new challenges of economic and business development 2013 · pdf filenew challenges of economic...

New Challenges of Economic and Business Development – 2013

May 9 - 11, 2013, Riga, University of Latvia

Marion Tenge 601

LEVERAGING SOCIAL CAPITAL ON PUBLIC SOCIAL

SOFTWARE PLATFORMS FOR ECONOMIC NEED SATISFACTION

IN THE AIRPORT INDUSTRY

Marion Tenge, University of Latvia, Latvia/

University of Applied Sciences Kufstein, Austria1

Abstract. Network ties that cross organizational boundaries, i.e. bridging social

capital, have been acknowledged by scholars of various disciplines as a major source of

competitive advantage. With the advent of public Social Software Platforms (SSP), such

as Facebook, organizations are provided with the opportunity to extend beyond

organizational boundaries and include the customer in the value creation process.

However, as Porter (2006, p. 225) noted, “the mere presence of firms, suppliers, and

institutions in a location creates the potential for economic value, but it does not

necessarily ensure the realization of that potential”. The aim of the research paper is to

explore, if airport organizations are able to increase their economic need satisfaction

when interacting with passengers on SSP. The paper adopts a strategy map approach to

deduce cause-effect relationships between engaging with passengers on SSP and

economic need satisfaction of airport organizations. Expert interviews with Corporate

Communication Managers of six out of eight major German airports (annual passenger

volume > 5 Mio.) provide initial insights into the current degree of economic need

satisfaction by contrasting the SSP Facebook with traditional communication channels

of the airports. The paper describes to what extent SSP contribute to economic need

satisfaction with respect to ‘customer insights’, ‘operational efficiency’, ‘innovative

strength’, ‘customer advocacy’ and ‘customer satisfaction’. The results show that while

airport managers already experience some increase in economic need satisfactions, they

are not yet able to tap into the full potential of SSP.

Key words: airport industry, economic needs, public social software platforms, social capital

JEL code: O33

1. Introduction

While traditionally airports used to be considered as infrastructure providers serving macro-economic

purposes, increased air traffic liberalization and airport privatization have forced airports to become more

commercially focused. Airports increasingly compete for passengers, who often have a choice between

two or more airports. Despite a growing awareness of the need for passenger-orientation to both sustain

independent development and reward shareholders, airports still suffer from a lack of genuine customer

insights. The passenger relationship and data is not owned by airports, but airlines and tour operators.

1 Corresponding author – e-mail address: [email protected], telephone: +49 177 8736325



602 Marion Tenge

Complexity is added by the fact that some airport services, such as shopping outlets or restaurants, are not

provided directly by airports to the passenger, but through concessionaires or tenants. With a growing

adoption of public Social Software Platforms (SSP) by customers, such as the online social network

Facebook, airport organizations eventually are able to virtually connect with their passengers and enter

into a dialogue for mutual benefit. SSP are web-based services that allow users to set up a profile within a

bounded system (Boyd and Ellison, 2007), connect to other users, groups or organizations and share

information updates or rich media (photos, videos etc.) with their network of connections based on

privacy settings (Tenge, 2013). Network ties that cross organizational boundaries, i.e. bridging social

capital, have been acknowledged by scholars of various disciplines as a major source of competitive

advantage. The concept of social capital is gaining momentum in organization studies. It has been proven

useful in explaining “an actors’ relative success in a number of arenas of central concern to organizational

researchers” (Adler and Kwon, 2002): for example achieving financial benefits (Burt, 1995), facilitating

information exchange and collaboration (Wasko and Faraj, 2005) and fostering innovative ideas

(Granovetter, 1973). Lin (1999, p. 30) defines social capital as “investments in social relations with

expected return”. Put in other words, investing time in maintaining network connections is beneficial, as

often the support of others is needed with regard to need satisfaction and goal attainment. The overall

notion of an organizational social capital theory is that relationship networks and other aspects “unrelated

to money can help organizations succeed economically” (Cohen and Prusak, 2001, p. 10). Intangible

assets come to the fore (cf. Johnson, 1999; Kaplan and Norton, 2004a). The production and transaction

oriented focus of industrialization has shifted to employees, customers and other organizational

stakeholders and the underlying networks that govern the relationship between those actors (Atkinson,

2006). Though the network-/relationship-approach is not a new field of business research, it currently

encounters a renaissance due to the emergence of SSP. SSP extend organizations beyond corporate

boundaries and enable them to re-establish network connections with their customers. SSP embrace

customer participation, while drawing on the ideological and technological foundations of Web 2.0. One

of the underlying principles of Web 2.0 is the definition of the “Web as a platform” (O’Reilly, 2007, p.

19), for facilitated idea sharing and joint value creation in a democratic manner (Kaplan and Haenlein,

2010). Content that is created by organizations and their customers on SSP is publicly visible and

persistent (McAfee, 2006).

The purpose of the paper is to explore, if airports are able to generate a return on their investment in a

social relationship with their passengers on the SSP Facebook. Facebook is the globally most adopted

SSP counting more than 1 billion active users (Facebook, 2012). Already 72.1% of German computer

users who account for 75.6% of the German population maintain a Facebook account (vor dem Esche and

Hennig-Thurau, 2013). The paper reports on initial results from expert interviews with German airport

organizations focusing on their ability to increase their economic need satisfaction when interacting with

passengers on SSP. As Porter noted “the mere presence of firms suppliers and institutions in a location

creates the potential for economic value, but it does not necessarily ensure realization of that potential”

(Porter, 2006, p. 225). The author adopts a Balanced Scorecard / strategy map approach (cf. Kaplan and

Norton, 2004b; Kaplan and Norton, 2004c) to propose cause-effect-relationships between interacting with

passengers on SSP and economic need satisfaction of airport organizations. Economic needs include the

needs for ‘customer insights’, ‘operational process efficiency’, ‘innovative strength’, ‘customer advocacy’

and ‘customer satisfaction’. As economic needs are theoretical constructs, they needed to be

operationalized by indicators. Indicators were deduced based on the developed generic airport strategy map

in the form of attitudinal questions. A semi-structured questionnaire was constructed including both open

ended-questions and likert-scale ratings. The likert-scale ratings indicate to what extend the respondents

agree that Facebook increases the economic need satisfaction of airports as compared to traditional

communication channels, such as e-mail, call-center or website. The questionnaire was distributed to six out

of the eight major German airports (annual passenger volume > 5 Mio.). The airports Berlin

(Tegel/Schönefeld) and Cologne-Bonn were excluded from the study. The existing airports in Berlin will



Marion Tenge 603

close down due to the planned opening of the new airport Berlin Brandenburg International. Cologne-Bonn

focuses predominantly on the low-cost traffic segment and is therefore only to a limited extend comparable

to the other airports in the sample, which have a rather balanced traffic segmentation. The airports included

in the sample have started to use Facebook 1.5 to 3 years ago and accounted for an average number of

Facebook ‘page likes’ of 27.928. The number of Facebook ‘page likes’ is equal to the number of individuals

who connected to an airport on Facebook and chose to receive information updates of the airport in their

own Facebook profile. The questionnaire was pre-tested by six social software experts holding management

positions in five different German companies in the tourism, media and online industry. The experts were

asked to assess the questionnaire in terms of logical consistency, ease of understanding, and contextual

relevance. The comments collected from these experts led to several minor modifications of the wording.

Based on the questionnaire for each airport face-to-face interviews with the Corporate Communications

Managers responsible for social software activities were conducted in the time period from November 2012

to January 2013. The interviews were recorded and transcribed. The results were submitted to quantitative

analysis (aggregation of Likert-scale items to variables, analysis of distribution of variables) and qualitative

analysis (text analysis, item identification based on frequency of occurrence). As SSP are a relatively

recent and fast changing phenomenon and little knowledge currently exists regarding the adoption of SSP

of organizations, it was necessary to integrate quantitative with qualitative analysis to be able to draw

meaningful conclusions.

2. The Balanced Scorecard / Strategy Map as Framework for Proposing Cause-

Effect Relationships between Leveraging Bridging Social Capital on SSP and

Economic Need Satisfaction of Airports

To propose cause-effect-relationships between interacting with passengers on SSP and economic need

satisfaction of airport organizations the author adopts a Balanced Scorecard (BSC)/ strategy map

approach. For each perspective of the BSC / strategy map (financial, customer, process, learning and

growth) the author discusses the relationship between bridging social capital, i.e. network connections

with customers, and organizational performance of airport organizations.

Performance measurement, in particular the concept of the BSC, has gained considerable momentum

in both managerial and academic contest. Notion of the BSC is that it is not sufficient to rely exclusively

on financial indicators and goals to achieve organizational performance (Kaplan and Norton, 1992).

Focusing only on lagging financial outcome indicators might promote organizational behavior that is

targeted at maximizing short-term performance, while sacrificing sustainable future growth. The BSC

places the emphasis on the enablers of performance (Mooraj et al., 1999). The BSC organizes strategic

objectives and measures in four different perspectives. The financial perspective focuses on the view of

the shareholders and is concerned with the lagging financial indicators such as profitability, growth and

shareholder value. The customer perspective defines the customer value proposition. Focus is on creating

customer satisfaction through an attractive value proposition and by this increase customer loyalty and

advocacy. The process perspective focuses on the internal processes the organizations needs to excel at to

deliver the customer value proposition. Hence, organizations need to concentrate on processes that have

the greatest impact on customer satisfaction and retention. The learning and growth perspective describes

how the intangible assets of an organization (for example human capital or information capital) are

integrated and aligned with strategy to create value. Learning and growth measures are lead indicators for

internal process, customer and financial performance. While the early BSC concept does not consider

cause-effect-relationships (Malmi, 2001), it was later evolved to include cause-effect relationships

between the four perspectives (Kaplan and Norton, 2001). In this respect strategy maps are a “natural

extension to balanced scorecards” (Neely et al., 2003, p. 130). Strategy maps can be used by



604 Marion Tenge

organizations for review and clarification of strategy, communication of strategy, for prioritization and

alignment of strategic initiatives and to focus the organization on long-term goals and mutual

understanding (Mooraj et al., 1999, 490; Kaplan and Norton, 1996b). A strategy map is a visual

representation of a corporate strategy and therefore must not be considered as “a strait jacket” (Kaplan

and Norton, 1996a, p. 34). Each industry/organization needs to develop their own BSC / strategy map

depending on the selected strategy. With the advent of SSP, such as Facebook, organizations have started

to extend their learning and growth perspective, process perspective and customer perspective beyond

organizational boundaries (Tenge, 2012). They are able to benefit from using SSP as part of their

information capital to leverage social capital, (network connections to customers) in order to enrich their

human capital (tacit knowledge of employees) to improve value creation in the process, customer and

financial dimension of the BSC / strategy map. Figure 1 shows how airport organizations can profit from

leveraging social capital by means of utilizing SSP for including the passenger in the value creation

process to achieve organizational performance.

Source: (Tenge, 2012)

Fig. 1. Generic Airport Strategy Map Based on (Kaplan and Norton, 2004c)

with Social Capital Dimension

The generic airport strategy map is targeted at airport organizations that pursue a growth strategy to

achieve long-term shareholder value and reflects the current strategy of all airports in the sample. As for

the internal (process) perspective of the strategy map, this involves a clear focus on the operational

passenger service processes (need for operational efficiency) as well as on continuous innovation

processes (need for innovative strength). In order to excel at the process and financial perspective, rich

customer knowledge is required in the learning and growth perspective of the strategy map (need for



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customer insights). Based on passenger feedback some potential improvements or service innovations

might be evaluated as being ineffective, as they have no impact on overall customer satisfaction (need for

customer satisfaction). Customer satisfaction can be seen as a driver of profitability, as it is an

antecedents of customer loyalty (Storbacka et al., 1994). Satisfied customers are also likely to become

advocates for the airport (need for customer advocacy). Hence, the customer perspective of the strategy

map focuses on customer satisfaction and customer advocacy. The total degree of economic need

satisfaction of airports on SSP is dependent on the satisfaction of the underlying economic needs in each

perspective of the airport strategy map. The economic needs and their respective operationalization in the

research study are briefly discussed before reporting on the results of the expert interviews.

Need for Customer Insights Learning and Growth Perspective

Through dialogue with passengers on SSP airports gain insights into passenger needs, requirements

and attitudes with regard to the airport experience. Learning about gaps between the service quality

expectations of passengers in contrast to their perception of the way the service is performed is a

precondition for airport managers to carefully determine necessary investments in airport service quality.

The theoretical construct ‘need for customer insights’ is operationalized by the following attitudinal

questions:

1. On Facebook, we gain deeper insights into customer needs, requirements and attitudes;

2. Facebook helps us to better determine where the customers’ perceived service quality differs from

the expected service quality;

3. On Facebook we are able to better detect priority areas for service quality investment spendings

with influence on customer satisfaction (root-cause detection).

Need for Operational Efficiency Process Perspective

Increased smart phone ownership is providing passengers with ubiquitous access to SSP. They access

their social network ‘on-the-go’ and exchange real-time information. In this respect, they also expect a

faster response time of organizations (IBM, 2011). Especially for business travellers and frequent leisure

travellers smart phones have become a crucial element of their everyday lives. This development offers

the opportunity for airport organizations to increase their operational efficiency with regard to ease and

speed of information dissemination (e.g. in times of crisis or air traffic disruptions) and passenger

communications (e.g. passenger service, complaint management). The theoretical construct ‘need for

process efficiency’ is operationalized by the following attitudinal questions:

1. Facebook speeds up information dissemination;

2. Facebook accounts for a reduced response time to passenger inquiries/questions;

3. Facebook facilitates management of passengers service quality expectations;

4. Facebook facilitates complaint handling.

Need for Innovative Strength Process Perspective

Organizations that maintain network connections that cross organizational boundaries (weak ties that

span a structural hole) are more innovative as compared to their competitors, as external network

connections provide information sometimes not available within the organization itself (Granovetter,

1973). Innovative airport services of today may quickly become the minimum expectations of tomorrow.

It is therefore important for airports to timely notice shifting customer expectations to keep passengers

satisfied und to keep up with competing airports. To sustain stable revenues for themselves and their



606 Marion Tenge

business partners (airlines, shopping outlets, restaurants etc.) maintaining a dialogue with passengers is

beneficial for evaluation of new service ideas or introduction of new services to the passengers. The

theoretical construct ‘need for innovative strength’ is operationalized by the following attitudinal

questions:

1. Since using Facebook, we are able to notice shifts in customer expectations more timely;

2. On Facebook we get instant customer feedback on new service ideas;

3. Facebook facilitates the introduction of new services to the passengers.

Need for Customer Satisfaction Customer Perspective

Tailoring the airport service quality to passenger needs in the process perspective is a precondition to

achieve passenger satisfaction in the customer perspective. Airports conduct passenger satisfaction

surveys on a regular basis, for example surveys administrated by the Airport Council International for all

participating airports.

The theoretical construct ‘need for customer satisfaction’ is operationalized by assessing, if airports

experienced an improvement of their customer satisfaction scores.

1. Since using Facebook our passenger satisfaction scores improved

Need for Customer Advocacy Customer Perspective

SSP are based on informal communication between users. Web-based word-of-mouth (WOM)

communication enhances the traditional WOM communication from personal one-to-one to virtual many-

to-many communication. Interactions between users are publicly visible and persistent. When satisfied

passengers become advocates for an airport, positive WOM is amplified through their social graphs

(Jeong and Jang, 2011). By this, the reach of WOM is increases as compared to traditional

communication channels. The theoretical construct ‘need for customer advocacy’ is operationalized by

the following attitudinal questions:

1. We noticed an increase in the amount of positive WOM since using Facebook;

2. Since using Facebook the reach of positive WOM increased.

3. SSP as Mediator for Economic Need Satisfaction of Airport Organizations? –

Initial Results from Expert Interviews

The reasons for maintaining a Facebook profile for communication with passengers are not consistent

across the airport sample (see Figure 2). While 100% of the respondents agree that they use Facebook to

‘inform passengers about the airport and the airport service portfolio’ and to ‘generate positive WOM’

about the airport, only 83.3% of the respondents use Facebook to purposefully ‘gain information on

needs, requirements and opinions of passengers’ or to ‘increase passenger loyalty’. 66.7% of the

respondents maintain a Facebook profile with the goal to ‘improve the service quality of the airport’ or

because ‘passengers expects airports nowadays to be present on Facebook’. 50.0% of the sample

indicated to use Facebook to improve their ‘process efficiency through real-time communication with the

passenger’ and only 16.7% indicated that the reasons include the intention to ‘involve passengers in

innovation processes’.



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Source: own construction of author based on research results

Fig. 2. Reasons of Airports for Maintaining a Corporate Facebook Page

The results are not surprising, as all respondents reported that the department of Corporate

Communication is initiator and driver behind the Facebook activities. Therefore, communication goals

have priority over market research or process-oriented goals. Table 1 summarizes the results of the expert

interviews with regard to the attitudinal questions of the study. Basis for the rating was a 5-point-likert

scale. A rating of ‘3 = neither agree nor disagree’ indicates no advantage of Facebook as compared to

traditional communication channels, whereas a rating of ‘4 = somewhat agree’ indicates the existence of

some advantage and the rating of ‘5 = strongly agree’ is equivalent to a strong advantage of Facebook.

Generally, Facebook is considered to contribute to an increase of total economic need satisfaction (mean:

3.75). However, some economic needs such as ‘customer advocacy’ (mean: 4.17) or ‘innovative strength’

(mean: 4.06) are rated higher by the experts as compared to ‘customer insights’ (mean: 3.54) and

‘operational efficiency’ (mean: 3.83). Regarding the need for customer satisfaction (mean: 3.00),

Facebook does not contribute to an increase of need satisfaction in the view of the respondents.

Table 1

Contribution of Facebook to Economic Need Satisfaction

Mean Std. Deviation Kolmogorov-Smirnov Test

Total Economic Need Satisfaction 3.72 0.293 p = 0.838

Customer Insights 3.54 0.332 p = 0.721

Operational Efficiency 3.83 0.563 p = 0.550

Innovative Strength 4.06 0.443 p = 0.612

Customer Advocacy 4.17 0.816 p = 0.990

Customer Satisfaction 3.00 0.632 p = 0.518

p > 0.05: normal distribution can be assumed

5-point Likert-scale: 1 strongly disagree; 2 somewhat disagree; 3 neither agree nor disagree; 4 somewhat agree; 5 strongly agree Source: own construction of author based on research results



608 Marion Tenge

From the transcribed expert interviews explanations for the ratings were obtained to gain more

information about the underlying opinions of the respondents. The data was analyzed for recurring

patterns. If at least 67.7% of the sample mentioned the same topic, it was considered to be important and

coded into an item. The most obvious items are the “topics that occur and reoccur” (Taylor and Bogdan,

1975, p. 83). Table 2 shows that concerning the need satisfaction for ‘customer insights’ two items were

identified. The tonality of the items was both positive and negative. Airports report that Facebook enables

them to get a better feeling of customer moods and opinions, because “people speak their mind freely”

and they can “be closer to the passenger”. However, despite a constant increase of Facebook page likes

for all airports, they complain that the customer insights obtained are not yet representative.

Table 2

Need for Customer Insights – Results from Expert Interviews

No. Tonality of

Item Item Consolidated Interview Statements

1. Positive Get better feeling of

customer moods

and opinions

Be closer to the passenger / get insights into needs

Get insights into needs and positive, negative opinions

People speak their mind freely

It was not expected that a specific topic was of such

interest for the passengers

2. Negative Customer insights

not yet

representative

Only individual opinions

Critical mass not yet reached

Compared with total passenger volumes of the airport,

tool not representative

Other tools still more representative


Table 3

Need for Operational Process Efficiency – Results from Expert Interviews

No. Tonality

of Item Item Consolidated Interview Statements

1. Positive Suitable tool for

crisis communi-

cation and commu-

nication of air

traffic irregularities

Own experience confirms, that it works, e.g. strikes

Useful tool to quickly inform in times of crisis, strikes etc.

Tool used for communication of irregularities, e.g. strike

Useful for communication regarding acute incidents

2. Positive Faster information

dissemination and

reaction possible

Communication on Facebook faster

Fast feedback to passenger possible

Faster information dissemination

Fast social channels complement traditional channels

3. Negative No increased

efficiency of

complaint

management

processes

Not focussed

Public discussion of complaints not intended

Internal processes not yet completely set up

Does not facilitate internal processes




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With regard to the need satisfaction for ‘operational process efficiency’ two positive and one negative

item were identified and summarized in Table 3. Airports consider Facebook as a suitable tool for crisis

communication and communication of air traffic irregularities that is appropriate for faster information

dissemination and reaction. All respondents confirmed during the interviews that they have already used

Facebook as a communication channel for acute incidents, for example strikes or severe weather

conditions. By contrast, currently no airport uses Facebook to increase the efficiency of complaint

management processes. Reasons include that respective internal processes are either not yet set up or not

adequate, complaint management on Facebook is not focused by the airport or that a public discussion of

complaints is not intended to avoid the risk of a viral dissemination of negative word-of-mouth.

With regard to the need satisfaction for ‘innovative strength’ two positive and one negative item were

identified and summarized in Table 4. All airports agree that Facebook accounts for a facilitated

communication of new services to the passenger. The second positive item that was identified relates to

the fact that airports reported frequent initiatives to generate passenger feedback regarding specific topics.

The approaches to generate passenger feedback have been reported to be rather ad-hoc than strategic.

This is in line with the result that only 16.7% of the respondents claimed to be on Facebook to

purposefully involve passengers in innovation processes. The respondents also stated that the obtained

passenger feedback did not contain actionable knowledge. Reasons included too little participation of

passengers as compared to total passenger volumes of the airport and the related problem of

representativity.

Table 4

Need for Innovative Strength – Results from Expert Interviews

No. Tonality


1. Positive Facilitated

communication of new

services to passengers

Agreement to statement by all airports

2. Positive Frequent initiatives to

generate passenger

feedback regarding

specific topics

Passenger involvement takes place

Airport will continue to gather feedback

Feedback on new airport services gathered

Existing dialogue with departments to encourage use

of Facebook to gather feedback on new services

3. Negative So far, little actionable

knowledge from

feedback obtained

Too little passenger posts on requirements

Too little active and useful passenger feedback

Feedback not yet representative

Feedback not generalizable to all passenger


Concerning the need for ‘customer advocacy’ again two positive and one negative item were

identified. The summarized items presented in Table 5 include the possibility to positively contribute to

an emotionalization of the airport and by this increase the emotional attachment of the passenger to the

airport. This is achieved by posting emotional stories and photos of the airport. As public opinion still

regards airports as mere providers of infrastructure and noise producers, emotionalizing the airport

experience is an important agenda point for the airport industry. Airports also reported on the opportunity



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to purposefully increase WOM. Especially aviation related topics have been found to be of special

interest to the Facebook fans of the airport and trigger interaction. The effect of the positive aspects is

constraint by the fact that not all target groups can be reached on Facebook as compared to other

communication channels. However, vice versa, the experts also noted that new target groups emerge on

Facebook that cannot be reached by traditional media. It is therefore intended to integrate Facebook with

other channels.

Table 5

Need for Customer Advocacy – Results from Expert Interviews

No. Tonality


1. Positive Emotionalization of

airport possible Increase emotional attachment of passenger to the airport

Feel fascination of aviation / aviation related postings

Tell interesting and emotional stories about the airport

and people at the airport

Humanization of airport / introduce departments and

people

The public still regards airports as infrastructure provider

2. Positive Possibility to

purposefully increase

positive word-of-mouth

(WOM) and virality

Emotional posts, i.e. no pure facts and figures, foster

WOM

Creation of posts that foster WOM

Aviation related topics arouse special interest /trigger

interactions

3. Negative Not all target groups

can be reached on

Facebook

Not all target groups on Facebook

Other target group on Facbook

Limited reach


Table 6 shows that it is not yet clear, if Facebook has an impact on the customer satisfaction scores of

airports, as it is currently not monitored and measured. Meaning, that no link exists between the Facebook

activities and operational performance indicators of the airport.

Table 6

Need for Customer Satisfaction – Results from Expert Interviews

No. Tonality


1. Negative Influence of Facebook on

customer satisfaction not

measured

No monitoring, no benchmarking, no knowledge, if

relationship exists


83.3% of the respondents believe that the future importance of Facebook and other SSP is going the

increase, 16.7% predict a stable importance. Given the growing importance of the communication

channel, organizational structure is seen as a success factor to be able to harvest its full potential

(Table 7). Challenges mentioned by the experts include the transition from departmental silos to an



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interdisciplinary, network-oriented approach to Facebook maintenance, the development of standards and

routines and a lack of human resources.

Table 7

Organizational Challenges – Results from Expert Interviews

No. Tonality


1. Neutral Organizational structure as

success factor for harvesting full

potential of Facebook

(interdisciplinary approach to

Facebook management)

Adequate organization of Facebook activities

as a precondition

Increase involvement of other departments

Routines need to be developed

Transition from hierarchical structure to

network structure necessary

Lack of resources


4. Conclusions and suggestions for further research

The paper has shown that Facebook enables airport organizations to enter into a dialogue with

passengers and leverage bridging social capital, i.e. network connections that cross organizational

boundaries, to increase their economic need satisfaction. Despite that airports already report fruitful

benefits of their Facebook activities, they are not yet able to fully exploit the potential of the SSP. This is

due to both external and internal reasons:

1. Despite that the number of Facebook users connecting to airports is constantly increasing, the

critical mass needed for passenger feedback to be representative is not yet reached. This currently

restricts the utilization of Facebook for market research or an active involvement of passengers in

innovation processes.

2. As the Facebook activities of airports are anchored in the department of Corporate

Communications, communication goals, for example fostering positive WOM or faster

information dissemination, have priority over other business process-oriented goals.

3. Airports are still at the beginning of a transition process for a more interdisciplinary approach to

Facebook management, meaning that they face the challenge of adapting existing organizational

structures as well as routines and resources.

In the view of the author airports need to focus on two principal success factors to further increase the

degree of economic need satisfaction:

1. Development of critical mass: passenger insights must be representative to be of value for airport

organization. It is therefore necessary to increase the number of Facebook ‘page likes’ and

passenger interactions. As customers voluntarily enter into a dialogue with organizations on SSP,

i.e. without any contractual obligation to maintain the relationship, further research is needed and

currently conducted by the author, how the motivation of customers to engage with organizations,

volunteer information or even act as organizational advocates can be sustained or increased.

Obviously, more work is needed to fully understand the motivation of passengers to actively

engage with airport organizations on SSP. Knowledge of the underlying motives is vital for

airports to be able to correctly respond to customer needs. Otherwise, the expected future value of

the relationship will decrease from the perspective of customers and so will the investment of



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effort in maintaining the relationship (cf. Lindenberg, 1990). Put in other words, in absence of

reciprocal behavior, social capital will be discounted (Flap, 2001).

2. Adaption of organizational structure: an interdisciplinary, network-oriented approach to Facebook

management is a precondition to be able to move from supporting communication processes to

also increasing the efficiency and effectiveness of other operational processes. However, prior to

embedding SSP into processes the identification of clear business goals based on corporate

strategy as well as of key performance indicators (KPIs) is essential for a holistic approach to SSP.

As SSP are a relatively recent and still emerging phenomenon the conduction of a longitudinal study

would be beneficial to assess changes in economic need satisfaction and adaption of organizational

structures of German airport organizations caused by an increasing adoption of SSP by passengers over

time. The study reports on a small sample size and is geographically limited to Germany. This restricts

the generalizability of the research findings. Notwithstanding, though the study focuses on the airport

industry, it can be adapted to any other industry by customizing the strategy map approach. It would be

interesting to explore the differences in economic need satisfaction across industries (e.g. consumer brand

organizations vs. service organizations).

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614 Marion Tenge

SOCIAL SOFTWARE PLATFORMS AS MOTOR

OF OPERATIONAL AIRPORT EFFICIENCY?

– A CONCEPTUAL FRAMEWORK

Marion Tenge, University of Latvia, Latvia/

University of Applied Sciences Kufstein, Austria1

Abstract. Purpose. Due to commercialization, privatization and liberalization, the

traditional role of German airport organizations as merely providers of infrastructure

gives way to a more market-oriented understanding. Airport service quality and the

ability to constantly innovate are important variables that contribute to overall airport

attractiveness. Despite that airports are becoming increasingly aware of the need for

customer-orientation, the majority of airports still suffer from a lack of genuine

customer (passenger) insights. This due to the fact that airlines and tour operators own

the passenger relationship and data. The emergence of public social software platforms

(SSP), such as the online social network Facebook, is now enabling airport

organizations to enter into a dialogue with the passenger and gain a deeper

understanding of passenger needs while leveraging social capital. The research paper

examines, if airports are able to increase their operational efficiency when entering into

a collaborative communication with their customers on SSP.

Design/methodology/approach. Based on a social capital / network approach to

organizational work, the paper discusses the convergence of social and technological

networks and the underlying motives of customers and organizations for joining social

software platforms.

Findings. The paper proposes a theoretical model to describe how a mutually

beneficial relationship between organizations and customers on Facebook can help

airports to reach economic goals. As a next step, the theoretical model will be

operationalized and empirically tested in 2012 using qualitative and quantitative research.

Originality/value. Social capital research as well as the adoption of SSP by

organizations is still mainly scoped within organizational boundaries. The paper

broadens the research focus to the focal actors organization and customer. From a

practitioners’ point of view, airport managers might find it useful to learn what

organizational challenges arise when engaging with customers on social software

platforms.

Key words: online social networks, social software, social capital, service quality, operational

efficiency, airport industry

JEL code: O33




Marion Tenge 615

1. Introduction

In the last decades German airport industry has undergone a lot of changes due to commercialization,

privatization and liberalization. The traditional role of airports as providers of infrastructure serving macro-

economic purposes is changing and gives way to a more market-oriented understanding. Airport service quality

and the ability to constantly innovate are important variables that contribute to overall airport attractiveness in

addition to location, price, destination portfolio and flight scheduling [1]. Passenger insights are paramount for

aligning airport service quality with passenger needs. However, airports are complex business relationship

networks that lack genuine passenger insights. While no airport would exist without passengers, the passenger

relationship and data base is owned by airlines and tour operators. Complexity is added by fact that numerous

airport services are not provided directly by the airport to the passenger, but through concessionaires, tenants,

handling agents etc. Current measures of airport service quality, such as passenger satisfaction surveys, are

useful for benchmarking purposes, but do not reveal the true customer perspective. Typical passenger pain

points are waiting times at check-in and baggage-drop off counters, lack of cleanliness of airport facilities or

orientation in terminal buildings. Reducing the passenger to a statistical number while measuring the obvious

might take the form of both operational weaknesses as well as limitations on customer-centric services.

With a growing adoption of public Social Software Platforms (SSP) by customers, such as the

globally most adopted online social network Facebook, airports eventually are provided with the

infrastructure to enter into a dialogue with their passengers and to continuously gain direct passenger-

knowledge. SSP are web-based services that allow users to set up a profile within a bounded system [2],

virtually connect to other users, groups or organizations and share information, videos, photos etc. with

their network of connections based on privacy settings. As of December 2011 Facebook counts more than

800 million active users worldwide (Germany: 21.6 Mio.). 50% of all active users log on to Facebook

each day. More than 350 million active users access Facebook through mobile devices, for example smart

phones or tablets [3]. 73% of all international German airports maintain a corporate profile on Facebook

to provide information about the airport and offer a platform for discussion and feedback for passengers

and other stakeholders.

SSP shape the environment in that human interactions take place, meaning that they have an impact

on the transformation of human society [4]. When the CLUETRAIN MANIFESTO postulated that the

industrialization was not much more as an interruption of the social relationship between organizations

and their customers [5], this thought has been revolutionary. Ten years later, with the convergence of

social and technological networks, the prophecy turns into reality. Customers are becoming increasingly

empowered, as social infrastructure and platforms of participation are catching up with the business

infrastructure [6; 7]. During the time period of industrialization, economies-of-scale, division-of-labour

and mass marketing organizations merely talked at the customer. The social relationship between

organizations and their customers eroded – and so did social capital. The concept of social capital is

gaining currency in organization studies. It has been proven useful in explaining “an actors’ relative

success in a number of arenas of central concern to organizational researchers” [8]: for example achieving

financial benefits [9], facilitating information exchange and collaboration [10; 11] or fostering

organizational innovation [12].

The growing adoption of SSP is now enabling organizations to talk with the customer: “If you like thinking

in organizational terms, the customer has a seat at the table, and is part of your Monday morning staff meeting

in all departments” [13]. The advent of SSP demands for a new marketing paradigm. GUMMESSON defines

marketing as a dimension of society with the core variables of relationships, networks and interaction. He

argues that marketing must no longer be treated as an isolated discipline, but needs to be broadened to general

management and social life [14].

On SSP interpersonal relations as well as the relations between organizations and their customers are

extended into the digital world. By setting up a user profile, individuals publicly display their social

relations (connections) to other individuals, groups or organizations and by this enable researchers to get



616 Marion Tenge

a glimpse of their offline social network. SSP have become a popular research topic for interdisciplinary

scholarship. “Science advances whenever we can take something that was once invisible and make it

visible; and this is now taking place with regard to social networks and social processes” [15]. As

interactions on SSP may also be of non-economic nature, the research findings of scholars of psychology,

behavioral economics and sociology might prove to be useful for organizations that aim to engage with

their customers on SSP for mutual benefit.

2. Research Questions

To be able to tap into the potential of SSP, airport organizations need to understand their motivational

pull. The following research questions are formulated:

1. What are the motives of individuals for joining SSP?

2. How can airport organization leverage SSP for achieving economic goals?

3. Research Approach

The paper is based on a social capital/network approach to organizational work. A social capital

approach to organizational work is different from an atomic organizational theory, which is concerned

with individual transactions between an individual customer and an organization, such as single service

episodes, but ignores the relationship networks between the organization and its customers as well as

among customers. It takes the intangible elements of the customer-organization relationship, such as the

need of the customer to be cared for and recognised into account [11]. The network-/relationship-

approach is not new to business research. It rather encounters a renaissance due to the rise of social

software platforms. Taking a historical perspective, social capital was already vital in ancient trade, when

business relationships have been personal and local [16]. Touching on the need-satisfier approach of

MAX-NEEF the motivational pull of SSP is analysed. Contributions from Self-Determination Theory

(SDT) are used for deducing criteria for achieving customer engagement on SSP.

4. Research Gap

In organization studies social capital research as well as research on the adoption of SSP by

organizations is still mainly scoped within organizational boundaries (see for example [17] on knowledge

sharing in communities of practice, [18] for use patterns of social networks sites by Microsoft employees

or [19] for case studies on BBC, CIA, Google and Serena Software). With organizations and customers

connecting online, two focal actors are building a social relationship relatively new to social capital

research: a formal entity (organization), that consists of a collection of individuals (employees), and an

individual (customer) that – as opposed to an employee – is not part of the organization. This results in a

need to broaden the research focus. The research paper aims to make some initial contributions in this

research area. Other scholars are invited to refine, correct or expand on it in future.

5. Related Work

The majority of existing research on the collaboration of customers and organizations on SSP has

been conducted by media or management consultancies with a clear focus on consumer brand companies



Marion Tenge 617

not on service-oriented organizations, such as airports. In 2010 UNIVERSAL MCCANN, a global media

agency, published the international research study “The Socialization of Brands”, based on the survey

data of 37.600 internet users in 54 countries. The findings show that customers demand for a more social

and interactive relationship with consumer brands and that online social networks are driving brand

loyalty and sales [20].

A survey of HULME, conducted for the technology provider Alterian, using representative

quantitative and additional qualitative studies in addition to desk research showed that 75% of sampled

active social software users in the UK und US believed that “there would be a positive impact from

companies taking more time to find out about their needs and interests” [21] provided that feedback is

acted upon and the outcome benefits the customer. 82% of the sample expressed a positive interest to get

involved with developing products and services. The study also highlights that the implications for

organizations, for example concerning necessary departmental restructuring, are not fully understood at

the most senior management levels.

Communication patterns of organizations on Facebook are explored in a global desk research study by

A.T. KEARNEY [22]. In the time period of November and December 2010 the Facebook pages of 50

leading brand companies have been analyzed. Key finding is that most of the companies do not yet

leverage the benefits of a collaborative communication with their customers, but use Facebook primarily

as a one-way communication platform.

6. Understanding the Motivational Pull of SSP

Understanding the motivational pull of SSP is crucial for organizations that want to tap into their

potential. RHEINGOLD argues that “people in virtual communities do just about everything people do in

real life, but we leave our bodies behind” [23]. Consequently it can be argued that individuals establish

network ties to other individual or organizations to leverage social support in order to satisfy their

fundamental human needs und by this increase the quality of their lives. Social relations act as a mediator

for need satisfaction, as human beings are dependent on others to attain goals [24].

Put in other words, social capital is a precondition for goal achievement. Social capital is generally

defined as “investments in social relations with expected return” [25]. The expected return can be equaled

with the expected degree of need satisfaction. SSP provide individuals with facilitated access to social

capital.

While traditionally organizations mainly focused on the customer needs, the motivational pull of

social software platforms demands for a holistic approach. It is vital to not only consider the customer as

a customer, but first of all as a human being. Therefore, organizations need to take a broader perspective

and to also address the fundamental human needs of a customer rather than narrowing down the focus to

the customer needs. Only paying attention to the customer needs would reduce the human being “into a

category of restricted existence” [26]. During the research paper the following classification of

fundamental psychological human needs is applied [27]:

1) Self-Determination/Autonomy;

2) Relatedness;

3) Recognition;

4) Meaning/Orientation.

According to Self-Determination-Theory [28; 29], an autonomy-supportive social context combined

with a feeling of relatedness and feedback that signifies competence and fosters recognition increases the

motivation of individuals to engage in an activity. A controlling social context, lack of affectionate care

and negative competence feedback undermines motivation. In addition, individuals need norms and

values to guide their action and provide for orientation and meaning. Thus, we need to understand to what



618 Marion Tenge

extent organizations can generate satisfiers to support need fulfillment of their customers and avoid the

impairment of needs when entering into a dialogue on SSP. Table 1 suggests success factors for

organizations to create customer engagement on SSP.

Table 1

Achieving Customer Engagement on SSP by Generating Satisfiers

for Fundamental Human Needs

Human Need Satisfier

Self-Determination;

Autonomy

Autonomy supportive communication content

(actuality, relevance, actionable knowledge)

Autonomy supportive communication context

(communication not controlled by events, customer data

only used with permission)

Recognition Communication fosters customer contributions

Positive feedback on customer contributions is provided

Relatedness Communication acknowledges unique distinctness of customer

(personalized communication)

Communication creates a sense of community

Orientation Transparent communication of realistic service promises

Fulfillment of service promises

7. SSP as Motor of Economic Growth

Passenger insights are key to create and sustain unique value propositions, align the passenger service

process accordingly and by this increase passenger satisfaction, loyalty and profitability. Customer

satisfaction can be seen as a driver of profitability. Satisfied customers are likely to establish a strong

relationship to the service provider resulting in customer loyalty and positive word-of-mouth [30].

Learning about gaps between the service quality expectations of passengers in contrast to their perception

of the way the service is performed is a precondition for airport managers to carefully determine

necessary investments in airport service quality. All quality improvement efforts need to be financially

accountable. Based on customer feedback some potential improvements might be evaluated as being

ineffective, as they have no impact on overall customer satisfaction [31].

As innovative airport services of today may quickly become the minimum expectations of tomorrow,

it is also important for airports to timely notice shifting customer expectations to keep passengers satisfied

und to keep up with competing airports. To sustain stable revenues for themselves and their business

partners (airlines, shopping outlets, restaurants etc.) maintaining a dialogue with passengers is also

beneficial for airports to uncover new revenue opportunities based on customer knowledge or for

evaluating new service ideas. Figure 1 shows a generic airport strategy map.

SSP offer an opportunity for airports to engage with passengers and gain valuable insights into their

expectations and attitudes while increasing the efficiency of quality assurance and innovation processes

for mutual benefit. It is not surprising hat organizations that maintain network connections that cross

organizational boundaries (weak ties that span a structural hole) are more innovative or adaptive as

compared to their competitors, as external network connections provide information sometimes not

available within the organization itself [33]. Customers also increasingly expect organizations to

maintain a corporate profile on public SSP.



Marion Tenge 619

Source: developed by author based on [32]

Fig. 1. Generic Airport Strategy Map

8. Theoretical Model

As previously shown airports join SSP to reach economic goals (satisfy need for subsistence), e.g.:

Gain richer and more context-aware customer insights as opposed to customer surveys;

Increase operational efficiency due to real-time communication with the customer (reduced time

for complaint handling, earlier detection of shifting customer expectations, facilitated management

of customer expectations with regard to airport service quality etc.);

Sustain customer satisfaction by interacting with the customer on a platform he is expecting the

organization to maintain a virtual presence while acknowledging the unique distinctness of each

customer (personalized communication);

Foster and increase reach of positive-word-of-mouth (customer advocacy).

Customers join SSP to satisfy their fundamental human needs:

Self-Determination/Autonomy;

Relatedness;

Recognition;

Meaning/Orientation.



620 Marion Tenge

According to Self-Determination-Theory the generation of need satisfiers results in higher task

commitment and engagement. With regard to the interactions of passengers and airport organizations

on SSP, generating satisfiers for human needs results in an increased motivation of the passenger to

interact with the airport and to volunteer information or spread positive word-of-mouth. If human

needs are impaired, reciprocal behaviour will not occur. The future value of the relationship will

decrease from the perspective of the customer, and so will the investment of effort in maintaining the

relationship on SSP [34].

Based on the discussed theoretical foundations, the following basic hypothesis is postulated: The

adoption of SSP by airport organizations only increases the perceived social capital from the

perspective of the airport (economic need satisfaction), if the perceived social capital increases from

the perspective of the passenger (human need satisfaction). Figure 2 illustrates the suggested theoretical model based on the example of the SSP Facebook.

Fig. 2. Theoretical Model Based on Facebook

8. Conclusions and Further Research

The paper argues that understanding and responding to service quality expectations of passengers is a

precondition for delivering competitive airport services. It was shown that airports lack high quality



Marion Tenge 621

customer insights, as airlines and tour operators have ownership of the passenger relationship and data

base. Current measures of airport service quality, such as frequent passenger surveys, are useful for

benchmarking purposes, but do not provide in-depth customer insights or the opportunity to establish a

relationship to the passenger beyond the process of actual service consumption. With the advent of public

SSP airports are able to enter into a dialogue with their passengers and take a genuine customer-centric

approach to airport service quality. The paper contributes to an understanding of the motivational pull of

SSP. Touching on the need-satisfier approach of economist Max-Neef and findings from Self-

Determination-Theory success factors for fostering customer engagement on SSP were deduced. Based

on the example of Facebook, the paper suggests the hypothesis that interactions on SSP that are governed

by norms of reciprocity increase the social capital for both, the passenger (human need satisfaction) and

the airport (economic need satisfaction). Though customer engagement is an off-balance-sheet item, it is a

key asset for co-creating an airport service experience that is aligned with passenger requirements and by

sustainable customer satisfaction.

Mutually beneficial relationships between airport organizations and their customers increasingly

become the motor of organizational development and competitive edge. If competing airports provide a

similar technical service quality, managing the social dimension needs to become dominating. Further

research is conducted to detail the theoretical model that will be subjected to empirical testing (qualitative

and quantitative research) resulting in either acceptance or refutation of the suggested hypothesis.

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Evgeniya Tonkova 623

MARKETING ACTIVITIES TO INCREASE COMPANIES’ REVENUES

Evgeniya Tonkova, Varna University of Economics, Bulgaria1

Abstract. The problem with falling sales in times of recessions draws the attention

of researchers who look for marketing opportunities to overcome it, or compensate for

the fall. Activities are oriented either towards more efficient use of internal company

resources, or towards more active marketing involvement in the company’s business

through utilization of opportunities arising from changes in the environment. The ability

to increase revenues in times of crisis through traditional marketing techniques is a

subject to questions. It is necessary to rethink the marketing approaches and re-balance

marketing resources in order to implement the updated marketing strategy by focusing

on reducing risks and increasing sales. The main idea of this report focuses on the

representation of real approaches to increase the revenues based on flexible marketing

solutions. The study aims to establish the major marketing activities that are

implemented by companies in order to overcome the drop in sales and/or to compensate

for those; also studied are specific business practices to increase revenue. The research

focus falls on investigating the opportunities to increase the companies’ revenue

through the use of transfer effects of cross-selling, adding marketing channels,

improving the user overall experience, updating the product range, generating additional

services/sales, implementing flexible marketing tools and taking a full advantage of

marketing event territory. The active use of all the tools in the marketing toolbox will

ensure a more accurate customer targeting and result in better market positioning off

and online. Special attention is given to the role of information in revenue management

for companies in the current conditions.

Key words: marketing opportunities, flexible marketing, revenues, information

JEL code: M31

Introduction

Changes in the market in the last couple of decades concerning competition and the ratio between

demand and supply according to product groups contributed for companies’ unstable revenues. Such

summary is made only for a particular country but also in general within the framework of world

economy. The economic recession had its effect on companies’ revenues, their costs and profits which

was to a considerable degree formed also by expectations of participants on the market. The unfavourable

macro and micro changes for a considerable part of companies contributed for forming a fall in sales.

Various marketing means are directed at compensating this fall. At the same time, however, the

development of technologies and the implementation of new capital based structures for distribution

1 Corresponding author – e-mail address: [email protected], telephone: +359 898636050



624 Evgeniya Tonkova

create the opportunity to generate other revenues with high and relatively low costs. To direct companies’

attention to low-cost marketing is exceptionally important in conditions of recession. Flexible marketing

solutions are a prerequisite for a more favourable market positioning and the achievement of economic

efficiency.

The priority of “revenues” for companies

While in 2009 companies’ focus was mainly on achieving the goals set and cutting costs, in 2011

Bain&Company’s surveys show that for the majority of company managers increasing sales in the

coming three years is a priority2. Revenues are listed by Deloitte as a first dimension for effective

company management at times of crises with a focus on price setting, growth, client survey, ensuring

revenues and optimizing the organization of those employed in sales3. In this respect real-time revenue

management becomes especially important for companies with high dependence on the use of capacity,

especially in the sphere of services. The highly technological channels of distribution with more active

information exchange, democratization of information4 and client reviews have an impact on consumer

decisions and revenues5 which makes them attractive to work out on behalf of companies and on demand

in the process of making purchasing decisions by clients.

The traditional division of revenues into: revenues from selling a company’s own products and

services, revenues from selling other companies’ products (those produced by other producers) and other

revenues (also from e-channels6) has its high potential to work on from a marketing point of view. This

research has in mind the accounting classification of revenues and the basic subdivision of companies of

producers and intermediaries/retailers. The focus on opportunities for increasing revenues from selling

producers’ own products and services is directed to the tools (see Table 1).

The very same tools as variables are used also in researching the opportunities for increasing revenues

from selling other products and services. As a whole, this track can be defined as a considerable resource

for increasing companies’ revenues which recently has not been used efficiently. Through using it one

can achieve the following advantages:

Optimizing the product range by reporting relevant demand;

Providing a complex service;

Providing a complex offer for solving a problem completely and others.

Designing various distribution channels in the last couples of decades has lead to the opportunity to

generate revenues from advertising, commissions and others that are exceptionally important for the

effective functioning of channels.

Besides the variables described in Table 1, in researching retailers’ marketing activity one needs to

include also the specific variables like increasing working days and hours, taking advantage of a cross-

selling product range involving on-site events and others.

2 Management Tools & Trends, Bain&Company, pp. 2-4. 3 Управление в несигурни времена. Петте бизнес измерения, които организациите трябва да вземат под

внимание по време на криза. Deloitte, 2009, с.1-2. 4 See in detail Kotler, P., Jain, D. and S. Maesincee. Marketing moves: a new approach to profits, growth, and

renewal, HBSP, p. 7. 5 See in detail: Luca, M. Reviews, Reputation, and Revenue: The Case of Yelp.com, 2011, http://www.hbs.edu/

faculty/Publication%20Files/12-016.pdf. 6 Chaffey, D. E-business and E-commerce Management – Strategy, Implementation and Practice, Fourth edn,

Pearson Education, 2009, p. 80.

http://www.google.com/books?hl=bg&lr=&id=UEzRNYRI_TwC&oi=fnd&pg=PR9&dq=+revenue+approach+marketing&ots=tkP4Hz7iy9&sig=vIoJZi4YmbYupaJSzKsTqRodmHE





Table 1

Tools with potential for increasing revenues from selling producers’ own products and services

Tools Specifics of application

Increasing product-

range positions

An opportunity to use it by companies functioning with incomplete

capacity, developed channels and loyal customers. It is supposed that

adding a product-range position will contribute for increasing a producer’s

revenues which does not always happen.

Designing new

distribution channels

Designing new channels is done with the aim to increase producers’

revenues in conditions of strong competition and market instability. It is

oriented to diversifying risk and a flexible management of the

product/channel lifecycles. The idea is that adding a new channel to the

existing ones (multichannel marketing7/multichannel distribution) will

contribute for the increase of revenues from selling a company’s own

products and services. A positive effect of applying new channels is

observed in the retailing banking sector8.

Database marketing Target offering according to database is also seen as a potential tool for

increasing revenues from sales9. Applying the data from analytic tools

10 is

with high importance for revenue management.

Tools that stimulate

sales

Stimulating sales on behalf of producers is a traditionally used approach for

attracting consumers and building loyalty. In this survey there are classified

three basic groups of tools: ones that are oriented to increasing usefulness,

ones that are oriented to decreasing general costs for consumers and/or

intermediaries and ones for lowering risks for consumers and/or

intermediaries.

Integration with other

producers

Integration with other producers enables market access and effective

distribution of the company’s own products. It is possible also to have

integration only in the frame of a single function.

Integration with

retailers

Integration with retailers is oriented to a more favourable positioning of the

producers’ offer in the retail and wholesale outlets.

Flexible offering Flexible offering is of particular importance for companies with high

potential for economies of scale in production and distribution. It is also a

tool for efficient management of the company capacity in the field of

services.

Working out new

markets

Working out new markets is seen as an opportunity to increase revenues

from transferring from local to international business.

Other marketing tools The variety of marketing tools results into the question about which of

those are applied real time with the aim to increase companies’ revenues.

Note: The table of variables has been made by the author for the goals of this research

7 See in detail: Venkatesh Shankar, J. Jeffrey Inman, Murali Mantrala, Eileen Kelley, Ross Rizley. Innovations in

Shopper Marketing: Current Insights and Future Research Issues, Journal of Retailing (1, 2011), pp. 32-33. 8 See in detail: Vikram Lund, V., Watson, I., Raposo, J. and C. Maver, Optimizing Distribution Channels: The Next

Generation of Value Creation, IBM Corporation 2002, pp. 1-15. 9 See in detail: Seller, M., Gray, P. A Survey of Data Based Marketing, 1999, p. 3. 10 See in details: DemandGen Report, Data Rich: The Payoff of Marketing Measurement on Revenue Performance,

2012, p. 5.




Table 2

Tools with potential for increasing retailers’ revenues


Increasing

product-range

positions

An opportunity to be used by retailers who function with incomplete capacity,

successfully introduced retail outlets and a large number of well-to-do

consumers. The idea is that each and every addition of product-range positions

will contribute for the increase of revenues. However, it is not always a fact and

does not guarantee efficiency11

.

Designing new

channels of

distribution

Intermediaries also make efforts for designing new channels: vending,

catalogues, e-channels, call channels and others. They expect that adding new

channels will contribute for higher revenues.

Database

marketing

Part of intermediaries has their own database which can be used efficiently in

target offering (databases for the cross-selling of new services and products12

)

and differentiating offers.

Tools that

stimulate sales

The variety of tools oriented to lower risk, higher usefulness and lower expenses for

consumers presupposes involving them in strategies for higher revenues from sales.

One pays special attention to the opportunity for applying the promotional set of tools

for achieving competitive advantages in the retail sector in conditions of recession13

.

Integration with

producers

Integrating producers with intermediaries therefore, needs to be seen as an

opportunity for increasing revenues for both sides.

Integration with

retailers

Integration with other retailers is possible in looking for opportunities for

survival. It is also applied in view of achieving higher marketing efficiency.

Flexible offering Flexible offering is an exceptionally important tool for creating expectation

within consumers. It is applied when there is registered fall in sales and a

strongly expressed cycle in buying according to days and time.

Working out new

markets/segments

Highly technological distribution channels are viewed as an opportunity to work

out new market segments with a positive effect on retailers’ revenues from sales.

More working

days

A chance to apply it in critical conditions or when one registers lack of

realization of the sales plan. What is of interest for the researcher is the

assessment of the effect on behalf of the retailers applying it.

More working

hours in outlets

A chance to apply it in critical conditions or when one registers lack of

realization of the sales plan. What is of interest for the researcher is the

assessment of the effect on behalf of the retailers applying it.

Taking advantage

of cross-selling

product range

Product-range update based on company’s survey or information from outside.

One summarizes what generates the purchase of every product-range category.

The tool is taken into consideration in positioning the products in space in the

particular retail outlets.

11 See in detail: Broniarczyk, S., Hoyerq, W. Product: Retail Assortment: More ≠ Better, Retailing in the 21st

century: current and future trends. Berlin 2010, pp. 271-284. 12 See in detail: Wagner A. Kamakura, Michel Wedel, Fernando de Rosa, Jose Afonso Mazzon. Cross-selling

through database marketing: a mixed data factor analyzer for data augmentation and prediction, Intern. J. of

Research in Marketing 20 (2003), pp. 45-65. 13 Retail’s Recession Survivors: Not Waiting for a Rescue, A.T. Kearney, Inc., 2009, p. 7.





Taking advantage

of organizing on-

site events

A tool of exceptionally high potential for increasing sales. Yet, it is not used to

the full because of managerial flaws.

Other tools for

increasing

revenues

Various tools that can be used by retailers with expectations for a positive impact

on revenues.

Note: The table of variables has been made by the author for the goals of this research

Design of the survey

The focus of the research is on problems of Bulgarian companies in conditions of economic crises and

the use of marketing tools oriented at higher revenues with the respective registered effect. The aim of the

research is to highlight the basic issues accompanying business subjects and the marketing efforts for

solving them as oriented to revenue increase. The hypotheses as a subject of the empirical research in the

report are as follow:

1. Are there any considerable differences in using marketing tools for increasing revenues on behalf

of manufacturers and retailers?

2. Are there any considerable differences in the effect generated by them?

The descriptive research survey is based on a questionnaire14

and involves 308 Bulgarian companies

that are functioning at the moment of doing it (10-30 January 2013). The sample is balanced according to

basic classifying principles like specialization, field of economic activity and a company’s main activity.

Main results of the survey

The data of the survey show that companies in Bulgaria are affected by the crisis in various directions

and degrees. It is evident that prevalent is the opinion about a relatively negative, negative and strongly

negative impact of the crisis on companies’ activity with a general relative share of 70.5%.

Table 3

Managers’ opinion about the impact of the crisis on company’s business

Impact Relative share

Positive 6.8

Relatively positive 6.8

Neither positive, nor negative 15.9

Relatively negative 25.0

Negative 25.0

Strongly negative 20.5

General 100.0

14 The questionnaire is done by company managers in the period January 5 - January 20, 2013.




Issues that are most often registered by companies last year are fewer sales, less clients, worse

financial results and problems with competitors (Table 4). The high market risk, the problem of the

quality of the products offered and survival are the least declared as business issues.

Table 4

Problems in doing companies’ business

Problems for companies in 2012 Relative share*

Fall in sales 52.3

Less clients 40.9

Worse financial results 40.9

Incomplete use of capacity 20.5

Imposing new administrative barriers 22.7

Drastic increase of production costs 22.7

Problems with competitors 25.0

High market risk 6.8

Problem with the quality of products and services offered 11.4

Problem with survival 11.4

Another issue 4.5

Note: The score of percentage is above 100 because respondents have marked more than one issue.

The results of the survey show that most of the companies in conditions of crisis have oriented to

flexible offers and designing new channels of distribution that have been assessed as having a

prevailingly positive effect of application. Impressive for a researcher is the high relative shares of a lack

of effect from applying tools like: integration with other producers and retailers, database marketing and

working out new markets. There is confirmed the alternative hypothesis for the presence of considerable

differences in the marketing tools used by manufacturers, as well as a difference in the effect registered

by them.

Table 5

Marketing tools used for increasing revenues from producing and selling producers’ own products

and the effect of applying the tools

Tools Relative share of the

companies using the tools*

Effect from using the tool (%)

Positive No effect Negative

Increasing the product-range

positions

60.0 50.0 40.0 10.0

Designing new channels for

realization

66.7 60.0 30.0 10.0

Database marketing 53.3 44.4 55.6 0

Tools that stimulate sales 60.0 44.4 55.6 0


producers

53.3 33.3 66.7 0

Integration with retailers 40.0 14.3 85.7 0

Flexible offers 73.3 90.9 9.1 0

Working out new markets 60.0 50.0 40.0 10.0

Other marketing tools 20.0 0 100 0





However, the variety of tools applied for higher revenues from a company’s own production is not

linked only to having a positive effect. Besides the positive effect registered in companies (from 14.3% to

90.9% for the particular tools), one observes also lack of effect (9.1% to 100% for the particular tools),

and for three of the researched tools there is even a measured negative effect for 10% of the companies.

The effect of applying the various marketing tools is only conditional and is represented through a self-

evaluation of the respondents. It encompasses not only the direct effect, but also the transfer effects and

the end result in the company revenues.

Producers have oriented mainly to increasing the range of other producers’ products they offer and

applying tools for stimulating their sales. However, one observes that as a whole there are high relative

shares of the lack of effect from applying marketing tools, which means inefficiently invested means in

marketing that is oriented to increasing revenues from selling other producers’ products.

The positive effect has biggest accrual in using tools that stimulate sales and flexible offering. The

results of the research confirm the hypothesis that not all companies have and use the potential for selling

other companies’ products successfully. There manage well those of them which rely on linked and

complementary demand within the framework of the product range in conditions of stimulating and

flexible offering.

Table 6

Marketing tools used for increasing revenues from selling other producers’

products and the effect of applying those tools


companies using the tool*

Effect of applying the tools (%)


Increasing the product-

range positions

81.8 12.5 87.5 0

Designing new

distribution channels

54.5 20.0 80.0 0


Tools that stimulate sales 66.7 50.0 50.0 0


producers

44.4 25.0 75.0 0

Integration with retailers 44.4 0 75.0 25.0

Flexible offers 55.6 40.0 60.0

Working out new

markets

55.6 20.0 60.0 20.0

Other marketing tools 33.3 0 100 0


The prevalent part of production companies have used marketing tools for increasing “other revenues”

in the previous year (63.6%) and revenues from selling services (69.2%).

Retailers have oriented also to various marketing tools for increasing revenues. The tools used most

often are increasing product-range positions, flexible offering and working out new markets/segments.

The highest share of positive effect is observed in increasing product-range positions, flexible offering

and stimulating sales. The survey shows that a considerable part of the companies have had expenses for

a set of tools whose application has registered no effect at all. Such examples are the increase of working

hours and days in outlets and involving on-site events. Moreover, there is even registered negative effect

in part of the companies which have applied the tools of increased working days and working out new

markets/segments.




What makes an impression in Tables 5, 6 and 7 is the negative effect from working out new markets

registered by part of the producing and retailing companies. One could find the reasons for this in the

crisis that affected the prevalent part of the countries and in the risks characteristic for this type of

expansion. There is confirmed the alternative hypothesis for the presence of considerable differences in

the marketing tools used by retailers and a difference in the effect registered by them.

Table 7

Marketing tools used for increasing retailers’ revenues and the effect of using the tools


companies that use the tools*

Effect of applying the tools (%)


Increasing product-range

positions

78.3 72.2 27.8 0

Designing new distribution

channels

52.4 41.7 58.3 0


Tools that stimulate sales 52.4 58.3 41.7

Integration with producers 33.3 37.5 62.5 0

Integration with retailers 57.1 50.0 50.0 0

Flexible offering 66.7 64.3 35.7 0

Working out new

markets/segments

57.1 46.2 46.2 7.7

Increasing working days 38.1 22.2 66.7 11.1

Increasing working hours in

outlets

38.1 12.5 87.5 0

Taking advantage of cross-

selling product-range

33.3 37.5 62.5 0

Taking advantage of onsite

events

38.1 33.3 66.7 0

Other tools for increasing

revenues

15.0 25.0 75.0 0


The prevalent part of retailing companies have used marketing tools for increasing “other” revenues in

the previous year (52.5%) and revenues from selling services (60.7%). The activity of retailers in this

field is weaker than that of producers.

Most companies have made changes in their product range in the last 5 years (Table 8). The highest

activity is observed in the period 2009-2010.

Table 8

Relative share of companies who have changed their product range

Period Relative share of companies who have changed their product range

2008/2007 68.8

2009/2008 78.9

2010/2009 90.9

2011/2010 66.7

2012/2011 78.9




Survey data show a prevalent activity directed to more services for customers, working out new

product lines and a new activity (Table 9).

Table 9

Directions planned for increasing the product range

Directions for increasing the product range Relative share

Adding new product lines 26.7

Adding new product items to the already existing product lines 16.7

Adding new services 36.7

Carrying out a new activity 20.0

The highest share of application among companies is that of technological innovations, followed by

product, process and logistic ones.

Table 10

Application of innovations in 2012

Innovations Relative share*

Product 40.7

Technological 48.1

Process 33.3

Logistic 25.9

Remark: The score of percentage is above 100 because respondents have marked more than one issue.

The prevalent part of innovations are the result of investing company’s own means – 92.9% and only

13.5% of the companies have used also means of EU programs.

Of interest is the classification according to satisfaction from the means invested in marketing in the

previous year. The prevailing assessment is “rather satisfactory” – its relative share is 35.1%. However,

one is left under the impression of the high relative share of “neither satisfied, nor dissatisfied”. About a

quarter if those questioned show relative or complete dissatisfaction from the means invested in

marketing.

Table 11

Satisfaction from the means invested in marketing in 2012

Satisfaction from the means invested in marketing in 2012 Relative share

Completely satisfied 13.5

Rather satisfied 35.1

Neither satisfied, nor dissatisfied 27.0

Rather dissatisfied 13.5

Completely dissatisfied 10.8

Total 100.0

Of interest is the fact that only 13% of those questioned use consulting services for the aims of

managing company sales. The decisions concerning the management of company sales are influenced by




the owner’s subjective view (80.5%), the manager’s subjective view (29.3%), experts’ views within the

framework of consulting services (24.4%) and the marketing manager’s competence (14.6%).

Conclusions and recommendations

The conclusions that are to be made from the survey can be summarized in the following directions:

1. Companies in Bulgaria are affected to different degrees by the crisis, what prevails is the

negative dimension.

2. Companies use various marketing tools for increasing revenues, but applying those does not

always lead to a positive effect, which highlights the issue of the efficiency of the means

invested in marketing.

3. Marketing solutions in companies therefore, need to be based on a professional and expert

ground in order to balance the influence of owners and company managers.

4. Basing marketing decisions on a professional and expert ground will contribute for them being

more efficient and leading to greater satisfaction from applying them.

The results of the research direct the attention of marketing specialists to the following characteristics

and concerns:

The variety of marketing tools oriented at higher revenues with potential for working out on

behalf of companies has to be seen as an independent application or as a set of tools.

In selecting tools one has to have in mind the specifics of the product/channel/market.

The efficiency applying an independent marketing tool or a set of tools is not guaranteed,

which means that a preliminary argument for applying it is necessary.

What is necessary is synchronization and coordination of the marketing activity among the

separate participants in the channel of realization since all of them contribute for the

generation of revenues.

It is necessary to put marketing in companies on professional ground which is to influence

the marketing performance of companies and their financial results.

The professional direction to various marketing tools, integrating them or having alternatives of

applying them is a key factor for improving company market positions in conditions of change. The

flexibility of marketing decisions based on actual information and the creativity15

in approaches, means

and messages is the winning orientation for overcoming current problems and working out future

marketing designs.

Therefore, companies need to direct their attention to handling the opportunities of having a feedback

with their customers. Taking advantage of new ideas and non-standard decisions that customers give is a

prerequisite for arousing and maintaining the audience interest through updating the marketing offer. The

interest to this information on behalf of consumers is going to increase. Registering, accumulating and

analyzing customer information16

in revenue management and applying it in database marketing is a

prerequisite for more purposeful offering and more efficient use of the tools invested in marketing.

The results of the study direct one’s attention to issues that concern the effect of the used marketing

tools aimed at increasing revenues. In order to secure the effect aimed, companies need to use modern

systems and modules for processing information both in the stage of designing their activity and in

tracing the parallel/consecutive and the direct/transfer effect of applying the respective tools. Tracing the

15 Tore Kristensen, A Cognitive Creative Approach to Marketing Management, Innovative Marketing, Vol. 2,

Issue 1, 2006, pp. 19-22. 16 Lederer, P., Yeoman, I. The natural extension of marketing , Journal of Revenue & Pricing Management (2003) 2,

pp. 81-82.




transfer effect in marketing activity allows one not only to define the effect on revenues, but to define the

effect of other key variables on the company business as well.

Involving actively marketing in programs for revenue increase is of considerable importance for

companies that have problems in using the capacity. For them the positive effect of using marketing tools

is expressed not only in revenue increase, but also there is registered considerable thorough positive effect

on efficiency and profitability. Seeking ways to increase revenues makes companies in the field of

services more flexible, dynamic and creative in conditions of changing environment with ensuing

problems and opportunities. The high risks that accompany new markets orient companies to implement

opportunities for revenues increase. The emphasis of the marketing activity falls on creating conditions

for long-term cooperation with current consumers and consumer involvement in the process of working

out market offers.

Bibliography

Управление в несигурни времена. Петте бизнес измерения, които организациите трябва да

вземат под внимание по време на криза. Deloitte, 2009, с. 1-2.

Broniarczyk, S., Hoyerq, W., 2010. Product: Retail Assortment: More ≠ Better, Retailing in the 21st

century: current and future trends. Berlin, pp. 271-284.

Chaffey, D., 2009. E-business and E-commerce Management – Strategy, Implementation and Practice,

Fourth edn, Pearson Education, 80 p.

DemandGen Report, Data Rich: The Payoff of Marketing Measurement on Revenue Performance, 2012,

p. 5.

Kotler, P., Jain, D. and S. Maesincee. Marketing moves: a New Approach to Profits, Growth, and

Renewal, HBSP, p. 7.

Lederer, P., Yeoman, I., 2003. The Natural Extension of: Marketing, Journal of Revenue & Pricing

Management, 2, pp. 81-82.

Luca, M., 2011. Reviews, Reputation, and Revenue: The Case of Yelp.com [Online] Available at:

http://www.hbs.edu/faculty/Publication%20Files/12-016.pdf [Accessed 1-10 March 2013].

Management Tools & Trends 2011, Bain&Company, 2011 [Online] Available at: http://www.bain.com/

Images/BAIN_BRIEF_Management_Tools.pdf [Accessed 5-20 January 2013].

Retail’s Recession Survivors: Not Waiting for a Rescue, A.T. Kearney, Inc., 2009.

Seller, M., Gray, P., 1999. A Survey of Data Based Marketing.

Tore Kristensen, 2006. A Cognitive Creative Approach to Marketing Management, Innovative Marketing,

Vol. 2, Issue 1, pp. 19-22.

Venkatesh Shankar, J. Jeffrey Inman, Murali Mantrala, Eileen Kelley, Ross Rizley, 2011. Innovations in

Shopper Marketing: Current Insights and Future Research Issues, Journal of Retailing, 1, pp. 32-33.

Vikram Lund, V., Watson, I., Raposo, J. and C. Maver, 2002. Optimizing Distribution Channels: The

Next Generation of Value Creation, IBM Corporation, pp. 1-15.

Wagner A. Kamakura, Michel Wedel, Fernando de Rosa, Jose Afonso Mazzon, 2003. Cross-selling

through Database Marketing: a Mixed Data Factor Analyzer for Data Augmentation and Prediction,

International Journal of Research in Marketing, 20, pp. 45-65.



http://www.hbs.edu/faculty/Publication%20Files/12-016.pdf



634 Claudia van der Vorst

THEORY OF DECISION MAKING

FOR THE EFFECTIVE ANALYSIS OF ERP SELECTION AT SME

Claudia van der Vorst, University of Latvia /

University of Applied Science Kufstein, Austria1

Abstract. The decision making theory in the area of organisation theory is very ma-

ture as a field of research. Since mid of the 20th

century the management decision mak-

ing theory is divided into normative (rational) decision making and descriptive (behav-

ioural) decision making. With the work of Kahnemann and Tversky the economical

behaviour was strengthen.

Mainly these theories have been taken into consideration analysing an important de-

cision making process at Small and Medium Size Entities (SME) – the selection and

purchase of an Enterprise Resource Planning (ERP) System. This strategic decision is

one very critical. The management usually focus mainly on the implementation an ex-

tensive process which often cause cost overruns. Focus for this research was purely on

the selection of the ERP system and all influencing decision criteria. The reflection with

the efficiency of the process as well as the satisfaction with the decision was one result

along a developed process.

Expert Interviews and Case Studies have been executed to support the theoretical ap-

proach and literature review. The interviews provide a clear overview of the current

practice and support the hypothesis that ‘a clear and structured process and the aware-

ness at senior management level from the very beginning’ would lead to a high efficient

long-term decisions. The focus of the case studies was mainly on testing the model,

process and theoretical findings.

In summary a theoretical model along a clear execution process, clear decision mak-

ers and a structured set of decision criteria for this specific research scope are the main

scientific results for this study.

Key words: decision making, Enterprise Resource Planning (ERP), Small and Mid-size Entities (SME),

selection process

JEL code: D80, L20

Introduction

Strategic decisions have been made since centuries by every emperor and leader in history but the

term strategic decision making in management has been discussed just in the 20th century. Theorists as

Barnard, James March, Herbert Simon, and Henry Mintzberg laid the foundation for the study of manage-




Claudia van der Vorst 635

rial decision making with their research and novel papers. The awareness of a dependency on culture,

economy and politic has resulted in a movement away from the traditional approach to consider all as-

pects of psychologies, economists, sociologists, organisational theorists, statisticians, philosophers and

others. Risk is an inescapable part of making a decision, especially a strategic decision, meaning the im-

plications of it might be enormous (cf. Buchanan et. al., 2006 and Harrison, 1993).

Strategic decisions for small and mid-size entities (SME) are very critical and more relevant than ever

given the need for globalization. Due to the historical approach and set up of these companies, business

processes even for critical areas are not structured. Especially the question of “who makes the decision

and how?” has rarely been analysed.

As an example, one very critical and special event is the process of ERP selection. It is a one off stra-

tegic decision process in which usually the decider has little or no experience. This acquisition is a fun-

damental cost factor. In a lot of industries in mid-size companies it is over 5% of the yearly turnover (cf.

Biermann, 2005). The decision for one specific ERP package defines not just the IT framework with

hard- and software, the selected system is the backbone for all business processes. The interviews with

industry experts provide a clear overview of the current practice and support the propositions that aware-

ness at senior management level from the very beginning would lead to successful long-term decisions. A

clear and structured approach should be followed as well as experience from large entities leveraged for

SME considering their specifics.

The main aim for this research will focus on the use of a proposed theoretical model for in a very

practical environment. Combining theoretical approaches with operational findings based on a specified

example.

The novelty of the research is a suggested theoretical model which has been developed with the input

and requirements of experts and tested in real life cases in combination with detailed operational results.

The efficiency of strategic decisions which are usually made like this example on an irrational basis can

be increased using a rational approach.

Theoretical background and literature

The history of decision making reaches back hundreds of years. With diverse and different focus on

the various sciences and intellectually disciplines like mathematics, sociology, psychology, economics

and political sciences just to name a few. The research into risk and organizational behavior has just the

main desire to help to achieve better outcomes. Leaders of all kinds have been forced to make decision

like the emperors in wars, but it wasn’t until the seventeenth century before humankinds understanding of

numbers was up to calculate risk and decision making. Daniel Bernoulli, Friedrich Gauss and Francis

Galton have been the ones before the 20th

century to come up with studies of random events, normal dis-

tribution and concept of regression just to name some examples coming close to the economic study of

risk analysis. In the 20th

century the studies and interest of researchers in the management fields occur and

new theories have been developed rapidly. Chester Barnard separates personal from organisational deci-

sion making. Neumann and Morgenstern describe with their game theory the mathematical basis for eco-

nomic decision making. Herbert Simon and James March shared the fascination of organizational behav-

ior and Simon rejected the classical notion of rational decision making. Henry Mintzberg positions deci-

sion making in the context of managerial work in the 1980ties. Followed by Amos Tversky and Danies

Kahnemann publishing the prospect theory, which demonstrates how people fail to make rational deci-

sions in an areas of uncertainty and founded the area of behavioral economics.

The scientific field of decision making is getting mature the area of management decision making.

The differentiation of rational and irrational decision making is a more recent field of research (cf. Bu-

chanan et al., 2006)




There are multiple possibilities to differentiate the different disciples of decision making. Harrison de-

fines decision making models in four categories: the rational (classical), the organisational (neoclassical),

the political (adaptive) and the process (managerial) decision making (cf. Harrison, 1993, p.28). More

common is the distinction between normative or prescriptive and descriptive or positive decision making

which was developed and established end of the 20th

century. Most of the time decision making theories

are focusing mainly on the normative theory which is concentrating on identifying the best decision to

take, assuming the ideal decision maker who is fully informed and able to calculate the risk to make a

fully rational decision based on a structured approach. Therefore normative decision making is always

related on a predictable process on how people should make a rational decision. The descriptive decision

making is the younger discipline focusing on the fact what people actually do and how decisions are real-

ly made. Therefore descriptive decision making is linked to the rather irrational approach of making deci-

sions. Since the normative, optimal decision making often created hypotheses for testing against the actu-

al behavior the two areas are very closely linked.

As decision making is such a crucial part of the business and increasingly happens at all levels of

management it needs to be differentiated. Based on the different levels mainly three should be considered:

Strategic decisions done be owners/ board members, Tactical decisions done be managers and operational

decisions done by most employees. (cf. Bowett, 2013). Given this categorization the example of ERP

selection for SME, is definitely a strategic decision.

Strategic decision making has a long been a topic of interest in the organization theory and strategic

management. Considering multiple research papers and theories foster that strategic decision making is

highly complex considering a lot of dynamic variables. The identified groups of Harrison (cf. Harrision,

1996, p. 46) categories the variables but support strongly that the example of selection decision is defiant-

ly a strategic decision. “The decision must be critically important to the long-term success of the total

organization.”. (Harrison, 1996, p.46).

Models of decision making

Following the question on how to make decisions rather that how decisions been made, models have

to be considered as well. An approach Mintzberg (cf. Mintzberg et. al., 2001, p.89) analysed is the simple

process of rational decision making. He quotes that decisions are always following the same structure in

four steps: “Define – diagnose – design – decide.” This is a very simple model but very often used. He

added, to be more effective, companies should embrace intuitive or action oriented forms of decision

making. But none of the step-by-step approaches of rational decision making basically consider this.

P.A.C.E.D is another model often used for teaching decision making, basically with the underlying as-

sumption of rational decision making. PACED stands for: „Define the Problem, list Alternatives, list and

rank Criteria, Evaluate alternatives using criteria, Decide best alternative.” Following this model a ration-

al decision could be supported. Others quote or define models to follow, but basically very similar just

with some more details and focus on individual steps of the process (cf. Bowett , 2013). Reviewing the

methodology of decision making, Schwarber (cf. Schwarber, 2005, p.1087) points out that: “in terms of

methodology, the elements that go into superior decision making never vary.” These elements are objec-

tives, alternatives and risk. Later in his study the person making it was involved. Overall there are multi-

ple different decision making models available. The suggested model developed by the author later on,

considers this theoretical part which follows a purely rational basis. Irrational models have not been found

in literature but this would contradict the irrational approach. Basically rational models are the basis sup-

ported by the human factor.

In summary, reviewing the different theories, the identified field of research fits in the area of strategic

decision making mainly focusing on rational decision making processes and models. The irrational more

descriptive part has definitely an impact but the level considered so far couldn’t specify any detail.




Research question and analysis

Researchers have analyzed considerably extensive the implementation of ERP systems, the optimiza-

tion of ERP systems, management of ERP issues and details of ERP functionality (cf. Schlichter et al.,

2010, p.496). Very few analyzed the failure of ERP implementations, the selection of the system and the

models how to ensure a successful implementation (cf. Sternard et al., 2011, p.1513.)

Based on relevant literature the author identified the most important criteria2 for selection and measur-

ing satisfaction that are the key driving forces behind successful ERP implementation. Analysing them

individually before each system selection is part of a suggested method driving this research. Given that,

very specifically for the selection and decision making part of an ERP system is still only little research

work done in this area.

This research paper is part of a wider research approach executed over the last 3-4 years. Focusing on

the theory, the suggested model and the real life case studies it takes the results of previous research into

consideration. A paper published and presented at the international conference in Kufstein3 in August

2012 discussed some hypotheses along the expert interviews. One key result according to the expert in-

terviews was the confirmation that this important strategic decision is mainly done on an irrational basis.

28 experts supported the hypothesis: “The satisfaction with the ERP system is mainly gut feel. Only prob-

lems, complains and negative impressions are registered. If the ERP system runs successfully it is not

captured in numbers”.

So, on this basis it would help to support this manly irrational taken decision with a rational approach.

People felt kind of satisfied and happy with the decision but the failure rates are very high. A more struc-

tured approach in the very beginning would support the success and satisfaction with the ERP system in

the end. On that basis the following research question was developed for this research:

“Is there relationship between the use of a structured approach e.g. executing a model and the effi-

ciency of the decision?

This research question leads to the main proposition for this research paper:

Using a suggested model leads to a higher efficiency with the decision

The use of a structured model to support the qualitative discussion of the decision making at SME was

the basis for further reviews and development during the expert interviews.

Theoretical model development

On the basis of the theoretical decision making and the operative approaches of ERP life-cycle devel-

opment the following model was generated with the input of experts and reviews in the later interviews.

This model takes multiple theoretical models as a basis (see Theoretical Background and Literature).

These models cannot be compared and one evaluated as the best one. A deeper comparison with the ERP

live-cycle models was conducted but these ERP models are mainly focusing on the implementation part

of the life-cycle not on the selection, the decision making part. Shaul (cf. Shaul et al, 2012, p. 362) de-

fined the EPR life-cycle in four fundamental phases, planning, implementation, stabilization of the ERP

system into normal operation, and enhancement. This is one cycle where only the planning phase would

2 Results have been presented at the international conference: “New Challenges of Economic and Business Devel-

opment” in Riga from 10.-12. May 2012. Title of the paper: “Approach for selecting ERP software at mid-size

companies reflecting critical success factors”. 3 International Conference “International business and economics conference” in Kufstein, Austria from 03.-05.

August 2012, Title of paper. “Why do you need an ERP system as a SME Company? How do you know which is

the right one? Expert opinions” published by author.




be relevant for decision making. All other models mention from ERP providers or in literature vary only

very little and mainly in terminology and wording. Just recently the acquisition part (selection) gets more

popular mainly covered by the scientists Verville, Palanisamy and Bernadas (cf. Verville et al., 2010,

p. 36). The acquisition is part of the planning phase. Shaul mentioned as well in a very recent publication,

that problems occurring with the ERP systems should be based on so called critical success factors and

should be traced back to earlier phase requirements and decisions (cf. Shaul et al., 2012, p. 371). Markus

et al. argued as well that the planning phase is usually underestimated and preventing and resolving future

problems start before implementing. He points out that analyzing the planning phase can prevent future

failures (cf. Markus et al, 2000, p. 255).

Fig. 1. Decision Making Model created by author 2012

Discussing existing models with the experts and comparing them with the rational decision making

models which are used for the bigger companies the suggested model (see Figure 1) was developed by the

author. Key elements influencing the strategic decision making have been identified and discussed. The

main aim of the model is to be simple and understandable for managers and executives of SME. There-

fore complexity was reduced as much as possible and elements reduced or summarized.

The key elements guiding and influencing the decision making model are: the decision making pro-

cess, the deciders and supporting knowledgeable people and a list of detailed decision making criteria

which are defined and prioritized at the very beginning. The impact on the decision making by politics,

company organization structure and information provided can be neglected but might be considered as

influencing factors for the defined elements.

The model itself is very generic; it could be used for almost any strategic decision making process at a

SME. Only the content of the elements needs to be distinct specifically according to the detailed research

field, like this example of the ERP selection.




These three elements identified on a theoretical basis are derived mainly from literature. This is an in-

ductive input which can mainly be divided in the three mentioned elements and the wider content support

the details according to the ERP selection at SME:

The process structure which has been deduced from various existing processes which has been de-

veloped for either acquisition, IT or different parts of the ERP life-cycle.

The people to be involved which have been analyzed focusing on decision making of SME com-

panies and acquisition.

The most relevant set of decision making criteria which has been derived from literature for the

entire ERP life-cycle and very specifically are linked to the relevant requirements and triggers.

The efficiency of the decision can be evaluated in relation to the satisfaction with the system. Satisfac-

tion can be analysed according to review the fulfillment of the use of the process, the involvement of

important knowledgeable people and the definition and set up of decision making criteria. Very specifi-

cally the decision criteria are categorized according to the literature review. A very recent study from

Shaul (cf. Shaul et al., 2012) reviewed the criteria relevant to the different phases of a life-cycle which he

called critical success factors (CSF). The decision criteria are defined and prioritized in the beginning and

evaluated later on for efficiency. Even on a pure qualitative basis this gives an indication about the effi-

ciency and satisfaction with the decision.

Research description

The research is based on a qualitative research approach. An ERP life-cycle (selection, implementa-

tion & operation) is very complex and challenging to execute, even for large organisations, but especially

so for SMEs which seldom use a structured process (cf. Verville, et al., 2003, p. 585). Therefore it will be

a more valid research approach for the research to use a series of Semi-Structured Expert Interviews and

Company Case Studies as quantitative approaches where the return rate is expected to be very low.

This empirical approach of the research relied heavily on qualitative, rather than quantitative

measures. A more quantitative approach would only have been plausible if SMEs were observed to utilise

structured and more directly comparable methodologies to drive their ERP implementations. Given this

complexity, the author decided to use triangulation as an approach for this qualitative research with the

intention to enrich the quality of the research due to the different approaches. According to Mayring (cf.

Mayring, 2002, p. 147) the triangulation can be based on different sources of data, different interpretation

of the same results, different methods as well as different theories. For this research different research

methods have been chosen due to be able to compare results on a qualitative basis.

Semi-structured expert interviews with a subject matter expert (the author) were preferred to question-

naires as this ensured greater consistency in the presentation and interpretation of questions and their an-

swers during the actual interviews. The research field of SME and its executive level has not reputation for

being very responsive. Schmitz (cf. Schmitz, et al., 2007, p.252) stated a response rate of questionnaires of

15.1% which was seen as very high and Verville (cf. Verville, et al., 2003, p. 585) in a similar research field

stated to just use qualitative methods due to the low response. Therefore as suggested by Atteslander (cf.

Atteslander, 2000, p.12ff ) the method of semi-structured interviews has been chosen. The main findings

have been supported and the suggested model been tested including the process, criteria and people. The real

life company case studies have been identified as the only method to support the results with intensive input.

These two different methods support the validity, quality and reliability of the research results. A question-

naire with eight topics was developed and used as the basis for each of the interviews. This approach led to

more reliability in the subsequent comparison of the information and data collected. From the information

allocated from literature and during this series of semi-structured interviews a hypothetical ERP decision

making model was developed (see figure 1) and reviewed and then tested using two real life case company




case studies. The first Company Case Study was used to initially test the “decision making model” and a

corresponding set of “decision criteria”, “the decision process” and the “deciders” in order to drive the ERP

selection decision. The second Company Case Study focused on an intensive and detailed execution and test

as developed during the first company case study.

The expert interviews have been executed in person or on the telephone along the set of questions.

The timeframe for each interview was one up to two hours. The first interviews confirmed the critically

and relevance of the topic. The model was reviewed, updated and discussed during the last 2/3 of the

interviews. The experts have been high knowledgeable managers, IT executives or owners of a small and

medium-size production company.

Company Case Study I: Small Production Company in the process of selecting an ERP system. The

model and elements with all details have been discussed and used, during the selection process. The com-

pany has been supported during the entire cause of the implementation. Just after go-live and after the

system reached a saturation point, about a year later additional interviews have been executed with differ-

ent experts of the company.

Company Case Study II: A medium size production company had to select an ERP system. They used

the model and elements in all details and tested the results from the interviews and Company Case Study

I. After the final decision for one ERP solution the key decision makers have been interviewed.

Research results and discussion

The overall research question has been presented along with the main proposition: Using a suggested

model leads to a higher efficiency with the decision. Supporting questions have been developed along the

use of the detailed elements of the model developed. The research question and proposition have been

developed and analyzed with input from the literature review, the semi-structured expert interviews and

the company case studies.

Fig. 2. Overall results created by author 2013




An overall diagram was developed to summarize the results. This diagram points out the use of the

model in terms of quality executed during the decision making. Quality in this diagram combines the

three key elements analysed and generated according to this specific decision. As higher the quality

meaning: as higher the use of the proposed process, the people and the use of decision criteria, as higher

the efficiency of the decision meaning the satisfaction with the system.

Comparing all results in relation, the use of the model and the quality of the decision making accord-

ing to the proposition an overall trend could be summarized according to the analysed details. Using the

suggested model developed with the input of the experts and leveraging all analysed and defined details,

the proposition can be confirmed leading to a higher efficiency in decision making.

Results of Company Case Study I in detail

Comparison of the key criteria for EPR selection

Group of criteria

Requirements

Company Case

Study I first ideas

Company Case

Study I revised

more detailed

analysis

Company Case

Study I results at

go live

Company Case

Study I results

one year after go

live

Strategy / Organi-

sation

A cheap system

should be imple-

mented to cover

all sales function-

ality. CEO has

clear understand-

ing of his view of

company needs.

Management team

has been involved.

Clear requirements

defined and priori-

tised. Scope com-

pletely reviewed.

Decision making

process structured.

The CRM part

went live as

planned before an

important fair. The

external sales

people could be

trained and con-

nected. The report-

ing requirements

of the CEO been

fulfilled after go

live of the ERP

part 4 month later.

Fit with strategy

overall evaluation

with a 8 (10 is the

best evaluation).

Only security,

user access and

risk-legal was

evaluated lower

(6). They like

their ability to

influence the

processes as well

as how decision

and acquisition

went (9).

Functionality Main focus was on

all client data to be

covered and sup-

port for the sales

process. Timeline

4-8 weeks.

Scope extension to

a full CRM and

EPR system with

the full manage-

ment functionality.

Timeline extended

to 6 months.

Scope covered as

expected. Some

changes required

over time due to

very late specifica-

tion. But imple-

mentation success-

ful in scope.

Functional fit,

implementation

ability, flexibility,

ease of customisa-

tion, user friendli-

ness, training and

online help are

rated (8).

Technology No internal IT

department. The

maintenance

should remain

with the existing

supporting IT

company.

Old hardware

should be reused.

Hosting seemed

possible for some

functionality.

Additional soft-

ware support

needed.

CRM sever hosted

successfully. ERP

server in-house.

Solution worked

fine with old IT

support company.

The technology

was overall rated

as (9). The inte-

gration with others

and clear technical

concept was rated

lower.




Group of criteria

Requirements

Company Case

Study I first ideas

Company Case

Study I revised

more detailed

analysis

Company Case

Study I results at

go live

Company Case

Study I results

one year after go

live

Vendor Would be nice to

stay with existing

brand.

No open source

system wanted. No

freeware. Re-

quirement to

check all packages

of existing brand

plus packages of

packages used by

friends and col-

leagues of the

CEO.

CRM & ERP

solution was fine

but the external

consultant compa-

ny maintaining the

reports, forms and

interfaces was not

very professional.

Possible im-

provements have

been identified in

the first months.

Vendor been rated

with an overall

(9). Very satisfied

with market posi-

tion, industry

skills, long term

stability. The

problem with the

external software

support was

solved by chang-

ing to a new pro-

vider. After almost

a year they are

very happy with it.

Economical As cheap as possi-

ble. Short term

investment and

long time service

costs should be

low (under 5000

Euro).

Cost was not the

first priority any

more. Price should

be OK but very

cheap is not an

option. High prior-

ity on intangible

factors like scope

extension, hosting

and additional

reporting.

The licenses been

bought to the

extend as needed.

Additional budget

released for yearly

changes, mainte-

nance and hotline.

Economical was

rated (6). It is

much more expen-

sive as though and

calculated in the

beginning due to

many add ons. On-

going service and

support is very

expensive.

Fig. 3. Results of Company Case Study I created by author 2012

The detailed results of the company case studies confirm in addition that the use of the suggested

model would support this usually very irrational decision with the attend to follow a structured and ra-

tional model.

Conclusions and Suggestions

Searching the literature dealing with the decision making theory in combination with the criteria for

decision making and ERP selection models which are focusing on the planning and selection phase, it

became clear that these subjects are not completely covered by researchers, in addition, these topics are

currently not related. This research examined the ERP selection part of the overall ERP life-cycle with the

focus on SME companies. It developed and empirically tested a model relating the selection of an ERP

system and the level of satisfaction with the overall ERP life-cycle by defining a set of criteria. The pro-

posed model assumed a quality approach for execution with the people involved and the criteria defined.




The model was tested and validated with mainly one very long company case study and a second very

detailed company case study focusing on the detailed analysis of the set of criteria.

This study contributes to academic research by producing empirical evidence to support the theories

that the suggested model used would lead in the defined research field to a higher efficiency in executing

the decision. Specifically the process, the people involved in the decision making process and the set of

criteria defined have a positive impact on the satisfaction of the chosen ERP system for a SME company.

According to the wider audience of experts consulted, there is empirical evidence that any other company

consulted in the same region, industry and with the same size would conclude to the same result.

Conclusions

1. The suggested model (Fig. 1) has been developed as a generic model to support strategic decisions

which are usually executed following a behavioral approach, mainly on an irrational basis. Given stra-

tegic decisions are critical for companies, very specifically the analysed scope of SME, the rational

model would be very supportive for an efficient decision. The valid structure and use of the suggested

model could be confirmed by experts and with company case studies.

2. The three key elements defined with the suggested model have been detailed and for this very specific

research case, the selection of an ERP system at SME companies, they confirm to increase the effi-

ciency of the decision.

Suggestions

The use of the provided model is suggested to be used by executives of a SME company, who need to

make a strategic decision and do not have enough information, interest, theoretical background or experi-

ence to do so. Using the suggested model very specifically for the detailed study of ERP selection the

identified elements are analysed, tested and evaluated in much detail. The decision making process is

suggested as well as the involvement of the right people and a set of criteria is proposed as a starting

basis.

The phenomenon that a strategic decision is just made on a pure irrational basis was confirmed for

SME not for bigger entities, global companies or corporations. Therefore the suggestion is to executives

in small and medium size companies to consider this rather theoretical model like the suggested one, to

support effective strategic decision making with rational input.

Bibliography

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393 p.

Biermann, P. 2005. Marketinglösung für das mittelständische Kundensegment der Schweizer Branche

für IT.

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tor2u.net [Accessed 25.02.2013 1.37PM.]

Buchanan, L.; O’Connell, A. 2006. A brief history of decision making, Harvard Business Review and

Harvard Business School Publishing, pp. 33-41

Harrison, F.E. 1993. Interdisciplinary Models of Decision Making, Management Decision, MCB Univer-

sity Press Limited, Vol. 31, No. 8, pp. 27-33.

Harrison, F.E. 1996. A process perspective on strategic decision making, Management Decision, MCB

University Press Limited, Vol. 34, No. 1, pp. 46-53.




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problems encountered and success achieved, Journal of Information Technology, 15, pp. 245-65.

Mayring, P., 2002. Einführung in die Qualitative Sozialforschung. BELTZ Verlag, 5th Ed., 170 p.

Mintzberg H.; Westley. F. 2001. Decision making: It’s not what you think. MIT Slon Management Re-

view, Spring, pp.89-93.

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pp. 1086-1092.

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Sonderdruck.

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over a decade. Journal of Enterprise Information Management, 23(4) pp. 486-520.

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& Data Systems, 112(3) pp. 360-384.

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Industrial Management & Data Systems, 111(9), pp. 1511-1530.

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Sandra Heiden 645

APPLICATION OF INNOVATIVE APPROACHES AND TECHNIQUES TO

INCREASE THE EFFECTIVENESS OF KNOWLEDGE MANAGEMENT

PROCESS IN ORGANISATIONS

Inesa Voronchuck, University of Latvia, Latvia;

Irina Lando, University of Latvia, Latvia1

Abstract. The new recently developed economic situation in Europe requires

employees to be able to acquire new skills quickly and adapt to the changing

environment.

Demand for the highly skilled employees is constantly growing and learning becomes

a part of the daily routine. Employees are studying after office hours, therefore, there is a

high demand for the training curriculums that would help employees to acquire new

knowledge within short time periods and would be highly efficient and effective.

It is critical to understand how much an employee can learn during this time, and

whether it is possible to teach a person to think faster.

The effect the training courses offered by the authors is an ability to think and

analyse information faster, develop and assess alternative solutions, reach plausible

decisions. The research conducted by the authors is devoted to the speed memorizing

and speed reading techniques. The author has developed the training program, tested it

on multiple groups and introduced it in practice. The training program provides with an

effective and measurable practical results.

Objective of this training program is to increase the speed of reading and memorizing

for more than three times during a six day course. The authors has also developed an

advanced training program to improve mental capacity, expand possibilities of

memorizing data. The program develops skills of effective interoperability when

working with extensive volumes of information.

This research is based on the author’s study conducted in 1999 – 2012 and contains

data of training results of 4,587 people.

Key words: knowledge management, speed reading, adult education, vocational education, innovative

teaching methods

JEL code: M12

Introduction

The new economic situation in Europe requires more effective utilisation of human capital. Private

and state employers can no longer afford employing significant numbers of staff. As a result of staff

1 Corresponding author – e-mail address: [email protected], telephone: +37167273009



646 Sandra Heiden

numbers reduction, employees’ indispensability and an effective use of professional skills and abilities, as

well as the ability to continuously improve professional skills and be retrained according to the business

needs become the key elements of success. It is also important to understand whether adults can be

trained to think faster and be able to process significant volumes of information. Current research is

dedicated to development of methods of improving effectiveness of information processing and thinking.

The author has launched a series of training sessions dedicated to improving memory capacity and

speed reading techniques in Latvia and abroad in 1999-2012. The author has summarised all training

results in the individual reports and have consolidated them in the Ph.D. thesis “Application of

innovational training methods in organisations”.

The results of the research conducted by the author established effectiveness and efficiency of the

speed reading and speed memorizing techniques and proved they can be used in various areas, such as

private business – for increase of employees’ competitive advantage, universities (the author conducted

similar trainings in the Stockholm School of Economics and the University of Latvia), and ordinary

schools for children over 8 y.o. (author has accumulated results of over 1,500 trainings for

schoolchildren).

The skill-set acquired during such trainings allows trainees not only estimate and analyse information

quickly, but also do it effectively.

Actuality

Actuality of innovational training methods’ use develops in companies that need to manage significant

organizational changes within short time periods. For example, implementation of a new strategy,

expansion into the new markets, personnel re-training within limited timeframes, significant changes in

the economic environment, such as an economic crisis and staff layoffs that result in the additional

responsibilities delegated to the remaining employees.

As a result of rapid organizational changes, many employees are working in the stressfull conditions

and need to manage additional workload.

Training methods offered by the author include speed reading and speed memorising techniques and

have been used for training top managers and „C suite” executives, owners of the following companies in

Kazakhstan: coal mining company “Karazhira”, “Azia Energo”, “Kazah Trans”; in Russia: “Russian

Railways” (Moscow), “Rosselmash” (Voronezh), “Morozko”, “Bahetle”, “Sabantuy” (Kazan),

“Linguagelink” (Samara, Sankt-Petersburg), “Metallurgical combine” (Lipeck); in Latvia: “Norvik

Banka”, “Swedbank”, “Rietumu banka”, “Eiroaptieka”, “BTA” and many others, within the scope of

“Open Mind” project, “Latvian Association of Logopedists”, facilitating the Latvian language course to

43 teachers from Rezekne, as well as training students under the program of speed memorising in the

University of Latvia, and the speed reading program in the Stockholm School of Economics in Riga.

Description of the issue

In the period of Latvia’s accession to the EU one of the main requirements of the European

Community was introduction of “more innovation in education and training” and following the concept of

life long learning. By that time the author had already developed, tested and put into practice the

programs for the National Program for the Latvian Language Training for training the teachers, who

taught adults. At present, the relevance of the study conducted by the author is only growing stronger

.The retirement age is only shifted upwards, which means that the number of available job places is being

reduced. At the same time the new economic conditions, and consequences of the economic crisis in the



Sandra Heiden 647

EU along with the continuing reduction of available employment drive up the demand for the increased

competitiveness in the labor market. Yet, the continual development of new technologies requires

constant relearning and mastering new knowledge. For example, in the present day young people, after

completion of high school often speak three foreign languages fluently and with ease, which is not to say

about the older generation of people who should learn. The need for proficiency in English is on the

increase also. Moreover, the technology developments necessitate constant retraining. The new skills are

to be acquired in a short time. To do so it is necessary to develop the technologies that will serve as a tool

to help adults learn new things quickly. The author has developed the programs that can be efficiently

used in training professionals in any field. On the other hand, often these kinds of training attend senior

managers, executives and business owners. However, in terms of strategic development of the Latvian

state, the methods developed by the author can be used successfully to teach both school and university

students (albeit with implementation of certain changes in the organization of the learning processes).

And, since the youth is the future of any country, its foundation for a prosperous future, in the opinion of

the author, for facilitation of development of the young generation, it is advisable to introduce such

training as early as at the primary school age, to prepare the future work force capital.

Novelty

For the first time in Latvia the author has introduced innovational training methods for the large scale

training courses aimed at residents of the rural areas and farmers. The author used speed memorising

programs with application of association and figurative thinking developed by her earlier. As a result,

these methods proved to be new and unknown to majority of trainees.

Most trainees noted that they have not heard about techniques used to improve learning processes

before. Trainees were not familiar with speed memorising approaches that would enable them to

effectively retrieve necessary information later.

The author considers it is of paramount importance that the trainees were explained the basics of the

learning techniques that would help them to acquire new information in an efficient and effective way. If

a person is not able to acquire new information after a 1.5 hour training session, any teaching efforts

would be useless.

In the described project it was important to facilitate trainings within relatively short time periods, as

the author was asked to cover all travel and office expenses. As a result, it was necessary to organise

training courses so that training hours would be delivered within a minimal number of days. Availability

of trainees also represented a challenge - some of them were not able to take off a couple of days off

work, especially during harvesting period.

According to the training requirements, all trainees were asked to complete a test at the end of the

course with a passing rate of 75%.

The above factors motivated the author to develop new approaches to training of employed adults, use

her prior experience in learning, teaching and facilitating training courses.

For the first time in Latvia innovational training methods have been tested in practice for the large

scale training courses facilitated to adults who lacked learning skills necessary to acquire and retain

significant amounts of information within short time periods.

Materials and Methods

Training was carried out in the form of workshop session trainings, because the purpose of the

training was to master the practical skills.



648 Sandra Heiden

While working on this paper the authors would implement exactly the system of workshop sessions

training. The author believes that such a system is most suitable for implementation of the learning

process where the methods of fast memorizing and speed reading are used.

First, because the delivered instruction is of applied nature and aimed at achieving specific results.

Therefore, the classes are designed in such a fashion that the workshops for memorizing comprise 80%

and theory 20%, while in the speed reading classes 90% of the time is devoted to practice and 10% to the

theory. The theory is directly connected with practice and it serves only to illustrate the required

exercises. In general, there are two very different aspects of training, i.e., lectures and practical lessons

(workshops). The training conducted by the author requires constant practicing, which cannot be replaced

by lectures.

Second, in the classroom the teacher must constantly receive feedback from the students.

Such an arrangement allows implementing several principles simultaneously.

Straight away we can see the difference between how a particular individual talks the talk and walks

the walk. It becomes rather obvious whether the person already uses the new techniques or keeps clinging

to the old ones. Also, the group has the opportunity to learn from each other, and utilize both the positive

experience (of those who got the results already) and negative (errors of others are immediately evident).

This kind of feedback assessment helps make the learning process as effective as it can get.

Third, creation of a relaxed atmosphere, which author considers to be crucial since the positive mood

is very important for any type of training. When students find pleasure in learning, then learning is easy

and effective. Creation of such an atmosphere requires a very large emotional input from the teacher. A

similar effect was described by the Bulgarian psychotherapist Georgi Lozanov in his work on

suggestopedia (Lozanov, 1977).

Fourth, during training for fast memorization and speed reading, students are offered to try to practice

a set of different methods and only after the practical application of a particular technique can they make

a conclusion as to which of the offered methods was the most suitable for each of the students.

Individuals with flexible mental capabilities can use all the proposed methods with equal efficiency, but

sometimes a person may prefer only one of the offered memorizing techniques or quick reading

strategies. This is where the teacher’s professionalism comes into play during this kind of training, i.e. the

teacher’s ability to render assistance to the student who finds it hard to implement something in practice.

In addition, the particular learning style of an adult individual should be taken into account (Honey,

Mumford, 1982).

All data obtained in the learning process were recorded and then processed by a computer-

implemented software.

Results

During training it was found that the minimum result, achieved in the course of speed reading is an

increase in speed reading by two or three times the initial speed.

The speed reading program is designed for six days of training, four academic hours a day. This

format of learning is factored by both the peculiarities of the brain (i.e., due to purely physiological

reasons) and other reasons.

On the average, people are able to increase their reading speed two to three times compared to their

original speed of reading. The maximum result obtained during the training conducted by the author was

an increase in reading speed sevenfold.

From the viewpoint of the author it does not make sense to strive for any particular result. More

important is that each student can increase the reading speed compared to the speed they had at the

beginning.



Sandra Heiden 649

In the process of the speed reading the attention is getting increased dramatically and, as a result,

comprehension of the read information increases sharply.

However, it is worth mentioning that the greater the vocabulary the reader has, the faster this

individual can read.

In the course of training conducted by the author the key factors affecting the speed of reading of

adults have been identified.

1) Psychological barriers. Most of the adults before the start of training already know what to expect

of themselves. What’s more, when adults during training succeed in learning and get the results

higher than those they expected of themselves, they may begin to doubt whether everything has

been done right. We all know how to read and adults find it difficult to understand why should

they need to be able to read fast.

2) Attention or lack thereof. Even at school we get used to read paying equal attention to the short

and the long words. In fact, the short words we can just recognize without reading them through.

Furthermore, there are many established myths related to the process of reading. For example, all

of us have heard the myth that you need to read slowly and carefully. But a slow presentation of

information invokes a decrease of concentration and the person gets distracted. Off topic /random

thoughts arrive. Which are not associated with the specific text. So it’s no wonder that it is the

rapid reading that increases attention.

3) Re-reading or regression. Most often re-reading of the same part of a text takes the same time for

adults as reading for the first time. However re-reading decreases the amount of paid attention. So

before you re-read the incomprehensible part of the text, you are better off finishing reading the

entire passage, chapter or section to the end, so that you get the general idea of the text. And only

then you can re-read the points that were not understood. However re-reading makes sense only if

you pose questions. That is what specific question you want answered.

4) Correct eye movements over the lines. In 1878 the French ophthalmologist Javal in France

conducted a number of experiments on eye movements during reading. Up to this finding it was

thought that in order to comprehend the text while reading the eyes must dwell to read every word.

It was this discovery that triggered further researches in the field of fast reading.

5) The Perception of chunks. In school we are still are taught to read the syllables, one after another.

This is because syllables are much smaller than words, and are easier to learn. But reading the

separate syllables splits the semantic information. Children at first do not like reading exactly

because they do not understand the meaning of what they read. Any adult can check out the said

above, by taking an unfamiliar book and reading aloud the syllables of two pages, and then trying

to retell what’s been just read. It will not work because the information is so split that it simply

does not add up into a single picture.

6) Pronunciation or vocalization. When readers pronounce internally what they’re reading to

themselves, they hear their own voice. This means that even though the lips are closed, the speech

apparatus continues working. And since the vocal cords are composed of muscles that need the

time to contract and stretch, it turns out that we cannot read faster than we speak. How many

words per minute can we say? Often it depends on the peculiarities of the language. For example,

if you listen to the BBC news for those for whom English is their native tongue, it has been

estimated that the rate of presentation of information is over 400 words per minute.

7) Experience. The more one reads, the more different are the words one can recognize from the text

without having to read those. In addition, people who read a lot possess a rich vocabulary on

different topics. As a result, no matter how offensive it may seem, the more experienced is the

reader, the more quantitative results he or she can achieve at the end of the classes. Usually

experienced readers in six days pass the mark of 1,000 words per minute.

8) The peculiarities of operation of the brain. A person cannot read faster than he thinks, because for

the process of reading it is important to comprehend whet is being read.



650 Sandra Heiden

9) The purpose of reading. Reading speed is a function of the purpose of reading and by it is wholly

determined. It is often said that the speed reading of complex literature is impossible. Not true. It

all depends on the experience and vocabulary of the reader. But there is a difference between

leisure reading, and the reading to acquire new knowledge, or reading necessary for work. The

speed reading can be compared with a new sports car. While driving within the city one has to

observe speed limits, traffic signals, road signs, etc but on a highway off the city limits you can

drive at full speed restricted by the power of the engine. But if your car is too old, you can’t go any

faster than you car allows you even on a highway. This is the difference between an experienced

reader and the not –so- experienced one.

10) Academic knowledge about the reading processes. It can help avoid many mistakes in the teaching

process, since there are established erroneous and limiting beliefs that may interfere with learning,

such as „one must read slowly to remember better,” „there is the diagonal reading „, „people who

read fast do not remember much”, etc. It should be remembered that people who read at low

speeds, even with a good understanding of the text are just unable to read large amounts of

information, and therefore make conclusions on various topics.

The quantitative results obtained from the training are summarised below (see Figure 1.)

0

200

400

600

800

1000

1200

1400

1600

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Fig. 1. Corporate training results of 31 organisations

The chart presents an average speed of reading of trained employees at the beginning and end of the

training course.

During the training of top management it was established that the initial average speed of reading was

219 words per minute with understanding of the context at 50% (six questions were asked to check

overall understanding of the text. Most trainees have answered three out of six questions). After

completion of the training programme the average speed of reading reached an average of 823 words per

minute with understanding of 100% (all six questions were answered correctly). Thus, on the average the

speed of reading increases in 3.41 times (see Figure 1).



Sandra Heiden 651

Speed of readings of adults who are not part of top management on average increases in 2.67 times.

Authors consider that the difference in the results depends on a habit of maintaining high levels of

intellectual capacity on a regular basis.

As presented on the chart, the initial speed of reading does not differ significantly. Usually, adults

read 180 – 250 words per minute. During the training courss that provides a constant intellectual

challenge and increases information load, the results can increase more than 3 times. Analysis of the

training results among trainees of different organisations can explain a difference in the level of

competition (the higher is the level of competition, the quicker trainees get used to respond to variations

and solve more difficult intellectual and non-standard problems). This means they have higher intellectual

capacity and are ready for higher intellectual load.

The end result also depends on the general level of development. During the experiment it has been

established that top managers usually achieve the best results.

Discussion

Application of Speed reading techniques in the author’s view may be of practical nature. In order to

quickly read one must think fast. Here the author sees the possibility of using Speed reading techniques

for training of staff in organizations. The working day is eight hours, but the question is, how much and

what kind of work can accomplish an employee during this time.

If the employees are focused on results rather than processes, and their income depends on the results

of their work, the efficiency of such employees can be improved by teaching them the Speed reading

techniques. After accomplishment of the course 98% of students reported an incredible enthusiasm and

desire to do something.

This is despite the fact that usually the students were adults and that the percentage includes the

corporate courses trainees (i.e. courses organized by request of corporations) and that classes were

conducted in the evening after work hours.

Organization of this kind of training requires a greater effort on the part of the teacher.

Since classes takes place in the form of intense training, to ensure the high quality results each student

should always be tested to evaluate their success via feedback and make adjustments in the learning

process of each individual student to ensure effectiveness.

The teacher should be able to motivate students and encourage them to focus on achieving the best

results, help eliminate the psychological barriers that may occur during training.

The author believes that it is not quite correct to try to calculate the average initial speed and the

average final speed. It’s more like counting the average temperature in the hospital. Much more relevant

is how much each of the learners advanced in comparison with the initial test.

In addition, during an interview it is worth to determine whether the student during training managed

to keep a positive attitude, because this kind of learning requires some effort from the student.

The techniques described in this article should be applied as early as primary school age to ensure that

people in their adult life gain a high level of intellectual development, and consequently, a higher level of

income.

The author believes that the techniques and methods of memorizing and fast reading should be

introduced more widely in the territory of Latvia.

First of all, it is connected with the strategy of focusing on the future of the state.

According to an international survey of educational achievements Program for International Student

Assessment (PISA) conducted in 2009 on the level of intellectual development of school students (it’s

economic future of the state),



652 Sandra Heiden

Latvia is only on 30th place among 65 countries with respect to the skills of its students to analyze

information and practically apply the skills learned in school. At the same time Estonia is on 13th place in

the world, while Lithuania on the 40th.

In the PISA study the children accomplish the tasks of six degrees of complexity.

If the student reaches level 2, it means s/he knows how to use this knowledge only in the simplest non

curriculum situations. The 3rd level is a little better, but still speaks of undistinguished student’s abilities.

The 4th level is when the student is able to use knowledge to get new knowledge.

And those who do the tasks of the 5-6th levels can be regarded as an intellectual elite.

In Latvia, 62% of all students are on the 2-3rd levels, the 4th level reached 17% of the students, and

the 5th 2.8%. In Latvia the highest level 6 reached just 0.07% of the students.

Significantly more (16.8%) of the students in our country are of the lowest 1st Level. But those who

even don’t reach that level comprise 0.36%.

The author believes that one can make a prediction about the level of income of the adults who will

grow out of these kids who don’t know how to analyze information and make logical conclusions. In

other words, these individuals will grow up to represent only the cheap labor.

Based on the above evidence, authors consider it necessary to develop the speed reading and storing

information skills among university students in order to maintenan competitiveness of the future young

experts on the our market and competitiveness of the country forming the future intellectual elite.

Conclusions and offer

The methods of speed reading and memorizing have been used for decades in the developed countries.

These methods can be effectively used for training personnel in various organizations.

The methods are of interest in and of themselves; methods become more effective when used for

specific purposes, whichever an organization might pose and they can be successfully applied to solve

practical issues related to professional requirements. The non-traditional teaching methods can be applied

depending on the objectives and the specific learning environment.

The application of the methods can be affected by the number of people in a group, the overall level of

education of the trainees, goals and objectives of the specific courses.

The dominant idea for implementation of speed reading and fast memorizing methods, in author’s

opinion should be directed to the possible practical application of these methods in various fields.

In English-speaking countries, these teaching methods are widespread. The methods are used for

teaching of both the open access groups and staff of corporations.

In the U.S.A training with using methods of speed reading have been conducted for the educators

from the perspective of public administration.

The increased interest in methods of speed reading and memorizing can be explained by the general

demand for the need to expedite processing of information.

From the teacher, such a system involves the creation of an environment where acquisition of new

methods would be done in a natural way, in the process of use of the materials necessary to perform job

duties, and the course would be focused on ensuring the achievement of educational goals.

When choosing a method of teaching the primary emphasis should be the efficacy.

The author suggests a more widespread adoption of the methods proposed by the author in practice.

Education of this kind is expedient to begin with school-age children to prepare a competitive workforce.

Already, in Latvia, in spite of 11.6% unemployment rate (in 2011, according to the Institute of Statistics)

there is a shortage of highly qualified personnel. On the other hand there is a “brain drain”.



Sandra Heiden 653

Therefore, the methods proposed in this article might help when it is necessary to retrain the staff in

the event of a sharp reduction of the number of employees in organizations. When those left are supposed

to perform the duties of the fired /laid off employees.

The methods described in this article can be learnt at minimum time and immediately applied in

practice to perform job duties.

The speed-reading and memorizing methods can be effectively used to educate students so that they

can significantly save time and effort needed for acquiring a particular subject, and provide an

opportunity to read through the whole list of literature recommended for the course.

It should be noted also that at the speed of reading below 250 words per minute a student must spend

about eight hours a day just to read the relevant literature.

Arrangement of classes should take into account the factors affecting the efficiency of learning and

reading speed of adults. Comprehension of these factors helps avoid many mistakes and streamline the

learning process.

The main conclusion of this article is that the methods speed reading and speed memorizing can

within a short term give the maximum measurable results.

Considering the factors influencing the speed of reading established during the training it is possible

to introduce the speed reading at all levels, including training of professionals to maintenance skills

necessary for retraining and managing high volumes of processing text information.

Bibliography

Highlights from PISA 2009. [Online] Available at: http://nces.ed.gov/pubs2011/2011004.pdf.

Honey P. and Mumford A. “Using Your Learning Styles”, Peter Honey Publications, 1995, 35 p.

Lando I. “Application of non-conventional methods of training for personnel training for adaptation to

new economic conditions” International Conference for Doctoral Students “Current Issues in

Economic and Management Sciences” LU: ISBN 978-9984-45-418-4 Rīga 2011.g. 10-12. nov.

Lando I. “Non-Standard Methods of Learning for Personnel” Conference “Continuing and Distance

Education for Developing of Workforce” (THENUCE – European Thematic Network in University

Continuing Education, LU) ISBN 9984-572-72-2 Riga 19-20.Okt. 2001. p. 111.

Lando I. “The experience of implementation of the innovation training methods for adult training within

the framework of the European Union project” the vocational education and training” „First

International Scientific Conference on Project Management in the Baltic Countries“. 2012. gada 8.-9.

februāri. Rīga: LU, Conference Proceeding: ISBN 978-9984-49-470-8, 2012, 244 p.

Lozanov, G.K. (1977), Suschnost, istoriya i eksperimentalnie perspektivi suggestopedicheskoi sistemi pri

obuchenii inostrannim yazikam [Essence, History and Experimental Perspectives of Suggestopedic

System for Teaching Foreign Languages], Metodi Intensivnogo Obucheniya Inostrannim Yazikam

[Intensive Methods for Learning Foreign Languages] 3, pp. 7-16.

The Condition of Education 2011. [Online] Available at: http://nces.ed.gov/programs/coe/pdf/coe_irl.pdf.

http://www.evf.lu.lv/pmconf2012/news/t/7693/

http://www.evf.lu.lv/pmconf2012/news/t/7693/



654 Barbara Wagner

IMPACTS OF EMOTIONAL INTELLIGENCE

ON LEADERSHIP EFFECTIVENESS

Barbara Wagner, University of Latvia, Latvia1

Abstract. This paper aims to identify the impacts of emotional intelligence on leadership

effectiveness. First, different approaches to leadership are shown and analyzed and narrowed down to a

working definition of leadership. This definition is furthermore translated into categories of leadership

categories as a first step to measure effective leadership. The categories are then filled with items from

various leadership and management definitions in order to find an itemization of leadership. Itemizations

used by previous academics, such as Stogdill’s Leadership Behaviour Description Questionnaire (LBDQ)

and Bass and Avolio’s Multifactor Leadership Questionnaire (MLQ) are presented and analysed. The

latter is then decided to be the most promising one for valid leadership research. In the second part,

emotional intelligence is introduced and the capabilities of emotional intelligent persons are shown. It is

then analysed if the defined characteristics of effective leaders would be enhanced by emotional

intelligence, which is confirmed by this secondary research as well as by different primary researches.

Recommendations for further research are given.

Key words: leadership, emotional intelligence, LBDQ

JEL code: M12

Introduction

In today’s work environment with international teams, a constant lack of skilled workers and

experts and a generation joining the workforce which is more technically literate, connected and mobile

than any other generation before (Bristow et al. 2011) leadership is gaining importance and therefore

coming into the focus of management research. The main research questions within leadership research is

what makes an effective leader, are there certain traits, abilities or behaviours that might be identified,

how could those be measured and developed and which other abilities might be of importance. In this

paper, the impacts of emotional intelligence on leadership effectiveness are analysed. As a fairly new

concept, emotional intelligence has only been discussed for the past twenty years and valid researches on

the effects of emotional intelligence in the work environment are still rare. This paper tries to add to the

discussion with an analysis of the links between emotional intelligence and effective leadership.


The words “leader” and “leadership” did not come into the English language until the 13th century. It

came from the Anglo-Saxon “leiden” which is to go forward, or to go up to. And it was then used usually

to describe the person at the head of an army. (Ramsden 2008, p. 20) Today, researchers usually define

leadership according to their individual perspectives and the aspects of the phenomenon of most interest

to them (Yukl 2006, p. 2). Leadership definitions can roughly be differentiated into goal-oriented,

influence-oriented, vision-oriented and coordination-oriented. The goal-oriented definitions of leadership

1 Corresponding author – e-mail address: [email protected], telephone: +49 176 619 361 67



Barbara Wagner 655

focus on company goals, which are the reason for the existence of leadership in the work environment.

Therefore, the goal-orientation seems to be a logical definition base for leadership in the work

environment. On the other hand, most of the authors focus on the goals and the achievement thereof only

without taking into account the process of leadership and how the goals are reached (Bower 1997, p. 7;

Holzbaur 2001, p. 55; Franke 1972, p. 50). The influence-oriented leadership definitions take into account

that individuals need to be influenced in order to work towards company goals and that those goals have

to be seen as common objectives. Leadership is – according to this perspective – seen as the influencing

process necessary to have employees reach company goals. While taking a broader perspective than the

goal-oriented perspective, those definitions do not clearly state the difference between individual and

company goals and how leaders can reduce this difference (Scanlan 1982, p. 30; Riggio 2011, pp. 119-

120; Lorsch 2010, p. 414). While clearly stating the importance of formulating visions which combine

company goals and individual goals, most vision-oriented definitions of leadership do focus on visions

only and do not explain the process of translating goals into visions and the process of turning visions into

reality (Charteris-Black 2007, p. 219; Hinterhuber, Krauthammer 2001, p. 18; Carnegie 2011, p. 45). The

coordination-oriented definitions of leadership show the complexity of leadership and its task but do

leave out the process of leadership as well as the relationship between leaders and followers (Potthoff

1979, p. 80; Hungenberg, Wulf 2006, pp. 329-330; Link 2010, p. 7). Summarizing the perspectives,

leadership is defined as the process of translating company goals into visions, which are understandable

and shareable by different stakeholder groups and influencing employees to share those visions and

coordinately work towards them. While leadership has been defined by translating goals into visions and

influencing people to work towards those visions, management can be seen as the underlying structure,

defining the goals and providing the structures and control mechanisms. Both concepts do have joint

goals but different, complimentary ways to reach them. So the company goals would be reached most

efficiently if leadership and management were performed at the same time. Concerning the roles of

leaders and managers, it is according to Yukl obvious that a person can be a leader without being a

manager (e.g., an informal leader), and a person can be a manager without leading (Yukl 2006, p. 5). It

does take very different personality traits for leaders and for managers, as the definitions above have

made clear. Therefore leadership and management abilities are rarely found in the same personality. This

is the reason why a differentiation between leaders and managers is advisable.

In order to conduct further research on leadership, emotional intelligence and motivation it is

necessary to define some kind of measurement system for all three concepts. Only if one is able to

measure the concepts, one is able to research interrelations and effects. Therefore different measurements

used by previous researchers are analysed before selecting the appropriate measure for this research.

“Measurement is about assigning numbers to objects, ideas, views or answers. It is the systematic and

disciplined observation, quantification and interpretation of phenomena guided by a theory in one way or

another. In science, the accurate and systematic measurement of phenomena can give great practical

control over the subject, and can make possible the formulation of principles or laws which can make

confirmation or refutation unambiguous and clear” (Chopra, Kanji 2011, p. 69). In the social sciences,

phenomena such as quality, leadership, emotional intelligence, poverty, inequality and social capital are

so ambiguous and perplexing that there is no agreement among social scientists regarding the

conceptualization of the construct and what it constitutes (Chopra, Kanji 2011, p. 70). It is therefore

necessary to clearly conceptualize the phenomenon in question and fit the measurement method to this

conceptualization. The conceptual definition of the phenomenon is the first step a social scientist or

researcher has to make. A purchaser of a test will first want to know how a particular construct such as

poverty or emotional intelligence is defined (Chopra, Kanji 2011, p. 70). The second step is to define how

a phenomenon is measured in an accurate representation of the construct which means creating different

items in a measurement system. This means to interpret or convert the conceptual definition into an

operational definition of the construct very carefully and accurately. This challenge involves establishing

casual connections, specifying the measurement model, estimating of the model, model identification and



656 Barbara Wagner

assessment of model fit, including validating the reliability of the measurement model (Chopra, Kanji

2011, p. 70).

Formulating a vision

Influence

employees to

share the vision

Motivate

followers to

work towards

the vision

Vision

External relations

Focus

Personal

relationships

Goal setting and

measurement

Teamwork and

collaboration

Performance monitoring

Conflict resolution

Motivation

Decision making

process

Change management

Effort recognition

Incorporating

feedback

Respect

Source: own illustration

Fig. 1. Effective Leadership categories and items

Leadership was defined as the process of translating company goals into visions, which are

understandable and shareable by different stakeholder groups and influencing employees to share those

visions and coordinately work towards them. This definition implicates three broad categories of

leadership qualities: first, a leader has to be able to translate company goals into understandable and

shareable visions, second a leader needs to know how to influence his employees to share those visions

and thirdly the leader has to motivate his followers to coordinately work towards the visions. According

to Chopra’s advice, these categories now have to be itemized. For this task the itemization of leadership

from different researchers is analyzed to see if the items proposed fit the above definition. Due to the

often synonymous use of the terms leadership and management, itemizations of the term management are

not excluded in this analysis. In a survey conducted by Alexander, Hearald and Mittler, the measurement

was based upon ten conceptual categories of leadership: creativity/innovativeness, vision, personal

relationships with members, teamwork and collaboration, goal setting and measurement, performance

monitoring, resource acquisition, focus, external relations, and conflict resolution (Alexander et al. 2011,

p. 347). Vision and external relations are skills that seem to be useful for the formulation of a vision that

incorporates corporate goals and may be understood and shared by different stakeholder groups. For the

influence on employees to share the vision, personal relationships with members and focus seem to be the

most helpful skills among the selection proposed by Alexander et al. In order to motivate followers to

coordinately work towards the vision, goal setting and measurement is necessary, as well as teamwork



Barbara Wagner 657

and collaboration, performance monitoring and conflict resolution. Resource acquisition and creativity do

not seem adequate measures for leadership as defined above. Alexander further explains effective

leadership as paying attention to issues of process, such as recognition of member effort, incorporating

feedback and input, and ensuring respect for all opinions (Alexander et al. 2011, p. 343). Attention to

process issues and the recognition of member effort seem best suitable in the part of working towards the

vision realization. Incorporating feedback and respect for all opinions are important when influencing

employees to share the vision. According to Trehan, for success in professional life and for performing

various managerial roles and functions effectively, a manager is expected to excel in leadership,

motivation, communication, decision making, interpersonal relations and change management (Trehan,

Shrivastav 2012, p. 55). Since the task at hand is to find items to measure leadership, the usage of

leadership as itself for an item is not helpful. Motivation fits best into the category to motivate employees

to work towards the vision, while communication is mostly used to influence employees to share the

vision. Decision making is probably best suited to the category vision formulating, although this category

does not implicate this item. Interpersonal relations may be seen as a synonym for the personal

relationships with members and therefore be allocated at the category influence employees to share the

vision. The same category seems to be appropriate for change management, since a newly adapted vision

might be combined with necessary changes.

Chopra defines management as a system comprising a range of human actions designed to facilitate

the desired outcome. This human action subsumes planning, organizing, leading, coordinating,

controlling, staffing and motivating. This also includes “managing” oneself, a prerequisite to attempting

to manage followers (Chopra, Kanji 2011, p. 63). If leading is excluded once again from the items due to

the above mentioned reasons, this definition adds planning, organizing, coordinating, controlling, staffing

and motivating. Motivation has already been added to the items, while the other items are very clearly

management functions and do not apply to the core of leadership, according to the differentiation between

management and leadership in the literature review part. Therefore, the definition of Chopra does not add

any new items.

In 1963 Stogdill developed the Leadership Behavior Description Questionnaire (LBDQ) which

follows Stogdills typology of leadership style into consideration and initiating structure. The first versions

of the questionnaire contained two factorially defined subscales—Consideration and Initiating Structure

in Interaction. Several new subscales have been developed, such as Production Emphasis, Tolerance of

Member Freedom of Action, Influence with Superiors, and Representation of the Follower Group

(Stogdill 1969, p. 153). This questionnaire has been used as basis for different studies (e.g. Hartmann et

al. 2010; Sweney et al. 1975). Hartmann’s scale consists of five-point, fully anchored scales that measure

respondents’ agreement with eight statements concerning consideration behavior, and eight items

concerning initiating structure behavior. Respective sample items are “My supervisor treats his employees

as equal” and “My superior determines in detail what should be done and how it should be done”. The

items expressed the leadership style in which supervisors manage the activities of their subordinates

(Hartmann et al. 2010, p. 287). Since Stogdills questionnaire is mainly used to describe leadership

behavior and is designed to identify the performed leadership style, it does not seem adequate for the

general measurement of leadership which is the main task at hand.

Another often used (Kanji 2008, p. 417; Trehan, Shrivastav 2012, p. 55; Clarke 2010, p. 9) Leadership

questionnaire is the Multifactor Leadership Questionnaire (MLQ) which is based on Bass’s model of

transformative leadership. Bass’s conceptualization of transactional and transformational leadership

included seven leadership factors, which he labeled charisma, inspirational, intellectual stimulation,

individualized consideration, contingent reward, management-by exception and laissez-faire leadership.

In subsequent writings, he noted that although charismatic and inspirational leadership were unique

constructs, they were often not empirically distinguishable, thus reducing his original multifactor model

to six factors (Avolio et al. 1999, p. 441).The MLQ (Form 5X) was developed to address concerns with

earlier versions of the MLQ survey, including problems with item wording, lack of discriminant validity



658 Barbara Wagner

among certain leadership factors, and the incorporation of behaviors and attributions in the same scale

(Avolio et al. 1999, p. 442). “The six factors and their operational definitions are: (1) Charisma/

Inspirational provides followers with a clear sense of purpose that is energizing, is a role model for

ethical conduct and builds identification with the leader and his or her articulated vision; (2) Intellectual

Stimulation gets followers to question the tried and true ways of solving problems, and encourages

them to question the methods they use to improve upon them; (3) Individualized Consideration focuses

on understanding the needs of each follower and works continuously to get them to develop to their full

potential; (4) Contingent Reward clarifies what is expected from followers and what they will receive if

they meet expected levels of performance; (5) Active Management-by-Exception focuses on monitoring

task execution for any problems that might arise and correcting those problems to maintain current

performance levels; and (6) Passive-Avoidant Leadership tends to react only after problems have

become serious to take corrective action, and often avoids making any decision at all” (Avolio et al. 1999,

pp. 444-445). Clarke used the Multifactor Leadership Questionnaire Form 5X (MLQ-5X) to measure

transformational leadership behaviors. All of the MLQ-5X responses are made on a five-point scale

ranging from 0 (not at all) to 4 (frequently, if not always) (Clarke 2010, p. 9).

Table 1

Comparison of leadership measurements

Category Items by definitions Bass’s MLQ-5X

Formulating vision External relations

Charisma / Inspirational Vision

Influence employees to share

the vision

Decision making Intellectual Stimulation

Focus

Personal relationship Individual consideration

Incorporate feedback

Respect Charisma / Inspirational

Change management

Motivate followers to work

towards the vision

Process Management-by-Exception

Conflict resolution

Motivation Charisma

Performance monitoring Contingent Reward

Goal setting + measurement

Effort recognition Individual Consideration

Teamwork

Source: own illustration

As shown in the above table, the leadership categories drawn from the definition of leadership may be

itemized either by the items of independent definitions of leadership and management or by the MLQ – 5X.

The MLQ – 5X is based on Bass’s theory of transactional and transformational leadership. As became clear

in the literature review part, transformational leadership is believed to be the most effective currently known



Barbara Wagner 659

leadership style. Due to those reasons as well as for the sake of comparability in leadership research, it is

decided to use the MLQ – 5X in this research for the measurement of leadership.

Beginning in the 1990s, the idea of emotional intelligence began attracting a good deal of attention,

both among psychologists and in the popular press. Many people seem to agree that emotional

intelligence is important, even though they are not exactly sure what it is. After all, emotions are

important and intelligence is good, so emotional intelligence must be valuable, too (Shiota, Kalat 2012, p.

301). Earlier, emotional intelligence was not discussed because emotions were seen as “undesired

influences on the logical-analytical behaviour and were left outside in order not to scratch the ideal of the

rational acting manager” (Schlegel 2003, p. 13). Salovey subsums the forms of personal intelligence

proposed by Gardner (Gardner 1993, p. 8) under his basic definition for emotional intelligence which

structures these abilities in five sections: Self-perception, to know ones own emotions; suitability, to

handle emotions; goal-directed, to translate emotions into actions; empathy, to know what others feel;

relationships, basis for popularity, leadership and interpersonal effectiveness (Salovey, Rothman 1991,

pp. 280-282). According to Caruso, Emotional intelligence comprises four areas of competencies which

are named hieratically: identify emotions, use emotions, understand emotions, and manage emotions

(Caruso, Salovey 2005, pp. 7-8). Summarizing, emotional intelligent persons recognize their own

emotions and the ones of others, know how to influence and regulate those emotions and can manage

them in order to use emotions for effective actions.

The main criteria for effective leadership were defined according to Bass and Avolio as charismatic /

inspirational, intellectual stimulation, individual consideration, management by exception and contingent

reward. The question is now if these characteristics can be enhanced by emotional intelligence. “Being

able to use emotions for goal achievement opens the possibility for self motivation and creativity” (Hauer

2003, p. 38). This statement by Hauer implicates that emotional intelligent people tend to be more

motivated and creative, a fact that can lead to them being inspirational role models. Trehan states that

effective leaders mostly rely on the expression of feelings to help convey their messages. So when

effective leaders want to implement significant changes, they rely on the evocation, framing and

mobilization of emotions (Trehan, Shrivastav 2012, p. 59). Therefore emotional intelligent leaders are

more likely to be seen as believable and integer since their word will be supported by the displayed

emotions. This advantage is likely to add to the charisma of leaders. Charismatic persons are described as

persons who care, understand others and believe in their strengths (Avolio et al. 1999). These abilities all

base on empathy, one of the main abilities within emotional intelligence. The second characteristic of

transformative leaders is the intellectual stimulation. According to Shiota, emotional stimuli grab our

attention; therefore emotional arousal does improve memory. Emotions – if under control – help us

making more correct and holistic decisions (Shiota, Kalat 2012, p. 333). It may be deducted from this

statement that emotional intelligent leaders do tend to make better decisions and may have an improved

memory. They may therefore be able to better intellectually stimulate their followers. This impact is

possible but will not necessarily happen in all cases. Therefore one cannot say that emotional intelligence

necessarily improves the intellectual stimulation. The next characteristic of effective leaders is individual

consideration. Per definition, emotional intelligent leaders do know the emotions of their followers and

know how to influence them. Since emotions are highly individualized, leaders do have to consider each

employee individually in order to know his or her emotions and to influence them if needed.

Individualized consideration is therefore implicit in the concept of emotional intelligent leadership.

Management by exception is the next characteristic of transformative leaders. An emotional intelligent

leader can recognize the emotions of his followers and will treat them accordingly, meaning that in case

of strong emotions usual management techniques may not be useful. Therefore an emotional intelligent

leadership style will implicitly have tendencies of management by exception. If this management style is

fully executed or not does, on the other hand, not depend on the emotional intelligence of the leader but

on other situational variables. The last characteristic of an effective leader according to Bass and Avolio

is the contingent reward. Emotional intelligent leaders are likely to display more positive emotions since



660 Barbara Wagner

they know how to regulate their negative emotions. These emotions are likely to be contagious, since a

leader is under direct and constant observation of his followers (Goleman et al. 2003, p. 37). So emotional

intelligent leaders are likely to create a positive work environment, what may be seen as a reward for the

employees. If other rewards are granted or not, does not necessarily depend on the emotional intelligence

of the leader but on other context variables.

Conclusion

As seen above, emotional intelligence is very likely to add to the leadership qualities charisma /

inspirational and individual consideration. It may furthermore enhance intellectual stimulation, management

by exception and contingent reward. Based on this purely secondary research one can conclude that

emotional intelligence will make leaders more effective and successful. This conclusion is supported by

different findings from primary research as well, such as Trehan who found emotional intelligence important

for leadership, motivation, communication, decision making, interpersonal relations, and change

management at 99% level of confidence (Trehan, Shrivastav 2012, p. 65). Cartwright subsumed the meta-

analysis of various studies with the statement that the ability to perceive emotion is a factor associated with

effective leadership (Cartwright, Pappas 2008, p. 161). Clarke proved the relationship between emotional

intelligence and transformational leadership with personality and cognitive abilities as control variables

(Clarke 2010, p. 15). Bin Sayeed came to the same conclusion, summarizing that leaders are most likely to

lead their followers if they have insights into their needs, values, and hopes. This insight may be facilitated

through a higher level of emotional awareness and sensitivity. Leaders can create emotional responses in the

followers, communicate and instill commitment toward a common vision and create shared norms. Focusing

on individual followers, leaders should be supportive, considerate, empathetic, caring, and giving

personalized attention. These requirements may be easier for an individual who is high on emotional

intelligence and is able to accurately perceive and understand others’ emotions, while managing his/her own

emotions (Bin Sayeed, Shanker 2009, pp. 596-597).

Since the correlation between emotional intelligence and leadership may be seen as confirmed, further

research should be conducted, first on the ability to measure and develop emotional intelligence and

second on the impacts of emotional intelligent leadership e.g. on the motivation of employees, their

loyalty, customer satisfaction or goal achievement.

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Barbara Wagner 663

IMPACTS OF LEADERSHIP BEHAVIOUR

ON SUBORDINATE MOTIVATION

Barbara Wagner, University of Latvia, Latvia1

Abstract. After defining important key terms, this paper shows different types of

leadership behaviour by analysing them as action and non-action. While action is defined

by conscious, disciplined, long-term goal-oriented behaviour, non-action is characterized

by lack of focusing, lack of energy and the disability to cope. Non-action and passiveness

are distinguished and different reasons for non-action are shown. Some leaders are non-

active due to a lack of focus and tend to lack prioritizing (thematic straying), be driven

only by the immediate situational needs only (reactiveness), lack planning and reflection

(activism), be unable to develop new plans of action (use of behavioural templates) and

lack the ability to translate intentions into actions (state orientation). Other leaders lack

the energy to act, caused by the denial of the need for action (defensive avoidance), an

inwardly, uninvolved attitude (distanced activity) or the subjective lack of influence

(learned helplessness). After these different types of leadership behaviour and its roots are

described, a short excursion shows the most important facts and differences between

intrinsic and extrinsic motivation. As a result, the different types of leadership behaviour

are analysed in regards to their impact on subordinate motivation or demotivation. It is

shown, that leadership action tends to be more motivating for employees then non-action,

while still bearing some threats. Leadership action can motivate employees by serving as

an example, giving orientation and meaning to their tasks. On the other hand, if a leader

seems to be too perfect in its behaviour, employees tend to feel inferior and lose their

motivation. Leadership non-action does not have any potential to motivate subordinates,

even though the different characteristics do have different levels of negative impact on

subordinate motivation. As a conclusion, hands-on suggestions are given how leaders

should behave in their day-to-day worklife in order to motivate their subordinates.

Key words: behaviour, motivation, leadership, management

JEL code: M12

1. Introduction

One of the many and complex tasks of leaders is to motivate their subordinates in order fort hem to

deliver high quality results in a timely manner as well as staying loyal to the company. There is an

increasing amount of motivational theories, analysing which incentives are most likely to create the

desired effects. Some focus on the monetary aspect, believing that motivated employees can be obtained

through huge salaries and other benefits. Other theories focus more on the so-called intrinsic motivation,

using the attractiveness of tasks and the distribution thereof to motivate the employees.

1 Corresponding author – e-mail address: [email protected], telephone: +49 176 619 361 67



664 Barbara Wagner

This paper has a completely different focus. It is based on the theory, that leaders do have a

continuous influence on the motivation of their employees through their conscious and unconscious

behaviour. The focus of this paper is therefore on the analysis of different leadership behaviours and their

impact on subordinate motivation. The goal is to formulate suggestions for leadership behaviour in order

to motivate their subordinates even during the daily routine.

2. Definition of Key Terms

2.1. Definition Leadership and Subordinates

“A person can be defined as a leader according to his or her hierarchally higher position as compared

to other members of an organization, who are referred to as followers or subordinates.“ [1] This definition

of leadership and subordinates uses the position of both as unique differentiation. While being applicable

in most former cases, modern organizational structures tend to have more and more “primus enter pares”,

leaders on the same hierarchical level as their subordinates. A definition by tasks and actions seems

therefore more up to date.

Leadership can also be defined as “the situational influence of employees, which uses leadership

instruments and is oriented towards a success which is to be reached jointly.”[2] This definition focuses

on the actual task of leading without referring to the hierarchical positions of leaders and employees. It

therefore appears more practical than the previous discussed definition. Nevertheless, it does have its

weakness by presenting the leader as the active and the employee or subordinate as the passive part in the

leadership relationship. With this interpretation, highly qualified, self dependent employees can only

contribute their knowledge and engagement as a good will, since they are supposed to play a more

passive part.

Leadership shall therefore be defined as “a mutual interpersonal influence, interaction and continuous

design of a company’s reality for joint target achievement.”[3] Leaders do bear the responsibility for the

achievement of goals and will therefore rule over the subordinates in conflict situations.

1.2. Definition Behaviour

Behaviour can be described as the sum of individual or groups acts and responses to external

stimulations and influences. [4] The behaviour of an individual or a group is influenced by personality,

thoughts, beliefs, desires and previous experiences. The personality of a person can be described and

analysed by using the different traits. One common model for personality traits are the “Big Five”

dimensions of personality. These are Extraversion (positive emotions, warmth), Neuroticism (anxiety,

vulnerability), Agreeableness (trust, tender-mindedness), Conscientiousness (competence, self-discipline)

and Openness to experience (fantasy, ideas). [4] These traits form individual thoughts and beliefs, which

have an direct impact on one’s behaviour.

Another way to understand behaviour is desire or “moving pleasures”. Moving pleasures are impulses

to act because one is in a disagreeable situation. [5] Another reason for actions is the wish to fulfil one’s

desires. Reiss distinguishes 16 basic desires, controlling our actions: “Power, Independence, Curiosity,

Acceptance, Order, Saving, Honour, Idealism, Social Contact, Family, Status, Vengeance, Eating,

Physical Activity and Tranquility.” [6]

With this background, behaviour shall be defined as personality-influenced actions and reactions,

oriented to fulfil desires and reach an agreeable status.



Barbara Wagner 665

1.3 Definition Motivation

The word motivation comes from the Latin word “movere” (to move) and therewith relates to things

that make us do something, that make us move. Motivation can be described as “those processes initiating

and keeping up goal-oriented behaviour”[5] In order to understand the concept of motivation, two

different points of view should be considered. First, the causal point of view, asking why an individual is

acting (or acting in a specific manner). Second, the teleological point of view, asking for which goal an

individual is acting. In business, the key interest lays in performance, which describes (company-) goal-

oriented acting. Therefore, the teleological point of view is taken. In this sense, motivation can be defined

as “the pursuit of goals, implying reciprocity between individual and situation”. [7]

2. Leadership Behaviour

Due to it being linked so closely with the personality, behaviour has many different patterns and may

therefore be categorized in uncountable ways. For the purpose of this paper, with a clear focus on

leadership behaviour, the most distinguishable forms of leadership behaviour shall be presented in this

chapter. The most important differentiation of leadership behaviour is between action and non-action.

Both categories have different sub-dimensions, clarifying and summarizing different types of leadership

behaviour.

2.1 Action

The difference between action and behaviour in general is, according to Weber, that actions have

a subjective meaning for the individual. [8] This implies that action is oriented to a specific subject

and a particular goal. Parson and Shils also argue, that in case of action, a person’s behaviour is

chosen consciously and guided by an actor’s will to attain a certain goal. Unintentional activities are

therefore not considered actions. [9] Action may also be described as “a self-started, active approach

to work and pursuing certain goals beyond what is required”. [10] In managerial contexts,

harbouring more complex and enduring requirements, action is not only self -starting and proactive,

“but also self-driven, e.g. continuously self-nurtured”. [11] Undertaking actions also requires a

certain amount of effort, in order to consciously chose the action and exert it. [12] These

characteristics of actions (subjectively meaningful, self-started / self-driven and increased effort)

form the dimension of energy-related actions.

The second dimension of actions is the focus-related dimension. One central characteristic of focus-

related action is, that it is long-term oriented. [12] This long-term focus reflects behaviour “which

demands significantly more preparatory activities, a better understanding of work processes and potential

strategies which enable a person to control a situation rather than being dominated by it.”[13] Action is

also characterized by being goal-oriented and conscious. Since action does not necessarily imply

observable behaviour or physical movement, it is sometimes hard to tell action and non-action apart. One

way is, to discern, whether a certain form of behaviour is based on an individual’s own reference system

and can therefore be described as an action. A third characteristic of focus-related action is the discipline

needed to perform an action even despite setbacks and difficulties.

2.2. Non-Action

Non-action is not equivalent with passivity. Some none-actions involve a great deal of activity, while

nonetheless not constituting action as described above. “Non-action constitutes behaviour which is



666 Barbara Wagner

characterized by deficient energizing or focusing and implies that in situations where action is in principal

possible, potential […] is not exploited.”[12] Non-action in the energy-related dimension is owed to a

lack of energizing; it is then described as defensive avoidance, closely related to the denial, that action is

needed. [14] Deficient energizing is also shown in distance activity, representing a form of non-action in

which, due to a lack of subjective meaningfulness, the other energetic aspects of action (self-starting, self-

driven, effort) are blocked. [12] The third dimension of non-action due to lack of energizing is the learned

helplessness which occurs, when a person repeatedly tries in vain to influence processes of subjective

meaningfulness. [15] As a result, the focus and energy are more and more blocked by potential problems,

which seem insurmountable to the individual.

Non-action can also be owed to the lack of focusing, which is than categorized in the focus-related

dimension. A phenomenon which indicates a deficient channelling of energies is known as thematic

straying. According to Dörner et.al, who introduced the term, thematic straying is likely to occur when a

person pursues several different objectives with roughly the same priority and are lacking prioritizing,

selecting and committing to a certain goal. [16] Non-action due to lack of focusing can also be observed

in the forms of reactiveness or activism. When individuals show a short-term horizon and a rather diffuse

representation of goals, their actions are not goal-directed but impelled by immediate, situational

demands. This behaviour is known as reactiveness and can result in cognitive overload. [13] While

reactiveness occurs due to a lack of foresight, activism is mostly linked with a lack of focus. Individuals

act highly energetic but poorly goal-directed or consciously. This behaviour is likely to occur in situations

of crisis, when the stress-level increases and activities become ineffective. [16] Poorly focused energy

may also result in non-action in the form of use of behavioural templates. This phenomenon describes the

application of traditional, but inappropriate, behavioural patterns. Dörner and Stäudel suggest that,

“templates are likely to be used in the case of negative emotions”. [16] In this case, people tend to use

behavioural patterns instead of developing new action plans. Another phenomenon of non-action is

known as state orientation. In this case, “attention is focused on past, present and future states, rather than

on actions that may bring change”. [17] Action deficits are in that case neither based on failure to make

an effort nor upon a lack of knowledge or abilities. The reason for non-action is rather the inability to

translate intentions into actions.

2.3. Summary

Action Non-Action

En

erg

y-

rela

ted

Subjectively meaningful Defensive avoidance

Self-started / self-driven Distanced activity

Increased effort Learned helplessness

Fo

cus-

rela

ted

Long-term orientation Thematic straying

Reactiveness

Focus on goals Activism

Discipline Use of behavioural templates

State orientation

Fig. 1. Action and Non-Action in the focus-related and energy-related dimensions



Barbara Wagner 667

3. Motivation

3.1. Extrinsic Motivation

Extrinsic Motivation describes the pursuit of goals because of a given stimulus. This stimulus, which

Skinner described as reinforcement, increases the probability that certain behaviour is shown. [18] This

stimulus can be external, such as praise from parents or teachers or a payment raise from the employer.

The reinforcing stimulus can also come from the individual itself, when defining certain treats for other

tasks which have to been completed. The motivation for performing the tasks is then laying in the treat,

not in the task itself. [5] Extrinsic motivation is therefore focused on stimuli outside the task in question,

not necessarily coming from an outside person.

In an organization, the main extrinsic motives are money, security and prestige. Money-related

motives are the monthly salary as well as other monetary incentives promised by the employer when

certain goals are reached. These incentives are a classic example for extrinsic stimuli – they reinforce the

possibility for goal-reaching behaviour. Security is, according to Maslow, one of the most basic needs of

an individual. [19] A workplace which is perceived as secure satisfies this need and therefore provides a

motivation to behave in the desired way in order to keep the job. Prestige can be an extrinsic motivation,

if the job is seen as highly prestigious. This is mainly achieved through job titles or through a known

brand or company. All the mentioned motives are extrinsic, since they do not directly relate to the job or

task itself.

Extrinsic motivation is known for being not as effective as intrinsic motivation, which is described

below. Some experiments have also proven, that intrinsic motivation for a certain task can decrease, if an

extrinsic motivation (e.g. an incentive) for this task is given. [5]

3.2. Intrinsic Motivation

Intrinsic motivation is based in the task itself – the performance of the task is perceived as a pleasure,

which motivates the individual to repeat its performance. [5] If certain behaviour is intrinsic or extrinsic

motivated depends also from the individual and its perception of motivation.

In an organizational context, it is harder to influence the intrinsic motivation than it is to influence the

extrinsic motivation. Lepper and Hodell found four factors which are likely to positively influence the

intrinsic motivation: challenge, curiosity, control and phantasy. [20] Activities, which challenge the

talents of an individual and are neither too hard nor too easy are likely to increase the intrinsic motivation.

The achievement of set goals increases the perception of the individual to have control over its own

actions and results. In an organizational context, this may be achieved through the promotion of

employees or through job enrichment. Curiosity is likely to positively influence the intrinsic motivation if

discrepancies between the actual knowledge of the individual and the newly presented information are

present. In this case, the individual is likely to research new information to explain the discrepancy.

Another way to increase the intrinsic motivation is to increase the perceived amount of control. The more

control a person perceives to have, the higher the intrinsic motivation. In an organization, the more saying

employees have in the processes, the more likely they are to be intrinsically motivated. Another finding

is, that the intrinsic motivation is higher, when phantasy is targeted as well. In the business context, this

can happen through practical experiences and the connection of topics to totally different topics (out of

the box thinking). [5]

As showed above, it is hard for leadership to directly influence intrinsic motivation. The task of

leaders is therefore to create a framework for intrinsic motivation. [3] How the behaviour of leadership

influences this framework is shown in the next chapter.



668 Barbara Wagner

4. Impacts of Behaviour on Motivation

4.1. Impacts of Action on Motivation

As described above, leadership action implies energy and focus and their various sub-categories. The

impacts of these categories on subordinate motivation shall be shown in order to gain a holistic picture.

Action of a leader implies that the goal he or she is working for is subjectively meaningful. These

meaningfulness, if obvious to the subordinates, may transfer to them and show them the reason for their

day to day business. If a leader appears to be self-started and self-driven, subordinates may perceive him

or her as intrinsically motivated and not only repeating the corporate wordings. This perceived intrinsic

motivation can serve again as an example for the subordinates in a way, that if their leader is intrinsically

motivated, they can reach this form of motivation as well. When a leader shows an increased effort

through his actions, employees may be motivated to match that effort and work more or harder. On the

other hand, it is also possible that employees perceive this effort as a pressure on themselves to work

more and will therefore become demotivated.

The long-term orientation and the focus on goals of action are likely to motivate subordinates, since it

provides security and orientation. Subordinates are in this case more likely to judge, which behaviour is

desired by the company and what is expected of them. Furthermore, if they do not have to worry about

leadership’s changes of minds, they do have more energy to focus on their tasks. Another aspect is, that if

set goals are reached through joint effort, subordinates are likely to perceive this achievement as

motivating. The discipline of leadership is most likely to serve as an example for subordinates, e.g. to not

show up late or to concentrate on their tasks even with the temptation of doing the tasks slower or later.

Nevertheless, should a subordinate be generally less disciplined than its leader, her or she may feel

constantly less valuable or inferior to the leadership, which may result in demotivation.

4.2. Impacts of Non-Action on Motivation

If a leader takes defensive avoidance, the subordinate may either overtake this attitude, which is not

likely to have a direct impact on their motivation. Should a subordinate observe this attitude at his

leader’s behaviour without believing that it this the right course of action, the subordinate will get highly

demotivated due to a lack of control. Should a leader behave distantly and without making an effort,

subordinates will firstly not feel the need to make an effort themselves and secondly lose motivation to

act according to corporate standards, since they do not have to expect reactions to their behaviour. If

leadership is non-active because of learned-helplessness, this lack of control is likely to overspill to the

subordinates and having a demotivating effect, especially in regards to the intrinsic motivation.

If the behaviour of a leader shows thematic straying, subordinates may become less motivated, if they

feel that their subjects or tasks are not becoming enough importance or attention. Employees may in this

case, no longer see the sense in their daily task and begin to perform them less effectively. Should a

leader react only in respond to the immediate situational need, subordinates will lack routine and reliable

standards to orient themselves on. Furthermore, they may perceive their leader as stressed, which is likely

to increase their stress level as well. A similar effect is to be expected from activism, when the leader acts

superficial and rash. Subordinates will lack orientation and security, if leadership decisions are made

quickly, superficial and without being explained to the subordinates, who may feel left out which may

lead to a perceived lack of control. Should a leader use behavioural templates, subordinates do know

exactly which reactions to expect and are able to plan their behaviour accordingly. This will give them a

certain amount of security and orientation, even though a motivation is not to be expected due to the lack



Barbara Wagner 669

of new inputs or creative action plans. A leader’s state orientation is likely to paralyze its subordinates as

well, since they are not shown, how to change the situation or reach the goals.

5. Conclusion

As shown in the previous analysis, leader’s action is more likely to improve the motivation of

employees than non-action is. While acting, leaders should always be aware, that subordinates take their

actions as example and may fear that the same discipline and efforts are expected from themselves. Non-

action will not motivate the subordinates, even though not all aspects do have a negative influence on the

motivation of employees.

As a result, leaders should show an energetic and focussed behaviour, conscious about their actions

and results, knowing about the long – term goals and priorities and find a subjective meaningfulness in

what they are doing. If this set of mind is obvious to the employees, a framework for their intrinsic

motivation is created.

References

1. Bass, B.M. (ed.), Bass and Stogdill’s Handbook of Leadership, Theory, Research and Managerial

application. 3rd edition, New York, 1990.

2. Rahn, H.J., Unternehmensführung. 5th edition, Ludwigshafen, 2002.

3. Franken, S., Verhaltensorientierte Führung. Handeln, Lernen und Ethik in Unternehmen. 2nd edition,

Wiesbaden, 2007.

4. George, J.M. & Jones, G.R., Organizational Behaviour. Upper Saddle River, 2000.

5. Rudolph, U., Motivationspsychologie. Berlin, 2003.

6. Reiss, S., Who am I? The 16 basic desires that motivate our behaviour and define our personality.

New York, 2000.

7. Nerdinger, F., Motivation und Handeln in Organisationen. Eine Einführung. Stuttgart, 1995.

8. Weber, M., Wirtschaft und Gesellschaft. 5th edition, Tübingen, 1972.

9. Parsons, T. & Shils, E.A. (edts.), Toward a General Theory of Action. 2nd edition, Cambridge, 1967.

10. Frese, M. et.al., Goal orientation and Planfulness, Action Styles as Personality Concepts. In, Journal

of Personality and Social Psychology, Vol. 52, 1987, pp. 1182-1194.

11. Heckhausen, H., Motivation and action. 2nd

edition; Berlin, 1991.

12. Bruch, H., Leaders, Action. Model Development and Testing; Mering, 2003.

13. Hacker. W., Arbeitspsychologie. Bern, 1986.

14. Bibeault, D.B., Corporate Turnaround, How managers turn losers into winners. New York, 1992.

15. Seligman, M., Learned Helplessness. San Francisco, 1975.

16. Dörner, D. et.al, Ein System zur Handlungsregulation oder, Die Interaktion von Emotion, Kognition

und Motivation. In, Roth, E. (ed.), Denken und Fühlen. Aspekte kognitiv-emotionaler

Wechselwirkung. Berlin, 1989.

17. Kuhl, J., Handlungs- und Lageorientierung. In, Sarges, W. (ed.), Management-Diagnostik, 2nd ed.,

Göttingen, 1995.

18. Skinner, B.F., Recent Issues in the Analysis of Behaviour. New York, 1989.

19. Jung, H., Allgemeine Betriebswirtschaftslehere. 9th edition, München, 2004.

20. Lepper, M.R. & Hodell, M., Intrinsic Motivation in the classroom. In, Ames, C. & Ames, R. (eds),

Research on motivation in education, Vol. 3, San Diego, 1989.



670 Jens Wingenfeld

THEORETICAL ARGUMENTS FOR A PASSIVE INVESTMENT STRATEGY

Jens Wingenfeld, University of Latvia, Latvia /

Fachhochschule Kufstein, Germany1

Abstract. One main classification of portfolio management strategies is the

differentiation between active and passive approaches. Proponents of an active

investment management strategy believe that capital markets are inefficient, and

therefore it should be possible to achieve above-average risk-adjusted returns via stock

selection and/or timing. On the other hand, passive investment managers do not believe

in such opportunities. Next to diverse empirical quantitative studies, there are developed

some theories that can support a passive investment strategy by a distinct sequence of

logical arguments. Aim of the depiction is to elaborate these existing theories and create

a better understanding of employing passive investment management strategies. The

paper presents these theories and evaluates their utility for an application of a passive

investment approach. Altogether, five specific qualitative arguments could be found

which are eligible to be a theoretical proponent for passive portfolio management. The

validity to the active versus passive debate is critical interpreted. The novelty is that the

detected research models are able to find an adequate answer to the question which

investment style is preferable under diverse presumptions by the methodology of a

qualitative approach. Other studies often employ tests with success-measurement

figures. The weakness of these single quantitative scientific models is their reference

only to the past. With the help of an entire qualitative theory, the commitment to one of

the above mentioned basic investment strategies can receive a more profound

appreciation. The research is embedded in view of the fact that public pension schemes

will not be able to guarantee an adequate living standard for the coming pensioners in

Europe. The result is that some of the presented theories are indeed very suitable to gain

a sophisticated decision for a special investment approach, although some assumptions

are not fully congruent with the reality on worldwide financial markets.

Key words: passive investment approach, indexing

JEL code: G11

1. Introduction

By the end of October 2012, fund management companies of German provenience governed assets

under management (AuM) with a volume of more than 715 billion Euros in mutual funds open to the

general public and more than 952 billion Euros in specialised funds (open to institutional investors only)

1 Corresponding author – e-mail address: [email protected], telephone: ++49/177/2962958



Jens Wingenfeld 671

(BVI, 2012). In the United States of America, the most important capital market in the world up until

now, the combined assets of the nation’s mutual funds were US-$ 12.71 trillion in October 2012,

according to the Investment Company Institute’s official survey of the mutual fund industry (ICI, 2012).

Considering these huge amounts of money alone, both the importance of the portfolio management

process and its responsibility in terms of the global economy become obvious. It has to be stated that

public pension scheme is not, nor will it ever be able to guarantee an adequate standard of living for its

citizens in our society. In this regard, it is essential for nearly any citizen to provide for their retirement on

their own. Hence, the question should pertain to specific methods that are intelligent and rational.

Therefore, mutual funds are a popular investment vehicle. A mutual fund can be described as a

financial intermediary that pools the savings of various investors who share a common financial goal

(Achleitner A., 2002, p. 657). Because an investor has a huge choice of mutual funds, the question is

which of these investment vehicles are preferable or – concerning the view of a fund company – what is

the best way to manage a fund or portfolio in general. This problem is also one of the dominant themes in

modern finance, both for institutional investors and also for private investors.

One fundamental approach to categorize portfolio management is on the one hand an active approach

and on the other hand a passive one:

Portfoliomanagement

Active

Portfoliomanagement

Passive

Portfoliomanagement

Source: Own.

Fig. 1. Basic categorization of the Portfolio Management Process

Few topics have generated more engaging discussions between academics and investment

professionals than the debate over active versus passive portfolio management (Harlow W.V., 2005, p. 1).

A lot of definitions exist for both kinds of investment styles. Basically, an active portfolio manager

tries to outperform a given benchmark; whereas within a passive management strategy, the objective is to

track a given benchmark as accurately as possible.

Active and passive portfolio management approaches are often seen as the two main and opposing

investment styles (Malkiel B. G., 2003, p. 2). The following remarks should provide an answer to the

question if the employment of passive investment management tools, like Exchange Traded Funds (ETFs),

is to justify by diverse theoretical and universal appropriable chain of thoughts.



672 Jens Wingenfeld

2. The Single Specific Qualitative Arguments for a Passive Investment Strategy

2.1. Sharpe’s Arithmetic of Active Management

Sharpe (1991, pp. 7-9) published a short but remarkable article about his point of view of a basic

axiom of investment management. His theory does not invoke and is independent from efficient markets

or any other financial theory, but relies only upon the laws of addition, subtraction, multiplication and

division. Sharpe was prompted to implement his theory by often used statements of investment

professionals like the following ones (Sharpe W. F., 1991, p. 7):

“The case for passive management rests only on complex and unrealistic theories of equilibrium in

capital markets.”

“Any graduate of the Business School should be able to beat an index fund over the course of a

market cycle.”

Sharpe countered these statements by introducing his laws of arithmetic which are based on the all

over accepted assumption that the entire capital market is composed of active investors and passive

investors; or put another way, the average performance of all investors (either active investors and

passive investors) will be the same as the market performance, because from a superior point of view,

at any one time, the holdings of all investors in a particular market make up that market. For his model,

Sharpe postulates that a certain market like the S&P 500 or anyone else has to be selected. Furthermore,

a clear distinction between an active and a passive investor has to be carried out. The latter one holds

every security from the market (as defined above), with each represented in the same manner as in the

market. By implication, an active investor is simply one who is not passive. Market return is defined as

a weighted average of the returns of all securities within the market, using beginning market values as

weights (Sharpe W. F., 1991, p. 8). Sharpe’s laws of arithmetic are the following ones (Sharpe W. F.,

1991, p. 7):

“If “active” and “passive” management styles are defined in sensible ways, it must be the case that:

(1) Before costs, the return on the average actively managed dollar will equal the return on the average

passively managed dollar, and;

(2) After costs, the return on the average actively managed dollar will be less than the return on the

average passively managed dollar.”

Sharpe enunciates that these assertions will hold for any time period. Moreover, no exception is

possible to this mathematical necessity which is casually named as the “Zero -Sum Game of

Dispersion of Return” or also “Equilibrium Accounting”. Ferri (2011, p. 28) describes this issue in

the context of explaining Sharpe’s introduction of the Greek letter beta (β) for representing market

risk: “In summary, there’s only one market risk and one market return. No excess return or excess

risk exists in this market. This makes all non-market risk a zero-sum game: For every non-market

risk winner (i.e., for any active investor) there must be a non-market risk looser at the same time in

the market. Another way of stating this is that the asset weighted performance of all investors, both

positive and negative, will equal the overall performance of the market. However, no one invests for

free. After fees and expenses, most non-market risk takers must underperform the market by the

costs they incur. It’s simple arithmetic.”

It is, of course, possible that individual active investors add value. But if they do, it is at the expense

of other active investors. Because of the fact that some existing studies are convinced that active

strategies gain advantage over passive strategies in their context, Sharpe (1991, p. 7) presents three

practical occasions why these false observations can occur:



Jens Wingenfeld 673

1) Not all passive managers are passive in a true sense. Hence, not all index managers hold all

securities in market proportions, rather they often sample the market of their choice; often to

charge high enough fees to bring their total costs to an equal level or exceed those of active

managers.

2) This group of investors who is labled in some studies as “active investors”, do not fully represent

all “non-passive” investors in the market. Often, the active part is applied to institutional investors

only; thus, the retail investor who pays the added costs for the active managers via inferior

performance, is not counted within this context. Another example that will tend to produce results

that are better than those obtained by the average passively managed dollar, is connected with

survivorship bias. The latter is the tendency for failed funds to be excluded from performance

studies due to the fact that they do not longer exist.

3) As possibly most important reason, Sharpe claims that there are often wrongly applied statistics,

because it is necessary to compute the performance of an average actively managed dollar versus a

passive one. Some comparisons use a simple average of all large and small managers or e.g. the

median active manager. A consequence of such an approach is that certain empirical regularities of

a superior active investment strategy persist.

Sharpe (1991, p. 9) accentuates that by a proper measurement, the average actively managed dollar

must underperform the average passively managed dollar, net costs. If empirical analysis arises which

refutes this principle, these studies will be guilty of improper measurement. In Sharpe’s opinion, the

return advantage gained by one active fund can only be at the expense of another active fund that

underperforms the market, hence we can describe it as an entire zero-sum game.

2.2. Thorley’s Drop-Out Argument

In contrast to the Efficient Market Theory and its implications for a passive investment strategy,

Thorley (1999, p. 11) argues in his article “The Inefficient Market Argument for Passive Investing” in

favor of a passive investment strategy even under the assumption that the stock market is not efficient.

The author does not explicitly postulate an informational efficient capital market for a functioning passive

investment strategy, in fact he states quite the opposite; he presents a logical line of arguments which

leads to the following conclusion (Thorley S., 1999, pp. 6 et seq.):

1. In a perfectly efficient stock market, advantages of skill don’t matter, rather it is all luck, and less

skilled players have the same one in three chance of beating the market like anyone else. Thus,

market efficiency is a protection for less-skilled participants taking wrong decisions.

2. If the market is not informational efficient, successive thoughts are valid:

In a competitive market, all participants with superior knowledge and abilities will reach

superior investment results. Vice versa, such traders with low skills will reach below-average

results.

Traders with below-average results will realize their failure, because it is easy for them to

compare their trading results with public index returns (roughly, this is the average result,

before expenses).

As Sharpe points out, an alternative to reach better returns for all below-average traders is to

use a passive strategy, e. g. investing in an Index Fund or ETF instead of “financing” the

above-average returns of the superior traders (Sharpe W. F., 1991, p. 9).

The market becomes more competitive the more inferior participants leave and switch to the

fraction of passive investors. This way, the number of inferior participants who stay in the

market becomes smaller. Hence, fewer financiers remain manifesting superior returns for the

high-skilled traders.

http://www.investorwords.com/992/company.html

http://www.investorwords.com/3665/performance.html



674 Jens Wingenfeld

Due to the number of inferior participants quitting the market, the level of competence in the

remaining market increases. It becomes harder for all skilled traders to reach superior

investment results compared to the former situation with more low-skilled traders present. The

longer this process persists, the greater the hurdle for the remaining participants to achieve

adequately superior returns.

As a result of the above given argumentation line by Thorley, only such rational investors who deny

an informational efficient capital market and concurrently claim an above-average level of trading-skills

for themselves, will remain in the market.

2.3. The Influence of Asset Allocation on the Portfolio Management Performance

Rather than focusing on risk-adjusted returns, practitioners often simply want to ascertain which

decisions results in superior or inferior performance (Bodie Z. et al., 2011, p. 874). Active investment

strategies can be categorized in many respects. Referring to Statmann (2000, p. 17), any active investment

strategy consists at least of market timing or stock-picking or a mixture between these approaches,

whereas a passive investment strategy only consists of asset allocation.

Table 1

The Three Items of the Investment Management Process

Asset Allocation Alternative Expression:

Strategic Asset Allocation, Static

Asset Allocation, Fixed Weight

Asset Allocation, Investment

Policy, Portfolio Policy

Market Timing Alternative Expression:

Tactical Asset Allocation,

Dynamic Asset Allocation

Stock Picking Alternative Expression:

Security Selection

Purpose: Universal sharing of the Portfolio

to the diverse asset classes, in

which exposure is required. There

is no possibility to realize an

outperformance with this kind of

choice. Asset Allocation does not

cause avoidable costs.

Purpose: Exploiting deviations of the

valuation of single assets-classes

(markets) to achieve outperform-

mance. Success of Market Timing

implies prediction skills. A

Market Timer accepts additional

but avoidable costs.

Purpose: Exploiting deviations of the

valuation of single securities to

achieve outperformance.

Success of Stock Picking

implies prediction skills. A

Stock Picker accepts additional

but avoidable costs. Note: A passive investor only works

with this kind of investment deci-

sion and does not care about the

other two elements. He adapts his

asset allocation only for the case

if his risk exposure or his liquidity

requirements change, but not for

the purpose to achieve an

outperformance.

Note: Market Timing means active

investing, but a Market Timer

can also take an asset allocation

decision, if it constitutes a

minimum range of assets. If this

is not the case, Asset Allocation

is only a negligible side effect

of Market Timing.

Note: Stock Picking means active

investing, but a Stock Picker

can also take an asset allocation

decision, if it constitutes a

minimum range of assets. If this

is not the case, Asset Allocation

is only a negligible side effect

of Stock Picking.

Source: Statmann M., 2000, p. 16.



Jens Wingenfeld 675

Brinson et al. (1986, p. 133) define asset allocation within a portfolio management process as

investment policy which identifies the long-term asset allocation plan (including asset classes and normal

weights) selected to control the overall risk and meet fund objectives. For a practical implementation of a

portfolio of assets, the first two of a total of four steps are:

1. Deciding which asset classes to include and which to exclude from the portfolio.

2. Deciding upon the normal, or long-term, weights for each of the asset classes allowed in the

portfolio.

For Brinson et al., market timing means the strategic under- or overweighting of an asset class relative

to its normal weight, for purposes of return enhancement and/or risk reduction, while security selection is

the active selection of investments within an asset class. As a consequent resumption of the two steps

above, this means for the portfolio management process:

3. Strategically altering the investment mix weights away from normal in an attempt to capture

excess returns from short-term fluctuations in asset class prices (market timing).

4. Selecting individual securities within an asset class to achieve superior returns relative that asset

class (security selection).

Brinson et al. developed an arithmetic framework which can be used to decompose total portfolio

returns in the sense of a performance attribution. They used data from 91 pension plans for a complete 10-

year (40-quarter) period beginning in 1974. They computed that the mean average annualized total return

was 9.01 per cent. The contribution of market timing accounted for a loss of 66 basis points per year,

while security selection caused a loss of 36 basis points per year. Thus, they found out that within their

sample the two main active portfolio management approaches even contributed to a negative performance

over time. Furthermore, with the help of the time-series R-squared they found out that on average 93.6

per cent of the total variation in actual plan return was explained by policy, vice versa, less than 10

percent of variation of returns could be ascribed to active portfolio management. In a further study,

Brinson and Gilbert (1991, pp. 40 et seq.) regenerated together with Singer their first study from 1985.

They examined data from 82 large pension plans over the 10-year period December 1977 to December

1987 and found out that 91.5 per cent of the variation in quarterly total plan returns could be explained by

investment policy.

Ibbotson and Kaplan (2000, pp. 26-33) expanded the Brinson et al. study, because the applied

performance attribution of funds was only measured over time; which means that they examined how

much of the variability in the monthly returns of each fund can be explained in a fund’s policy benchmark.

Thus, the authors wanted to answer the following questions:

a. How much of the variation in return among funds is explained by policy differences? The question

is whether there is a tendency for policy to differentiate performance across funds.

b. What is the ratio of the policy benchmark return compared to the fund’s actual return (explaining

the level of returns)?

For answering question a), the authors compared funds with each other through the use of cross

sectional regression analysis R-squared. If all funds were invested passively under the same asset

allocation policy, there would be no variation among funds. If all funds were invested passively but had a

wide range of asset allocation policies; however, all of the variation of returns would be attributable to

policy. Ibbotson and Kaplan (2000, p. 32) demonstrated that asset allocation explained about 40 per cent

of the variation of returns among funds. On average, across funds, asset allocation policy explains a little

more than 100 per cent of the level of returns.

Drobetz and Köhler (2002) conducted a study on simple monthly returns of 51 Swiss and German

balanced mutual funds. They followed the research approach of Ibbotson and Kaplan (2000), which

means that they also distinguished exactly the same three research questions like them. Drobetz and

Köhler found out that more than 80 per cent of the variability of returns in a typical fund over time is



676 Jens Wingenfeld

explained by asset allocation policy, roughly 60 percent of the variation among funds is explained by

policy, and more than 130 per cent on the return level, on average, is explained by the policy return level.

The latest study in this field comes from Kinniry et al. (2006). They tested a sample of 214 US domestic

equity funds over a very long time period from 1966 to 2003. Table 2 gives a synopsis of the above

presented research results to the question what impact asset allocation has for portfolio performance:

Table 2

The Impact of Asset Allocation for the Portfolio Performance

Brinson et al.

(1986)

Brinson et al.

(1991)

Ibbotson/Kaplan

(2000)

Drobetz/Köhler

(2002) Kinniry et al.

(2006)

Number of

Analyzed

Funds

91 US-Pension

Funds

82 US-Pension

Funds

94 US-Equity

Funds

51 German and

Swiss Equity

Funds

214 US Equity

Funds

Time Period 1974 – 1983 1977 – 1987 1988 – 1998 Up to 12/2001* 1966 – 2003

Share of Return and Risk Parameter Determined by Asset Allocation

Return

Variation of a

given Fund

over Time

93.6% (Avg.)

Med. n. a.

91.5% (Avg.)

Med. n. a.

81.4% (Avg.)

87.6 % Med

82.9% (Avg).

85.7% (Med.)

18.9% (Avg.)

15.0% (Med.)

Return

Variation

across Funds

Time

n. a. n. a. 40.0% (Avg.)

Med. n. a.

65.0% (Avg.)

Med. n. a.

81.6% (Avg.)

85.5% (Med.)

Return level 112% (Avg.)

Med. n. a.

101% (Avg.)

Med. n. a.

104% (Avg.)

100% (Med.)

134% (Avg).

131% (Med.)

122% (Avg.)

106% (Med.)

Return compared to Benchmark p. a.

-1.1% (Avg.)

Med. n. a.

-0.1% (Avg.)

Med. n. a.

-0.3% (Avg.)

0.0% (Med)

-2.4% (Avg).

-2.0% (Med.)

-0.5% (Avg.)

Med. n. a.

* no exact time period given Source: Author’s Composition of Cited Studies.

2.4. The Mean-Reverting Effect

Berk and Green (2004) derived a theory of portfolio management which focusses on the relationship

between fund flows and performance. Their model suggests that fund flows are one key mechanism that

prevents a persistent outperformance, but also removes a persistent underperformance. An economy is

assumed in which investors and managers are fully rational. It follows a brief description of the model:

There exist skilled active investment managers with differential ability to generate positive risk-

adjusted excess returns. A further assumption is that managers and investors alike know who these

managers are. Thus, in the market exists at least one active managed fund which achieves a performance

above-average. Investors recognize this as an evidence for replicable skill rather than luck. They expect

also an above-average performance in the future with a probability of more than 50%. As a result, the

amount of assets under management of the superior fund grows very strong. It is a generally accepted fact

that the greater the funds’ size, the expected return of the portfolio as a whole becomes lower (negative

fund size effect), see e. g. the elaborations of Zheng (1999), Finn and Sawacki (2001), Chen et al. (2004),

Pollet and Wilson (2008) or Bessler et al. (2010). Referring to Bogle (1999, pp. 265 et seq.), basically

there are three reasons why an increasing cash-inflow results in a negative fund performance:



Jens Wingenfeld 677

A decreasing investment universe

In many jurisdictions there are limitations concerning the maximum share of a single asset a fund is

allowed to invest, see e.g. section 52 German Investment Act (InvG). Despite this, a fund with big cash

reserves relative to its investment target is only able to purchase small tranches of light capitalized

securities. Even if such a tranche will produce a good performance, it will not affect the funds’

performance very well because of it small weighting within the fund. Costs of analysis for the single asset

are independent from this matter of fact. Hence, investments in light capitalized stocks will not pay for

the big fund, although ceteris paribus these stocks can be a worthwhile investment for a small fund.

Because of this phenomenon it can be observed that funds with high cash-inflows have a tendency to

focus their policies to high capitalized securities and therefore mimic more and more a benchmark index,

because high capitalized stocks in most indexes have a higher weight than lower ones. As described in

number 2, investment universe also constrains to higher capitalized assets the more a fund attracts money

from investors. This means the respectively investment universe diminishes. In correspondence with Peter

Bernstein, Warren Buffet explains: “We have always known that huge increases in managed funds would

dramatically diminish our universe of investment choices. (…) Obviously performance would be much

diminished if we had only 100 securities available for possible purchase compared to, say, 10,000

available when our capital was microscopic (Bogle J., 1999, p. 270).

Indirect Transaction costs

Another important, but not always very obvious reason for a shrinking investment entirety arises due

to the market impact of purchase and sale. These implied costs emerge from the deviation of the realized

transaction price and the price which would develop if no transaction would occur (Keim and Madhavan,

1997, p. 272). However, these kinds of costs are not easy to measure. The higher the single transaction

volume, or the more urgent it is, the higher the costs. This relation becomes stronger if the certain stock is

less liquid. On the other hand, if the fund manager divides his order into smaller shares to minimize

implied transaction costs, it will emerge higher direct transaction costs. A manager of a small fund who

has to execute relative small-size trades is not concerned by indirect transaction costs.

Organizations’ Costs of Hierarchy

Bogle (1999, p. 270) contends that with the growing of an investment company the influence of the

single manager recedes. He claims that a fund manager cannot work best in an environment with high

hierarchical and bureaucratic structures. In his view, the superior skills of an excellent manager are

repressed.

“Picking stocks, like writing stories, is a one-at-a-time endeavor. It is done best by individuals or

small groups of people sharing their ideas and buying only the very best. A small fund family managing

selective portfolios (…) can succeed as a group, but no large institution (…) can order dozens of

managers to outperform. The image can be branded, but not the talent. The people matters more than the

name.”(Bogle J., 1999, p. 270).

Chen et al. (2004, pp. 1278 et seq.) bring forward the argument that hierarchy costs may be especially

relevant for mutual funds. The basic premise is that in large organizations with hierarchies, the process of

agents fighting for (and potentially not having) their ideas implemented will affect agents’ ex ante

decisions of what ideas they want to work on. Thus, small organizations ought to outperform large ones

on tasks that involve the processing of soft information (i.e., information that cannot be directly verified

by anyone other than the agent who produces it). If the information is soft, then agents have a harder time

convincing others of their ideas and it becomes more difficult to pass this information up the organization.

If we confess that funds’ performance decreases the more resources the fund has, investors will

allocate their money into this fund until it has reached the performance of the second best fund. At that

point, investors will be indifferent between investing with either manager, so money will flow to both

managers until they have reached the performance of the third best fund. This cascade effect persists until



678 Jens Wingenfeld

the performance of all former outperformer funds declines to the performance of a passive benchmark

fund.

In the contrary, all funds with an inferior performance successively have cash-outflows until they

reach the performance of a passive benchmark fund.

The result is that in equilibrium all funds have the same expected return than the passive benchmark.

In this equilibrium all managers, regardless of their skill level, have the same expected return.

3. Research results and discussion

3.1. Evaluation of the discussed qualitative theories to the research question

Beside quantitative arguments that sometime support and also sometime do not recommend the

application of passive investment strategies, the above presented arguments are a strong argument to

implement a passive strategy in general, which means unconnected and independent of special market

movements. The author agrees with the argumentation line of Sharpe (1991) in a strictly theoretical

perspective. But it has to be stated that even today it is not possible to buy “the market” in a convenient

and cost efficient way, especially for retail investors. Sharpe claims the market has to be selected. With

this approach, it is necessary to make an active decision which defines his model down. Referring to the

World Federation of Exchanges, a total number of 46,514 stock exchange listed companies are available

to an investor (WFE Monthly Report, 2012). This number is only the amount of listed companies of such

states that are a member of the World Federation of Exchanges. This given figure consists of very

heterogeneous companies which are not all covered by index funds, exchange traded funds, or other

passive investment tools. Thus “to buy the market” is a very theoretical approach, especially for a private

investor. For the latter, it is simply impossible to invest into the entire market by buying all assets in the

same weight as the market prescribes due to occurring fees relative to the investment amount.

However, if we apply Sharpe’s Arithmetic of Active Management ceteris paribus to an established

investment universe like German DAX or US S&P 500, all assumptions of Sharpe’s model can be

transferred into reality of investment and it can be considered as “fundamental law”. In such a case, it is

very easy for a passive investor to transfer his strategy and to buy “the market” by only purchasing a few

standard products. Thorley’s thoughts seem to be coherent and also a strong proponent of applying a

passive investment strategy. But one should notice that this theory – like the Efficient Market Hypothesis

– requires a strictly rational investor which is a paradigm in traditional finance. In this context of

neoclassical finance science, the theoretical model of the “homo economicus” is a key assumption in

terms of positive economic theory. Homo economicus refers to a greatly simplified model of human

behavior where an individual is characterized by perfect self-interest, perfect rationality, and free access

to perfect information regarding a specific condition. But a growing number of economists have come to

interpret diverse anomalies described in literature as consistent with several irrationalities that seem to

characterize individuals making complicated decisions. These irrationalities fall into two broad categories:

first, investors do not always process information correctly and therefore infer incorrect probability

distributions about future rates of return; and second, even when given a probability distribution of

returns, investors often make inconsistent or systematically suboptimal decisions (Bodi et al., 2011, p.

210). Insofar, Thorley’s arguments are a self-contained theoretical assumption which should be accepted

as a piece of advice for any market participant who does not have an overwhelming conviction about his

own research and trading abilities. In this context Barber and Odean (2001) provided an interesting

example of overconfidence in financial markets. They compared trading activity and average returns in

brokerage accounts of men and women and found out a general greater overconfidence of men versus

women which is also well documented in the psychological literature.



Jens Wingenfeld 679

Overall, it is obvious that asset allocation has an overwhelming influence on the risk/return tradeoff

within the portfolio management process. All studies arrive at the conclusion that active investment

decisions in terms of selecting and timing did little to improve performance. “Extra returns seemed to be

unrelated to the level of active management.”(Brinson, G. P. et al., 1991, p. 48): Nearly all surveys show

that active management has not even been neutral to fund performance, but “rather destroyed a significant

portion of investors’ value.”(Drobetz and Köhler, 2002 p. 233) respectively “reduces return and increases

volatility.”(Kinniry et al., 2006, p. 53) Kinniry et al. underline that dynamic asset allocation (i. e. all non-

passive portfolio management methods) can enhance portfolio performance only if investors have the

ability to consistently predict expected returns in financial markets. But it is a well-known fact that it is

nearly impossible to forecast expected returns in a persisting manner in a sustainable above-average

quality. Bernstein (2001, p. 80) summarizes this with the following sentence: “For a retail investor the

likely conclusion do draw from this research is restricting investment process to asset allocation and to

abstain from active fiddling with the portfolio, that could reduce long term return and does not have a

clearly positive effect on portfolio risk.”

Hence, if asset allocation has such an important impact on the outcome of an investment strategy and

other methods do only contribute little or even a negative share to investment success, this finding is

possibly the strongest theoretical proponent of a preference of a passive portfolio management strategy. If

passive management is implemented by investing in one or a few broad market indexes via Index Funds,

Exchange Traded Funds, or Investment Certificates, asset allocation is automatically realized with nearly

no additional expenses.

For Berk and Green (2004), the fact that investments with active managers do not outperform passive

benchmarks is a consequence of the competiveness in the market for capital investment. For them

successful funds capture excess returns. Therefore, all the economic rents generated using managers’

ability by raising fees, thus investors do not participate on superior managerial skill. The managers

themselves benefit from their skills. The arguments of Berk and Green are very coherent, the effect

described by the authors can regularly be observed in the field. In conclusion, the authors give a further

strong qualitative support for an application of a passive investment strategy.

3.2. Proposal for further research activities

Altogether, it has to be stated that there exist some interesting, but not very well known theories which

do recommend passive investment portfolio management eminently. Although they are a strictly

theoretical approach and base on diverse assumptions which cannot be observed in reality all the time, the

theories contribute to a better understanding of a rational and prescient portfolio management style. They

conduce to justify a special portfolio management approach by scientific arguments which are applicable

in any market environment and therefore can be seen as statements with a universal validity, detached

from a certain market movement and situation. Further research activities should be done in this field of

international finance, because it is crucial for any citizen to provide for their retirement in a self-reliant

way.

Bibliography

Achleitner, A. K., 2002. Handbuch Investment-Banking. Wiesbaden: Gabler.

Barber, B. & Odean T., 2001. Boys Will Be Boys: Gender, Overconfidence, and Common Stock

Investment, The Quarterly Journal of Economics, 116(1), pp. 261-292.

Berk, J. & Green, R., 2004, Mutual Fund Flows and Performance in Rational Markets. Journal of

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Bernstein, W. J., 2001. The Intelligent Asset Allocator. How to Build your Portfolio to Maximize Returns

and Minimize Risk. New York: McGraw Hill.

Bessler, W.; Blake, D. P.; Lueckoff, P.; Tonks, I., 2010. Why Does Mutual Fund Performance Not

Persist? The Impact and Interaction of Fund Flows and Manager Changes. Finance Meeting

EUROFIDAI AFFI. Paris.

Bodie, Z.; Kane, A.; Marcus, A. J., 2011. Investments. New York: McGraw-Hill/Irwin.

Bogle, J. C., 1999: John Bogle on Investing. The first 50 years. New York: McGraw Hill.

Brinson, G.; Beebower, G.; Hood, R., 1986. Determinants of Portfolio Performance. Financial Analysts

Journal, 42(4), pp. 39-48.

Brinson, G.; Beebower, G.; Hood, R., 1991. Determinants of Portfolio Performance II: An Update.

Financial Analysts Journal, 47(3), pp. 40-48.

Bundesverband Investment und Asset Management e.V. (BVI), 2012. Investmentstatistik. [Online]

Available at http://www.bvi.de/de/statistikwelt/Investmentstatistik/index.html [accessed 08 January

2013].

Chen, J.; Hong, H.; Huang, M.; Kubik, J., 2004. Does Fund Size Erode Mutual Fund Performance? The

Role of Liquidity and Organization. American Economic Review, 94(5), pp. 1276-1307.

Drobetz, W. & Köhler, F., 2002. The Contribution of Asset Allocation Policy to Portfolio Performance.

Financial Markets and Portfolio Management, 16(2), pp. 219-233.

Ferri, R A., 2011. The ETF Book. All you need to know about exchange-traded funds. Hoboken, N.J: John

Wiley & Sons.

Finn, F. & Sawicki, J., 2001. Smart Money and Small Funds. Journal of Business Finance and

Accounting, 29(5, 6), pp. 825-846.

Harlow, W. V. & Brown, K. C., 2005. The Right Answer to the Wrong Question: Identifying Superior

Active Portfolio Management. Journal of Investment Management, 3(3), pp. 1-21.

Ibbotson, R. & Kapplan, P. D., 2000. Does Asset Allocation Policy Explain 40, 90, or 100 Percent of

Performance? Financial Analysts Journal, 56(1), pp. 26-33.

Investment Company Institute (ICI), 2012. Investment Company Fact Book. [Online] Available at

http://www.ici.org/research/stats/trends/trends_11_11 [accessed 08 January 2013].

Kinniry F.; Tokat, Y.; Wicas, N., 2006. The Asset Allocation Debate: A Review and Reconciliation.

Journal of Financial Planning, 19(10), pp. 53-63.

Malkiel, B. G., 2003. Passive Investment Strategies and Efficient Markets. European Financial

Management (9), pp. 1-10.

Pollet, J. & Wilson, M., 2008. How Does Size Effect Mutual Fund Behavior? Journal of Finance, 62,

pp. 2941-2969.

Sharpe, W. F., 1991. The Arithmetic of Active Management. Financial Analysts Journal 47(1), pp. 7-9.

Statman, M., 2000. The 93.6% Question of Financial Advisors. Journal of Investing, 9(1), pp. 16-20.

Thorley, S., 1999. The Inefficient Markets Argument for Passive Investing. Brigham Young University.

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exchanges.org/statistics/monthly-reports [Accessed 6 January 2013]

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http://www.world-exchanges.org/statistics/monthly-reports



Nicola Zech 681

STAKEHOLDER RELATIONSHIP MANAGEMENT

IN THE CONTEXT OF CRISIS MANAGEMENT

Nicola Zech, University of Latvia, Latvia1

Abstract. In an organizational crisis, typically multiple stakeholder groups are

affected and involved – to a varying extent. Stakeholders’ needs and demands have to

be balanced and prioritized wherever applicable. Professional crisis management and

crisis communication may help creating support for and trust in companies by the

complete range of its stakeholders.

This research paper works out key success factors for stakeholder relationship

management in the context of crisis management. Thereby it considers how professional

stakeholder relationship management before, during, and after a crisis helps overcoming

the crisis and reducing its impact. The results base on in-depth literature review. An

introduction of the fundamental concepts of stakeholder management and crisis

management serves as a basis for their consolidation. Practical implication of the paper

is to introduce the stakeholder and stakeholder relationship specifications towards crisis

management in general and crisis communication in specific. The findings will be

converted into instructions for setting up a crisis management plan and corresponding

training plan.

Key words: crisis management, crisis communication, stakeholder management, stakeholder relationship

management

JEL code: M100

Introduction

The modern, more powerful technology has the capacity to transmit crises and disasters increasingly

faster and to a broader audience, especially to the organization’s Stakeholders. As a consequence to the

speed of news spreading, maximum justifiable time of reaction and communication of affected companies

and industries is constantly decreasing. In order to meet the requirements of professional and almost

instant reaction at the same time, applying the most appropriate and effective leadership concept is a

fundamental aspect. However, in acute crisis situations there may be no opportunity to verify the

information available or to seek for further details. Therefore, without professional crisis preparation and

training, decisions may be taken on information without having full confidence in its source or content.

(Cosgrave J., 1996)

1 Corresponding author – e-mail address: [email protected], telephone: 0049 89 37066487



682 Nicola Zech

1. Stakeholder Management

Robert Philips claims that “organisations are dependent on their Stakeholders for their success and

their failures” (Phillips R. 2003, p. v). Further notable remarks considering the same subject are: “The

social structure of the modern society can no longer be described accurately as consisting only of

relations among natural persons; our understanding must be stretched to include as well those relations

between natural and collective actors, and between two or more collective actors.” (Scott W. R. & Davis

G. F., 2007, p. 7) or “No organisation is self-sufficient; all depend for survival on the types of relations

they establish with the larger systems of which they are a part.” (Scott W. R. & Davis G. F., 2007, p. 11)

A modern Stakeholder Management approach can be interpreted as obtaining “optimal benefits for all

identified Stakeholder groups, without giving priority to one Stakeholder’s interests over another. Under

this philosophy, the entire purpose of the firm becomes the co-ordination of Stakeholder interests.”

(Sautter E. T., 1999, p. 314) Kotler claims that companies can no longer operate as self-contained, fully

capable units without dedicated partners, but they are increasingly dependent on their employees, their

suppliers, their distributers and dealers, and their advertising company. (Freeman R. E., Harrison J. S.,

Wicks A. C., Parmar B. L., & De Colle S., 2010)

Whereas in the traditional perspective a company is seen as an economic entity, the Stakeholder view

sees it as a network of relationships among the firm and its Stakeholders. In consequence, the Stakeholder

view does not attribute competitive advantage solely to best adapting to the company’s environment by

taking advantage of strengths and opportunities and overcoming weaknesses and threats, but to a high

degree to superior linkages to Stakeholders leading to trust, goodwill, reduced uncertainty, improved

business dealing, and ultimately higher firm performance. (Enz C. A., 2010) Whereas managers still think

first about what the organisation wants and needs to generate profit, true Stakeholder engagement implies

understanding of what Stakeholders value and view as important. (McEuen M. B., 2011)

Stakeholder Groups

Even before questioning if Stakeholders are managed right, it should be questioned if the right

Stakeholders are managed. In 1963, the term “Stakeholder” was introduced in an internal memorandum

of the Stanford Research Institute (now SRI International, Inc.). (Freeman R. E., 1984) In 1984, R.

Edward Freeman published his landmark book “Strategic Management: A Stakeholder Approach” and

defined a Stakeholder as follows:

“A Stakeholder in an organisation is (by definition) any group or individual who can affect or is

affected by the achievement of the organisation’s objectives.” (Freeman R. E., 1984, p. 46) “Stakeholders

include employees, customers, suppliers, stockholders, banks, environmentalist, government and other

groups who can help or hurt the corporation.” (Freeman R. E., 1984, p. vi)

An essential distinction should be drawn between influencers and Stakeholders: “some actors in the

enterprise (e.g. large investors) may be both, but some recognizable Stakeholders (e.g. the job applicants)

have no influence and some influencers (e.g. the media) have no stakes.” (Donaldson T. & Preston L. E.,

1995, p. 86)

Organisations need to understand how far their Stakeholders will go to achieve, promote, or protect

their stake. A stake – by definition – may be:

“An interest

Right (legal or moral)

Ownership

Contribution in the form of knowledge or support” (Bourne L., 2009, p. 30)



Nicola Zech 683

Can affect or are affected by

Fundamentally in Stakeholder Management, each organisation has to define its respective

Stakeholders and their perceived stakes. (Freeman R. E., 1984) A Stakeholder Map, adapted from the

example of a Traditional Stakeholder Map shown in Fig. 1 has to be drawn.

Source: author’s construction based on Freeman R. E. (1984, p. 25) and Phillips R. (2003, p. 126)

Fig. 1. Traditional Stakeholder Map

Stakeholder influence can be rated by three elements:

Power: the ability to exercise one’s will over others;

Legitimacy: socially accepted and expected structures that help define whose concerns or claims

really count;

Urgency: the dynamics of the time-sensitive nature of Stakeholder interactions (Maignan I., Ferrell

O. C. & Ferrell, L., 2005).

Managers often underestimate the complexity of Stakeholder identification and solely consider the

most obvious ones such as customers, owners/stockholders or government agencies and administration.

(Sautter E. T., 1999) This may possibly result in short-term salient Stakeholder Management. Managing

an organisation based on a short-term salient Stakeholder (who possesses all three attributes: legitimacy,

power, urgency) orientation predominantly does not lead to sustainable corporate success. (Vilanova L.,

2007).



684 Nicola Zech

2. Crisis Management

According to Spillan J. & Hough M. (2003, p. 401), Crisis Management is “the function that works to

minimize the impact of a crisis and helps an organisation gain control of the situation. It also operates to

take advantage of any benefits that a crisis may present.” Richardson describes Crisis Management as still

being in its infancy – for not having produced an overarching schema yet. There does not even exist a

common language nor commonly used meanings of “emergency”, “disaster” or “catastrophe”.

(Richardson B., 1994) As there does not exist one universally accepted definition of “crisis” either,

various approaches to the definition of crisis and – consistently – the Crisis Management process will be

reviewed. Third key term is Crisis Communication. In numerous contexts these three terms are

considered in a progressive way. (Coombs W. T., 2010)

Crisis Definition and Typology

Still, no single, universally accepted definition of (organisational) crisis exists. In general, a crisis

represents a “turning point”. (Faulkner B., 2001) In Chinese ideographs „crisis“ (wei-ji) represents danger

as well as opportunity. Although the term crisis therefore implies negative as well as positive outcomes,

most certainly no manager would ever argue for the strategic creation of crises in order to advance

organisational goals as an effective form of management. (Coombs W. T., 2010) Consequently, in

common business, a crisis can be defined as an “undesired, extraordinary, often unexpected and timely

limited process with ambivalent development possibilities”. (Glaesser D., 2006, p. 14) Fink considers a

crisis as not necessarily being bad but as merely being characterized by a certain degree of risk and

uncertainty. (Fink, S., 2002) Commonly, a crisis is characterized by the following conditions:

Time constraint;

Limited information (both in quality and quantity);

Decision load constraint (Cosgrave J., 1996).

According to Elliott D. et al. (2005) organisational crises share a number of features:

Crises involve a wide range of Stakeholders;

Time pressure requires an urgent response;

A crisis usually results from a surprise to the organisation;

High degree of ambiguity in which cause and effects are unclear;

A crisis creates a significant threat to an organisation’s strategic goals.

“Risk” is predominantly used in connection with “crisis”. In this context, “risk” is characterised as

“the product of damage and probability of occurrence” (Glaesser D., 2006, p. 38). Furthermore, risk

factors represent an anticipating step towards a crisis. i.e. if risk factors are dealt with immediately they

might be eliminated and crises prevented or at least its magnitude constrained. The term “disaster” is

generally used to define a major negative event that has the potential to affect a company or industry.

(Hystad P. W. & Keller P. C., 2008) Whereas the root cause of crises might be to some extent self-

inflicted, Faulkner refers to a disaster as situations where an enterprise (or a collection of enterprises) “is

confronted with sudden unpredictable catastrophic changes over which it has little or no control.”

(Faulkner B., 2001, p. 136)

First of all, each organisation should answer the following question for itself: “What would you

consider to be a crisis for your organisation?” (Mitroff I. I., 2000, p. 39) The answer needs to be well-

thought-out, detailed, and honest. All executives might be asked to write down examples of what they

believe would constitute a crisis for their organisation. (Mitroff I. I., Pearson C. M., & Harrington L. K.,

1996) Ideally, as many executives and employees as possible are integrated in the brainstorming, because

the more input is gathered the more realistic the picture drawn. In the early stage of risk identification,



Nicola Zech 685

potential magnitude, cost and probability are not considered in detail. (Luecke R., 2004) Risk sources are

listed without sorting first and evaluated in a next step. Most importantly, organisations must not rely nor

concentrate solely on crises which have occurred before. However they may analyse patterns and

interconnections in past crises. (Mitroff I. I., 2000)

Based on various authors’ frameworks for Crisis Typologies, hypernyms for a source-based

categorization may be defined as follows (Coombs W. T., 2004; Glaesser D., 2006; Henderson J. C.,

2005; Luecke R., 2004; Mitroff I. I. et al., 1996; Mitroff I. I., 2000; Richardson B., 1994):

Economic crises;

Environmental crises;

Health crises;

Informational/Reputational crises;

Physical crises;

Political crises;

Social cultural crises;

Technological crises.

Only by determining the specific crisis type, causes and impacts may be treated immediately and

effectively. However, a crisis may fall into one or more categories at the same time.

Crisis Management Process

“You and your managers should understand that anytime you’re not in a crisis, you are instead in a

pre-crisis, or prodromal, mode.” (Fink S., 2002, p. 7) This indicates that the Crisis Management process

never stops and is not a once-only procedure but a perpetual one. Professional Crisis Management “must

be integrated into an organisation’s existing systematic programs, such as total quality management,

environmentalism, and health and safety, which cut across functions, departments, and business units.”

(Mitroff I. I. et al., 1996, p. 117) “While not all crises can be foreseen, let alone prevented, all of them can

be managed far more effectively if we understand and practice the best of what is humanly possible.”

(Mitroff, 2000 I. I., p. 5) Ian Mitroff’s statement gives a clear indication on why the implementation of a

systematic management process instead of pure ad-hoc-reaction is essential. Thus a crisis’ duration

respectively damage can be limited. According to him, the first step has to be “overcoming denial – the

worst enemy of Crisis Management” (Mitroff I. I., 2000, p. 9)

In 1986, Steven Fink published the first book on the topic of Crisis Management: Crisis Management:

Planning for the Inevitable. Although in recent years a vast array of Crisis Management books have been

published, this one remains a more than useful classic. Fink S. (2002) compares the Crisis Management

process to a disease by defining consecutive phases:

Prodromal crisis stage;

Acute crisis stage;

Chronic crisis stage;

Crisis resolution stage.

Glaesser describes Crisis Management as “the strategies, processes and measures which are planned

and put into force to prevent and cope with crises.” (Glaesser D., 2006, p. 22) He even defines 7 detailed

phases of Crisis Management. However, one essential aspect which is not displayed in Fig. 2 is the active

feedback after the recovery of a crisis to the early stages of Crisis Management (analysis, evaluation,

protection, training). (Pearson C. M. & Mitroff I. I., 1993) Obviously this would be substantial for

ensuring on-going learning processes and constant improvement.



686 Nicola Zech

Crisis prevention

Risk management Crisis coping

Crisis precautions

Risk management Crisis avoidance

Limitation of

consequences Recovery

Analysis Evaluation/

Planning Protection/

Implementation Training

Early Warning

Adjustment Employment of instruments

Source: author’s construction based on Glaesser (2006, p. 22)

Fig. 2. Phases of Crisis Management

In addition, a Crisis Management team has to be determined. The Crisis Management team identifies

and develops Crisis Management strategies under the coordination and control of their team leader.

(Ritchie B. W., 2004) They need to work under the condition of time pressure as well as under the

consciousness of the current situation being of high importance to the company. The Crisis Management

team might not always be the same, different types of crises might require different team members. (Fink

S., 2002) Therefore the training must not be too specific or team member oriented. Furthermore, a clear

reporting sequence has to be created so that people know what to do or whom to contact in the event of a

crisis.

Burnett insists that in Crisis Management strategic action has to be taken both to avoid or mitigate

undesirable developments and to bring about a desirable resolution of the problems. Eventually Crisis

Management will only be successful if a continuous effort is notable. (Burnett J. J., 1998) Besides that

Crisis Management needs to consist of strategic planning processes and include the preparation of

detailed contingency plans as well as the definition of decisional roles and responsibilities. But in addition

to that a degree of flexibility must be retained: “Organisations […] have to be mindful of the fact that no

two crisis situations are identical and that therefore, although managerial responses are planned in

advance, such responses need to be flexible to take account of the requirements of the exact

circumstances encountered.” (Evans N. & Elphick S., 2005, p. 147) Fink even adds another perspective:

“The key is to control as much of the crisis as you can. If you can’t control the actual crisis, see if you can

exert some degree of influence over where, how, and when the crisis erupts.” (Fink S., 2002, p. 22-23)

This indicates that not each Crisis Management process has to or can be finished satisfactorily. But,

however, as much input for future Crisis Management processes as possible has to be extracted. The

Crisis Management process determines in the end “whether the media and the public perceive the

organisation favourably as a hero or a victim or unfavourably as a villain. The mismanagement of a crisis

is one of the surest ways in which to earn the label villain.” (Mitroff I. I. et al., 1996, p. 19)

Crisis Communication

A wide range of companies sees the media either as a cause of crises or their principal point of

contact. Whereas some aspects of these statements may be true, Crisis Communication has far more

functions and scope of influence in each Crisis Management stage. Certainly, the management of

Information Technologies (e.g. e-mail, television, news media) is crucial. Mitroff I. I. et al. are equally

right to state: “Realize that there are no secrets in the modern world. Realize that taking the initiative by

telling the truth allows you to control who reveals the truth, in what circumstances, and when it is

revealed.” (Mitroff I. I., 2000, p. 79) Nevertheless, the various perspectives of the recommendable extent

of shared information have to be balanced: Whereas “lawyers typically want to say as little as possible

during a crisis in order to avoid or minimize legal liability[;] marketing, public affairs, and public



Nicola Zech 687

relations executives, on the other hand, want to share information more broadly as a means of retaining or

recovering consumer confidence and hence safeguarding their business.” (Mitroff I. I. et al., 1996, p. 13)

“Crisis Communication can be defined broadly as the collection, processing, and dissemination of

information required for addressing a crisis situation. In pre-crisis, Crisis Communication revolves around

collecting information about crisis risks, making decisions about how to manage potential crises, and

training people who will be involved in the Crisis Management process. The training includes Crisis

Management Team members, crisis spokespersons, and any individuals who will help with the response.

Crisis Communication includes the collection and processing of information for Crisis Management

Team decision making along with the creation and dissemination of crisis messages to people outside of

the team. Post-crisis involves dissecting the Crisis Management effort, communicating necessary changes

to individuals, and providing follow-up crisis messages as needed.” (Coombs W. T., 2010, p. 20)

Two basic types of Crisis Communication can be identified:

Crisis knowledge management

Stakeholder reaction management

In this context, “crisis knowledge management involves identifying sources, collecting information,

analysing information (knowledge creation), sharing knowledge, and decision making. Crisis knowledge

management is behind the scenes. It involves the work the crisis team does to create public responses to a

crisis. Stakeholder Reaction Management comprises communication efforts (words and actions) to

influence how Stakeholders perceive the crisis, the organisation in crisis, and the organisation’s crisis

response.” (Coombs W. T., 2010, p. 25)

Facing the speed of media coverage these days, it is unlikely that there will be a time delay between a

crisis occurring and the resulting media coverage. This implies the significance of immediate Crisis

Communication. Because if immediate information is not available, this leaves room for speculative

stories. (Ashcroft L. S., 1997) Applying “no comment” in Crisis Communication could imply that the

organisation is guilty or hiding something, therefore spokespersons would be wise avoiding this phrase.

(Coombs W. T., 2010) Furthermore, in most cases it seems advantageous to tell the truth at a time of

crisis. (Ashcroft L. S., 1997) How and what an organisation communicates during a crisis has a

significant effect on the outcomes of the crisis – this includes the number of injuries and the amount of

reputational damage sustained by the organisation. (Coombs W. T., 2010)

Ideally, a company speaks during a crisis with one voice. Nevertheless, this must not be confused with

having just one trained and well-informed spokesperson during a crisis. In fact, different spokespersons

may be needed to cover various areas of expertise, or a crisis may last several days or longer making it

impossible for one person being the sole voice for the organisation. Furthermore, the person may vary

upon the crisis type or media. However, all spokespersons must be kept on the same information level to

help insure consistency. (Coombs W. T., 2010) In the majority of organisations, “Public Relations” is the

department responsible for Crisis Communication. Their main fields of action in this context are training

spokespersons, developing guidelines and policies as well as determining general processes for dealing

with the media. (Burnett J. J., 1998)

Crisis Management Plan

As a rule, the production of a customized anticipating Crisis Management Plan pays off since in

time of crisis “the decision makers are in the most unsuitable position for taking the right decisions:

they are under a pressure of time which prevents the collection of the relevant information and their

analysis in depth. Furthermore, the decision makers are under internal psychological pressure arising

from the feeling of failure and the need to defend themselves, and they have to resist the various

interest groups in the industry. In such situations there is a danger of failing to see the current

development in their correct proportions and of choosing convenient solutions without examination of



688 Nicola Zech

possible negative effects and long-range results.” (Arbel A. & Bargur J., 1980, p. 83) Even though a

Crisis Management Plan can most probably never cover all potential types of crises, having prepared a

plan and having thought in advance of the myriad decisions inherent in a crisis helps in finding

efficient and time-saving responses.(Barton L., 1995) However, all Crisis Management Plans are

useless unless the organisation “is ready to acknowledge that all crises create powerful emotions in

those affected by them.”(Mitroff I. I. et al., 1996, p. 189) Therefore, implementing a Crisis

Management Plan depends heavily on the humans performing.

Most companies are not well prepared for crises. Even worse, Mitroff I. I. et al. (1996) consider most

Crisis Manuals being useless. Common reasons are:

1. most manuals lack an overview of Crisis Management’s systematic nature

2. no manual covers all relevant aspects or concerns associated with every crisis

3. Crisis Management manuals and programs contain either too much or too little detail

4. many manuals are crated to satisfy the needs and/or anxieties of corporate headquarters

5. most manuals are primarily reactive

6. very few manuals specify the education, knowledge, and training required to implement an

effective Crisis Management program


There is hardly any crisis situation imaginable which would not affect any Stakeholder. On the

contrary, typically multiple Stakeholder groups are affected and involved - to a varying extent. “During a

crisis, another group that may join the functional publics is the victims. Victims may have been customers

prior to the crisis; however, when customers are harmed, they become victims.” (Stephens K. K., Malone

P. C., & Bailey C. M., 2005, p. 395) Two major determinants of Stakeholders’ reactions to company

crises are identified as being the crisis cause and the company’s Crisis Communication. (McDonald L.

M., Sparks B., & Glendon A. I., 2010) In the context of Crisis Communication, “one always needs to bear

in mind that there are multiple courts in which one is being tried. First, there is the court of law. Second,

there is the court of public opinion. Third, there is the stock market and other societal institutions.”

(Mitroff I. I., 2000, p. 90)

In the literature a great number of expressions give implication to an interrelation of Crisis

Management and Stakeholder Relationship Management. Hereinafter a literature review considering this

interrelation is summarized. It does not appear being easy to balance all Stakeholder needs and claims in a

crisis situation. Therefore a strategic approach towards a Stakeholder Relationship Management under

these conditions seems advisable. Alpaslan et al. suggest “that developing trusting and cooperative

relationships with Stakeholders enables the organisation and its Stakeholders to prepare and respond to

crises more efficiently, effectively, and ethically than adhering to contracts or the principle of shareholder

value maximization.”(Alpaslan C. M., Green S. E., & Mitroff I. I., 2009, p. 39) Pearson C. M. and Clair J.

A. define an organisational crisis as a low-probability, high-impact event which could threaten the

viability of an organisation and its organisational Stakeholders. (Pearson & Clair, 1998)

Especially in times of crises it seems not sufficient considering shareholder interests. Depending on

the nature of the crisis type one or more Stakeholders may be especially affected and need specific

attention. The salience (i.e. the degree to which managers give priority to competing Stakeholder claims)

of affected Stakeholders may change dramatically during a crisis. Even if impossible for all imaginable

crisis situations, managers should nevertheless simulate potential alterations of individual Stakeholder

saliences. (Alpaslan C. M. et al., 2009) As Stakeholders have (by definition) a stake in the company, this

company has at least a moral commitment to the inclusion of Stakeholders into the Crisis Management

process.



Nicola Zech 689

From the Stakeholder perspective, a crisis can be defined as an unpredictable event which threatens

their expectancies and can seriously impact an organisation’s performance and generate negative

outcomes. In addition, a crisis can threaten an organisations’ social legitimacy (the consistency

between organisational and Stakeholder values) as it violates Stakeholder expectations of how an

organisation should operate. Whereas an effective Crisis Management might result in a stronger

organisation, “management by crises” would take a heavy toll on Stakeholders. Provoking (physical,

financial or psychological) harm to Stakeholders is considered the most negative outcome in this

context. The Stakeholder reception is essential for defining a crisis situation. In this regard, Crisis

Management aims to prevent or lessen the negative outcomes and thereby protect the Stakeholders. The

effectiveness of Crisis Management is frequently rated by Stakeholders upon highly visible crisis

responses. (Coombs W. T., 2010)

A crucial question in an organisational approach to uncertainty in the environment is asked by

Harrington and Ottenbacher: “What (external) strategic relationships are formed to minimize the effects

of an uncertain world. “Organisations operate in unstable environments where they must constantly

evaluate how they will respond to Stakeholders. They not only have to compete for limited resources with

the outside environment, but they also have limited resources by which to react to external groups. By

examining the attributes of Stakeholder groups, researchers can classify how organisations may formulate

their reactions to pressures and inquiries.” (Stephens K. K. et al., 2005, p. 393) In addition organisations

should use the knowledge not only of its team but of as many Stakeholders as possible - the sum is

usually better than the individual results. Information Stakeholders may have available should be used

and signals sent out by Stakeholders should be made use of. (Alpaslan C. M. et al., 2009; Pearson C. M.

& Clair J. A., 1998) Probably more time and resource investment becomes necessary if Stakeholders

included in Crisis Management process but companies on the other hand are likely to reduce impact of

crises on various levels. (Alpaslan C. M. et al., 2009)

Conclusions, proposals, recommendations

Mitroff I. I. summarized essential recommendations for Stakeholder Relationship Management in the

context of Crisis Management:

1. “Never, never assume that the outside world (persons outside of your immediate work group or

family) will see a situation exactly as you do.

2. List as many assumptions as possible about as many Stakeholders as you can think of. Be aware

that the Stakeholders you overlook, and especially the unwarranted assumptions that you are

making about them, can come back to haunt you later.

3. Never, never solve the wrong problems precisely! In other words, always ask yourself, “Are we

solving the wrong problem?”” (Mitroff I. I., 2000, p. 124)

Displayed in more detailed way, this refers to an ideal Crisis Management manual integrating the

Stakeholder Relationship Management approach (see Figure 3).

In summary, instructions for setting up a professional Crisis Management Plan and corresponding

training plan considering Stakeholder Relationship Management are:

1. A pre-crisis audit including interviews with both internal and external Stakeholders should be

conducted in order to determine the crisis-preparedness of an organisation.

2. The contingency plan should include a detailed communication plan which specifies who inside

and outside the organisation should receive when and which information by which media channel.

3. All means of communication need to be targeted at all Stakeholders and not just the media.

4. Crisis Communication from the perspective of a Stakeholder may start with pre-crisis messages

which give them some information about a potential crisis.



690 Nicola Zech

5. Performing post-Crisis Communication, Stakeholders must be updated on the business continuity

efforts as the organisation returns to normal operations.

6. For testing the contingency plan, it seems advisable to prepare a detailed crisis portfolio / scenario

for each crisis type defined. Best case, worst case scenarios shall be implemented.

7. Training shall include general training, table-top exercises, workshops and real time and live

simulations including flexible elements with the aim to test the organisation, communications and

the teamwork of those concerned and the ability of individual actions.

8. Crisis management audits and training have to be implemented into business activity plans and

reiterated on a regular basis.

Scenarios Criteria Signals Containment Recovery Post-Crisis Stakeholders For each crisis

family, at least

one type of crisis

that can occur and

its root causes,

i.e. how, when,

and why

Likely versus

worst-case

scenarios, i.e.

worst possible

time,

circumstances,

causes, and most

unfavourable

publicity

Criteria/ hurdles

that must be

surmounted to

trigger a crisis

response, (e.g.

activation of

Crisis

Management

Team)

Early warning

signals that a

crisis is likely to

occur, i.e., events

which are very

near to the criteria

Physically

isolate?

Encase?

Neutralize?

Disperse?

Treat?

Physically

remove?

Transport?

Reduce?

Convert?

Privatization of

key customers

Privatization of

key faculties

manufacturing

sites

Backups for

manufacturing

information

distribution

Triage criteria

No-fault audit

Review critique

of key

assumptions

Causes?

Key lessons

learned vs. not

learned?

Additional CMT

Training?

Privatization of

key stakeholders

and their role in

crisis plans/

capabilities

Contacts?

Available?

Location?

Part of CMT?

Internal vs.

external?

Crisis Types Audits Meetings Training Miscellaneous 1. Economic crises

2. Environmental crises

3. Health crises

4. Information/Reputation crises

5. Physical crises

6. Political crises

7. Social cultural crises

8. Technological crises

Schedule of

precrisis audits

Scope of precrisis

audits

CTM

Designer,

operator,

maintenance,

personnel

Simulations

Conflict Mgnt.

facilitator

CMT

Designer,

operator,

maintenance,

personnel

Simulations

Conflict Mgnt.

facilitator

Source: author’s construction based on Mitroff I. I. et al. (1996, p. 191)

Fig. 3. Ideal Crisis Management manual

For the development of particularized Crisis Management and Training Plans further research is

advisable. Therefore, the author will conduct expert interviews as well as scenario-based interviews in the

progress of the doctoral study.

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Ashcroft, L. S., 1997. Crisis Management - Public Relations. Journal of Managerial Psychology, 12(5),

pp. 325-332.



Nicola Zech 691

Barton, L., 1995. Crisis Management: Preparing for and Managing Disasters. Cornell Hotel and

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Zane Zeile 693

POLICY INITIATIVES IN MATERNAL AND CHILDREN’S

HEALTH: A CASE OF LATVIA

Zane Zeile, University of Latvia, Latvia1

Abstract. Health, education and economic development being interrelated, an

improvement in a nation’s overall health will result in increased economic development.

Health is a part of human capital. This paper presents the results of a study aimed at

improving maternal and children’s health by analysing documents that describe public

policy and states the conclusions drawn. Logical constructive, interpretive and

comparative methods were used in the analysis. The research covered the period between

2000 and 2011. The results can organized in three ways depending on the recipient. In the

first group which is directed toward politicians and ministry officers, the focus of the

analysis was to determine the quality of the policy documents. It was found that the

quality of policy documents aimed to improve the maternal and children’s health has

improved over time. In the earlier “Strategy of Maternal and Children’s Health”, the

financial and human resources required to achieve the goals are not indicated; nor is the

time frame. In comparison, the later “Plan for Improving Maternal and Child Health in

Latvia for 2012-2014” specifies the necessary resources and the goals are measurable and

specific. The reporting mechanism is developed, and the responsible and involved

institutions are indicated. In the second group intended for doctors and researchers the

results of investigating the trends in maternal and children’s health in the period between

2000-2011 were reported. Although prenatal and infant mortality is decreasing, it is still

well below the EU average. The causes for the indications of poor health are prospective

parent smoking, unhealthy lifestyles by children and adolescents and insufficient access to

timely and quality care. The third group of research results which can be used by NGO’s

and local governments concentrated on intersectoral collaboration. Inter-sectoral

collaboration and education is emphasized in “Plan for Improvement of Maternal and

Child Health for 2012-2014” and in “Public Health Guidelines”.

Key words: policy initiatives, policy documents, maternal and child health, inter-sectoral collaboration

JEL code: I14

Introduction

The goal of this paper is to identify the trends in maternal and children’s health between 2000 and 2011 and

ascertain the level of improvement of the major policy documents in this field. The tasks undertaken by the

research were to analyze maternal and children’s health data, to determine main causes of poor health and to




694 Zane Zeile

evaluate the following policy documents: “Strategy for Maternal and Children Health Care”, “Plan for

Improving Maternal and Children’s Health for 2012-2014”, “Public Health Strategy for 2004-2010”, the action

plan for the implementation of “Public Health Strategy for 2004-2010”, “Public Health Guidelines for 2011-

2017” and the evaluation of achievement of goals set in “Public Health Strategy for 2004-2010” The evaluation

criteria were the SMART criteria for goals, appropriate time frames, identification of responsible institutions

and resources. The reporting mechanism is also discussed for the “Public Health Guidelines for 2011-2017”. In

the third part of the research results the intersectoral collaboration is discussed.

Theoretical discussion

What influences maternal and children’s health?

The main question is: what influences maternal and children health? Is it the health care administration, the

quality of health care personnel, or the lifestyle factors of prospective parents? The data about pregnant women

who smoke (~10%) and the influence on stillborn babies by parents who smoke indicate that lifestyle factors

are most important. The quality of care is important as well. Improving the performance and quality of health

services has become a prime objective of policy reform worldwide. Reliance on innate professionalism to

deliver high quality, safe and effective services has come to be seen as curiously old fashioned. Ideas coming

from “new public management” (Ferlie et al in Wikstrom and Dellve, 2009) have increased schemes aimed at

measuring and shaping the performance of health care delivery. Pay for performance (P4P) schemes provide

that a portion of payment is based on performance, assesed against one or several measures.(Hahn, Mannion

and Davies in Wikstrom and Dellve, 2009). There is a growing evidence to suggest that public dissemination of

performance data can stimulate provider organisations to improve internal data collective systems and

processes and lever beneficial changes in staff behaviour. (Davies in Wikstrom and Dellve, 2009). However,

there is also a growing evidence to suggest that public disclosure of performance data can induce a range of

unintended and dysfunctional consequences for organisations and patients. (Smith, Mannion et al in Wikstrom

and Dellve, 2009.) In Latvia, this scheme might improve quality and safety of care, where it is especially

needed: maternal and children’s health services and raise the responsibility of doctors. In the situation of low

wages it might be of value. However, it might create stress and peer- pressure in professionals.

Another question: If the same problems exist in two successive documents does it mean that they

haven’t been solved in the period between development of documents? The first document formulating

strategy was developed in 2003 and the plan in 2012. The urgent call for intersectoral collaboration in

promoting adolescent and youth sexual and reproductive health which is a serious issue has not been

heeded.Inter-sectoral collaboration has been introduced as a new approach as compared to earlier

methods. Probably Latvia will need to learn from overseas experience to develop intersectoral

collaboration as a means for improving health. Community participation and intersectoral collabration are

core concepts in the present view of the promotion of healthy living.(WHO, 1986, 2005). (Cramer et al in

Wagemakers, 2010) has stated that community participation is required to design programs that address

the social determinants of health, and intersectoral collaboration has great potential for community action

to improve health. (Wagemakers et al. (2010) think that intersectoral collaboration focuses more on the

organisational level, whereas participation focuses mostly on the community level.

Innovative and current research

The research is based on a multifaceted approach in the analysis of the four policy documents using

the SMART principle and conforming to the reporting mechanism, indicated resources and the required



Zane Zeile 695

time frame. The most important finding of this research is that there is a correlation between stopping of

twofold child birth benefit for pregnant women who timely register with doctor and decrease in timely

registering with doctor of pregnant women. Several drawbacks and tendencies in policy documents in

maternal and children’s health contain novelty as well.

The index of human development consists of the following three factors: economic development

(GDP per capita), health (life expectancy at birth) and educational level (adult literacy per 10000

inhabitants). The research was based on several assumptions. Health and education determine human

capital which consists of the abilities and skills that increase the potential for economic activity.

(University of Latvia, Institute of Social and Political Research, 2006/2007). Good health begins with

healthy prospective parents, mother and father which in turn result in healthy children. This is a

prerequisite for healthy society. Health is the basis for the ability to achieve a higher level of education

and to work effectively.

Health and economic development – challenges for the government

A challenge for Latvia’s government is to acknowledge the correlation between a healthy society and

workforce and successful economic development. Government must recognize that while GDP and

exports are current economic indicators, young people’s health is an indicator of future economic activity.

Many policy documents have been developed to promote it. “Plan for improvement of maternal and child

health from 2012-2014” and “Public health guidelines for 2011-2017” are based on international

documents, both within the EU and global.

The importance of maternal and child health as a key indicator of nation’s health has been defined in

several international documents. “Global strategy for women’s and children’s health” (UN Secretary

General, 2010) calls for united action by governments, global and regional institutions, health workers

and researchers. It encourages all to strengthen health care systems and join efforts across all sectors of

health, education and nutrition. It expresses the belief that a focus on the most vulnerable is required,

including women and children,the poorest, orphans and those living furthest from health care services.

Innovations in technology, treatment and the delivery of services are making it easier to provide better

and more effective care.(UN Secretary General, 2010.)

Another important document is “European Strategy for children and adolescent health development”

(WHO, 2005). It marks understanding that investment in early stages of life has lifelong impact, affecting

economic development and sustainability and establishment of a healthier society.

Research methods

The following policy analysis methods were used for drawing the main conclusions and tendencies in

the policy documents, logical constructive method (a type of analysis and synthesis), interpretation

method, comparative method, dynamic statistical rows (comparison of data in time).

Research results

The research results can be divided in three parts, defined by user groups:

1. The trends in maternal and children’s health in the period between 2000 and 2012. The users of

these research results might be researchers and doctors.



696 Zane Zeile

2. The quality of documents, by comparing documents regarding mother and children’s health. The

target group that could use these results are politicians, ministry officers and developers of policy

in the Ministry of Health and Welfare.

3. The new emphasis on intersectoral collaboration and education in “The plan for improvement of

maternal and children’s health for 2012-2014” and “Public health guidelines for 2011-2017”. User

groups here are NGO’s, local self-governments, ministries, health organisations, government.

Maternal and infant health indicators from 2000-2012

Perinatal mortality has been decreasing since 2003. However it increased in 2009. Perinatal mortality

indicators are fluctuating. In rural areas infant mortality is generally lower that in urban areas. Perinatal

mortality has been decreasing in time. By 2007 perinatal mortality had reached the EU average level.

Source: Demography 2011, Central Statistical Bureau of Latvia

Fig. 1. Perinatal mortality per 1000 live births and stillbirths.

Causes of perinatal, neonatal and stillborn infants

(Trapencieris, 2009) has researched that causes of perinatal, neonatal and postneonatal deaths are

influenced by maternal attitudes towards pregnancy, mother’s and father’s lifestyle and status, as well as

health care quality. Significant causes for stillborn babies and perinatal deaths are the mothers’s and

father’s smoking before conception and maternal smoking during pregnancy. Various health problems of

the mother, pregnancy difficulties, as well as tobacco and alcohol use by the mother and father are the

main causes of infants not delivered to term, stillborn babies and infant deaths in 1st week of life.

Approximately 10% of pregnant women have smoked during pregnancy, 0.5% used alcohol, 0.1%

psychoactive substances (Public Health Agency, 2008).

Perinatal mortality per 1000 live births and stillbirths

0

2

4

6

8

10

12

14

16

18

20

1995 2000 2005 2010

Years

Ind

icat

ors

Total perinatal mortalityper 1000 live births andstil lbirthsstil lbirths

death at age 0-6 days

Total perinatal mortality per 1000 live births and stillbirths

Stillbirths

Death at age 0-6 days



Zane Zeile 697

Figure 3 shows that maternal mortality is very high in Latvia. It is even more significant when

compared to other EU countries, especially Denmark, Finland and Estonia. Maternal mortality is another

indicator of the quality of perinatal health care in the country. It includes women, who have died during

pregnancy, childbirth and post-delivery period.

Source: Maternal and children’s health in Perinatal Period, Public Health Agency, 2009

Fig. 2. Maternal mortality in Latvia from 2001 to 2010.

It is important to begin antenatal care (before the 12th week of pregnancy) to ensure a good health

outcomes for the infant. However between 1.8 and 2.7% of women have not seen a doctor to check their

health or monitor their pregnancy. The rate peaked in 2009. The number of women who received

antenatal care before the 12th week of pregnancy has decreased from 89.6% in 2006 to 88.3 in 2011

(Figure 4). However, this indicator has varied each year. A lack of antenatal care might result in higher

perinatal mortality and infant death.

Diminishing number of pregnant women that register with a doctor in a timely manner might be

explained by the fact that until 2004 timely registration was significantly motivated by the twofold child

birth benefit. After 2004, mothers would receive a maternity benefit of 14 days additional leave from

work if they began antenatal care before the 12th week of pregnancy. This support was available for all

women. In 2008, socially insured individuals could receive a parental benefit of 70% of social payment

wages. This benefit was paid from the social payments that had been made. After the economic crisis

beginning in 2009, the standard rules were changed and the amount of the benefits was reduced. This

shows how health policy influences peoples behaviour. Additionally, according to the view of

gynecologists and birth specialists state paid pregnancy care health services not always are available,

therefore there is risk that antenatal care may not be ensured (Ministry of Health, 2012).

Maternal mortality (absolute numbers)

0

2

4

6

8

10

12

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Years

Mat

ern

al m

ort

alit

y (a

bso

lute

nu

mb

ers

)

Maternal mortality(absolute numbers)



698 Zane Zeile

Source: Demography, 2011, Central Statistical Yearbook of Latvia

Fig. 3. Rate of women, who have started antenatal care before 12 th week

of pregnancy in Latvia from 2001 to 2011.

The number of smoking mothers and fathers is important factor affecting the health of newborns. Ten

percent of pregnant women smoked during pregnancy. In 2011 a significantly higher number of stillborn

babies were born to mothers, who smoked during pregnancy.

Smoking mothers accounted for:

9.5% of live born babies;

19.6% of stillborn babies.

For smoking fathers:

32.8% of live born babies;

34.8% of stillborn babies.

Children’s (1-14) and adolescent’s (15-17) health

One of the most important means to monitor children’s and adolescent’s health are regular preventive

check-ups.

General children’s health status is characterized by 3 health groups:

1st health group: children wihout chronic pathologies, organ and system functions without

pathologies, physical development according to age;

2nd health group – children with threats of development of chronic illnesses, acute illneses

develop with complications;

3rd health group- children with chronic illneses, genetic organ and system pathologies.

Antenatal care started from 12th week of pregnancy , rate

84

85

86

87

88

89

90

91

92

93

94

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Years

An

ten

atal

car

e s

tart

ed

fro

m 1

2 t

h

we

ek

of

pre

gnan

cy Antenatal care startedfrom 12th week ofpregnancy , rate

Antenatal care started bofore 12th week of pregnancy

94

93

92

91

90

89

88

87

86

85

84

An

ten

ata

l care

sta

rted

bo

fore

12th

week o

f p

reg

na

nc

y



Zane Zeile 699

Source: Disease Prevention and Control Centre, Statistical Data about year 2011

Fig. 4. Children’s (3-14 years) division in health groups in Latvia from 1995-2011

Figures 4 and 5 show that the percentage of children in the 1st health group has not increased

significantly in the last 16 years. For adolescents it has decreased by two percentage points. Figure 5

presents the results of of calculations made by the author regarding health problems.

Source: calculations made by the author, based on data of Disease Prevention and Control Centre, Statistical Data Collection

about year 2011

Fig. 5. Rates of diseases for children and adolescents in Latvia, in 2011

Division of adolescents in health groups

0%

20%

40%

60%

80%

100%

1995 2000 2005 2010 2011

Years

Ind

icat

ors 3rd health group

2nd health group

1st health group

0

5

10

15

20

25

30

35

40

45

Val

ue

s

Impaired hearing Speech illnesses Other illnesses of posture

Types of illnesses

Types of illnesses for children and adolescents in

Latvia in 2011

children

adolescents

45

40

35

30

25

20

15

10

5

0

Valu

es



700 Zane Zeile

As shown in the Figure 5 the greatest rate of is other disorders of posture and impaired vision.

Impaired vision and scoliosis increase with age. Speech disorders decrease rapildly with age.

Health problems have been detected in 30% of children and in 35.5% of adolescents. Data shows that

health problems increase with age. From 1st grade pupils, already 32.3% have health problems and these

indicators have a tendency to increase.

Other factors which describe schoolchildren’s health are nutrition habits, prevalence of smoking and

alcohol use, as well as physical activity.

Lifestyle habits of school children – nutrition, alcohol use and smoking prevalence

According to Survey of Health Habits of Schoolchildren in Latvia, 14.6% of schoolchildren in school

year of 2005./2006 never eat breakfast on working days. Only 18.2% boys and 21.1% girls eat vegetables

daily, indicating a decrease when compared to school year 2002./2003. 39.8% of schoolchildren eat

sweets at least once a day. Amongs 11-year old girls the rate rapidly increased from 31% in 2001./2002

school year to 41% in the 2005./2006 school year.

The positive trend has been observed as well: a number of schoolchildren who drink cola once a day,

has decreased significantly.

TV viewing and computer use affect children’s vision and posture,as well as contributing to an

increase in obesity. Computer and TV viewing data for schoolchildren in 2006 show that 32.5% of boys,

and 30.2% girls watch TV at least 4 hours on work days. In 2001 among 15 year olds, 24% of the boys

and 8.9% of the girls have spent at least 3 hours a day at the computer.The number of girls in the 15 year

old girls group who who spend at least 3 hours a day increased significantly from 8.9 in 2001 to 29% in

15 year. This number has increased in all girls age groups.

Trends in alcohol use and smoking prevalence are very alarming. The number of 15 year old

schoolchildren, who have used alcohol at least once a week for boys varies. It was the lowest in 1994 at

17.5%. It appears to have peaked in 2008. at 27.8%. In 1994, 6.8% girls used alcohol at least once a week

and in 2006 it increased to 12.7% (Health Economics Centre, 2009).

The rate of smoking of both boys and girls who smoke regularly increased with age. Observing the

rate of smoking schoolchildren, it can be concluded that prevalence of smoking is not decreasing. The

rate of smoking boys in the last 3 years has stabilized, but among girls it continues to increase (Health

Economics Centre, 2009).

2. Comparative analysis of policy initiatives regarding maternal and children’s

health in Latvia

2.1. Comparative analysis of “Strategy of maternal and children’s health care in Latvia” with

“Plan for improvement of maternal and children’s health for 2012-2014”

The first document, devoted to improvement of maternal and children health was “The strategy of

maternal and children health care in Latvia” (2003). This document had many drawbacks when compared

with “Plan for improvement of maternal and child health for 2012-2014”. The main goals of the strategy

are a healthy next generation, reduced genetic pathologies and child morbidity, increase in birth rate by

5%, reduction in child mortality to average EU average. These goals are too vague, universal and not

specific. On the whole, they do not meet the SMART criteria for goals, which specifies that goals should

be specific, measurable, attainable, realistic and timely. In the document indicators were defined, but only

for some goals and they are vague, not being specific and measurable. The neccessary financial resources



Zane Zeile 701

and responsible institutions are not identified. This is a serious drawback as it inhibits implementation and

control of policy stated in the policy documents.

However the positive side of this document is the development of possible course of action and states

the consequences of no action.

Caldwell and Mays (2012) describe the CLAHRCS programme in three levels.The macro-level

requires governmental action. At this level programme exists conceptually. In the meso-level, the

CLAHRC programme started to shape from policy to programme with specific scope of defined

deliverables. Micro-level frame is understanding of CLAHRCS as an organisation in its local contexts,

including its ability to fulfil the proposed model as policy and programme. The analysed policy

documents described in this article also have these three levels. The first is a policy initiative, a proposal

for Cabinet of Ministers. At the meso level, it is planned in greater detail with necessary resources,

actions and indicators. At micro-level, it is the implementation of the policy document in a health

organisation, for example Perinatal Health Care Centre.

2.2. Analysis of the “Public Health strategy for 2004-2010”

The goals for maternal and children health for the period 2007-2010 were included in “Public health

strategy for 2004-2010”. It was decided further not to develop a seperate document. “Strategy” and it’s

action program for 2004-2010. was accepted by the Cabinet of Ministers on the March 6, 2001. In this

document the goals formulated are mostly expressed as qualitative indicators but quantitative indicators

are used as well. This strategy and action program has been regularly monitored and reports on results

were prepared by Public Health Agency for the Ministry of Health. Each report covered completion of a

specific goal.

The strategy is well structured and clear. The implementation process, monitoring and evaluation has

been defined. The action program for implementation of “Public health strategy for 2004-2010” has

shown the neccesary financial resources required each year for state institutions, local-self governments

and NGO’s. Financing mechanism is based in budget reality and the implementation of activities is

planned to comply with the available budget. If the financial resources are only partially available then it

is indicated that the goals would be achieved only partially.

In the action program of “Public Health Strategy for 2004-2010” activities, required to reach each

goal, responsible institutions, the expected results and their indicators and schedule has been stated.

Monitoring progress and timely reporting of results are important requirements in implementation of this

document. It characterizes health policy planning process as a goal oriented process. Each second year

Ministry of Health handed in a report in the Cabinet of Ministers.

Evaluation of “Public Health guidelines for 2011-2017”

In “Public Health guidelines for 2011-2017” a new concept “health of mother, father and a children”

has been introduced. It is noteworthy because health habits of fathers and their attitude towards partners

pregnancy influence health of the children.

The aim of public health policy is to increase healthily lived life years and prevent early death, to

improve and restore good health.

The main directions for achieving these goals have been developed:

1) ensure partnerships and promoting equal opportunities for all inhabitants;

2) improve the health of pregnant women and children;

3) reduce non- communicable diseases.



702 Zane Zeile

Health Economics Centre (2010) has developed policy results, action results and resultative indicators

to precisely show the goals and indicators of the guidelines. Indicator is a measure which shows when a

goal has been achieved.

There are several policy results, action results and resultative indicators that relate to maternal and

children’s health.

Policy result (A1): average newborn life expectancy has increased. Resultative indicators: average

newborn life expectancy for men (in years) has increased from 69.1 years of life in 2014 to 71.1 years of

life in 2017.

Action result (C1): informing of parents about effects of substance abuse on pregnant women’s and

fetal health. Resultative indicator: rate of smoking pregnant women has decreased from 9% in 2014 to 8%

in 2017 (Health Economics Centre, 2010).

From the results it is estimated that only very small improvements in health indicators have ocurred. It is

especially alarming regarding infant mortality and pregnant women, who have smoked during pregnancy.

Instead of setting the target low not to compromise the policy developers in case the target is not reached,

effective strategies should set high target goals to improve maternal and children’s health. Two important

indicators have not been shown regarding maternal health – maternal mortality and antenatally uncared for

women. These indicators are rising, therefore should have been included. Lack of those indicators might

result in lack of monitoring and diminished improvement in care as well and acess to care.

Evaluation of “Report on achieving goals set in public health strategy for 2004-2011”

“Report on achieving goals set in public health strategy for 2004-2011” is a document showing the

progress in achieving the set goals. Many goals relating to the health of mother, infant and children’s

health have either not been reached or only partially reached. The causes preventing the achievement of

goals were not analysed in this document. If they had been analysed, the goals might have been reached

more timely or completely. The third goal stated in the document is that by 2010. the health of newborns,

infants and pre-school children has to be improved significantly. The first subgoal required that Latvia be

in the top third European Region states in terms of the quality of work in reproductive health, antenatal,

perinatal and children’s health services. Unfortunately this subgoal has not been reached. The following

indicators of first subgoal of the third goal have not been reached: the number of antenatally uncared

women until 12th week of pregnancy is increasing, the number of Caesarean sections is increasing,

mother mortality is very high. Three more subgoals relating to children’s health, as well as life

expectancy have not been reached.

3. Intersectoral collaboration

Intersectora collaboration is an important trend in both public health administration and in improving

maternal and children’s health. Many institutions, ministries and local-self governments are included in

“Maternal and children’s health improvement plan for 2012-2014” and “Public Health guidelines for

2011-2017”. Nutbeam (1998 a, in Wagemakers et al (2010) has defined intersectoral collaboration as “a

recognized relationship between part or parts of different sectors of society which has been formed to take

action on an issue to achieve health outcomes or intermediate health outcomes in away which is more

effective, efficient and sustainable than might be achieved by the health sector acting alone.”

Intersectoral collaboration in “The plan for improvement of maternal and children health for 2012-2014”

main calls for intersectoral collaboration in mainly involving NGO’s in informal education in sexual and

reproductive health for adolescents and youth because they have longer experience in this area. It also calls



Zane Zeile 703

for education in family planning and education in schools regarding these issues Here the Ministry of

Education and schoolteachers work as a team. Nutbeam (1998a in Wagemakers et al (2010) thinks that

health education, e.g., communication of information, skills and confidence necessary to take action to

improve health in itself is not enough to bring about behavioural effects. Therefore reorientation towards

health promotion, in particular community action in health, is needed and is now noticable.

The plan encourages cooperarating among state institutions, local self- governments and NGOs in

adolescent and youth sexual and reproductive health education. In 2011. the guidelines for local self-

governments in health education were confirmed. This will support local self-governments in sexual and

reproductive health education and support activities. To implement these guidelines beginning from 2012, it is

planned to introduce local self-governments coordinator net that will be responsible for public health issues.

Several local self-governments (Riga, Rēzekne, Talsi) have already been active in organising specialist work

groups in information exchange about violence against children. Primary health specialists and media should

play role in educating young parents about violence against children and children safety. (Ministry of Health,

2012). WHO and EU institutions also should be team players along with government, local self-governments

and NGO’s. The key players, who ensure intersectoral collaboration in implementation the “The plan for

improvement of maternal and children health for 2012-2014” are the following: The Ministry of Health,

Ministry of Welfare, World Health Organisation, National Health Agency, Association of Latvian

Gynecologists and Birth specialists, Health Inspection, Disease Prevention and Control Centre, Riga Stradiņš

University.

Conclusions

1. Analysis of data and time-series show that the indicators of maternal and infant health during period

2000-2012. have not improved much. Infant, perinatal and neonatal mortality have decreased during the

period 2000-2012, but these indicators fluctuate from year to year, and do not indicate an overall

downward trend. Maternal mortality remains high. Antenatal care started from 12 th week of pregnancy

has desreased from 92.9 in 2003 to 88.3 in 2011. Most of the indicators are below EU average.

2. The policy document analysis shows that diminished number of women who have started timely

pregnancy care might be explained by changes in social benefit system, because these indictors

correspond to the cessation of twoforld child birth benefit.

3. There are serious drawbacks in “The strategy of maternal and children health care” (2003), when

compared with “The plan for improvement of maternal and children health for 2012-2014” and

“Guidelines for public health for 2011-2017”. In the first document there is a lack of SMART criteria

for goals, fiancial resources, responsible insitutions and time frame are not indicated. The latter two

documents are well prepared, with the SMART criteria present. In time, the policy documents have

improved in many aspects.

4. Intersectoral collaboration mentioned in “The plan for improvement of maternal and children health

for 2012-2014” focuses sexual and reproductive health education for adolescents and youth. The team

players here are schools, NGO’s and local self-governments. Violence against children has been

recognized as a problem, which has not yet fully been researched. Local self-governments, which

have started work groups in information exchange in violence against children are indicated.

Proposals

1. Trends in perinatal mortality and maternal motality asks for more detailed research on causes of poor

maternal and infant health.



704 Zane Zeile

2. Well-functioning perinatal care-system should be created and a perinatal and maternal mortality audit

be implemented. (Wolfe, 2012) states that prental care can help to undo past harms, alter risky

behaviours, build capacity for health. Because the pregnant woman is the intended recipent of

services, her compliance and satisfaction tends to be primary. Goals that focus on the mother’s health

include decreasing maternal mortality, decreasing short-term maternal diseases and generally

improved maternal health and well-being.

3. Policy document development might be improved by creating policy briefs before developing

strategies, guidelines or plans. (Lavis et al, 2009) describes that policy briefs allow to mobilise a full

range of research evidence for a high priority issue. It can be of help to peolpe who are responsible for

making desicions about health policies and programmes and those who support policy makers.Policy

briefs take much shorter time to develop and allow to consider whether it is a high priority issue which

is being addressed. The policy brief should describe the problem, costs and consequences of options to

adress the problem, and the key implementation considerations.

4. Intersectoral collaboration should be strengthened and developed between ministries, local self-

governments, NGO’s and foreign organisations (EU, WHO, UNICEF). Policy developers and local self-

governments as well as other partners might use the model developed by Wagemakers et al. (2010). The

models or framework has structured key variables. Variables that local collaboration partners might use

are regard for participant’s expectations, competences, experience, expertise. Variables pertinent to

parnerships are: the role, task and responsibility and structure, leadership management. The evaluation of

outcomes should be based on percieved effectiveness, benefits and costs.

5. Programs for improving adolescent’s health should be developed to reduce the impact of films, media,

advertisments and marketing that create unhealthy habits such as smoking and excessive alcohol use,

obesity and sedentary lifestyle.

Bibliography

Bronnum-Hansen Henrik, 2000. Socioeconomic differences in health expectancy in Denmark,

Scandinavian Journal of Public Health, 28, 194 p. [Online] Available at: http://sjp.sagepub.

com/content/28/3/194.

Caldwell and Mays, 2012. Stydying policy implementations using a macro, meso and micro frame

analysis: the case of Collaboration for Leadership in Applied Health Research (CLAHRC)

programme, Research Policy and Systems, 10, 32 p. 10/1/32.

Central Statistical Bureau of Latvia, 2011. Demography 2011, Riga: Central Statistical Bureau of Latvia,

pp. 86-87.

Hogan C. Margaret et al., 2010. Maternal mortality for 181 countries, 1980-2008: a systematic analysis of

progress towards Millenium Development Goal 5, Lancet, 375: pp. 1609-1623. [Online] Available at:

http://www. thelancet.com.

Lavis et al, 2009. SUPPORT Tools for evidence – informed policymaking 13: preparing and using policy

briefs to support evidence-informed policymaking, Health Research Policy and Systems, Suppl 10:

13 p. [Online] Available at: http://www.health-policy-systems.com/content/7/S1/s13.

Mackenbach et al, 2008. Socioeconomic inequalities in health in 22 European Countries, The New

England Journal of Medicine, 358, pp. 2466-2481.

Mackenzie Mhairi, 2008. “Doing” public health and “making” public health practitioners: Putting policy

into practice in “Starting Well”, Social Science and Medicine, 67, pp. 1028-1037. [Online] Available

at: http://www.elsevier.com/locate/socsciemed [Accessed 14 February 2013].

Ministry of Health, 2012. Plan for improvement of maternal and children health for 2012-2014, Riga:

Ministry of Health, pp. 10, 14-15, 26-28, 38-57.

Ministry of Health, 2011. Public Health Guidelines for 2011-2017, Riga: Ministry of Health, pp. 9-10.



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Ministry of Health, 2004. “Public Health Strategy” implementation action program for 2004-2010, Riga:

Ministry of Health.

Ministry of Health, 2003. Strategy of maternal and children health care, Riga: Ministry of Health.

The Order of Ensuring Help for Deliveries, 2006. The rules of Cabinet of Ministers, No. 611, 25 July

2006, Riga.

Partnership for Maternal, Newborn and children’s Health, 2010. Global strategy for woman’s and

children’s health, UN Secretary General.

Public Health Agency, 2009. Maternal and children health during perinatal period, Riga: Public Health

Agency, pp. 9, 19-23.

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Riga: Public Health Agency.

Richter et al, 2009. Socio-economic differences and adolescent health, Social Science and Medicine, 69,

pp. 396-403.

Tabuns et al, 2006/2007. Latvia. Human Development Report. Human Capital, Riga: University of

Latvia, Institute of Social ad Political Research.

Trapencieris, Māris. Women, who have used dependency creating substances and their newborns. Riga.

Wagemakers et al, 2010. Community Health Promotion: a framework to facilitate and evaluate supportive

environments for health”, Evaluation and Program Planning, 33, pp. 430.

Wikstrom E. and Dellve L., 2009. Contemporary leadership in health care organisations: fragmented or

concurrent leadership, Journal of Health Organisation and Management, Vol. 23, Iss 4., 411 p.

Wolfe W. Matthew, 2012. Mother and child: a multi- determinant model for maternal and infant health

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706 Anna Zhigalova

CONSUMER ATTITUDES AND BEHAVIOUR

Anna Zhigalova, University of Latvia, Latvia1

Abstract. Ability of attitudes to predict behavioural intentions continues to be a

major focus of theory and research. This article reviews theoretical framework on

attitude and behaviour correlation that experiences significant progress along with the

changing environment and covers research that is investigating behavioural differences

through various lifestyle segments. Sparkling wine category research investigates

consumer attitude to the category and particular brands from a lifestyle segmentation

perspective. Through understanding of brands’ positions in mind of consumers (brand

continuum, brand attraction, image, levers) according behavioural reactions are

estimated, evaluating how rational and emotional brand attractiveness influence the

intention to act (willingness to buy the brand, to recommend or to pay premium price).

The study confirmed that there was a significant association between the lifestyle of the

consumers and the brands used. It was concluded that consumers often choose products,

services and activities over others because they are associated with a certain lifestyle.

Key words: attitude-behaviour relation, intention, lifestyle

JEL codes: D03, M31

Introduction

Ability of attitudes to predict behavioural intentions continues to be a major focus of theory and

research. Significant amount of consumer literature is devoted to the attitude-behaviour relationship

where attitude is treated as a function of beliefs and associated values (Bass and Talarzyk, 1972; Kraft,

Granbois and Summers, 1975). The attitude concept played a central role in scientific attempts to

understand human thoughts and behaviour. Throughout the 20th

century, the concept has had a

tremendous impact on the social sciences. Perhaps the most fundamental assumptions underlying the

attitude concept are the notion that attitudes, in some way, guide, influence, direct shape or predict actual

behaviour.

Lifestyle is the most holistic segmentation approach that takes into account everything that might help

marketers identify and reach desirable target markets (Gonzalez and Bello, 2002). Typically, a traditional

lifestyle analysis segments markets using variables from the social sciences (e.g., psychology, social

psychology) in combination with the commonly used demographic descriptors (e.g., age, race, sex). The

underlying premise is that people who are similar in terms of such things as attitudes, opinions,

motivation, orientation, access to resources, values, and interests are also similar as consumers. Segments

are defined in terms of how consumers choose to spend their time and money. They deal with everyday

behaviourally oriented facets of people as well as their feelings, attitudes, interests and opinion. A

lifestyle marketing perspective recognizes that people sort themselves into groups on the basis of the

things they like to do, how they like to spend their time and how they choose to spend their disposable




Anna Zhigalova 707

income. Lifestyle is an important concept used in segmenting markets and understanding target

customers, which is not provided by the study of demographics alone. Many researchers have focused on

identifying the lifestyle of the consumers’ to have better information about them.

Demographics do not give a complete picture of the consumer, thus hampering the marketer in

segmenting the market to its full potential (Cooper, 1984). Bone (1997) indicates that the use of

demographic characteristics such as age, income and employment status can be misleading factors while

segmenting markets. The use of chronological age as a tool for segmentation is not as closely related to

purchase behaviour as the psychological age (Barak & Rahtz, 1999; Barots, 1990). Though income is

highly related to buying behaviour, it is generally used in segmenting the market; but it does not take into

consideration factors such as activities, interest, health (Bone, 1995; Burnett & Wilkes, 1989; Moehrle,

1993). Social class adds a greater depth to demographics but it has to be supplemented by other

information to give a meaningful insight of the individual characteristics. Lifestyle segmentation has been

a very useful concept for marketing and advertisement planners. (Wells and Tigert, 1971)

By incorporating psychographics information with demographics, the marketer will better understand

the wants and needs of the consumers. Psychographics was a term first introduced by Demby (1974) putting

together psychology and demographics. Psychographic or Lifestyle refers to consumers’ activities Interests

and Opinion. More specifically it focuses on what people like to do, what are their areas of interests, and

what are the opinion people hold on various matters (Lazer, 1963, Plumer 1974). Hence lifestyle patterns

provide broader views about the consumers. The basic premise of lifestyle research is that the more the

marketers know and understand their customers, the more effectively they can communicate to them and

serve them. (Kaynak and Kara, 1996). This study used the lifestyle analysis to identify market segments.

The main purpose of this study is to empirically examine the association between the consumers’ general

life styles and their consumption patterns within the sparkling wine category.

Theoretical Background

Earlier researches on attitude correlation with consumer behaviour was concerned primarily with

demonstrating the predictive validity of the attitude construct (Wilkie and Pessemier, 1973) and has been

demonstrated that changes in beliefs lead to changes in attitude (Lutz, 1975), that people combine belief

and evaluation in the formation of an attitude (Bettman, Capon and Lutz, 1975). Attempts to predict

behaviour from attitudes are largely based on a general notion of consistency. It is usually considered to

be logical for a person who holds a favourable attitude toward some object to perform favourable

behaviours, and vice versa.

According to Ajzen et al (1977), attitudinal and behavioural entities may be viewed as consisting of

four different elements: the action, the target at which the action is directed, the context in which the

action is performed, and the time, at which it is performed. The generality or specificity of each element

depends on the measurement procedure employed. Given action is always performed with respect to a

given target, in a given context, and at a given point in time. Criteria based on multiple observations of

behaviour generalize across one or more of the four elements. For example, when the behavioural

observations constituting the criterion measure involve a very heterogeneous sample of targets, the target

element is essentially left unspecified. However, when the different targets constitute a more

homogeneous set, their common attributes determine the target element. Similar considerations apply to

the definition of the action, context, and time elements.

The central thesis of Ajzens’ ‘Attitude-Behavior Relations: A Theoretical Analysis and Review of

Empirical Research’ is that the strength of an attitude-behaviour relationship depends on the degree of

correspondence between attitudinal and behavioural entities. Considering target and action elements alone, two

attitudinal predictors can be identified that deserve special attention. The most common measure specifies a



708 Anna Zhigalova

given target without reference to a particular action. This predictor may be termed attitude toward a target. Of

less frequent use is attitude toward an action, a predictor that specifies both action and target elements. A

similar distinction can be made with reference to behavioural criteria. When the criterion is an index based on

observations of heterogeneous behaviours with respect to a given target, only the target element is specified

and the resulting measure may be called a multiple-act criterion. When only one behaviour toward a given

target is observed, both target and action elements are specified and we obtain a single-act criterion.

Two major distinguishable conceptualizations of attitude could be defined in the literature. Multi-

dimensional that consider attitude to be a complex construct comprised of two or more components. In

accordance with this view, Krech, Crutchfield and Ballachey (1962) define attitude as an enduring system

of cognitions, feelings and response dispositions centered about a single object.’ Also, Rosenberg and

Hovland (1960) describes attitude as a ‘predisposition to some class of stimuli with cognitive, affective

and behavioural responses.’ Attitude-behaviour relationship are considered to be stronger when the

components are consistent (Rosenberg and Hovland, 1960; Rosenberg, 1968 and is suggested that

cognitive, affective and conative evaluations of objects are distinguishable aspects of attitude and that

simultaneous consideration of all three components should be most predictive of overt behaviour

(Greenwald, 1968). Failure to find a consistent direct relationship between attitude and behaviour may be

due to a failure to measure people’s standing on all three components of attitude and to employ these as

simultaneous and/or independent predictors of behaviour.

The major alternative considers attitude as a single affective construct. For example, Thurstone

defines attitude as “the affect for or against a psychological object” (1931). Fishbein (1967) argues that

scaling techniques have in common the characteristic that they place individuals on a dimension of affect.

This affect for or against an object is typically inferred from an assessment of people’s beliefs about the

object and the evaluative aspect of those beliefs. Therefore, alternative approaches to the measurement of

attitude provide alternative measures of the same thing and should yield the same results. Obtained

differences among alternative instruments in measurement of an attitude, according to this approach,

would be due to measurement error and not the assessment of alternative components.

A third and intermediate position is maintained in the paper “Attitude Measurement and Behaviour

Change: A Reconsideration of Attitude Organization and Its Relationship to Behaviour” by Richard P.

Bagozzi and R. Burnkran (1979). According to their view, attitude is a complex construct comprised of

cognitive and affective components. These components simultaneously account for behavioural

intentions. These intentions, in turn, lead to overt behaviours.

Katz and Stotland (1959) and Rosenberg (1968) point out that all true attitudes must have both

cognitive and affective content, although they need not include a conative component. Similarly,

Rosenberg (1968) stresses that, with the exception of cognitive dissonance, most of the consistency

theories give only token recognition to the definition of attitude as an internally consistent structure of

affective, cognitive and behavioural components; but, in practice, the behavioural component is usually

treated as a dependent variable. The two component attitude position is consistent with the fact that self-

reported behaviours and stated intentions to respond have frequently been treated as dependent effects of

affective and/or cognitive variables (e.g., Tittle and Hill, 1967; Warner et al, 1969, Rogers and

Thistlethwaite, 1970). Intentions appear to be at a lower level of abstraction than the cognitions and

affective feelings on which they are based.

Ajzen summarized theories of predicted behaviour in his study ‘Nature and operations of attitudes’

(Annu. Rev. Psychol. 2001): most studies concerned with the prediction of behaviour from attitudinal

variables were conducted in the framework of the theory of planned behaviour (Ajzen 1991) and, to a

lesser extent, its predecessor, the theory of reasoned action (Ajzen & Fishbein 1980). According to the

theory of planned behaviour, people act in accordance with their intentions and perceptions of control

over the behaviour, while intentions in turn are influenced by attitudes toward the behaviour, subjective

norms, and perceptions of behavioral control. The cognitive foundations of these factors are consistent

with an expectancy-value formulation. Support for the theory in general is summarized in a meta-analysis



Anna Zhigalova 709

(Armitage & Conner 2000a) and a review of the literature (Sutton 1998), and another review summarizes

its applications to health-related behaviour (Conner & Sparks 1996).

The lifestyle concept was introduced by Bell (1958), Rainwater, Coleman and Handel (1959), and

Havinhurst and Feigenbaum (1959), pointing to its potential significance in understanding, explaining

and predicting consumer behaviour. William Lazer introduced the concept of lifestyle patterns and its

relationship to marketing in 1963. He defined lifestyle pattern as a systems concept. It refers to a

distinctive or characteristic mode of living, in its aggregate and broadest sense, of a whole society or

segment. The aggregate of consumer purchases, and the manner in which they are consumed, reflect a

society’s [or] consumer’s lifestyle. Moore (1963) suggested still another definition of lifestyle to bridge

conceptual and operational interpretations of the term. The term “life style” suggests a patterned way of

life into which people fit various products, events or resources. It suggests that consumer purchasing is an

interrelated, patterned phenomenon, products are bought as part of a “lifestyle package”.

Weber (1922) already used the term “Way of life” and the term “lifestyle” for persons in a certain status-

group, based on as well social economic as on cultural resources. Lifestyle is described as ‘the behaviour

and rules used within a certain status group in those social interactions that are outside the economic sphere,

which one regards in order to belong to a social group and by which one can distinguish oneself from

others’ (Ouwehand et al). This behaviour is led by the individual’s choices but these choices take place

within a limited number of opportunities, depending on one’s structural position in society. Economic

classes and status groups are in this way connected but do not completely coincide. Decades later Herbert

Gans (1991) distinguished five ‘ways of life’ for urban residents. From the end of the seventies, the work of

Bourdieu has been very influential (Parker, 2004; Devine & Savage, 2005). Bourdieu builds on the work of

Weber and distinguishes economic, cultural and social capital. Lifestyles are seen as a product of the volume

and the interaction between economic and cultural capital (Bourdieu 2001). Ganzeboom (1998) states that

the important difference in stated preferences and revealed preferences of different generations have not

received much attention. Bourdieu assumes an obvious path of someone’s life, but people make also

rationale choices (Anderiesen and Reijndorp 1999). Gerhard Schulze states in his book

‘Erlebnisgesellschaft’ that the cultural hierarchy has lost ground to a much more horizontal experience

society like a market model, due to growing wealth and opportunities (in Germany). “Where the cultural

capital of Bourdieu will be built up through the years according to the lines of the philosophy of life, the

choice on the experience market is a question of the moment. Why shouldn’t these choices differ from

moment to moment and from domain to domain?” (Van der Wouden and Kullberg, 2002). Jansen states

after describing the way lifestyle has been conceptualized in different disciplines: “The approaches show

important differences in their definition of lifestyle and in the factors through which it is expressed and

through which it can be measured. The concept of lifestyle may vary from a limited characteristic to a broad

spectrum of behaviour and various psychological and social variables.

Research on the sparkling wine category

The research investigates consumer attitude to the category of sparkling wines in general and concrete

brands in particular and through understanding of brands’ positions in mind of consumers (brand

continuum, brand attraction, image, levers) estimates according behavioural reactions, evaluating how

rational and emotional brand attractiveness influence the intention to act (willingness to buy the brand, to

recommend or to pay premium price).

Research methodology: quantitative survey, face-to-face interviews. Target group: Inhabitants of

Latvia, aged 18-74, drink champagne/sparkling wine at least once per three months. Sample size: 511

target group representatives.



710 Anna Zhigalova

The research designed to identify how consumer’s attitude towards brands influence behaviour

through Brand Potential Index executed by GfK Latvia.

Acceptance of Premium

PricingQuality

Brand Awareness

Uniqueness

Identification with Brand

Empathy with the

Brand

Confidence in the Brand

Willingness to recommend

Brand

BuyingInterest

Brand Bonding

actio

n-orie

nted facets rational facets

facetsemotional

BrandPotential

Index

Source: GFK Research

Fig. 1. Brand Potential Index

The Brand Potential Index is operationalized through 10 different facets. It measures intersectorally

the attractiveness of a brand according to the perception of customers. The Brand Potential Index (BPI)

reflects their emotional and rational valuation as well as the behavioural willingness vis-à-vis the brand

and therefore comprises all relevant aspects of the attitudinal brand strength.


Fig. 2. Brand Potential Dimensions



Anna Zhigalova 711

This measure allows for a valid picture of the relative attractiveness of the brand within its

competitive environment and makes a future-oriented evaluation of the brand success possible.

In BPI dimensions consumer’s attitudes towards brands are measured – how emotional and rational

attitude leads to the behaviour – willingness to buy the brand, pay premium price and willingness to

recommend.

Among this competitive set, Rīgas Šampanietis has the highest scores, winning in terms of rational

and emotional attitude from consumers and, accordingly, willingness to act.

The weakest sides of Rīgas Šampanietis are price premium (the target group is not willing to pay

more for this brand) as well as Attachment.


Fig. 3. Brand Potential Dimensions

If comparing to Martini Asti, Rīgas Šampanietis is weaker in most of the facets, except awareness,

scoring the worst particularly in rational attachment. Based on these diagrams could be concluded that

attitude has strong relation to the behaviour of consumer’s brand choice and loyalty.

The most attractive for the target group and thus the strongest brand from all the brands observed is

Martini Asti. Rīgas Šampanietis is quite close and can be marked as one of the strongest brands in the

market. To maintain or improve it’s positions marketing strategy of acquiring stronger emotional link

with the consumers required.

If looking at the existing and potential target group of Rīgas Šampanietis, we can see that it is quite

similar to the Champagne/ sparkling wine consumer on average – the largest segment is Open-minded

(more young people, with higher education, searching for self-realization and enjoyment of life). At the

same time, there are more than on average segment Settled (which is older target group, traditional-

oriented people, desiring peace and harmony) representatives among the Rīgas Šampanietis regular

consumers.



712 Anna Zhigalova


Fig. 4. Brand Potential Score

To sum up, – Dreamers, Adventurers and Open-minded covers the 45% of the Rīgas Šampanietis

customers and is recommended direction for the further communication. Still, it has to be taken into account

that these target groups are highly occupied by the main competitor of Rīgas Šampanietis Martini Asti.


Fig. 5. Consumer Segments vs. Brand Preference



Anna Zhigalova 713

The largest segment in the Champagne market is Open-minded, it covers almost the third part of the

market. There are more settled segment representatives among Rīgas Šampanietis regular consumers than

on average in the market and also comparing to the other brand consumers. There are smaller number of

adventurers among Rīgas Šampanitetis consumers, comparing to other brand consumers, as well as

average in the market.


Fig. 6. Structure of Value Orientation and Drivers of the Consumption

As a research results showed, sparkling and Champagne category is preferred by open-minded

segment, which is in the sector ‘to live a passionate life’, interested in adventures, fun, freedom and

innovations. Rīgas Šampanietis is also strong in settled segment that is characterized by being devoted to

traditions, modesty and precaution.

Conclusions

Through evolution of studies, attitude-behaviour relationship remains a central element in theoretical

as well as applied work, based mainly on the assumption that attitudes can explain and predict social

behaviour. When empirical evidence concerning the attitude-behaviour relationship appeared to

challenge, some investigators came to the defence of the attitude construct by questioning the validity of

the instruments used to assess attitudes. Other investigators either resigned themselves to the conclusion

that attitudes are poor predictors of behaviour or suggested that their impact on behaviour is moderated by

situational factors, by personality traits, or by characteristics of the attitude itself. Attitude-behavioural

path depend on a complex of various determinants, as latest researches report, it may vary if considering

cross-national differences, or different product groups, or different consumer age groups or different

lifestyles.



714 Anna Zhigalova

Concepts of life, values and intentions of the consumers are so multifaceted that demographic target

group analysis and one-dimensional target group models often are too limited to understand consumer

behaviour and to create marketing activities oriented to their needs. Lifestyle approach is an instrument to

investigate values, behaviour and interests of the consumers, to allow marketing activities to be focused

to the target group specific needs and use in the complete marketing process.

In the 21st century, “Lifestyle Marketing” has become the magic buzzword to enthral customers after

the 80s “Niche Marketing” and the 90s “Branding” craze. Which allows to center promotional approach

on the interests, values, attitudes and way of life of consumer target group. In lifestyle marketing one

categorizes customers based on their interests, activities and opinions. Lifestyle marketing attempts to

group customers according to some amalgamation of three categories of variables: activities, Interests,

and Opinions and identifies the potency of a customer’s chosen lifestyle for determining the sort of

products to be purchased and the specific brands that are further likely to appeal to the chosen lifestyle

segment. Lifestyle marketing has assumed a new paradigm in today’s competitive business world.

Lifestyle Marketing necessitates and works best when companies are able to connect with the lifestyle of

their existing and potential customers by developing effective marketing strategies that seamlessly fit

their way of living. It provides tremendous opportunities to the companies to directly target a specific

type of consumer who will most likely be an enthusiast of the company’s specific products and thus,

provide a competitive business advantage to the company and generate more business.

The paper gives an overview of the theories according to the model of the consumer behaviour

process. The aim of the article was to give a view on consumer attitude – behaviour relationship, showing

how attitudes differ between lifestyle segments, particularly illustrated by a sparkling wine research and

to support the assumption that consumers often choose products, services and activities over others

because they are associated with a certain lifestyle.

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