail to attract new ones, which may be a challenge in this revolutionary age. Cook (2011)

reiterated that “Organisations that do not have a presence in terms of social networks run the risk of becoming

the dinosaurs of their age” (p. 27). So, in the long term, in Botswana, the government is investing and

promoting ICT uses and adaptation. To survive, therefore, there is need to positively respond to these

technologies. Small firms need not adapt all of them at once, but could start say with the most popular ones in

Botswana, that is, Face book or Google, and subsequently the others.

And some interesting results are as follows.

Targeted Marketing

In all categories, the results show that generally, business people understand the importance of targeting as

a way of rewarding loyal customers, 92.3% of certificate holders tailor promotions on those customers that give

them continuous business. The same trend can be observed in diploma holders (88.9%), degree holders (64.7%),

master’s holders (77.8%), and even those without any qualifications (71.7%).

It is interesting to note that most owners and managers have a number of incentives that they used to retain

their customers. Hair Salons offer free service after is a customer visits them for about four to five times. The

same salons show adaptability to customer changing hair styles or fashion. The same can also be said about the

car washes. Those who are into retailing indicated that they offer some month-end specials for the customers

that give them more business. Results also show that those into health (opticians) offer free consultation to their

regular customers. However, the rest only give incentives or offer presents during the festive season especially

over the Christmas holidays.

Customer Suggestions and Follow-ups

There was almost a 100% agreement on this that small firms allow their customers to air out their views

and suggestions in improving RM. Some small firms indicated that they even visit their customers at home.

This is more prevalent among those who operate car washes, tailors of garments (manufacturers), and

health facilities. These are also the few who use mobile Internet. Kotler, Keller, Koshy, and Jha (2007)

noted that:

Salespeople working with key customers must do more than call when they think customers might be ready to place order. They should call or visit at the other times and offer free services, take customers to dinner, and make useful suggestions about business. (p. 525)

Communications

Most of the business owners in Francistown indicated that they communicate with their customers as often

as possible, but further probes indicate that this is with regular customers who will be enquiring about the

availability of certain goods they need. The owners hardly contact their customers any other time, and most are

not concerned with having customer profiles except for the few that buy in large quantities. The owners hardly

make use of either direct responses via the radios or television or using the local newspapers and magazines.

Francistown has “The Advertiser” and “The Northern” magazines which are distributed weekly, but most of the

small firms do not use these. However, internal communication is strong: managers, owners, and their staff

always communicate business related issues from time to time as is supported by our results. These findings are

described in Table 2 according to business owner qualifications.


28

Table 2

Responses on Communication Qualification Explanation of responses

No qualifications

No qualification category produced surprising results. It was expected that most users do not use most modern methods of communication. The results are competent and generally in the same trends with the other categories. The most plausible explanation is that, this is now the work of experience of the companies. Experience was not one of the variables studied in this study; therefore this is beyond the scope of this study. No qualification category use: catalogues (30.4%), online (30.2%), mobile (67.4%), direct mail (17.4%), couponing (34.7%), telemarketing (47.8%), e-mail marketing (34.8%), direct response radio/TV (10.8%), magazine/newspapers (41.3%), and out of home (47.8%).

Certificate holders

The certificate holders do not use direct response television/radio (100%), catalogues (53.9%), direct response magazines/newspapers (53.9%), direct mail (92.3%), e-marketing (84.6%), bus shelters (69.3%) and are anti internet (69.2%). However, majority of them love the mobile (84.75) and to a certain extent use telemarketing (53.9%).

Diploma

Diploma holders are using the following communication strategies: Catalogues (55.5%), Mobile (77.8%), direct mail (33.3%), telemarketing (22.2%), e-marketing (33.3%), direct response magazines/newspapers (55.5%), out of home (11.1%). However, 0% is using couponing and direct response radio/television. These contrast to what we have in big shops where the managers with diplomas use these methods extensively. This could be explained by the fact that they are probably too cost conscious.

Degree

Degree holders’ use less of catalogues (35.3%) compared to their diploma counterparts. They also use online (29.4%), mobile (76.5%), direct mail (47.1%), couponing (17.7%), telemarketing (35.3%), e-marketing (17.6%). 0% are using direct response television/radio, but 47.1% are using direct response magazines/newspapers. Diploma holders use more of out of home methods compared to diploma holders (29.4%).

Masters/Doctorate

Masters/Doctorate holders use catalogues (44.4%), online (33.3%), mobile (88.9%), direct mail (44.4%), couponing (22.2%), telemarketing (33.3%), e-marketing (33.3%), direct response radio (0%), direct magazines/newspapers (11.1%), out of home (11.1%).

From these results, it is apparent that communication has to be enhanced and broadened for RM to be

effective. Lamb, Hair, and McDaniel (2004) noted that:

RM is a strategy that entails forging long-term partnership with customers. It begins with developing a clear understanding of who your customers are, what they value, what they want to buy, and how they prefer to interact with you and be served by you. (p. 12)

This means that a number of channels need to be opened so that strong relations are made strong with

customers.

Training of Employees

Generally all categories say staff is highly trained in handling customers: certificate holders (84.7%),

diploma (88.9%), degree (70.6%), masters/doctorate (88.9%), and no qualifications (80.4%). Most of the

training that was referred to is in-house training. Most organizations believe that employees can learn on their

own how to build relations with customers. Certificate holders (84.7%), diploma (55.5%), degree (70.6%),

masters/doctorate (88.8%) and with those without business qualifications (84.8%) saying employees can learn

on their own.

Here are also responses on continuous staff development, firms holding meetings every morning before

they start work to strategize customer handling techniques: certificate (61.6%), diploma (44.4%), degree

(41.1%), masters/doctorate (77.8%), and no qualification (60.9%).

It was observed during the interviews that the training for most workers is internal, and is done when the

need arises. Given that most employees do not possess business related qualifications, training should


29

encompass all things about customer care. According to Kurtz and Boone (2006), they noted that “Relationship

marketing does not rest entirely on information technology; it also incorporates good manners, or etiquette,

such as greeting people properly, with a firm handshake” (p. 27).

It was noted during the questionnaire process and interviews that management involvement of managers is

on basic principles about keeping the business going. They hardly work on creating the organizational vision,

mission statement, and company objectives that someone can easily read on visiting their offices. Unlike big

businesses, on entering management offices one easily reads these. This is important in constantly reminding

all stakeholders about the purposes of being in business. Cook (2011) emphasized this point by saying thus

“The approach which many organizations adopt in formulating a customer service strategy can be outlined as

follows; link to vision, values and corporate objectives” (p. 51).

Employee Motivation

The firm offers small tokens/rewards to motivate staff improve their attitudes to customer care. The results

showed greater support of this: certificate holders (84.7%), diploma (88.9%), degree (82.3%), masters/doctorate

(66.6%), and no qualification (69.6%) (see Figure 2) say they are offering small tokens to motivate staff.

Figure 2 shows that all categories agree that their firms offer employee motivation in almost equal proportions.

The levels of motivation are also enhanced by the empowering of employees to solve customer problems

(which is also consistent with the offer of tokens).

Some of the items mentioned by the owners and managers to motivate their employees by offering

transport to and from work, and allowing their workers to buy their products at reduced prices. They also offer

bonus at the end of the year, and sometimes give the workers some food hampers. Some indicated that they

review and increase the salaries of their employees. Sadly, however, some retail outlets said they offered these

incentives when they were initially opening the shop, and have since stopped doing so.

Figure 2. Employee motivation response level.

Certificate holder, 84.7%

Diploma holder, 88.9%

Degree holder, 82.3%

Masters/Doctorate holder, 66.6%

No qualification, 69.6%

Employee motivation response level-agreeing


30

Any success of RM needs to be fully supported by a happy workforce. Kurtz and Boone (2003) further

reiterated this by saying that “Employees can seldom, if ever, satisfy customers when they themselves are

unhappy” (p. 321). Things which satisfy employees need not be big especially for small firms, but surprises in

line with food hampers, lunch offers, and small presents as tokens of appreciation will go a long way in

satisfying the employees. Even employee of the month awards without money will always make a difference.

Employees are also motivated by being empowered to solve some problems brought by customers. The

researchers however found out that whilst employees are allowed to do this, this is very much restricted which

is however, normal. Some indicated that it is only on minor problems, or under supervision, otherwise

management does this alone. Most foreigners owned small firms allowed employees to solve problems since

they are the ones who will understand the local language (Setswana).

Figure 3 refers to objective awareness levels in the respondents. Generally all categories agree that, there

is clear communication between management and staff as a sign of good motivation (Certificate holders

(92.3%), diploma (100%), degree (82.4%), masters/doctorate (100%), and no qualification (73.9%)).

Figure 3. Objective awareness response level.

Others Services Rendered

If the product is not available, management tries to make it available for the customer who gives

continuous business. This follows the same trends as previously discussed above but however about the lessons

learnt from big businesses, the percentages take a dramatic plunge to certificate holders (53.9%), diploma

(66.6%), degree (64.7%), masters/doctorate (66.6%), and no qualification (54.3%).

Certificate holder, 92.3%

Diploma holder, 100%

Degree holder, 82.4%

Masters/Doctorate holder, 100%

No qualifications, 73.9%

Objective awareness response level-agreeing


31

Summary of Findings

Business people in Francistown are generally recognising the need to engage customers;

Most small retailers in Francistown rely more on traditional technology and are suspicious of the more

recent technology;

Level of education and experience affect the adoption of modern social network technologies which can be

employed by small firms to enhance relationship marketing;

Business people in Francistown appear to be going at a tangent with the trends in consumer requirement

development;

Business people understand the importance of targeting as a way of rewarding loyal customers;

Small firms allow their customers to air out their views and suggestions in improving relationship

marketing;

Small firms in Francistown communicate with regular customers who will be enquiring about the

availability of certain goods they need;

Small firms in Francistown are not taking advantage of cheap and free magazines to communicate with their

customers;

Training used by small firms in Francistown is largely internal;

Management in small firms is heavily involved in the process of relationship marketing;

Employees are highly motivated.

Discussion

It appears that all sectors are generally doing well but the major challenge appears like, the companies lack

capacity to expand in doing the things that they have set themselves. The following conclusions can be drawn

from the discussion:

Education is a success factor for small businesses considering, looking at those with diplomas, degrees, and

higher degrees who tend to differ with those with certificates and without qualifications on how they employ RM

and other marketing communication technologies;

Most firms are being run by uneducated people. The lower the education, the lower the application of

technology;

Experience is a great player in the success of small businesses as they appreciate the importance of RM and

do make effort to apply the minimum RM practices;

Technology is not being used optimally;

Most businesses are very slow in applying new technologies and cling to old technologies yet there are

better and cheaper technologies which can be more efficient;

The form of training being used is in-house training. This level of training is only capable of maintaining the

status quo of the organization and does not aim out towards expansion and attracting new customers;

Most small firms know what their customers expect from them;

Given the level of management involvement, most small firms are likely to survive and maintain the same

levels of operations.

Conclusions

Small business owners in Francistown have an idea of RM, however, they lag behind in terms of the

technologies and other tools that are used to enhance the customer experience. They really need to consider


32

some or all of the recommendations made in this regard to remain competitive. Failure to keep customers into

the long-term future affects the business continuity and opens it to aggressive competition that eventually

closes many such businesses out. RM needs to be invested into, through training of staff, continuous

professional development of the owners, and taking advantage of the available RM tools. These small

scale-scale business owners usually lack the long term focus. Without which, according to Katsande (2004), in

quoting Wilson and Gillison (1995), wrote that “organizations that are efficient and effective thrive”,

“organizations that are efficient and ineffective die slowly” (p. 15). Small scale businesses by virtue of lacking

the skills that are required are normally found to be ineffective, that is to say they fail to get the required results

and eventually close down.

Recommendations/Strategies

There is strong need to consider using the off-the-job training method which will bring in fresh and new

ideas in terms of RM rather than depending on internal training alone;

There is need to tap into the use of mobile/cell phone internet which is becoming popular with the

customers;

Management and owners still need to expand their levels of education, and broaden their visions so that

small firms are seen expanding;

Owners and management need to build strong associations or ties with well established and big business

managers instead of confining themselves to their territories;

There is need to infuse new blood into the management of small firms in order to adjust and accept new

technologies;

Small firms need not adapt all of the modern social technologies all at once, but could start say with the most

popular ones in Botswana, that is, Face book or Google, and subsequently the others;

Further research is recommended to confirm that employees are well trained.

References Berry, L. (1983). Relationship marketing. Chicago: American Marketing Association. Cook, S. (2011). Customer care excellence. New Delhi: Kogan Page Ltd.. Fitchett, J., & McDonagh, P. (2000). A citizen’s critique of relationship marketing in risk society. Journal of Strategic Marketing,

8(2), 209-222. Gummesson, E. (1999). Total relationship marketing: Experimenting with a synthesis of research frontiers. Australian Marketing

Journal, 7(1), 72-85. Katsande, C. K. (2004). Strategic marketing management. Harare: Zimbabwe Open University Module. Kotler, P., Keller, K. L., Koshy, A., & Jha, M. (2007). Marketing management—A South Asian perspective. India: Dorling

Kindersley Pvt. Ltd.. Kurtz, D. L., & Boone, L. E. (2006). Principles of marketing. Delhi: Akash Press. Lamb, W. C., Hair, J. F., & McDaniel, C. (2004). Marketing. Singapore: Thomson Asia Pte. Ltd.. Public of Botswana. (1999). Policy on small medium and micro-enterprises in Botswana. Government White Paper No. 1,

Gaborone. Sorce, P. (2002). Relationship marketing strategy. Rochester, N.Y.: Rochester Institute of Technology. Venter, R., Urban, B., & Rwigema, H. (2008). Entrepreneurship: Theory in practice (2nd ed.). London: University Press.


33

Appendix A

Dear business owner:

We are conducting a study on your experiences with relationship marketing in your business. We would appreciate if you

would fill in the attached questionnaire and return it to us as soon as possible. Please tick the relevant response under the correct

heading that best describes your response.

Table A1

Questionnaire

Strongly disagree

DisagreeNeither agree or disagree

AgreeStrongly agree

A Communication

1 We often communicate with customers

2 There is a lot of use of emails, SMS, telephone, in communicating with our customers

3 We make use of public relations quite a lot

4 Tailored promotions are used to keep customers who give us great business

5 The firm allows customers to air their views about business, as a two way communication process

6 Communication is enhanced by making follow-ups with clients after they buy from us

7 Catalogues and direct communication are heavily used in building strong relationships

8

B Training of employees

1 The staff is highly trained in customer care handling

2 Employees learn on their own how to build relations with customers

3 Managers and owners always talk to employees about building closer ties with clients

5 As part of continuous staff development, we hold meetings every day before start of work. These are meetings how to build a unified approach to customer treatment

C Management involvement

1 Level of interaction with the owners and managers is high in the organisation

2 Owner and manager are coming up with initiatives in providing customer care

3 Management is interested a lot in customer complaint handling

4

D Employee motivation

1 The firm offers small tokens/rewards to motivate staff and enhance their attitude on customer care

2 Employees are empowered to solve customer problems

3 Employees are aware of the objectives of the organisation and everyone works towards that

4 There is clear communication between management and staff as a sign of good motivation

5 Do staff get surprises from their bosses for behaviours that enhance good customer care, as form of encouragement


34

(Table A1 continued)

Strongly disagree

DisagreeNeither agree or disagree

AgreeStrongly agree

E Others services rendered

1 If the product is not available, effort is put get it for the customer that give us continuous business

2 Any lessons on how to care for customers learnt from big businesses that you practice, e.g., provision of chairs for customers before they are saved, as done by Barclays, PEP airtime customers

,

3 Use of the social networks in a dancing business-client interaction

4 Delivery is provided and is flexible and this is helping in keeping our customers

5 Our customer preferences is what determines what provide to them most


Inconsistency Quality Products (on Six Sigma Programs) Effect

on Customer Loyality: Case Study of Industry “Tahu”

Ayi Tejaningrum

STIE EKUITAS, Bandung, Indonesia

Product “Tahu” is a traditional food of Sumedang city in Indonesia, and becomes an icon of the city. This study

aims to see how consistent the quality of the products developed by small and medium-sized enterprises (SMEs) in

the prosess six sigma program compliance effect on customer loyalty. The method used in this paper is descriptive

exploratory. Based on a sample of 30 SMEs and 143 end-consumers, it showed that inconsistency in the quality

common among SMEs with small production capacity size that gives discomfort to the consumer. Inconsistency in

the quality values at each of SMEs which are distinguished by the production capacity is 3.301 or unclassified often

inconsistent on a small scale SMEs, 3.460 or unclassified SMEs are often inconsistent in size and capacity being

4.227 or inconsistent unclassified rare or likely to be consistent on SMEs the size of the production capacity.

Based on calculations using simple regression, suggest that the effect of dimensional consistency of product quality

to customer loyalty is at 34%, while the balance of 66% is influenced by other variables such as promotion,

competition level, location of the company etc.. It is recommended for further research is to be able to analyze the

causes of the high product quality inconsistencies SMEs.

Keywords: inconsistency quality, six sigma, customer loyalty

Introduction

Background Research

The study was conducted on 30 small and medium-sized enterprises (SMEs) engaged in the manufacturing

“Tahu” in the city of West Java Indonesia Sumedang. “Tahu” is the Indonesian traditional food, such as

soy-based foods are processed by boiling it to get the juice and left to curdle. Thickening of the soybean in

Indonesian society is known by the name of “Tahu”. Almost all Indonesian people love this food, both in

cooking and in cooking with other variations.

Common problems experienced by SMEs include: low quality of products, low commitment to fulfill

customer orders both locally and overseas, simple technology can result in a diversity of products, the lack of

communication and information networks with the relevant parties, and doing less research activities to analyze

the market demand etc. (Tejaningrum, 2012). This condition occurs also in SMEs crafters “Tahu” in the town

of Sumedang, where consumers feel that the sense of “Tahu” tends to vary, sometimes find the “Tahu” with

good taste, sometimes a bit high in salt so salty, or sometimes find a product that is somewhat stale, whereas

Ayi Tejaningrum, Dr., SE., MT, Management Department, STIE EKUITAS. Correspondence concerning this article should be addressed to Ayi Tejaningrum, PHH Mustopa No 31, Bandung, Indonesia.

E-mail: [email protected].

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INCONSISTENCY QUALITY PRODUCTS (ON SIX SIGMA PROGRAMS) EFFECT

36

from the same industry.

This study wants to see how far the relationship between the consistency of product quality dimension

“Tahu” to customer loyalty, and also analyzes the extent of the consistency of the quality of these products

occur at various scales of production.

Identification of the Problem

The identifications of the problem are the following:

How will consumers respond consistency of quality at various scales of production?

How does effect the level of consistency of quality with loyalty?

Is there a difference in the consistency of the quality dimensions at various scales of production?

What factors lead to inconsistencies dimensional product quality?

Purposes and Research Objectives

The purposes and research objectives of this paper are:

To find out how consumers will respond consistency of quality at various scales of production;

To see the effect of the level of consistency of product quality with loyalty;

To determine whether there are differences in quality consistency at various scales of production;

To determine what factors lead to inconsistency in the quality products.

Research Design

The Concept of SMEs

The concept of SMEs will be used in this study follows the provisions set out in the Constitution of the

Republic of Indonesia No. 20 Invitation 2008 on Micro, Small, and Medium Enterprise. Here is the concept

(Tejaningrum, 2012):

Small business: Is a productive economic activity that stand alone, which is conducted by an individual or

business entity that is not a subsidiary or branch company is not owned, controlled, or be a part either directly or

indirectly from a medium or large businesses that meet business criteria;

Medium enterprises: Is a productive economic activity that stand alone, which is conducted by an individual

or business entity that is not a subsidiary or branch company owned, controlled, or a part, either directly or

indirectly by the small business or a large business with the amount of wealth or annual net sales proceeds as

provided in this Act.

Table 1

Criteria for Micro, Small, and Medium Enterprise According to Law No. 20 of 2008

No. Business Criteria

Asset Revenue

1 Micro Max. 50 million Max. 300 million

2 Small business > 50 million-500 million > 300 million-2.5 billion

3 Medium enterprise > 500 million-10 billion > 2.5 billion-50 billion

Note. Source: Law No. 20 of 2008 (2012).

In this study, the classification of SMEs will refer to the Law of the Republic of Indonesia No. 20 of 2008,

as shown in Table 1. The craftsmen “Tahu” will be classified small if it has no assets of more than Rp 50

million and a turnover of not more than Rp 300 million. Classification small if it has assets of more than Rp 50


37

million to Rp 500 million with a turnover of more than Rp 300 million to Rp 2.5 billion. For classification

effort is being, has assets of up to Rp 500 million to Rp 10 billion with a turnover of between Rp 2.5 billion to

Rp 50 billion.

Based on these criteria, the study was divided into three groups of SME uptaken by soybean as the main

raw material of the industry “Tahu”. The classification is in Table 2.

Table 2

Classification Scale Industrial “Tahu” Sumedang City

No. Business Criteria

Absorption soybean/Mont Number of SMEs

1 Micro Max. 1,500 kilograms 14

2 Small business > 1,500 kilograms-3,000 kilograms 12

3 Medium entreprises > 3,000 kilograms 8

Note. Source: Compiled from field data.

In the SME classification using soy as the basis of the absorption calculation is based on the clustering of

matter in a practical convenience, but still refers to Law No. 80 of 2008.

The Concept of Quality and Quality Consistency

Adopting the concept of quality of some of the renowned quality experts includes: Goetsch and David

(2002, p. 3), Shigeru (1994, p. 6), Juran (1995, p. 9), in particular the definition of quality by Tejaningrum

(2012):

Complies with specifications that match or even exceed the specifications of the expected customers, both

internal customers and external customers where these specifications shall include specifications for goods and

services to deliver them;

Quality is dynamic in line with changing consumer behavior over time;

The dimensions of quality should be sourced from the perception of consumers, not producers.

Dimensions of quality in the product from the adopting quality dimension (Garvin, 1988; as cited in

Tjiptono & Chadra, 2005) and consists of eight dimensions: (1) performace; (2) feature; (3) reliability; (4)

conformance to specifications; (5) durability; (6) servicebilty; (7) esthetic; and (8) perceived quality. If we

apply the eight dimensions in the industry “Tahu” it will look as follows:

Performance: regarding the basic operating characteristics of the sense of “Tahu”;

Feature regard to secondary or complementary characteristics of the product to “Tahu” which packaging is

used, how to present, accompanying food package etc.;

Reliability with respect to a small chance of damage or disfigurement know scorched, stale taste and form

that broke;

Conformance to specifications, the extent of the design and operating characteristics meet the standards that

have been set previously. In this case is with respect to the overall specification “Tahu” which are the shape, color,

taste, price, food broadcaster, packaging etc.;

Durability: associated with the product “Tahu” how long it can still be eaten or expired;

Servicebility: with respect to the speed and comfort of consumers “Tahu” to get the service and the

cleanliness and security of the service;

Esthetics, the product appeal to the senses, in this case with regard to shape, color, appearance, size,


38

packaging, etc.;

Perceived quality: is related to the perception of the quality delivered by the various brands consumers the

industry like “Epen oyib”, “Tahu bungkeng”, “Tahu Sari Rasa”, “Tahu Haji Tatang” etc..

Of the eight dimensions of quality of their products, consumers will analyze the consistency dimension of

the products from time to time, or the scheme can be seen in Table 3 and Figure 1.

Table 3

Dimension the Quality of the Product “Tahu” No. Quality dimension Quality specification

1 Performance Sense

2 Feature Food broadcaster, wrapping, how to present, cleanliness

3 Durability Shelf life

4 Conformance to specifications Color, flavor, crispy level

5 Serviceability Speed and comfort care, proper hygiene services

6 Estetika Color, shape, appearance, size

7 Perceived quality Image of the company

8 Reliability Charred, taste stale, dirty, not crisp

Based on Table 3, then the dimension of the quality of the product idea can be identified in Figure 1.

Figure 1. The dimension of the quality.

Consistency of Quality the Six Sigma Program

Consistency of a quality product that has been determined based on the specifications that are expected by

consumers, the company has an obligation to maintain the consistency of the product. Common problems in

SMEs happen to inconsistency in the quality of products (Tejaningrum, 2012). Consistency in product quality

that often occurs in SMEs is the price of products, colors, sizes, flavors for food industry, performance or

overall appearance, product durability, speed and convenience of service, low quality assurance (Tejaningrum,

2012). Why this consistency must be maintained, the principle is to provide certainty to consumers, it will be

very closely related to the expectation value of the consumer at the time brought before making a transaction.

Consumers will conduct transactions, while, at least have the hope or expectation of the quality of the product

to be bought, hope this is usually in the form of price, speed of service, taste, color, size, performace, durability,

comfort care, etc.. With this expectation value, consumers will compare the performance values obtained at the

time the goods have been consumed. Understanding Six sigma was considered, by Pande, Neuman, and

Cavanagh (2000), as the target of operating performance as measured by statistics with only 3.4% for every

million activities defects or opportunities. The author himself defines six sigma as a consistency of product

quality, where the product will be uniform, and if anything happens variability chances only 3.4% of the one

Performace, feature, esthetic, durability, servicebility, conformance of specification, reliability, perceived quality

Dimensional consistency of quality “Tahu”: • Consistency sense out • Consistency accompanying food flavors • Consistency level of crispy • Consistency comfort • Consistency of service speed • Consistency durability • Consistency of performance • Consistency avoid disability


39

million products.

The Concept of Customer Loyalty

Consumer satisfaction is the comparison between expectation and reality when consuming a good or

service. If performance is below expectations, the customer is not satisfied. If performance is below

expectations, the customer is not satisfied. If performance meets customer expectations, the customer is

satisfied. If performance exceeds expectations, the customer is highly satisfied or delighted (Kotler, 2003).

Satisfaction is absolutely difficult to define because so many variables that influence it. While loyalty,

researchers took kosep as the level of consumer loyalty, penilaianya indicator is that if he is loyal then he will

continue to make a deal with the company when the product is needed, and they will not heed the advertising or

promotion of a competitor, they will buy other products produced by the company. In this study, the

consistency of the quality dimensions was measured using a Likert scale 5-story, namely, very consistent (5),

consistent (4), fairly consistent (3), less consistent (2), and inconsistent (1).

Research Methods

The method used in this research is descriptive qualitative method. Where data are described only

descriptively to describe the situation and conditions.

Population and Sample

Population of this study is the industry “Tahu” Sumedang town. Number of artisans who are subjected to

as many as 30, with 123 involving consumers or buyers fried Tahu. Sample of 30 SMEs is classified into

groups of micro, small, and medium enterprises (MSMEs) as to what has been presented in Table 2.

Analysis of Results

Response Consumers on Consistency Product Quality “Tahu”

Consistency of quality dimensions “Tahu” that were identified in item eight measurements (dimensions

performace, features, esthetic, durability, servicebility, conformance of spesification, reliability, perceived

quality) was measured using a questionnaire as a tool to collect data by calculating the level of consistency of

quality dimensions, using a Likert five scale: very consistent (5), consistent (4), fairly consistent (3), less

consistent (2), and inconsistent (1). Of 123 end-users, distributed on three scale production of micro, small, and

medium, respectively.

Table 4

The Average Level of Dimensional Consistency of Product Quality

No. Variable quality product Micro Small Medium

1 Consistency sense out 3.47 4.24 4.5

2 Consistency accompanying food flavors 3.24 3.89 4.31

3 Consistency level of crispy 2.65 3.21 3.86

4 Consistency comfort 3.24 4.26 3.98

5 Consistency of service speed 3.56 3.42 4.33

6 Consistency durability 3.20 4.21 4.46

7 Consistency of performance 3.49 3.89 4.12

8 Consistency avoid disability 3.56 3.98 4.26

Average 3.301 3.460 4.227

Note. Source: Calculated from field data.


40

With reference to Table 4, the following is the average value of consistency level. Micro scale has

averaged 3.301, a small scale has an average value of consistency level of product quality at 3.460 and the

average level of consistency of product quality dimensions is 4.227 medium scale. These data showed that the

scale was has the consistency of product quality dimensions higher than the small and micro scale. Small scale

has an average value of dimensional consistency of better quality than the micro scale.

Effect of the Level of Consistency of Product Quality Dimensions on Consumer Loyalty

To see the relationship between the dimensional consistency of product quality to the level of consumer

loyalty, it must first see the value or level of consumer loyalty to their respective industries. Loyalty levels were

measured using a Likert scale. A score of 5 is given to consumers with excellent loyalty criteria, value of 4 to

the criteria of loyalty, good value for category 3 loyalty enough, the value of 2 for the category of less loyalty,

and value 1 for the category of bad loyalty. Here are the average values of customer loyalty to the product on a

scale out of business.

Table 5

The Average Level of Consumer Loyalty Based on a Scale out of Business

Average consistency

No. Variable quality of the product Micro Small Medium

1 Loyalty is very high 4 12 22

2 High loyalty 7 14 13

3 Loyalty enough 11 9 4

4 Loyalty less 11 6 2

5 There is no loyalty 8 - -

Total consumer 41 41 41

Average 2.707 3.780 4.341

Based on the data in Table 5, the micro scale that the number of consumers who fall into the category of

very loyal customers there are four consumers, at scales that fall into the category of very loyal customers there

are 12 consumers, while for medium scales that fall into the category of very loyal customers there are 22

consumers.

Medium business scale has a number of very loyal customers compared to most small and micro scale.

The number of consumers who fall into the category of a good level of loyalty, the most widely owned by as

many as 14 small scale, but this is not much different from the medium scales have 13 customers, while at the

micro scale there are only have seven customers. While to the average level of loyalty, the average value

obtained for the micro scale of 2.707, for a small scale, there has an average value of 3.780 and the scale has an

average value of 4.341.

Effect of the Level of Consistency of the Dimensions of Quality Products out of Consumer Loyalty

Hypothesis to calculate the influence of the dimensions of quality products out of consumer loyalty are:

Ho: r = 0

H1: r ≠ 0

It means that the first hypothesis (Ho), states that there is no influence of the dimensional consistency of

product quality to consumers’ loyalty, and its hypothesis (H1) shows the influence of the level of consistency of

product quality consumer loyalty. By using the alpha (α = 5%), the results obtained following analysis in Figure 2.


41

σ/2 = 0.025Z = ‐1.96

σ/2 = 0.025Z = 1.96

Ho

H1

Figure 2. Local acceptance and rejection of the hypothesis.

From the calculation results obtained z count of 2.34. With a confidence level of 95%, the obtained z table

is 1.96 as shown in Figure 1. Because z count has a value greater than z table then reject H0 and H1 is accepted.

It can thus be concluded that the level of consistency of product quality dimensions affects customer loyalty.

From the calculation results obtained using the simple regression coefficient of determination of 0.34

means that the consistency of product quality dimensions was affected positively by 34% of the level of

consumer loyalty. Because the determination coefficient is positive, then this condition indicates that, the

higher the level of consistency of the product quality dimension, the higher the level of consumer loyalty. There

are other variables that affect the level of consumer loyalty in addition to the level of consistency of product

quality dimensions which are price, promotion, business location, level of competition, etc.. Another variable is

the magnitude of the effect by 66%.

Factors Causing Inconsistencies Quality Dimensions

Conditions for SMEs in general have similar characteristics, which konsistenssi quality dimensions tend to

be inconsistent (Tejaningrum, 2012) in a paper in the creative industries Cimahi consistency. Inconsistency in the

quality of creative industry products Cimahi city is not much different from the industry of “Tahu” Sumedang

town, where the cause of the inconsistency factor quality dimensions are caused by the following points.

Access to the upstream industry. Micro small businesses generally have very low access to suppliers,

where they tend to get raw materials from suppliers who source vary due to low production capacity. This

condition is different from the medium in which the SMEs scale, they generally have a supplier who is certain,

and usually from the main sources of suppliers, so that which will ensure uniformity of quality of raw materials.

This condition is seen that the consistency of the quality of the taste and crispness and performance consistency

MSMEs, micro has a low value compared to medium sized SMEs. Apart from the aspect of raw material,

inconsistencies in the quality of flavor, crispness and performance can also be caused by the frying oil, which is

generally medium sized SMEs already have a standard maximum limit use of frying oil, while they tended

micro SMEs would use frying oil many times without the standard limit time use.

Standardization process. The most dominant weakness in maintaining consistency of product quality on

SMEs is the absence of a written standard process, so different people will spell out the process is relatively

different, and this will certainly result in a inconsistency of quality. This condition is exacerbated by the high

turnover rate of labor especially in micro SMEs, and the process of knowledge transfer does not occur. This


42

results in a low durability consistency, also the performance of the product itself.

Equipment that traditional. Most SMEs have problems with regard to classic that is still traditional

production equipment with a low calibration values, this condition will result in a high level of product variety.

Conclusion and Suggestion

From this paper, we can conclude that:

Small businesses have a value inconsistency micro dimensions of product quality compared with small

and medium businesses, where the value of the average consumer’s perception for dimensional consistency of

product quality at the micro scale is 3.301 or consistent enough entry categories, including the category of

3.460 small scale and medium scale consistent enough 4.227 including a consistent scale;

The highest level of customer loyalty occurs in medium scale enterprises, while the lowest level of loyalty

is on the scale of micro enterprises. The average value for the level of customer loyalty on a scale of 2.707

micro enterprises, small scale value of loyalty in 3.780, and the value of loyalty on the scale being 4.341;

The level of consumer loyalty to the micro scale SMEs amounted to 2.71 or log in categories less loyal,

small scale entry of 3.78 or category and quite loyal and medium scale include the category of 4.34 or loyal. This

data suggest consumers take out a medium scale enterprises have a high loyalty rate than small and micro scale;

Influence the level of consistency of the product dimension to customer loyalty is at 34%. While the

remaining 66% are other variables such as location of the business, selling price, promotion system, the level of

competition etc.;

The need to sustain the role of government procurement of raw materials so as to ensure uniform product

quality, to form a ministry under the official container trade;

The need for the role of government to improve the knowledge and skills of SMEs in maintaining the

consistency of product quality dimensions.

References Goetsch, L. D., & Davis, B. S. (2002). Quality management for production, processing and services. New Jersey: Prentice-Hall. Juran, J. M. (1995). Quality designing, creating the new definition of quality into goods and services. Jakarta: Library Binaman

Pressindo. Kotler, P. (2003). Marketing management (11th ed.). Upper Saddle River, N.J.: Prentice Hall. Law No. 20 of 2008. (2012). Small and medium enterprises. Retrieved from http://www.depkop.go.id Pande, P. S., Neuman, R. P., & Cavanagh, R. R. (2000). The six sigma way. New York: The McGraw-Hill Companies. Pydek, T. (2001). The six sigma handbook. Jakarta: Four Salemba. Shigeru, M. (1994). Wide total quality control. Jakarta: Management Institute. Tejaningrum, A. (2012). Inkonsistensi Dimensi Kulitas Industri Kreatif UMKM Kota Cimahi Dalam Mencapai Nilai Six Sigma.

Proccedings from Seminar Nasioanl Kewirausahaan dan Industri Kreatif Bisnis II. SNKIB II Universitas Tarumanegara. Tejaningrum. A. (2013). Effect of creativity and innovation prodution on performance of organization (Case study of Industrial

wood craft). Proceedings from 3rd International Conference on Management. Penang Malaysia. Tjiptono, F., & Chadra, G. (2005). Service quality satisfaction. Yogyakarta: Andi Offset.


Meta-synthetic Strategies for Digital Recordkeeping and

Knowledge Utilization: International Trends*

Xiaomi An

Renmin University of China (RUC), Beijng, China

Judith Ellis

Enterprise Knowledge Pty Ltd., Melbourne, Australia

With the increasing number of applications and services online, more and more business processes are carried out

in a fully integrated digital working environment. To ensure the success of a business and the smart capture and

reuse of organizational knowledge, adequate recordkeeping is essential. A review of the related literature indicates

that international trends and future directions of recordkeeping awareness, recordkeeping processes and regimes,

recordkeeping systems and technologies are moving towards meta-synthetic support in a digital environment at

strategic level. However, little has been discussed about specific strategies of meta-synthetic support for digital

recordkeeping, and in turn, organizational knowledge. The purpose of this paper is to propose the adoption and

adaptation of the ISO/TC 46/SC 11 series of standards and the integrated use of ISO management systems

standards (MSSs) as enablers of meta-synthetic strategies to enhance organizational performance and accountability

through sustainable digital recordkeeping. The integrated use of ISO MSSs provides ever increasing opportunities

for integrated product, process, service, and compliance control. The mechanisms of the above meta-synthetic

strategies are collaboration, optimization, innovation, and compliance. The theoretical foundations are the

integrated use of life-cycle, continuum and ecosystem theories with multidisciplinary perspectives. The practical

outcomes are the support of varied evidence-based collaborations at multiple levels, such as national strategies and

plans for digital continuity, knowledge sharing and reuse, open government initiatives, e-government information

architecture and services competence building, and enterprise information governance.

Keywords: digital recordkeeping, knowledge management, innovation, meta-synthetic strategies, international

trends

Introduction

With more software applications and business and government services online, business processes within

an organization are increasingly carried out in a fully integrated, common digital working environment. More * Acknowledgements: This work is partly supported by the National Natural Science Foundation of China Key Program (Project Number: 71133006/G0314; Project Name: Developments of the Information Resources Industry in China: Strategies and Policies) and the National Social Science Foundation of China Major Program (Project Number: 13 & ZD 184; Project Name: Novel Mechanisms for the Integration of National Digital Archival Resources and Their Utilization).

Xiaomi An, Ph.D., Professor, Key Laboratory of Data Engineering and Knowledge Engineering of the Ministry of Education, Renmin University of China/School of Information Resources Management, Renmin University of China.

Judith Ellis, Managing Director, Enterprise Knowledge Pty Ltd.. Correspondence concerning this article should be addressed to Xiaomi An, Room 23, Jingyuan Building 9, Renmin University

of China, Beijng, 100872, China. E-mail: [email protected].

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records are born-digital and are expected to be maintained, used, and reused digitally and for multiple purposes

over time.

Creation and management of records are integral to any organization’s activities, processes and systems, records enable business efficiency, accountability, risk management and business continuity. They also enable organizations to capitalize on the value of their information resources as business, commercial and knowledge assets, and to contribute to the preservation of collective memory, responding to the challenges of the global and digital environment. (ISO30300, 2011; ISO30301, 2011)

Good digital recordkeeping is an essential component of successful e-business and organizational

innovation.

Open government initiatives in advanced countries are undergoing a transition from paper to electronic

recordkeeping. For example, all ministries of the Netherlands are required to be connected in the cloud by 2015

(Hofman, 2011), and Library and Archives Canada plans to be fully digital by 2017 (Allard, 2011), the Obama

administration has set a goal for the federal government to go completely paperless by the end of 2019, by 2019,

federal agencies will manage all permanent electronic records in an electronic format in US (Managing

Government Records Directive, 2012). Digital recordkeeping is the backbone of open government initiatives and

should be integrated into business processes (Presidential Memorandum—Managing Government Records, 2011).

There are increasing expectations of citizens and customers that organizations should operate in a trustworthy,

accountable, transparent, and socially responsible manner (ISO/TC46/SC11, 2007). However, according to a 2007

survey in China, almost 80% of organizations had no measures in place for the storage of records of emerging

technology in China (Zhang, 2008). According to a 2010 survey by the National Archives and Records

Administration (NARA), 95% of federal agencies were at a high to moderate risk of compromising the integrity,

authenticity, and reliability of records due to no management regime for digital records, such disturbing results

reveal that many government records are at risk of being lost forever (Ferriero, 2012). The need for robust digital

recordkeeping is becoming more pressing (Australian National Audit Office, 2012).

The challenges of the digital environment have been the focus of many initiatives in recent years.

Challenges include:

How to effectively assure the authenticity, reliability, integrity, usability, and reusability of records through

the continuum of their existence in an ever-changing digital environment;

How to maintain both the business value and the enduring societal value of records in conformity with

increasing diverse legal, business, cultural, and societal requirements throughout the records continuum;

How to robustly enhance consistent and sustainable recordkeeping frameworks to bring people, process, and

technology together as a complex new whole (Mcleod, Childs, & Hardiman, 2010; Upward, 2013).

International trends and future directions of recordkeeping awareness, recordkeeping processes and

regimes, recordkeeping systems and technologies have been identified as moving towards meta-synthetic

support in the digital world (An, Sun, & Zhang, 2011). However, there are few discussions on meta-synthetic

strategies for digital recordkeeping based on the integrated use of ISO recordkeeping and management systems

for records (MSR) products in archival and recordkeeping literature (Cabero, Martín-Pozuelo, & Zazo, 2011).

The adoption and adaptation of ISO/TC 46/SC 11 series of standards and integrated use of ISO MSSs as

enablers of a meta-synthetic strategy for digital recordkeeping lead to innovation in and for society. “MSSs

provide tools for a system and verifiable approach to organization control in an environment that encourages

good business practices” (Bustelo & Ellis, 2011). ISO/TC 46/SC 11 standards provide a managerial framework,


45

as well as standards and guidance for the design and application of recordkeeping practices and processes to

ensure authoritative and reliable information and evidence of business activity in organizations for as long as it

is needed for any purpose.

Concept of the Meta-synthetic Strategy

The concept of “meta-synthetic” originated in the late 1980s from Chinese scholars (Qian, Yu, & Da,

1990). It refers to a comprehensive integration methodology, combining people, knowledge and tools,

integrating quantitative and qualitative methods, theories and practices, dynamic and static processes, macro

and micro levels, centralized and distributed environment, etc. (Qian et al., 1990; Da, 1995; Li & Liu, 1998; Yu,

2005; Gu, 2007). The implications of the meta-synthetic concept are that its holistic and systems approach to

the integration of different independent parts as an integrated whole results in a large, open, and complex

system (An & Wang, 2010; An, 2011b). The adoption of meta-synthetic strategy has competitive advantages of

collaborative ways of thinking, optimized process, innovative system and compliance services through

integrated use of ISO MSR series of standards and other ISO recordkeeping products.

The hypothetical meta-synthetic strategy recommended in this paper for digital recordkeeping and

utilisation capture includes four elements:

(1) Collaborative ways of thinking towards unified goals for value-added services and high organizational

effectiveness. This thinking merges expectations of clients from more than one field or stakeholders from more

than one group, for example, evidence-based governance and collaboration for ISO MSSs implementations

(ISO 9000 Quality management, ISO 31000 Risk management, ISO 26000 Social responsibility, ISO 27000

Information security management, ISO 14000 Environment management, ISO 5001 Energy management,

ISO/TS 22003 Food safety management, ISO 28003 supply chain security management, ISO 19011 auditing

management, etc.). As a result, disaster recovery and business continuity, corporate and collective memory, and

benefits to all the organization’s stakeholders would be strengthened;

(2) Optimized processes promoting competitive complementary advantages for best practice and overall

efficiency. Such processes merge procedures, methods, and tools from more than one business process, such as

life-cycle management, continuum regime, and ecosystem. As a result, redundant and duplicate information is

eliminated, and business efficiency, effective decision-making, IT performance, and the effectiveness and

efficiency of organization as a whole are improved;

(3) Innovative services promoting the best value of products for a cost effective economy, which merge

multiple product quality criteria and requirements across systems. Relationships and linkages amongst MSS

would be built to be adaptable to organizational structure and culture change to enable information sharing,

sustainable development, and organizational innovation and competence building;

(4) Compliance synergy promoting consolidated conformity assessment with diverse kinds and multiple

levels of legal, regulatory, policy and standards requirements. As a result, the responsibility chain, legislative

and regulatory compliance, defence of stakeholders rights and interests, accountability and the social

responsibility of organizations are enhanced.

Such a strategy aims to build an overall management framework through which the organization’s

objectives are set, performed, and controlled, and at the same time provide the benefits through integration with

impacts such as eliminating redundancy, establishing consistency, optimizing processes and resources,

consolidating assessments, reducing maintenance, and improving decision making (ISO, 2008).


46

The Mechanisms of Meta-synthetic Strategies

Table 1 suggests the integrated use of ISO/TC 46/SC 11 products and ISO MSSs as robust enablers of a

meta-synthetic strategy for digital recordkeeping and knowledge capture. The mechanism is the integrated use

of three methodologies for digital recordkeeping, in terms of life-cycle (records management), continuum

(management systems for records), and ecosystem methodology (management systems standards) as a

complementary whole (An et al., 2010; An, 2011b). The life-cycle methodology focuses on protecting the value

of records as evidence of transactions across time and space in records systems at the operational level. This

needs the collaboration of various stakeholders as a cooperative whole. The continuum methodology focuses on

sharing the value of records as evidence and the resources of an organization across time-space at the

meso-level. This requires optimization of processes and systems as a harmonious whole. Ecosystems

methodology focuses on creating the value of records as organizational evidence, resources, and assets across

time-space at strategic level. This requires innovation in recordkeeping capability to be embedded in

management systems as an interactive whole. Based on the integrated use of the three methodologies, the

meta-synthetic methodology focuses on adding value to records as societal memory, resources, and assets by

taking advantage of the disciplines of business continuity management, recordkeeping, and knowledge

management as an adaptive whole, to face challenges of complexity, uncertainty, compliance, and

sustainability of business and systems in a networked society.

Table 1

Mechanisms of Meta-synthetic Strategies

Meta-synthetic mechanism Life-cycle methodologyContinuum methodology

Ecosystem methodology

Meta-synthetic methodology

Why/values made (knowledge management)

Protecting value/recordkeeping

Sharing value /MSR

Creating value/MSSsAdding value to sustainability/business continuity records & knowledge management

What/process featured (business continuity management)

Passive/standalone/ finite

Proactive/ connected

Interactive/networked/indefinite

Adaptive to uncertainty

How/systems and technology worked (risk management)

Product control Process control Service control Compliance control

Where/gaps filled in (business continuity, records & knowledge management)

Collaboration/ inclusiveness of different group of people

Optimization/ orderliness under control

Innovation/integrity of different parts

Compliance synergy/ complexity, uncertainty, compliance, and sustainability capacity building

Integrated use of ISO MSR series of standards and other ISO recordkeeping products would provide a

comprehensive set of solutions which would have three implications for the organization (An, 2011a; ISO/TC

46/SC11, 2012):

(1) Improvement of the efficiency, effectiveness, and economy of organizational resources and assets

adaptable to complex global competition;

(2) Enhancement of the quality assurance of documented information to support evidence-based

governance and knowledge use, adaptable to dynamic change in information and communication technologies;

(3) Accumulation, sharing, and exchanging information, evidence, memory, and knowledge of e-business

and e-service systems, aiming at collaboration, optimization, innovation, and compliance of business processes

and systems.


47

The Enablers of Meta-synthetic Strategies

With e-business increasingly using web-based emerging technologies such as the cloud, social networks,

and social media in a global market, with some outsourcing moving to crowd sourcing, and with

ever-increasing global competition for conformity assessment (e.g., audit, certification), there are increasing

international, national, and local regulatory requirements for evidence-based collaboration to support legal

protection, accountability, corporate governance, financial and practice audits, security, reputation management,

business continuity planning and implementation. There is greater need for cost-effective strategies to improve

informed decision-making, performance management, productivity improvement, consistency, continuity and

quality assurance in management and operations, as well as faster and more accurate service delivery, resource

management, and cost control. There are greater stakeholder expectations of openness, trust, and ethical

behavior by organizations. There are opportunities for innovation through capture and reuse of organizational

knowledge, and the use of strategic knowledge to support business (ISO/TC46/SC11, 2007). Table 1 shows the

benefits of integrated use of ISO/TC 46/SC 11 products and ISO MSSs as enablers of meta-synthetic strategy to

meet the above demands through integrated service, process, product, and compliance controls (ISO 30300,

2011; ISO 30301, 2011; ISO 15489, 2001; Bustelo & Ellis, 2010, 2011).

To address the above needs, there are four key enablers of meta-synthetic strategies for digital

recordkeeping and knowledge capture as summarized in Table 2.

(1) Integrated service control.

Integrated service control refers to customers and other stakeholders focusing on a collaborative way of

thinking whereby leadership and accountability for the authenticity, reliability, integrity, and usability of

records are strategically and operationally integrated into the way of doing business. This is to support

evidence-based collaboration, legal obligations, business requirements, and the management of risks and client

needs. Digital recordkeeping is no longer the responsibility of records specialists alone, it comprises

partnerships between all the stakeholders involved across multiple business applications, as well as appropriate

leadership. Funds and people would be guaranteed from top management, and resources allocated to managing

records generated by business would be commensurate with the assessment of risk, the nature of the activities,

and the size and type of organization. Thus scalable, extensible, and sustainable services can be built to

improve the quality, accessibility, and availability of records and timely response to best utilize their multiple

values.

(2) Integrated process control.

Integrated process control refers to a process system approach to management, optimized by continual

improvement so that management of risk, quicker response to dynamic change, measurement and assessment of

performance are interrelated processes of recordkeeping programs. The overall management systems for

recordkeeping operations are linked to save resources, cut costs, and improve efficiency and productivity. Thus

cost-effectiveness, efficiency, and green business processes can be continually improved.

(3) Integrated product control.

Integrated product control refers to a range of integrated controls for records, including: The creation and

control of records are integral to an organization’s activities; the proper management of records is integrated

into processes and systems automatically for effective and efficient conduct of business; techniques, processes,

and systems used to create and manage records are aligned with the organization’s specific business


48

requirements; the requirements for records, their management and ongoing use are incorporated into the design

and implementation of an organization’s overall information framework; business rules are developed for

designing and implementing systems which manage, use, and dispose of records; business system and

processes are designed so that records are secure from unauthorized use or modification and are accurate,

authoritative, accessible, and acceptable as evidence and assets as long as they are needed (ISO 15489, 2001;

Bustelo & Ellis, 2010, 2011).

(4) Integrated compliance control.

Integrated compliance control refers to consolidated conformity assessment and related activities that meet

all the legal, regulatory, and policy requirements and support accountable business practice, legal compliance

and protection. Such an approach will enable easy communication, technical operability, cost savings, better

delivery, sustainable development, and competitive advantage. Thus accountability, transparency, and openness

of business practice can be enhanced.

Table 2

Enablers of Meta-synthetic Strategies and the Optimal Benefits Meta-synthetic enabler Integrated use of MSSs and ISO/TC 46/SC11 product Optimal benefit

Integrated service control Action of an organization to meet a demand or need (ISO 26000: 2010, 2.1.6)

accessibility, availability, timely response, scalable, extensible, sustainable

Integrated process control Set of interrelated or interacting activities which transforms inputs into outputs (ISO 9000: 2005, 3.4.1)

cost-effectiveness, efficient, energy green

Integrated product control Results of a process (ISO 9000: 2005, 3.4.2)

authenticity, reliability, integrity, usability, reusability

Integrated compliance control

Responsibility of an organization for its decisions and activities, and state of being answerable to its governing bodies, legal authorities and, more broadly, its other stakeholders regarding these decisions and activities (ISO 26000: 2010, 2.1.10)

accountability, transparency, openness, good governance

Table 3

Meta-synthetic Strategies in Digital Recordkeeping Practice Meta-synthetic initiative

Meta-synthetic perspective Meta-synthetic approach Meta-synthetic outcome

Recordkeeping awareness (collaborative ways of thinking)

From bottom up to top down; From managing records as data to managing records as business, evidentiary and societal resources and assets

Towards information resources management and knowledge asset management; Multidisciplinary interests and pluralist approaches

Managing complexity, uncertainty, compliance and sustainability

Recordkeeping regime (optimized process)

From static process to dynamic process; From a passive approach to a proactive and interactive approach

Towards collaboration within and between organizations and social innovation; Digital continuity action plan and holistic approaches to business continuity management

Integrated life-cycle, continuum and eco-system regime

Recordkeeping systems and technologies (innovative systems)

From life-cycle separated processes to seamless workflow of EDMS, ERMS, and trusted digital repository integration; From isolated business continuity, recordkeeping and knowledge management systems to an integrated management system

Towards recordkeeping capability embedded into business continuity management systems and knowledge management systems; ecosystem building

Connectivity, collaboration, community and compliance capacity building


49

Outcomes of Meta-synthetic Strategies

Table 3 indicates that meta-synthetic strategies can provide collaborative ways of thinking for

recordkeeping awareness, optimized processes for recordkeeping regimes, and innovative models for systems

and technologies that keep records and capture organizational knowledge.

As a result of meta-synthetic strategies, recordkeeping awareness changes from bottom up to top down.

Recordkeeping moves towards managing records as business, evidentiary and community resources and

knowledge assets. This is to ensure that public sector resources are created, maintained, and used more

efficiently through collaboration by sharing ideas, expertise, and systems, by minimizing duplication, by

coordinating ways to manage digital information efficiently, and thereby ensuring digital information is

authentic, reliable, discoverable, accessible, usable, and reusable over time, whilst also ensuring what is not

needed is properly disposed of in a controlled environment (Digital Continuity Action Plan of New Zealand,

2009; Digital Continuity Plan of Australia, 2011). The focus of recordkeeping and knowledge capture and reuse

is on areas of open data, strategic and complexity, collective decisions around business value and enduring

societal value, contribution to a digital economy, information access, and organizational accountability (Piche,

2011).

Recordkeeping regimes change from static to dynamic, from passive to proactive, interactive, and

adaptable approaches. Initiatives have been taken towards cross-organizational collaboration and societal

innovation, holistic approaches across multiple levels and multi-dimensional governance (Feng et al., 2011).

Benefits of information to agency businesses, the government and the community are optimized; people,

processes, and technology are aligned to support effective information management; information is

fit-for-purpose over its life (Digital Continuity Plan of Australia, 2011). The direction of recordkeeping moves

towards information resource management and knowledge asset management, utilizing multidisciplinary

interests and pluralist approaches to deal with challenges of complexity and uncertainty in a dynamically

changing digital environment and to support varied evidence-based needs (Managing Digital Continuity of UK,

2011).

Recordkeeping systems and technologies change from separated life-cycle processes and systems to

seamless workflow of electronic document management system (EDMS), electronic records management

system (ERMS), and trusted digital repository (TDR) integration (Liu, 2011); and move from isolated business

management, records management, and knowledge management systems to integrated management systems

(An, 2009; An et al., 2010; An, 2011b; Upward, 2013). The direction of digital recordkeeping focuses on

cross-agency information sharing and collaboration across the public sector which will minimize duplication of

effort and expenditure, generate cost savings, improve service delivery, and provide an inclusive and unified

whole government plan at a strategic level linking digital recordkeeping to business success (Digital Continuity

Action Plan of New Zealand, 2009; Digital Continuity Plan of Australia, 2011; Managing Digital Continuity of

UK, 2011) .

Meta-synthetic frameworks are built into open government initiatives, e-government information

architecture, emerging technologies solutions and enablers, and government plans to improve the public value

of e-government services and e-government performance as a whole. This provides a foundation for open

government, leverages information to improve agency performance, and reduces unnecessary costs and burdens

(Information matters: Building government’s capability in managing knowledge and information, 2008;


50

Managing Government Records Directive, 2012). Framework requirements for recordkeeping are based upon

legislation, and international standards such as ISO 30300, ISO 30301, ISO 15489, and ISO 23081 (Hofman,

2011). Collaboration between business areas and information management areas is critical to the success of

effective recordkeeping; collaboration between departments, agencies, and archival repositories is critical to the

successful implementation of the recordkeeping plans, not just a technical framework (Hofman, 2011; Piche,

2011; AFNOR-CN11, 2012).

Conclusions

This paper proposes the integrated use of international standards produced by ISO/TC 46/SC 11 and ISO

MSSs as enablers of a meta-synthetic strategy to support effective evidence-based collaboration and good

governance for digital recordkeeping, which will support more efficient and accountable government, thereby

benefiting all stakeholders. This approach will build links with business continuity management, quality

management, security and risk management, audit and knowledge management. It provides a holistic and

systematic approach to digital recordkeeping that covers all aspects of the creation, control, and use of records

as long as they are required. Different management aspects and systems are integrated for shared outcomes and

various impacts through integrated service, process, product, and compliance control. The mechanisms of a

meta-synthetic strategy are collaboration, optimization, innovation, and compliance. Complementary and

multi-disciplinary approaches of life-cycle, continuum and ecosystem methodology come together as an

integrated, harmonious, and comprehensive new whole.

A meta-synthetic approach focuses on complete sets of solutions to managing complexity, uncertainty,

compliance, and sustainability in an ever-changing networked society. This is to build connectivity,

collaboration, community, and compliance among recordkeeping, business continuity management, knowledge

management, legal requirements, and technological infrastructure to support varied evidence-based

requirements across boundaries at multiple levels and in multiple dimensions such as national strategies and

plans of digital continuity, knowledge sharing and reuse, open government initiatives, e-government

information architecture and services competence building, and enterprise information governance.

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Bulletin, 6, 15-19.


Reform of Financial Institutions—Getting it Right

Matjaz Nahtigal

University of Primorska, Koper, Slovenia

The purpose of this article is to reflect upon the importance and the role of financial institutions before, during, and

after the financial crisis and to outline proposals for alternative approaches to the financial crisis. Without an

understanding of the historic development, nature and scope, and important limitations of modern financial

institutions, the regulatory reform of modern financial institutions cannot be successful. The success of financial

reforms and their restructuring can only be measured when modern financial institutions participate, support, and

develop the real economy and support a more balanced, inclusive, and diverse social development process. This is

what the really “exciting” banking and finance organizations should stand for. The regulatory reforms, bail-outs,

and dominant ideas about the European banking union, for example, are impeding, rather than facilitating, hope for

real economic and social recovery on both sides of the Atlantic. The method used in the present article, is legal and

institutional analysis of the financial institutions. The empirical and comparative overview of the role and

importance of financial institutions shows the variety of financial institutions developed in different historical and

socio-economic circumstances. They show there is no one single best model of financial institutions that could be

universally applicable. The design and the regulatory framework for the financial institutions should therefore take

into account the overall strategy of economic and social development. In absence of any such comprehensive

strategy it is unlikely that the regulatory reform of the financial institutions can be successful.

Keywords: the role of financial institutions, regulatory reform of financial institutions, the tenuous linkages

between the real economy and the financial institutions, financial hypertrophy and financial crisis, alternative

financial institutions

Introduction

The purpose of this article is to reflect upon the importance and the role of financial institutions before,

during and after the financial crisis and to outline proposals for alternative approaches to the financial crisis.

Financial institutions are commonly mentioned in academic and public debates, but their role remains

inadequately understood. Financial institutions and their activities grew immensely over the last few decades.

They became highly sophisticated so much, so that many of their detailed operations and transactions are only

understood by highly specialized experts. This is part of the reason why they attract a lot of attention, not only

for the purpose of bailing them out, but rather to better understand their role, importance, and relevance to the

real economy and to the societies at large.

It is worth remembering that in the period between 1950 and 1980, financial institutions were primarily

“uninteresting”, “boring institutions” with the task of allocating financial resources from the savers to the

Matjaz Nahtigal, Associate Professor of Law, Faculty of Management, University of Primorska. Correspondence concerning this article should be addressed to Matjaz Nahtigal, Faculty of Management, University of

Primorska, Cankarjeva 5, 6105 Koper, Slovenia. E-mail: [email protected].

DAVID PUBLISHING

D

REFORM OF FINANCIAL INSTITUTIONS—GETTING IT RIGHT

54

productive activities of the society. In the period between 1980 and 2008, however, a fundamental shift in the

world of finance occurred. Consequently, the world of finance and financial institutions has become one of the

fastest growing sectors. The role, size, and importance of finance have changed from the auxiliary role of

supporting the development of other economic and social activities to a dominant role and position in modern

(Western) societies. This fundamental shift has largely gone unnoticed.

At the explanatory level, the fundamental shift in the importance of finance can be explained as a

necessary, natural development of mature capitalist societies. Only after the crisis, with its epicenter in the large

financial institutions of the most advanced and developed countries worldwide, has it become clear that it will

not be possible to return to the path of sustainable and equitable development without comprehensive structural

changes in the role and activities of financial institutions.

The primary purposes of this article are twofold: (1) to illustrate how the financial system has become

increasingly dysfunctional; and (2) to illustrate the possibilities of how to redirect and reorient financial

institutions in the future to again become socially valuable and useful institutions.

Real Economy, Financial Institutions, and Long-Term Development

Among the critics of the present financial environment, created in the last decades, is a significantly

important and radical idea: breaking up several of the biggest financial institutions. The argument of Johnson

and several other important scholars is that the best way to tame large financial institutions and prevent future

financial disasters at the expense of society is to break-up the largest financial institutions. The simplest

explanation of the argument is that in making financial institutions smaller, a potential collapse of certain

financial institutions would not bring international finance into turmoil. When large financial institutions

operate in a highly leveraged form, with a great deal of debt and very little equity, huge and unfair costs may be

imposed on the rest of the economy. While the implicit subsidies provided to too-big-to-fail companies allow

executives and investors to increase compensation by hundreds of millions of dollars, the costs imposed on the

rest of us are in the trillions of dollars. This led Johnson to the conclusion that this is a monstrously unfair and

inefficient system. Many sensible public figures are increasingly pointing this out (Johnson, 2012).

There are also other similar proposals for providing safer banking. One idea is legislating higher capital

requirements. The purpose of this is to make sure banks and other large financial institutions depend more on

equity and less on debt and to a binding “leverage ratio”—a requirement according to which the banks should

have at least 10% in equity relative to their total assets (Johnson, 2012).

Johnson admits that even smaller financial institutions, in comparison with today’s megabanks, would not

be sufficient to ensure financial stability. They would ensure, however, more efficient supervision and reduce

systemic risks in cases of financial turmoil.

The authors arguing in support of the limitation on the size and leverage of financial institutions also

discuss, with lesser attention, the issue of the quality of these hypothetically restructured financial institutions.

The open issue would remain as to whether these smaller financial institutions would be capable of providing

stronger and better long-term support for the development of the real economy. Suppose that the first part of the

issue can be described as a quantitative issue—the size, the cap on debt, on leverage and so on. As such, the

second part of the issue can be described as qualitative. The qualitative issue can be described as the issue of

the quality of financial support for innovations, for the enhancement of productivity, and for the expansion of

output.


55

The distinction should be made between all kinds of financial activities aiming at securing long-term

support for the development of a real economy and those financial activities aiming at creating benefits for the

executives and investors. Needless to say, this distinction is, in reality, almost impossible to draw, but it

nevertheless remains crucial. Dirk Bezemer, a finance professor from the Groningen University, is one of the

few experts who pointed out this crucial, although rarely mentioned and analyzed, distinction. He has made a

distinction between credit that supports economic growth and credit that fuels bubbles and subsequently hinders

growth.

Bezemer’s path breaking analysis starts with the recognition that current macroeconomic models do not

distinguish between the credit flows that help and hinder the economy (Bezemer, 2012a, p. 3). He is convinced

that the neglect of credit and debt in economic theory left us unprepared for dealing with the financial crisis.

Moreover, he has pointed out the paradox that the dominant macroeconomic models of “general equilibrium”

do not have “money, financial flows, credit, or debt”. The models that are widely used in policy institutes,

academia, and central banks, have no bank. These models assume the liabilities of all borrowers always exactly

match the assets of all lenders.

The assumption is that, on the basis of accounting equality, the financial sector’s assets are the real

sector’s liabilities. According to Bezemer, however, this accounting equality, on which macroeconomic models

are based, is highly misleading and does not explain the true nature of modern finance. Namely,

…most of that debt growth has not been due to lending to the real sector—to non-financial firms, supporting growth in wages and profit. Almost all of it was due to mortgage lending and to credit to the non-bank financial sector credit, to inflate stocks and property prices and to create and trade options, futures, and other derivative instruments. These credit flows, and the activities they fuelled—share buybacks, leveraged buyouts, securitization—create no wage or profits for the many, but capital gains for the few, and a huge net debt burden on the economy.

Property and asset prices may be falling, but the debts that jacked them up are not. The threat to growth today is not a shrinking of the financial sector, but it enormous size. The accumulated claims by the non-bank financial sector cause a daily drain of purchasing power on the economy in debt services. This is money that could be effective demand for goods and services and stimulate economic growth. Nowadays, finance is stifling, not stimulating growth. (Bezemer, 2012b)

These findings have far reaching consequences for the debate on the role and importance of financial

institutions in the modern economy and society. They go beyond the discussion of the size and scope of large

financial institutions. On the basis of these insights, Bezemer has illustrated the process of the gradual

de-linking of finances and the real economy over the last three decades. The financial institutions have turned

away from supporting the real economy and from growing and developing in tandem with the real economy

and society. These valuable insights by Bezemer, who has reminded us that James Tobin, when discussing the

efficiency of the financial system, warned us that “… we are throwing more and more resources, including

cream of our youth, into activities that generate high private rewards disproportionate to their social

productivity” (Bezemer, 2012a, p. 2).

The theoretical reason for the confusion in explaining the role and importance of large financial

institutions in modern societies comes from accounting equality, according to which the financial sector’s

assets are the real sector’s liabilities. There is, however, a trade-off between “the financing of production (out

of retained earnings and fresh lending) on the one hand and credit flows returning into the financial sector on

the other” (Bezemer, 2009a, p. 13). As noted by Bezemer, this trade-off is absent from the mainstream models,

but is crucial to understanding the crisis.


56

On the basis of the flow-of-funds, credit has shifted away from the real economy to the financial assets

market. This shift has created its own dynamics, according to which the credits into financial assets and

financial instruments increased returns. This encouraged the next cycle of credit flows, debt growth, and asset

price rises. The unsustainable dynamic in the period of irrational exuberance was perhaps not viewed as deeply

problematic, because the real economy developed and grew at the same time. In good economic times, the shift

of credits from the real economy to the financial assets did not present a concern, due to the accounting identity

assumption. This assumption created an illusion of common growth and prosperity. The longer the illusion

lasted, the more destructive the social and economic consequences turned out to be.

If the above analysis is correct and the mainstream economic and legal experts and policy-makers failed to

address the phenomenon, then the financial institutions turned away from supporting the real economy into

extracting benefits from it. The crucial issue is how to re-connect the financial institutions and the real economy

such that the financial institutions start supporting the real economy again. It is a challenge, not only in how to

rebalance the power and influence the large financial institutions, but also in how to channel credit flows back

into the real economy. This redirection would not necessarily make banking and finance “boring” again, but it

would make sure that the financial institutions grow and develop in a sustainable manner together with the real

economy and the society at large. As a result, this redirection would probably decrease returns and bonuses to

large financial institutions and their executives. It would, however, spread economic, financial, and other

opportunities to the larger segment of businesses, new entrepreneurs, to start up firms and to many other

segments of society. The qualitative dimension of the financial reform should be added to the quantitative

dimension of the financial reform.

For the time being, governments on both sides of the Atlantic pay little attention to such an alternative

approach to the reform of the financial institutions. They continue to bail out the entire financial sector,

regardless of the cost for the public finance, and ultimately, for the taxpayers. Their perspective seems to be

that after bailing out the financial institutions, things would return back to prosperity, as witnessed in the years

before the financial crisis. The problem with this approach is that the period of the so-called prosperity was

based on many unsustainable and illusory premises. It was based on the supply of cheap money, on the toxic

flows of excessive liquidity to increasingly inflated prices of financial assets, and on the so-called credit

democracy for the citizens. Not one of the premises was sustainable and not one can be restored.

The attempt to restore the status-quo ante situation by merely making more regulations on large financial

institutions would only mean that financial institutions are still not sources of support and that they may

continue to present a “sustained drain of liquidity from the real sector to the finance, insurance and real estate

(FIRE) sector” (Bezemer, 2009a, p. 13). This problem with credit flows, which was little understood and rarely

mentioned before the crisis, continues to be unresolved. The consequences of not recognizing what Bezemer

has recognized—that the credits flowing to the financial assets are distinct from the credits flowing to the real

economy—go beyond the issue of the optimal size and scope of the financial institutions. Bezemer has offered

another important argument to support this view:

In the 1980-2007 era of cheap credit and deregulation, banks had every incentive to move from real-economy projects, yielding a profit, towards lending against rising asset prices, yielding a capital gain. In the 1990s and 2000s, loan volumes rose to unprecedented levels, supporting global assets booms in property, derivatives and the carry trade. The share of lending by US banks to the US financial sector—instead of to the real economy—went from 60 percent of the outstanding loan stock in 1980 (up from 50 percent in the 1950s) to more than 80 percent in 2007. (Bezemer, 2009b)


57

Unfortunately, the similar data for the EU are not available, but it would probably be a fair assessment that

in the last few decades, the EU, before and after the creation of the Eurozone, took a very similar path of

development. This means that financial liberalization, cross-border mergers, and the creation of large European

banks led to a similar path of unsustainable development with negative economic and social consequences. As

a result, the EU faces similar challenges in restructuring the banking sector to the US.

The challenges of restructuring the banking sector and financial markets go substantially beyond

regulatory measures and quantitative limitations on the size and leverage. The crucial debate remains how to

recreate a socially beneficial financial sector. In this sense, Bezemer is right when he is reminding us that the

financial sector continues to be bloated and dysfunctional. As long as modern societies cannot channel credits

via financial institutions primarily in the enhancement of productivity, wages, and the growth of the real

economy, the efforts to bail out such a financial sector will present a drain, not a support, for the long-term

economic and social development of modern societies. Therefore, the key challenge for modern societies is to

restructure and redirect financial institutions to again start performing socially useful functions.

Nothing less than the future of democracy is at stake. Concern about the future of democracy in relation to

the role and importance of financial institutions was very well understood by scholars, practitioners, and

politicians, such as Louis Brandeis, Douglas Williams, and Franklin Roosevelt, decades ago. However, it is

poorly understood by the present generation of leaders and mainstream scholars.

Another important aspect of the finance and financial institutions situation that was overlooked by most

mainstream economists, lawyers, and policy-makers is that corporations, businesses, and other parts of the real

economy are increasingly self-financed. This observation was almost completely ignored before the crisis in

good economic times and remains to be largely overlooked today. Only a handful of scholars pointed to this

issue of self-financing. Scholars who pointed out this phenomenon, including Roberto Unger, Zhiyuan Cui, and

Colin Mayer, observed that relatively little real investment in the expansion of production and productivity is

financed directly through stock markets:

Corporations in all major Western countries fund almost all their capital expenditures—investment in plant, machinery, and inventories—internally, through retained earnings, in other words, through profits and depreciation. Since 1952, retained earnings have covered 95 percent of capital expenditures. Since the early 1980s, through mergers and acquisitions, buybacks, and dividend distributions, more stock has been retrieved from stock markets than has been issued. As a result, new equity as a net source of finance is negative. (Unger, 1998, p. 283)

Why is it possible that such an important and revolutionary insight has been ignored for such a long time?

Part of the theoretical and practical reason lies in the nature of modern financial activities as explained

previously. Another part of the reason lies with the neoclassical and Keynesian literature, according to which

the accounting identity between savings and investment exists by definition. Whatever is saved is going to

automatically be invested. This implies that saving cannot be wasted and money cannot be squandered in the

financial casino.

The reality of modern complex financial institutions illustrates a different picture. Huge volumes of

financial transactions and trading between financial institutions do not necessarily and automatically guarantee

that the financial flows will be channeled to enhance productivity and output. Empirical analyses illustrate that

corporations have to rely on their own savings to finance their development. This observation, put forward by

economic and legal scholars Bezemer, Unger, and Cui, has been suppressed by the neoclassical and Keynesian

literature. The growing gap between the financial institution and the real economy was less problematic in good


58

economic times—when the underlying fragility and unsustainability of the financial arrangement was not taken

seriously. It remains unaddressed today. Without addressing it, it is difficult to determine how it would be

possible to overcome the ongoing crisis, except in the form of a temporary “kicking the can’ manner”.

In addition to the theoretical reasons, practical reasons for ignoring the problem of the inefficient

allocation of scarce resources lay ahead. Financial markets and financial institutions grew immensely in the last

decades. Confronting them directly would require courage and wisdom, as well as the theoretical knowledge

and practical skills rarely seen of public figures, such as policy-makers and advisers. It remains more

convenient to marginally improve the regulatory framework while bailing out many of the failing financial

institutions with taxpayer money, rather than approach a comprehensive and strategic restructuring of the

financial sector. Strategic restructuring would require a quantitative restructuring in terms of size and caps, as

well as a qualitative restructuring of financial institutions in order to reconnect them with the real economy and

the rest of the society.

These are the reasons why the approach toward banking bail-outs and toward the banking union in the

European context is far from efficient from a broad social and economic perspective. The entire approach needs

to be re-directed. The regulatory efforts should follow, not precede, such a reorientation. The best start in a new

direction, such as this, is to focus on what worked best in the past. These were networks of small local banks

which provided long-term support for the development of small and medium sized local businesses. Local

banks have traditionally been a backbone of local and regional development in many advanced economies,

including the US decentralized banking sector and the German system of Landesbanks. They have a much

better insight into the needs, possibilities, and potential of local businesses and have a much bigger stake in the

success of local and regional development. They represent one alternative possibility of how to secure a

deepening of finance in place of the futile process of financial hypertrophy (Lothian & Unger, 2011, p. 30).

Other forms of financial institutions with much larger stakes in supporting the long-term competitiveness

of the real economy, and with much greater interest in the more equal and inclusive access to credit, should

evolve. The difference between financial hypertrophy and financial deepening was established by Unger and

Lothian. They explain the contrast in the following way:

By the hypertrophy of finance, we understand increase in the size of the financial sector, of its share in profit, talent, and influence, regardless of the service that it renders to the real economy. By financial deepening, we mean the intimacy of the relation between finance and the real economy: not only consumption but also and above all production and innovation. (Lothian & Unger, 2011, p. 27)

Institutional innovations in the area of finance are something substantially different than the proliferation

of financial instruments and financial innovations in the last decades. Financial innovations served the purpose

of enhancing the volume of trade without the ultimate goal of supporting the development of the real economy.

Would not it be really exciting for banking to re-connect the financial institutions with the development of the

real economy, so that the next generation of talented bankers would participate, support, and help develop the

real economy and society at large? It is true that the banking bonuses for the top executives and the returns on

equity could (and should) be closer in line with the developments, returns, and rewards in the real economy, but

such a realignment would serve the real social needs and return prospects for the many excluded parts of the

population.

On the basis of the analysis presented above, it would be necessary to multiply and diversify financial


59

institutions in order to reconnect the world of finance with the world of real economy. For example, the role of

venture capital, which provides equity to start-up firms, the role of regional development funds, the role of

pension funds (on the need to activate pension funds for the purposes of long-term economic development

(Unger, 1998, pp. 148-150), and the role of other financial institutions can all contribute to the diversification

of financial institutions. It also contributes to more innovative ways for how to provide long-term support for

the real economy and its restructuring for start-up firms, industrial innovations, and the productivity

enhancement (the possibility to transform the US financial system toward more equitable and more efficient

system) (Dymski, Epstein, & Pollin, 1993).

A reorientation of the financial institutions is not without risks. The key point is that decisions for when

and how to provide finances for the real economy must be taken on the basis of a high level of expertise and an

understanding of the real economy. It must also be independent on any political meddling at the local, regional,

and national level. Policy-makers should support the improved links between the financial sector and the real

sector, but they cannot, and should not, interfere with the professional decisions of which investment

opportunities deserve high quality financial support. The same principle applies, even in the case of public

venture funds. However, these venture funds present a rare, but potentially promising, vehicle of the future

socially inclusive economic development.

Financial deepening, as a qualitative and quantitative contrast to development, would lead to a more

balanced, more diverse, and subsequently more inclusive development of the financial sector, real economy and

society at large. It would require strong leadership and a renewed opening of space for the economic, social,

and financial initiatives bottom-up approach, as well as better chances to pursue a comprehensive economic and

social reconstruction. It would present a task, as Lothian and Unger (2011, pp. 28-33) suggested in their

proposal, to return the financial institutions from the position of bad master again into a position of good

servant to the economy and society.

Such a restructuring of the financial institutions would certainly require broader social and economic

visions of modern economies and societies and would require broader social alliances. It would not be a magic

wand, but certainly present a more transparent, more balanced, and more inclusive approach to the economic

and social recovery. Needless to say, it would also meet with strong opposition in the form of present financial

and political oligarchies which continue to stymie any coherent and comprehensive approach to the recovery

beyond hopeless but allegedly necessary bail-outs and banking unions in the trans-Atlantic world.

Conclusions

Since the beginning of the crisis, many valuable proposals for how to tame financial institutions were put

forward. Among the most well-known is the Volcker rule, which is the prohibition of internal hedge funds,

internal private equity funds, and proprietary trading in commercial banking institutions. They include a return

to “narrow banking”, limitations of the size and leverage of financial institutions. Laurence Kotlikoff suggested

a limited purpose banking, in which banks are not allowed to borrow short and lend long. In addition, all risky

assets must be held in mutual funds (Johnson & Kwak, 2011, p. 6461). In practice, new legislation and

regulation, such as Dodd-Frank, was adopted. In a long and protracting legislative procedure—including heavy

lobbying and opposition from the Wall Street—a comprehensive new legislation was adopted by the US.

According to Johnson, the Dodd-Frank Act presents an important step forward in supervising and

regulating large financial institutions and a missed opportunity. It is a complex legislation which leaves a


60

dizzying number of details to regulatory discretion. Thus, it will depend largely on the integrity, quality,

independence, and professionalism of the regulatory bodies. More specifically, the courts will have to supervise

and regulate the financial institutions better than they have in the past.

Lawyers at Davis Polk counted 243 new rules and 67 new studies required by the Dodd-Frank Act.

Despite the comprehensive legal framework, many important aspects are exempted from legislation, such as the

new requirements for trading and clearing derivatives, which includes an exemption for “commercial end

users” that use derivatives for hedging purposes. Johnson has pointed out that the size of that loophole turns out

to be largely dependent on the wording of the rule defining exempt transactions (Johnson & Kwak, 2011, pp.

4396-4413).

It will be many years, before a judgment on the efficiency of such legislation could be made. It will also

take many years before it will become clear as to whether the President’s announcement, when signing the

Dodd-Franck Act, of the American people never again being asked to foot the bill for Wall Street’s mistakes

and about the transparency and risk reduction of such a bill (Johnson & Kwak, 2011, loc. 4324-44) will be

possible to verify. It is already possible, however, to say that the Dodd-Frank Act does not present as

substantial a reform of the financial institutions as the Glass-Stegall Act, in the New Deal era, despite the fact

that the magnitude of the problems and issues related to the role of financial institutions is bigger today than at

any other period of industrial, financial, and social development.

Alternatively, more thoroughly thought out approaches toward financial sector restructuring are needed.

According to the available reports and data, in the EU, the European commission has approved €4.5 trillion (37

percent of EU GDP) in state aid measures to financial institutions between 2008 and 2011 (EU Observer, June

2012). According to the report by former European Commissioner Liikanen:

During October 2008 to end 2010, European governments used a total of €1.6 trillion of state aid to support the banking sector, in the form of guarantees and liquidity support, recapitalisation, and asset relief measures. It was perceived that, without government intervention, a systemic crisis with serious consequences for the economy would have materialised. (Liikanen report, 2012, p. 20)

The real tragedy is, however, that despite this massive support in state aid and other support measures,

many EU member states economics and their regions economies continue to be in recession with high

unemployment and with very weak financial institutions. The situation is not significantly better in the US,

despite a more integrated federal financial system. The challenges ahead for the policy-makers today are even

bigger than at the eruption of the crisis. “Kicking the can down the road” has its limitations too.

As a starting point for a more substantive reform of financial institutions, it can be helpful to turn to

Bezemer, who argues convincingly that there is no neutral regulatory framework. Only after the nature,

character, and scope of modern financial institutions is understood and only after a significantly reoriented role

of the financial sector in the modern economy and society is envisaged, it becomes possible to turn to the

adoption of a substantially different regulatory framework. Such a framework would be more inclined to

provide high quality financial support for the development of a real economy, for its active restructuring, for

enhancement of productivity, and for the benefit of more socially inclusive overall development. Namely:

More specifically, the balance sheets of firms, households, and governments, and the regulations in the economic system on what sorts of balance sheets are being allowed, co-determine what forms new credit flows can take, how much there can be of it to different sectors (e.g., to the FIRE sector versus the real economy), and consequently how the economy will evolve. These will not the only factors shaping the economy, but neither can they be fully abstracted from,


61

as is current practice in much of economic research. In sum, there seem to be important contributions that accounting researchers can make to economics—rather than just the other way around, as is sometimes suggested. (Bezemer 2009a, p. 33)

There is no doubt that financial institutions and financial instruments will develop in the future. Shiller is

correct about that and also about the many socially useful innovations that were developed in the past. The

trouble is, however, that financial institutions in the last three decades contributed less to the public good than

they did before the crisis. Many mainstream academics, policy-makers, monetary authorities, financial

institutions’ representatives, and corporate media defended the liberalized, deregulated financial institutions.

The biggest challenge remains how to make the financial institutions serve broad social interests and make sure

that they are doing their best in delivering better products and services. Unlike Shiller, who believes that

improved regulations would be sufficient enough for financial institutions to serve broad social interests in the

best possible manner (Shiller, 2012, loc. 432-52), many other scholars, described previously, argue

convincingly that a mere regulatory reform will not be sufficient. Independent minded scholars from all over

the world would make a historical mistake if they did not deeply understand the substantive nature of this

disagreement. They should also not pay attention to the possible alternative ways to approach the financial,

economic, and social reconstruction of modern societies in different parts of the world.

References Bezemer, D. (2009a). No one saw this coming: Understanding financial crisis through accounting models. Retrieved June 5, 2013,

from http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf Bezemer, D. (2009b). Lending must support the real economy. Financial Times. Bezemer, D. (2012a). Finance and growth: When credit helps and when it hinders. Retrieved June 5, 2013, from

http://www.scribd.com/doc/93886065/Bezemer-Dirk-Berlin-Paper Bezemer, D. (2012b). Finance and economic growth delinked. Retrieved June 5, 2013, from

http://www.eurointelligence.com/eurointelligence-news/archive/single-view/article/finance-and-economic-growth-delinked.html

Dymski, G., Epstein, G., & Pollin, R. (1993). Transforming the U.S. financial system—Equity and efficiency for the 21st century. Armonk, N.Y.: M.E. Sharpe.

EU Observer. (2012). Brussels: Banks should pay for banks. Retrieved June 6, 2013, from http://euobserver.com/economic/116517

Ewing, J., & Alderman, L. (2011). Deutsche bank’s chief casts long shadow in Europe. New York Times. Johnson, S. (2011). Battle of the bank policy heavyweights, economics. Retrieved June 10, 2013, from

http://economix.blogs.nytimes.com/2011/03/10/battle-of-the-bank-policy-heavyweights/ Johnson, S. (2012). Breaking up four big banks. New York Times. Johnson, S., & Kwak, J. (2011). 13 bankers: The Wall Street takeover and the next financial meltdown. New York: Vintage

Books. Liikanen report. (2012). High-level expert group on reforming the structure of the EU banking sector. Retrieved June 10, 2013,

from http://ec.europa.eu/internal_market/bank/docs/high-level_expert_group/report_en.pdf Lothian, T., & Unger, R. (2011). Crisis, slump, superstition and recovery—Thinking and acting beyond vulgar Keynesianism,

joint piece. Retrieved June 5, 2013, from http://www.law.harvard.edu/faculty/unger/english/pdfs/JOINT_PIECE.pdf Shiller, R. (2012). Finance and good society. Princeton, N.J.: Princeton University Press. Strange, S. (1986). Casino capitalism. Oxford: Basil Blackwell. Unger, R. (1998). Democracy realized. London: Verso. Wolf, M. (2009). Why is it so hard to keep financial sector caged?. Financial Times.

Management Studies, ISSN 2328-2185

January 2014, Vol. 2, No.1, 62-72

Using MWD: A Business Intelligence System for

Tourism Destination Web*

Aurkene Alzua-Sorzabal, Jon Kepa Gerrikagoitia, Fidel Rebón

CICtourGUNE, Donostia-San Sebastián, Spain

The importance of Internet as mass media in the field of tourism is that it constitutes an important channel of

marketing institutions and business network of the tourist destinations. But very few subsequent processes of

management, maintenance, improvement, and exploitation of this appearance are deeply studied. The interactive

nature of the website, as both transmitter of information and receiver, has attracted the attention of scholars since

the interaction allows opening new approaches to the study of the network traffic (the pages user has visited, order

them, the time that it has been in them, the actions carried out...) and cyber behavior. Information flows from the

physical to the cyber world, and vice versa, adapting the converged world to human behavior and social dynamic.

The business intelligence systems based on Internet enable organizations intelligent actions to address

time-sensitive business processes and benefit from analytics. As result provides the opportunity to anticipate and

estimate visitor habits in a changing environment. This paper presents the research and technological fields which

have been incorporated to study of the destination web, a business intelligent tool based on Internet that it aims to

increase the performance of the local manager or tour operator by providing an enhanced insight through the

behavior of visitors on the website and future trends in research are expressed.

Keywords: tourism destination web monitor, web mining, web analytics, business intelligence system

A System Within the Business Intelligence Based on Internet

The present time has been recognized as a technology-mediated world, with computing and

communication entities interacting among themselves, as well as with users. In this technology-rich scenario,

real-world components interact with cyberspace thus driving towards what some scholars have called the

Cyber-Physical World (CPW) convergence (Conti et al., 2012). Information flows from the physical to the

cyber world, and vice versa, adapting the converged world to human behavior and social dynamics.

In this new technology-mediated world, information about the physical reality is seamlessly conveyed into

the cyber world. However, it is not obvious about how to transfer information and knowledge from the cyber

world toward the physical one. This opens up the field for the creation of innovative research and advanced

services to better understand and interact with the surrounding physical world as well as the social activities.

* Acknowledgements: The authors would like to thank the managers of BASQUETOUR (Basque Tourism Agency) and EJIE

(Computer Society of Basque Government) for their excellent cooperation and Basque Government for its ETORTEK program.

Aurkene Alzua-Sorzabal, Ph.D., Executive Director of CICtourGUNE.

Jon Kepa Gerrikagoitia, Ph.D., Director of Tourism Systems in the Digital Age Area, CICtourGUNE.

Fidel Rebón, Ph.D. Candidate, Research of Tourism Systems in the Digital Age Area, CICtourGUNE.

Correspondence concerning this article should be addressed to Fidel Rebón, Mikeletegi Pasealekua, 71-3, 20009 Donostia,

Gipuzkoa, Spain. E-mail: [email protected].

DAVID PUBLISHING

D

USING MWD: A BUSINESS INTELLIGENCE SYSTEM FOR TOURISM DESTINATION WEB

63

In fact, information technology and business intelligence, provide a novel direction to support enterprise

business in a new way (Chaudhuri, Dayal, & Narasayya, 2011). Business intelligence based on Internet is one

of the most robust trends that trigger the awakening of a growing interest in the field of strategic management

and e-science (Teo & Choo, 2001; Du Toit, 2003).

At this moment it is seeing a confluence of practices and technologies into business that enable

organizations intelligent actions to address time-sensitive business processes and benefit from analytics. As a

result, the new situation provides the opportunity to anticipate and estimate consumer habits on a changing

environment (Shih, Liu, & Hsu, 2010; Alzua-Sorzabal, Gerrikagoitia, & Torres-Manzanera, 2013).

The change has brought new means of communication, characterized by a decentralized set of

communication networks allowing fast, economical, direct and ubiquitous collections and generation of

information (Kahn et al., 1997; Pérez, Rodríguez, & Rubio, 2003). Hence, people are empowered to express,

share, create, consume, and organize information in a new manner (Pisani, 2008). Thus, the mass media come

into view as a suitable tool to develop communication strategies within the context of strategic marketing

(Varadarajan, 2010).

The importance of Internet as mass media in the field of tourism is that it constitutes an important channel

of marketing institutions and business network of the tourist destinations, providing huge volumes of

information available to potential tourists (Wang & Fesenmaier, 2006; Buhalis & Law, 2008).

The traditional communication channel (TV, newspapers, radio etc.) is replaced by websites that allow

access to all information (Abou-Shouk, Lim, & Megicks, 2012); enabling web users to get prices of products

and tourism resources in a transparent and dynamic (Lanquar, 2001). The new technology-mediated

environment not only provides destinations a new means of promotion and enhancement of tourist activities,

but also, new means of learning about the tourist taste and preferences. Advance solutions, tolls, and metrics,

play a very important role in this process of developing a deep understanding of the present and future visitor.

Beyond traditional web analytics, destination’s stakeholders are needed of innovations to support the intelligent

monitoring of the visitors, in order to anticipate and improve their performance. Destination management

organization (DMO) must find out to whom, to what, to how, and to when to refer to the visitor.

In this context, Centre for Cooperative Research in Tourism (CICtourGUNE) has designed an enhanced

system within the business intelligent based on Internet for measurement, analysis, and modelling of

destination digital visitors named destination web monitor (DWM). This paper presents the research and

technological fields which have been incorporated in recent years on the web sites of the DMOs, it defines the

DWM and future trends in research within the scope of the DMO’s website are expressed.

Related Work

The DMOs invest many resources: time, effort, and money in order to have a presence on the internet; but

very few of them are studying the subsequent processes of management, maintenance, improvement, and

exploitation of this appearance (Wang & Fesenmaier, 2006).

The interactive nature of the website, as both transmitter of information and receiver, have attracted the

attention of scholars since the interaction allows to open new approaches to the study of the network traffic (the

pages user has visited, order them, the time that it has been in them, the actions carried out...) and cyber

behavior.

Furthermore, new disciplines appeared in the last decade, such as, web mining in order to move forward in


64

discovering and analyzing useful information from web sites (Agarwal, 2010). It implies areas and technologies

related to information management and retrieval, artificial intelligence, machine learning, natural language

processing, network analysis, and integration of information (Cooley, Mobasher, & Srivastava, 1997; Wang,

Abraham, & Smith, 2005). Currently three approaches can be recognized: web usage mining, web content

mining, and web structure mining.

Web usage mining techniques are based on the process of discovering patterns of usage on web data

(Srivastava, Cooley, Deshpande, & Tan, 2000; Iváncsy & Vajk, 2006). It is about getting users profiles

inferring unobservable information about the user from their observable information (Arbelaitz et al., 2012a). It

is particularly interesting to discover the paths that are rarely followed by the visitor or the crossing of them

among the most visited pages (Shahabi, Zarkesh, Adibi, & Shah, 1997). Thus, the resulting indicators facilitate

the optimal design of a DMO’s website (Spiliopoulou, Faulstich, & Winkler, 1999).

Within the second group, the web content mining techniques define processes that try to discover useful

information from the content of web pages (Srivastava, Desikan, & Kumar, 2005). The contents hosted on a

web page can be text, images, videos, data stream, metadata, and hypertext (text, language marches, hyperlinks)

(Weiss, Vélez, & Sheldon, 1996). At present, researches are turning their attention to web multimedia mining

techniques, which seek to recognize and select the images (Rodríguez-Vaamonde, Ruiz-Ibáñez, &

González-Rodríguez, 2012) and video sections of interest (Ocaña, Martos, & Vicente, 2002).

Web structure mining techniques are focused on inferring knowledge from websites through the “links”

that they host. In this context we underline the work carried out by Piazzi, Baggio, Neidhardt, and Werthner

(2011) and Merinero, Rodríguez, and Pulido Fernández (2009).

The existing literature on the diverse web mining techniques applied to tourism destination shows that the

acquired information about the behavior of visitors, allows to customize the navigation scheme and/or the

content to new visitors according to previously defined behavior patterns (Das & Vyas, 2011; Perona, Arbelaitz,

Gurrutxaga, & Muguerza, 2010; Pierrakos, Paliouras, Papatheodorou, & Spyropoulos, 2003). Thus, web

personalization strategies have been developed in order to optimize and enrich visitor’s experience.

There are a large volume of professional solutions in the market (Google Analytics, Piwik, AWStats)

which incorporate the capture of the digital footprint and a process of web analytics. Web analytics is the

science that covers statistics, information technologies, as well as the economy, management, marketing

principles and several experts systems from other fields.

A diverse set of tracking tools, which capture the interaction of visitors, is needed to obtain the

information automatically on the digital footprint left by the visitor on the website. Currently, tracking tools

work at different levels: (1) server, using server logs; (2) client, by a remote agent (JavaScripts or Java Applet)

or by modifying the source code of a web browser; and (3) proxy, through an intermediate level where it stores

data between web browsers and web server (Srivastava et al., 2000). Most of the published studies are based on

tools and server logs (Cooley et al., 1997; Srivastava et al., 2005; Zaïane, Xin, & Han, 1998; Arbelaitz et al.,

2013); although more recent studies are using the implementation of a script on the websites (Shao & Gretzel,

2010; Pitman, Zanker, Fuchs, & Lexhagen, 2010; Plaza, 2011; Arbelaitz et al., 2013).

The DWM System

Definition

For this research the following definition of DWM has been adopted: a system to measure, analyze, and


65

model the behavior of visitors in different virtual areas (region, territories, tourist brands, associations, capitals,

districts, municipalities) in which a destination is promoted and with the objective of providing benchmarking

ratios that facilitate strategic surveillance and intelligent marketing policies.

DWM contributes to gaining a holistic understanding of the destination, which facilitates the extraction of

explicit and tacit knowledge of the networked system comprising different sites in its two aspects: relations

between them and the interaction of the visitor in each of them.

The design of the DWM satisfies the five levels of the web analytics maturity model (WAMM) (Gassman,

2008); a set of best practices covers the entire lifecycle of a product or service from conception to delivery and

maintenance.

General Architecture of DWM

Figure 1 shows the general stages of the processes within the DWM. The user accesses the destination

website through a PC, a smartphone, a tablet, or a PDA, and at that moment, it is when the capture of its

interaction with the site starts.

The collected data are processed in external servers to later convert it into useful information that will be

monitored. Once the monitoring of results is available, it proceeds to analyze and evaluate in order to draw

conclusions on the consumer profile about the destination.

Process of extraction, transformation and loading

Data Base

Reports

Data Warehouse

Query Send Information

+ Other web of Destination

Figure 1. General stages of DWM.

The technical platform starts capturing data before the visitor accesses the destination web page, recording

the search engine and the search word that has led the destination, in the case that the access is not direct. It is

possible to incorporate a small JavaScript code that must be hosted on each destination website. It records in

real time all the actions that the user makes and these are stored in a MySQL1 database belonging to the web

analytics tool.

After installing the tracking code on the web pages of the DMO, it proceeds to check the status of the

implementation.

Once the data are stored in the MySQL, an Extract, Transform and Load (ETL) process transports it to

another SQL server2 database on a daily basis. All the raw data need a cleaning process, for instance, to

1 Oracle and affiliates database. 2 Microsoft corporation database.


66

remove sessions generated by robots (Tan & Kumar, 2004).

When the cleaning process is finished, an analysis services3 project generates a cube with its dimensions

and fact tables to be able to interact with the obtained data. The project facilitates the design, creation, and

management of multidimensional structures that contain aggregated data from the SQL server database.

So far it has data in clean tables, which can be exploited through simple reports. To obtain answers to

more elaborate issues, the tables are transformed in order to work on the data easily with mathematical

packages that allow applying knowledge discovery in databases (KDD) techniques. This is a non-trivial process

to discover knowledge and useful information within the data contained in any repository of information

(Fayyad, Piatetsky-Shapiro, & Smyth, 1996).

The most common techniques of KDD employed in the domain of the website are: (1) characterization to

find rules that outline the general characteristics of the data obtained; (2) comparison to discover discriminatory

rules, for example, to determine the behavior of web robots; (3) associations and correlations of data where the

presence of a set of them implies the presence of others; (4) the prediction that seeks to predict a value or

values of an attribute based on its relevance to the rest; (5) the classification which compares sequences from a

group within a segment of users that show similar patterns of navigation; (6) the time series analysis that

recognizes patterns, characteristics, trends, differences, similarities intervals along a time sequence; and (7) the

sequence of behavior that is based on obtaining the patterns by which the presence of a set of data is followed

by another in temporal order (Zaïane et al., 1998).

Each action URL is assigned a topic because the combination of action and use provides a better

understanding of the real interest of the visitor (Arbelaitz et al., 2012b).

This assignment can be performed via specifications of interest found in the profiles of the users

(Ravindran & Gauch, 2004), open directory project (ODP) (Open Directory Project, 2013), or through the

analysis of the visited web pages (Sugiyama, Hatano, & Yoshikawa, 2004).

The first classification addresses in a fast and successful way the main menu topics of the website. Its

appearance is usually done in a standardized manner with values between 0 and 1. The information obtained is

displayed in a simple and clear way through reports and/or graphics that are incorporated into a SharePoint4

solution. This web solution allows fast access from anywhere platform.

All these techniques within the scope of web usage mining can be completed with the analysis of web site

content, web content mining, and studying the structure of the site, web structure mining. The set of processes

contributes to the system network that makes up different sites and the relationships between them through the

interactions of visitors that will help to achieve a holistic understanding of the destination as a whole.

Definition and Measurement of Variables

Professional web analytics tools, whose degree of maturity is positioned in the technical details (Level I),

respond to basic questions such as: fractional number of visits by nationality and location; engine search

references other websites, direct traffic, social networking; number of unique users; number of new visits

versus number of concurrent visits; number of hits per page, number of visited pages, pages viewed by

language, ratio of pages per visit, bounce rate number... (Peterson, 2006).

In addition, the maturity level of the DWM base allows formulating more elaborated questions, as the one

3 This allows processing online analytical (OLAP) and data mining processes. 4 Microsoft content management platform.


67

collected in Table 1. These enriched answers are displayed on a scoreboard that displays data on the

performance, behavior and, trends and predictions. The generic indicators of performance include workload,

efficiency, effectiveness, and productivity. The behavior indicators respond to the behavior of visitors and the

generic indicators over trend and prediction are focused on discovering new preferences and projections

focusing on the visitor and the behavior.

Table 1

Questions That Are Answered by Applying KDD Techniques to DWM

Questions Technical

What do our users? Sequential patterns

What do they like most and which least? Association rules or patterns frequently

How have they found? (Entry platform... ) Analysis of classification

Are there groups differentiated by origin? Analysis of clustering and classification analysis

What are the most common profiles by origin/topic? Association rules or patterns frequently

Are there behaviors differentiated by origin/topic? Clustering and other statistical techniques

What are the most common tour paths? Sequential patterns

What is the user behavior over time? Comparison between periods, trends... Other statistical techniques

What are the buying habits of tourists? Analysis of classification and association rules

or patterns frequently

What are the features they have in common successful products and services? Association rules or most frequent patterns and

other statistical techniques

The scoreboard developed by the DWM displays data on the performance (see Figure 2), behavior (see

Figure 3) and, trends and predictions (see Figure 4). Generic indicators of performance include workload,

efficiency, effectiveness, and productivity. The behavior indicators respond to the behavior of visitors and the

generic indicators over trend and prediction are focused on discovering new preferences and projections

focusing on the visitor and the behavior.

Figure 2. MWD performance indicators.

GENERIC

INDICATORS

PERFORMANCE

(KPIS)

TOTAL NUMBER OF

ACTIONS

TOTAL NUMBER

OF VISITS

TOTAL NUMBER OF

UNIQUE VISITS

TOTAL TIME ON

THE SITE

OPERATING SYSTEM

SCREEN RESOLUTION

Workload

PERCENTAGE OF

REBOUND

AVERAGE TIME ON

THE WEB SITE

AVERAGE NUMBER

OF ACTIONS

Efficiency

PERCENTAJE OF NEW VISITS

LOYALTY

Effectiveness

NEW VISITS

RECURRENT VISITS

LIN AND QNX WS 3 SYM WI 7 WVI MAC UNK IPD WPH W 2 K BLB IPA WI 8 WXP IPH

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

320 x 240 320 x 480 480 x 360 360 x 640 480 x 800 768 x 1024 640 x 960 1280 x 800

0 0 0 0 0 0 0 0

Acquire information

(profitable)


68

GENERIC INDICATORS BEHAVIOR

(KPIS)

NACIONALITY 1 (%)

NACIONALITY 4 (%)NACIONALITY 3 (%)NACIONALITY 2 (%)

SUBNACIONALITY 1 (%)SUBNACIONALITY 2 (%)SUBNACIONALITY 3 (%)

WHO ARE THEY? RECURRENT UNIQUE USERS

(%)

NEW UNIQUE USERS(%)

ACTION. 1

SEARCH ENGINES(%)

REFERENCES WEBSITES

(%)

DIRECT TRAFFIC(%)

SOCIAL NETWORKS(%)

WHERE THEY COME FROM?

IDIOM 2Nº of VIsits




TOTAL OF ACTIONS

ACTIONS/VISITBOUNCE

(%)

ACTION. 2

ACTION. 3 ACTION. 4

ACTION. 5 ACCIÓ N. 6

ACTION. 7 ACTION. 8

ARE THEY FAITHFUL?

HOW THEY LIKE US?

UNIQUE USERS (%)

HOW MANY ARE THEY?

+ 3 ACTIONS 2 - 3 ACTIONS 1 ACTION

+ 30 Sg. - 30 Sg.

Figure 3. MWD behavior indicators.

GENERIC INDICATORS TREND(KPIS)

TIME VISITOR CONNECTION OVER TIME

NUMBER OF VISITS TO MAKE MORE OF AN

ACTION ALONG TIME

KEYWORDS ANALYSIS ALONG A TIME SERIES

EVOLUTION OF THE GROUPS

DIFFERENTIATED BY ORIGIN

EVOLUTION OF PROFILES

FREQUENTLY BY ORIGIN / TOPIC

EVOLUTION OF BEHAVIORS

DIFFERENTIATED BY ORIGIN/TOPIC

DISTRIBUTION OF VISITS OVER TIME

TREND IN FREQUENTLY ROUTES

BEHAVIOR OF USERS WITH RESPECT TO TIME

TOURISTS BUYING HABIT

DISTRIBUTION OF ACTIONS FIRST TIME

ALONG

EVOLUTION OF ARRIVAL

VISITORS

BEHAVIORS

DISTRIBUTION OF ACTIONS LAST TIME

ALONG

CONNECTION ANALYSIS BY ORIGIN TIME ALONG

TIME

DISTRIBUTION OF THE ACTIONS OVER TIME

RESIDENCE TIME DISTRIBUTION OF USERS ALONG TIME

CONNECTIONS

ACTIONS

KEYWORDS

Figure 4. MWD trend indicators.

Discussion on the Different Studied Web Analytics Tools and MWD

Currently there is a large volume of vendors and solutions in the market, which apart from achieving the

gathering of the digital footprint are responsible for performing web analytics processes, such as Google

GENERIC INDICATORS

BEHAVIOR (KPIS)

GENERIC INDICATORS TREND

(KPIS)


69

Analytics, Piwik, AWStats, Adobe Analytics, etc..

In this section the discussion will focus on the first three ones that are the most widely used. Nonetheless,

significant methodological and technical differences can be identified among them. Respecting the extraction of

information, it can be done through server logs or using a script hosted on the website.

AWStats collects the navigation trace left in server logs; not allowing direct access to the data but

exposing them through a web reports. In obtaining the attributes to capture, the mentioned system does not

register the visited pages that they are hosted on the server cache. And so, it is not easy tracking the individual

cookies and queries to data hosted on the server, and the user time spent on visiting a page is inferred by an

algorithm.

Google Analytics and Piwik accomplish the capture of the digital footprint through a script, which should

be hosted on the website of the DMO, and whose implementation requires the involvement of the prescriber of

the web. The script transforms the user interaction in recognizable actions in a database, but does not enable to

capture the page reloads or clicks the button return (Srivastava et al., 2000).

Another significant difference should be noticed between Google Analytics and Piwik. In Google

Analytics data are housed on Google servers; so direct access to data is not facilitated. However, access to an

API or through a manual export to spreadsheets or simple text format is supported. The main limitation is that

data are allotted by day and do not cover the navigation attributes. To the contrary, Piwik provides full access

to the data and support further analytical possibilities. In this case, the data are disaggregated and related to the

time at which the action is performed. In addition, Piwik, allows data imports from Google Analytics.

Due to the described improvements the technological environment of DWM has been developed upon

Piwik in order to capture the digital footprint from the DMOs web pages. Moreover, customizing capture

DWM allows catching variables that are not available by default in Piwik, for example, the used device.

In DWM, it aims to increase the performance of the local manager or tour operator by providing an

enhanced insight through the behavior of visitors on the website. It is a clear improvement of the existing

solutions since it assists on audience segmentation according to the reason of the visit; facilitates the selection

of the clusters of tourism products in the interest shown by visitors: culture, sports, landscape, ecology,

alternative, etc.. The information generated by the monitor supports decision-making processes in increasing in

the number of followers and provides the most suitable periods of the year for a more effective communication

campaign. Because it is capable of responding to complex issues where only are able to respond those tools

whose maturity level is five.

Ultimately, DWM enables optimization and design of tourism web sites in a time sensitive framework.

Conclusion and Future Work

Internet and the web presence of the DMOs have broken heavily on custom and everyday uses for travel

research as well as moderator of the image formation and the willingness to travel to a destination. Intelligent

systems in the tourism, as it is the case with DWM, support tourism organizations to better understand the

business environment and potential customers. The new generation of information systems provides a novel

way to identify the most relevant information, greater decision support, greater mobility and ultimately, greater

and enjoyment of the tourist experience (Gretzel, 2011).

The DWM as a platform for competitive intelligence improved online marketing strategies. The DMO’s

decision-making will be supported by evidences on the effect of marketing strategies as far as on attracting new


70

customers, increasing the degree of loyalty of the visitors and launching programs to encourage the

spontaneous recommendations. In this way, the user is at the center of the system and their behavior with the

DMO site is interpreted in a quantitative and qualitative mode.

Future efforts in the investigating of the architectures and the algorithms that exploit the data within DWM

promise to lead us to the next generation of intelligence within website of the DMO.

By the 2014 it is expected to exceed the current figure of four billion mobile devices around the world;

with a higher number of mobile devices connected to the Internet than desktop computers (Martín,

López-de-Ipiña, Alzua-Sorzabal, Lamsfus, & Torres-Manzanera, 2013). The mobile device becomes a window

on the information in real time and having this accurate information is changing tourist behavior at the

destination would be crucial to enhance destination management and customer expectations. The developed

system, DWM, will support this new challenge, since it would facilitate through new developments to study the

visitor behavior on a destination through mobile applications and linked it to previously conduct a virtual visit

to destination.

Furthermore, DWM, foresees a new data storage structure that allows new connections between different

big data systems (Lohr, 2012). Because the highly disaggregated level of the data, DWM will make possible a

better adjustment with reality; more accurate, enabling complex answer questions related to multiple attributes

of tourism.

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