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ISSN 0265-2323

Volume 26 Number 1 2008

Bank Marketing
For the financial services sector
The future of retail banking
Guest Editor: Kent Eriksson

International Journal of

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International Journal of Bank Marketing


For the financial services sector

ISSN 0265-2323 Volume 26 Number 1 2008

The future of retail banking


Guest Editor Kent Eriksson

Access this journal online ______________________________ Editorial advisory board ________________________________ Guest editorial ___________________________________________ Population ageing: opportunities and challenges for retail banking
Jessica Lindbergh, Ruth-A da Nahum and Sofia Sandgren _____________

2 3 4

CONTENTS

Basic values and objectives regarding money: implications for the management of customer relationships
Margit Raich __________________________________________________

25

Industry-embedded financial decision making: the case of a fashion firm


Sara Jonsson __________________________________________________

42

Collaboration to improve local business services: lje Project in Sweden the Norrta
Amy Rader Olsson _____________________________________________

57

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EDITORIAL ADVISORY BOARD


Russell Abratt Nova Southeastern University, USA Dr Frank B. Abramson Relationship Consulting Group Ltd, UK Dr Mohammed Almossawi University of Bahrain, Bahrain Professor Michael Baker Westburn Publishers Ltd, UK Professor Ashish K. Banerjee Indian Institute of Management, India Professor A. Tansu Barker Brock University, Canada Professor James G. Barnes Memorial University of Newfoundland, Canada M.M. Bloemer Professor Dr Jose University of Nijmegen, The Netherlands Mark Colgate University of Auckland, New Zealand Professor Donald W. Cowell University of Central England, UK Professor Jean-Charles Chebat HEC Montreal School of Business, Canada Professor Leslie de Chernatony The Birmingham Business School, UK Professor Christopher J. Easingwood Manchester Business School, UK Professor Christine Ennew University of Nottingham Business School, UK Professor Barry Howcroft Loughborough University, UK Dr Barbara R. Lewis Manchester School of Management, UK Professor Arthur Meidan Sheffield University, UK Professor Luiz Moutinho University of Glasgow Business School, UK G. Lynn Shostack Joyce International Inc., USA Dr Kate Stewart University of Ulster at Jordanstown, Northern Ireland, UK Dr Trevor Watkins Head of Education and CPD, The Actuarial Profession, UK Professor Stephen Worthington Monash University, Australia Professor Mike Wright University of Nottingham, UK Dr Ugur Yavas East Tennessee State University, USA Dr Mosad Zineldin Va xjo University, Sweden

Editorial advisory board

International Journal of Bank Marketing Vol. 26 No. 1, 2008 p. 3 # Emerald Group Publishing Limited 0265-2323

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Guest editorial
About the Guest Editor Dr Kent Eriksson is Professor of Retail Banking at the Centre for Banking and Finance (CeFin) at the Royal Institute of Technology (KTH) in Stockholm, Sweden. He is Vice Director and Head of Research at Cen. His research covers retail banking and rm growth. He is particularly interested in how banks and customers behave when they interact, how they perceive their exchange, and how they create value. Dr Eriksson has published in the International Journal of Bank Marketing and Journal of International Business Studies, and has also published in such scholarly journals as the Strategic Management Journal, Journal of International Business Studies, Journal of Business Research, International Business Review, Management International Review , etc. Kent Eriksson can be contacted at: kent.eriksson@infra.kth.se

International Journal of Bank Marketing Vol. 26 No. 1, 2008 pp. 4-5 q Emerald Group Publishing Limited 0265-2323

The future of retail banking Ever since Henry Fords methods of mass-producing standardized products were replaced by more differentiated product ranges, rms have increasingly tried to customise their offering to customers. The benets can be huge, as has been shown by the Dells build-to-order system, which makes production more efcient and the product more customized. However, as The Economist (2001) points out, mass market customization typically fails because of differences in managing and organizing production so that the customer meets one rm interface. For example, only one third of customer relationship management processes are successful. The reasons for these problems are very evident in the banking industry. Banks have a long history of conservatism in their business practices, where a large range of more or less standard services have been offered through branches. However, for the past decade, changes in technology, regulation and general economic conditions have transformed the industry. Today, banks attempt to be their clients partner in solving their nancial needs. Even though customers still need to save, borrow, and make transactions, they do it through multiple channels, and with many different combinations of products. The major determinant for the future of banking is the customer. Customers preferences, and in particular the composition of the customer base, their acceptance of the new technology, and new actors will greatly inuence the outcome. The article in this Special Issue by Lindbergh, Nahum and Sandgren shows the drastic effect of demographic changes in banks customer markets. While it is difcult to predict the outcome on customer markets, it is very likely that changes will be considerable, and that future bank customer behaviour and attitudes are important for the future of retail banking. Research on customer behavior has shown that there is considerable inertia to how much and how quickly customers are willing and able to learn, yet little is known about how this learning works. The article by Raich in this Special Issue shows a structured method for exploring customer attitudes and behaviour. It is one example of the way marketers can work to nd a steady course in the future of retail banking. Another approach to the future of retail banking is to ask what business banks currently miss. This is especially relevant with regard to small and medium-sized
The author thanks Swedbank and the Swedish Savings Banks Academy for nancial support.

enterprises (SMEs). Numerous good government investigations have pointed out that banks SME customers do not utilize nancial services as efciently as they could, and that the reason for this to a large extent is the exchange in the bank-SME relationship (Binks et al., 2006; European Commission, 1996; 2003; UK Competition Commission, 2003). Jonssons article in this Special Issue studies a case where a small start-up rm chose alternative funding, despite the fact in order to offer value to each other, the bank and the SME should be aware of each others unique resources. The banks resources are its service offer and its ability to meet individual customer needs through customized services. In meeting these needs, the bank engages its employees, who apply their problem-solving expertise from a vast array of sources inside and outside the rm. Understanding the banks service offer thus often involves understanding the organization, and sometimes also their suppliers and partners. Adding value to the bank could therefore be done by using more of the expertise in the organization, thereby helping it to combine its vast array of sources into one service offering. The SMEs resources can thus be understood in terms of its customer relationships and supplier relationships. Customers have to be the central focus of attention because their way of living determines the needs that banks have to match. As a consequence, future research areas should focus on new ways of exchanging with customers, such as exchange in communities. The article in this Special Issue by Rader Olsson suggests that there are no major hindrances for banks to take a more active part in the development of local networks supporting small rm development. In fact, all other actors, including auditors, local government, external board members and in particular small rms themselves, encourage banks to take greater initiative locally. It is seen as important that banks emerge from their shells and take part in emerging networks. Banks have always been great observers on the local scene, but rarely tend to use that position for the benet of their customers. Together with other important actors banks can create a supporting network that promotes local growth in a community. The future of retail banking is promising, but there is a need to develop knowledge, methods and applicable frameworks to better seize the opportunities that lie ahead. Retail banking can transform societies if it works well, so much so that the 2006 Nobel peace price was awarded to Dr Mohammad Yunus for his work with Grameen Bank. Kent Eriksson Guest Editor
References Binks, M., Ennew, C. and Mowlah, A. (2006), The relationship between private businesses and their banks, International Journal of Bank Marketing, Vol. 24 No. 5, pp. 346-55. (The) Economist (2001), Special report on mass customization, The Economist, 14 July. European Commission (1996), Second Round Table of Bankers and SMEs: Final Report, European Commission, Brussels. European Commission (2003), Creating an entrepreneurial Europe: the activities of the European Union for small and medium-sized enterprises (SMEs), Commission Staff Working Paper, COM (2003) 26, European Commission, Brussels. UK Competition Commission (2003), Report on the Supply of Banking Services by Clearing Banks to Small and Medium-Sized Enterprises within the UK, Vols 1-4, UK Competition Commission, London.

Guest editorial

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0265-2323.htm

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Population ageing: opportunities and challenges for retail banking


da Nahum and Soa Sandgren Jessica Lindbergh, Ruth-A
Centre for Banking and Finance, Royal Institute of Technology (KTH), Stockholm, Sweden
Abstract
Purpose This paper seeks to shed light on the challenges and opportunities demographic transitions bring about to the banking sector. Increasing life expectancy, coupled with an increasing old age dependency ratio has implications for the demand for nancial services. This opens a window of opportunity for the banking sector to adjust its services so as to meet these changes and reap the benet of demographic changes. Design/methodology/approach The paper uses demographic forecasts made by the United Nations Population Division, to which are applied established economic models on life cycle behaviour. Based on the ndings, light is shed on potential scenarios that banks may encounter. Findings The life cycle models predict a higher overall asset accumulation level and a higher savings level, at least initially, in an ageing population. Other life cycle behaviour models point out that individuals risk aversion increases with age, while evidence shows that population ageing exposes individuals to greater risks. This increases the need for households to appropriately diversify and manage the risks they face, and encourages the development of products that are better tailored to these growing needs. Originality/value The paper proposes that banks can contribute to creating nancial stability. Banks can participate in nancial education and consequently increase households motivation to save more and in better ways. Consumer demand encountered by banks is shifting from credit products to savings products. The investment packages currently offered by banks need to adapt to changing needs: combined annuity and life insurance packages are one option. Keywords Savings, Risk management, Personal nance, Older consumers, Demographics, Banking Paper type General review

6
Received 29 April 2007 Revised 18 October 2007 Accepted 24 October 2007

Introduction There is an extensive global demographic transition taking place, albeit fullled to varying degrees in different countries. The proportion of elderly people is getting larger, and within 20 years, only slightly more than 50 per cent of the population in todays richest countries will be of working age, while almost 50 per cent will be dependent (i.e. either too young or too old to work). This transition will of course have great implications for many areas within societies: labour markets, childcare, elderly care and healthcare, to name a few, but also nancial markets. Since much of individuals behaviour regarding spending, borrowing and saving is determined according to where they are within their life cycles, an altered age structure will have consequences for the demand for nancial
International Journal of Bank Marketing Vol. 26 No. 1, 2008 pp. 6-24 q Emerald Group Publishing Limited 0265-2323 DOI 10.1108/02652320810847084

The authors grateful for Finance, to suggestions.

appear in alphabetical order and have contributed equally to the paper. They are valuable comments from seminar participants at the Centre for Banking and the anonymous reviewer, and to Kent Eriksson for helpful discussions and Financial support from Swedbank is gratefully acknowledged.

services encountered by banks. Hence, there are major challenges and opportunities for the banking sector to adjust to these changing demographics, and thereby contribute to making the transition a smooth one. Since there will be relatively few individuals working and paying taxes in the future, it will be of benet to society if individuals entering retirement do so with the funds necessary to live through it, without needing to resort to social welfare institutions. With the world population growing older, leading to an increased level of accumulated wealth, the consumer demand encountered by banks is shifting from credit products to savings products. This trend is apparent in most industrialised countries, as shown by Allen and Santomero (2001). In particular, asset accumulation in anticipation of retirement is of increasing importance to consumers as a result of higher life expectancy and the increasing proportion of the population nearing retirement. Given the growing competition in the banking sector and in light of the demographic challenges this sector faces, banks have been forced to become entrepreneurial and are thus changing their activities away from the traditional intermediation business of taking deposits and making loans. They are instead shifting to other forms of fee-producing intermediary activities such as trusts, annuities, mutual funds, mortgage banking, insurance brokerage and transaction services. Allen and Santomero (2001) show how demand for such activities has recently grown signicantly. Given that the need for and the reality of nancial innovation changes over time, banks need constantly to revise the intermediary role they have in society and adapt continuously to these new needs by restructuring their businesses in order to prosper and maintain their positions in the market. The future winners in banking markets will be those who are rst to reap the commercial benet of demographic changes. This paper starts out with a brief illustration of what kind of demographic transition we are facing, then goes on to describe theories about saving and spending behaviour over a lifetime, and nally touches upon what challenges all this implies for the retail banks. We use demographic forecasts made by the United Nations Population Division, apply established economic models about life cycle behaviour, and from this try to shed light on potential scenarios that banks will encounter. The demographic transition The worlds population is getting older because of longer life expectancy and lower fertility rates in most countries. These developments often interact as countries become richer and healthier, their inhabitants live longer, but also give birth to fewer children. In poorer countries, children have traditionally been seen as investments, while in richer countries it is rather the case that they, at an individual level, require investment. Furthermore, in wealthier countries where women tend to have more career options, they also seem less willing to spend too much time away from the labour market taking care of children. Of course, policy and infrastructure also have their implications; in countries where women can return to work after childbearing without losing too much status and/or income, fertility is often higher. For example, in Norway and Sweden, two countries with long allowances for maternity leave, but also strong laws and regulations prohibiting discrimination against women and parents, the fertility rates are higher than in Japan and Spain, countries where the costs of staying at home with children may be higher in terms of career.

Population ageing

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In this section, we give some illustrations of demographic development in the most developed countries. We generally chose a window of 50 years, from 1975 to 2025; thus, the rst 30 years shown are estimates, while the following 20 are projections. The data stem from the United Nations Population Division (2005). We focus here on the richest industrialised countries, also where the banking sector is obviously well developed. These countries had per-adult incomes above $US10,000 in 1985, and there is a large break in the data to the next group of countries, indicating that $US10,000 is an appropriate cut-off level (Beaudry and Collard, 2003). The countries are: . Australia; . Austria; . Belgium; . Canada; . Denmark; . Finland; . France; . Germany; . Iceland; . Italy; . Japan; . The Netherlands; . New Zealand; . Norway; . Sweden; . Switzerland; . the UK; and . the USA. Figure 1 shows the life expectancy of the inhabitants in these 18 countries. It is a fairly steep and linear increase, going from less than 74 years in 1975 to more than 82 years in 2025. The variation within this group of countries is not large. In 1975, the lowest and highest life expectancies were 72 and 76.3 years, in Austria and Iceland, respectively. In 2025, the projected life expectancies vary between 80.2 (in Denmark and the USA) and 86 years (in Japan). As mentioned above, we not only live longer; we also tend to give birth to signicantly fewer children than before. Figure 2 shows the average fertility rate for these countries, using a longer window to illustrate how much fertility has actually decreased, and how marginally it is expected to increase in the near future. Despite the predicted increase in fertility rates, they are still much short of the replacement rate of 2.1 children per woman. Globally, in 2005-2010, 73 countries or areas may well have fertility levels below the replacement rate and 45 of them are in more developed regions. Furthermore, countries with fertility rates below replacement levels are likely to account for approximately 43 per cent of the worlds population (World Population

Population ageing

Figure 1. Life expectancy

Figure 2. Fertility rate

Prospects, 2007). The three countries with the lowest fertility rates are all former members of the Eastern bloc: (1) Ukraine, 1.15 per cent; (2) Slovakia, 1.19 per cent; and (3) Slovenia, 1.21 per cent. In combination with roughly constant retirement ages, these two effects (increased longevity and decreased fertility rates) will result in an increased old-age dependency ratio (the proportion of those old to those of working age in a population). Figure 3 depicts the average old-age dependency ratio for these countries. As can be seen, within 20 years, the number of workers is likely to be only twice as many as the

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Figure 3. Old-age dependency ratio: 100 60y=15 2 59y

number of potential retirees. Furthermore, there is no reason to believe that the old-age dependency ratio will decrease within the foreseeable future, since life expectancy will continue to increase. A decrease in the old-age dependency ratio requires increased fertility rates, or increased immigration of adults, which is not very likely to occur in most developed countries. It is notable that for both Figure 3 and Figure 4, we used the conventional meaning of working age, i.e. between 15 and 59 years of age. This is not completely accurate in many developed countries, where few adolescents enter the labour market before the age of 20. For example, with this conventional meaning of working age, the old-age dependency ratio is 40 per cent in Sweden for the year 2005; instead, if we calculate the

Figure 4. Dependency ratio: 100 (15 2 59y/total population)

ratio with the working age being between 20 and 59 years of age, the ratio is 45 per cent. Retirement age is also a exible concept, even though there has only been a marginal change in the actual retirement age across the developed world. Finally, in Figure 4, we can see that only slightly more than half of the population is expected to be of working age in 2025. The effect of increased longevity and decreased fertility is slightly accentuated in the near future because of Baby Boomers reaching retirement age. Many countries experienced greatly increased fertility rates following the Second World War, as can be seen in Figure 2. These generations are now leaving, or starting to leave, the labour market, causing a shortage of labour in many of these countries. Following these trends of more elderly people and fewer people of working age, there will be fewer workers to support those who have already retired. Lately, many countries have gone from pay-as-you-go pension plans to fully funded systems. Where this is the case, the old-age dependency ratio might not be of the same importance, although it will still be important. Apart from the cash the elderly receive in pensions, they are still dependent on many other aspects of the welfare system, such as healthcare and other services provided by the public sector. Since individuals in the future will have more years in retirement, as long as the retirement age is not altered, they will also need more income for retirement spending; otherwise, they will have to lower their standards of living substantially during retirement. The increased need for higher savings is partly because of the increased time in retirement, but also because of the increased risk of healthcare spending, which follows increased longevity (Groome et al., 2006). This fact is likely to affect the way many people think about saving for old age, and thereby also their consumption levels during their working years. These demographic changes will therefore have far-reaching consequences for banking systems. Theoretical considerations The life cycle model Demographic changes and specically the ageing of the world population can affect economic dynamics in various ways. The most frequently used tool to model demographic changes on the economy is the life cycle model of savings, pioneered by Modigliani and Brumberg (1954). The savings rate is among the most studied of economic aggregates, reecting its importance in understanding a wide range of economic phenomena. How much society chooses to save today has important implications for the future welfare of the elderly, economic growth, consumption, etc. In its simplest form, the life cycle model of savings assumes that an individual lives for J years, works for j years and enjoys consumption in every period of their life (c1, c2, . . . , cJ)[1]. As time progresses, the real income y that the individual receives increases at a constant growth rate g: yi 1 gi21 y; for all years i 1; 2; . . . ; j. Individuals maximise their lifetime utility, given by:
J X i 1

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b i21 uci ;

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where b is the time discount factor that measures the degree of impatience of the individual, and u(ci) denotes the period utility function and is assumed to be increasing and strictly concave. The individual chooses consumption to maximise the above lifetime utility given the budget constraint:
J X i1

12

X ci yi ; i21 1 r 1 r i 21 i1
j

where the present value of lifetime consumption equals the present value of lifetime income. Households are assumed to be able to borrow, lend and save at the xed common real net interest rate r. The resulting optimal consumption rule states[2]:  j 1g 1 2 1r r c c1 c2 ::: cJ y : 4 r 2 g 1 2 1 r 2J Several straightforward implications follow from this optimal consumption rule. Individuals desire a at lifetime consumption path. An increase in income y increases consumption in all periods of the individuals life. For a given level of income, a higher income growth rate g implies an increased consumption in all periods. For a given retirement age j and a given income y, increasing a persons life expectancy J decreases consumption in all periods. Similarly, for a given life expectancy J and income y, increasing the retirement age j increases consumption in all periods. A change in the real interest rate r, however, has ambiguous effects on lifetime consumption. Given that the objective of an individuals consumption-saving decisions is to smooth consumption over time to maximise overall lifetime utility, savings rates should follow a life cycle pattern. This implies a prole of wealth that rises until retirement and subsequently falls, as individuals run down their assets to fund consumption. Figure 5 shows stylised life cycle proles of labour income, consumption, savings and accumulated savings (assets) based on Kruegers (2004) basic life cycle model. As the individual in the life cycle model is a representative agent, we may easily infer aggregate behaviour. Given that consumption as a fraction of income varies with age, changes in the age structure by denition inuence aggregate savings, investment and capital ows. Based on the basic life cycle model and using a simple simulation analysis, we are able to make straightforward predictions on how population ageing (e.g. in terms of fertility decline and longevity) affects future asset accumulation and savings. An increase in life expectancy. The implications of an increase in life expectancy on aggregate savings are clear-cut. For a given income prole and retirement age, consumption per period declines and savings increase in all periods of an individuals life. This is intuitive given that a given income has to be stretched over a longer lifetime horizon, requiring greater savings for retirement. The standard life cycle model predicts an increase in individual and thus aggregate asset accumulation and savings in response to an increase in life expectancy, as can be seen in Figure 6 [3]. A permanent decrease in the fertility rate. A change in the fertility rate has different short- and long-term implications. To illustrate this in a graph, we can no longer depict

Population ageing

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Figure 5. Income, consumption, assets and saving in the basic life cycle model

Figure 6. Increase in life expectancy

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a representative individuals lifetime consumption and savings pattern, as this no longer illustrates aggregate behaviour as in the previous example in Figures 5 and 6. When introducing a change in fertility rate, the dynamics change over time. The share of the various age groups in the total population changes over time until a new equilibrium results. The long-term implications are straightforward as the shares of the various age groups stabilise, which enables predictions of aggregate consumption and savings. In the long term, a permanent decline in the population growth rate entails a larger fraction of the population in older cohorts[4]. Given that asset accumulation is higher and the savings rate lower among older cohorts (if retired), per capita asset holding would increase and per capita savings would decrease, as shown in Figure 7. In the short term, however, the effect is ambiguous. As the large older cohorts (arising from previous higher population growth) go from being savers to dis-savers, aggregate savings rst increase and then decline, as shown in Figure 7. Consequently, as aggregate asset accumulation is the accumulation/stock of savings, it therefore increases over time until a new, higher, steady state level is attained, as shown in Figure 7. Asset-price meltdown The pending or ongoing entrance of the Baby Boomer generation into retirement age, as is the case in the USA and European countries, has sparked speculation on the consequences this will have for capital markets. Some studies suggest that when this Baby Boomer generation enters retirement age and starts selling off assets to smaller cohorts of workers, this will trigger a so-called asset-price meltdown. Many Baby Boomers have bought assets such as bonds and shares to fund their retirement. It has

Figure 7. Change in aggregate savings and assets following a slowdown in fertility

been argued that these purchases have driven up prices over a couple of decades. Ceteris paribus, the sale of these assets could lead to a decrease in prices given that there are too few people in the smaller generations that follow the Baby Boomers to buy the assets at todays prices. There is, however, little consensus on this hypothesis. Many studies argue that these effects will be relatively minor given that other mechanisms are at work. The openness of capital markets is a potential determining factor in this respect. Capital ows from countries whose populations are relatively old can mitigate declines in returns to capital in these countries and boost wages in recipient countries with relatively young populations. Even though the overall trend in demographic transition is going in the same direction across industrialised countries, there is still a difference in the rate of change of the age structure across countries, or in the timing of the Baby Boomer generation. Given the differences in age structure across countries, both across industrialised countries and more specically across high- and low-income countries, free capital ows can mitigate a potential asset price meltdown. A possible threat to this movement is eventual protectionism movements in both the industrialised and the developing world, which might prevent free capital ows and slow down the rate of growth. Faruqee et al. (2006) examined the macroeconomic implications of trade policy changes and showed that a protectionist surge would lower global growth, leaving global imbalances unresolved[5]. Life cycle risk behaviour While the life cycle hypothesis focuses on overall household asset demand, empirical evidence also suggests that households desire for portfolios of specic asset classes varies with age. Changes in the population age structure can thus have an important effect on the nancial structure as well. One aspect is that individuals risk aversion increases with age. With fewer pay checks in the future, one may be less willing to take on much nancial risk since there will be fewer opportunities to use labour income to cover potential losses. As life expectancy continues to increase and the lifetime remaining becomes more uncertain, the individual becomes more risk-averse with age. Similarly, the duration of assets would appropriately change over the life cycle, with long-duration assets such as equities being more appropriate for young workers saving for pension claims far in the future, and shorter duration assets such as bonds being more relevant for older workers. Empirical evidence shows that an individuals asset mix changes with the life cycle. When allocating savings between nancial assets and housing, an individual will put relatively more savings into housing during the rst part of the life cycle. At a young and family-building age, individuals spend most of their limited savings on housing. However, with age, the individual has probably acquired sufcient housing and at the same time, the need to cope with the uncertainty of remaining lifetime income becomes important. This creates a need to invest for retirement, and that in turn obliges the ageing individual to put an increasing proportion of savings into nancial assets. In particular, steady life expectancy increases because of medical advances make it more necessary than ever to invest for retirement. Thus, the demand for nancial assets increases with age, while that for housing decreases.

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Population ageing exposes individuals and households to greater risk The ongoing trend as we see it today is that, as a direct or indirect consequence of demographic changes, individuals and households are exposed to various types of risks to a greater extent than earlier, even though the risk of dying at any given age is lower than before. First, developments in medical science have contributed to dramatic increases in life expectancy over the past century. However, the additional years gained through this increase in life expectancy are also associated with greater health risks. On the aggregate level, there is a strong correlation between age and health expenditure. However, increased health expenses are not only the result of increased medical needs on behalf of the elderly, but also a result of costly improvements in medical care. Individuals thus face larger health-related risks and expenses as they grow older. Second, a shift in the design of pension plans is evident across developed countries. The shift involves a transition from dened benet pension plans to dened contribution plans, which place larger risk and responsibility on individuals and households. Third, as Agarwal et al. (2006) point out, there is life cycle behaviour in the nancial mistakes individuals make. They found strong evidence that old and young individuals tend to pay higher fees and face higher interest rates than the middle aged. The difference can be explained neither by individual characteristics nor by age discrimination from nancial institutions. This behaviour is hypothesised as being a consequence of the interaction between experience and cognitive decline. The young have high cognitive abilities but little experience, whereas the old have a lot of experience but declining cognitive skills. Whatever the underlying reason, the share of the population that is likely to make more nancial mistakes would tend to increase in an ageing population. The developments in demography, in interaction with what we know about life cycle behaviour, give nancial institutions, and in particular nancial retail institutions, the scope to address these future trends. The fact that individuals, especially in old age, are exposed to larger risks while they at the same time become more risk-averse with age increases the need for households to diversify appropriately and manage the risks they face, and encourages the development of products that are better tailored to the growing needs of individuals. Opportunities and challenges with an ageing population Relevance for retail banking The demographic changes that will occur for an extensive period create opportunities for retail banking. The fact that there will be an ongoing increase in the old-age dependency ratio across the world has opened up a need for households to bear a greater responsibility for managing the nancial obligations that ageing represents. For instance, more and more countries are cutting back on publicly provided benets, such as state-funded pensions and health care (Groome et al., 2006). Thus, there will be a greater demand for nancial products and services to compensate for this shift in liability. There are, however, a number of measures necessary to create an innovative environment for nancial products and services. Some measures can only be accomplished by governments, whereas others may also be provided by institutional

actors, such as banks and insurance companies. However, common to these measures is the need to highlight risk management and encourage long-term savings (Groome et al., 2006). The fact that we live longer today creates worries that individuals may outlive their wealth. This is possible if our savings are insufcient, or if we retire too early and/or spend too much too fast when retired. The nancial challenges created by an increase in the old-age dependency ratio are thus increased long-term savings and investments and knowledge regarding how to manage long-term risks and obligations. Creating an innovative environment Regulatory frameworks. We now offer a few examples of measures creating an environment focusing on risk management and long-term savings. For instance, one way of coping with longevity risk is to use regulatory frameworks, requiring pension funds to have a funding ratio above 100 per cent at almost all times. As such, the risk of being non-solvent is eliminated. According to Groome et al. (2006), this encourages pension funds to adapt a greater asset-liability management focus. Emphasising risk management may in turn encourage retirees and older people close to retirement to invest, while they otherwise might be less inclined towards investment funds because of a sense of high-level risk. Other measures affecting the nancial environment are tax rules, generally designed to give preferential treatment to retirement savings. Tax rules can be used to encourage long-term savings and risk management such as tax deductibility for interest payments on long-term bonds and other long-term saving solutions. As for institutional actors, precautionary behaviour can be stimulated by allowing tax deductibility on additional funding despite a funding ratio above 100 per cent (or whatever the minimum funding ratio requirement) (Groome et al., 2006). However, studies have shown that tax incentives do not really enhance overall savings, but to a large degree only reallocate savings (Organization for Economic Co-operation and Development, 2004). Since an increase in individuals liability towards retirement funding is likely, we can assume that interest in different types of pension fund will increase. However, because of a tendency to reallocate savings rather than increase overall savings, there should be an interest in creating personal investment solutions/portfolios that complement rather than compete with each other. Financial education. Many of these actions are by no means new or unique in nancial markets across countries. For individuals already actively saving for retirement, personal saving portfolios may not be clearly divided into short- and long-term savings. However, a signicant problem for many countries dealing with an ageing population is that their populations are under-saving, and one reason for this could be lack of nancial knowledge. Improving households nancial education would in turn motivate households to save more, and in better ways. For instance, employer-sponsored seminars are positively connected to employees participation rates in pension plans (Groome et al., 2006). Hence, nancial education can create new possibilities for nancial actors since it may increase the number of clients who are interested in their nancial situation. Increased nancial literacy should improve the efciency of nancial intermediation and, as such, create opportunities for new products for individuals saving needs (Groome et al., 2006). Lack of age-related information. Besides the importance of increasing nancial literacy, it is important to improve the quality of information on age-related matters. One issue that inhibits development of new nancial products and solutions is the

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difculty of estimating individuals ageing-related risks. This is due to a lack of availability, reliability and updated data on health care, mortality information and house price movements (Groome et al., 2006). By improving the availability and reliability of data, it would be easier for nancial actors to price and trade risks associated with age-related products. One bank that has discovered a new way of dit Suisse First Boston (CSFB), with its dealing with longevity risk market is Cre longevity index[6]. The longevity index is a standardised measure of expected average lifetime for general populations based on publicly available statistics. Both historical and future estimates are included in the index. The banks intention is to enable structuring and settlement of longevity risk transfer instruments, such as longevity swaps and structured notes. According to Jeremy Bennet, Managing Director and Global Head of CSFBs Structuring Group, the index will help spur the development of a liquid, tradable market in longevity risk (Business Wire, 2005). Todays market and future markets Housing market. Residence and other real estate is the largest asset for many households. Figure 8 illustrates asset composition, real property, nancial assets and debts in selected countries in the year 2000[7]. The gures are based on both reported public statistics and surveys distributed to households in these countries (Davies et al., 2006). In general, we can consider housing as a very important asset for a great deal of near-retirees and retirees in the future. Protecting the value of real estate is therefore of importance. Interestingly, studies have shown that households tend to spend more on consumption if their housing increases in value rather than their stock portfolio (Berg, 2006; Case et al., 2005). Apparently, increased housing value is perceived as a more permanent wealth increase than an increase in the value of the stock portfolio.

Figure 8. Asset composition in selected countries

Home equity release products such as reverse mortgages can provide households with a continuous stream of income after retirement. By enhancing the reverse mortgage market, households that are asset-rich but lack cash can therefore borrow against the equity in their residence without having to sell it (McCarthy et al., 2002, Creighton et al., 2005). However, the reverse mortgage market is not without risks for any of the involved parties. The risk of reverse mortgages is that when the loan becomes due, the property might be worth less than the sales price. This crossover point is a function of longevity, interest rates, home appreciation (both general and specic), and expenses (Mitchell et al., 2006). A concern put forward involving the house market is that housing prices will decline quite drastically when Baby Boomers housing demand is reduced because of old age, and hence a large number of properties will be up for sale (Mankiw and Weil, 1989), while the younger cohorts are less in number. However, other studies show that age has an insignicant or positive effect on housing prices. The possible positive outcome is due to the effect that income and education have on housing demands, and in general, Baby Boomers have good incomes and educations (for an overview, see Mitchell et al., 2006). The market for annuity products. The private insurance market will probably increase in importance as Western countries populations age. Because of longevity problems, many governments have reformed their pension plans and have placed greater responsibility on the individual to save for their retirement. Annuity products are typical insurance against outliving ones assets. An annuity guarantees a lifelong stream of payments. So far, market growth for annuities has not been very large, apart from in the US and UK markets, where they have been quite popular (Mitchell et al., 2006). The reasons for the slow growth of annuities derive from both the potential insurer and insured. Life insurance seem to be more popular than annuities, suggesting that people focus more on the risk of dying rather than worrying about outliving their assets (Brown et al., 2001). For the insurer, the problem or risk lies in the difculty of estimating longevity and consequently putting a competitive price on the product. Estimating how long a person will live is difcult and, to complicate matters further, buyers of voluntary annuities tend to live longer than the general population (McCarthy and Mitchell, 2002) sometimes referred to as an adverse selection and this is a common problem for annuity products. Studies have shown, however, that if the insurer can offer both life insurance and annuity products, it can benet from natural hedging (Cox and Lin, 2005; McCarthy and Mitchell, 2007). Hence, life insurance that covers death could be used to hedge risk associated with annuity products, that of people living too long. Another option to lower longevity risk is to let the annuities run for a period of ten to 15 years instead of a lifetime and at the end of each period, evaluate the possibility of prolonging the annuity. Long-term health care markets. In countries where public programs for health care are more extensive, the pressure for private market solutions concerning healthcare and costs for nursing home and long-term care have not been a major source of concern to date. However, the pressure on these governments age-related costs will probably facilitate the market for healthcare insurance. The protection against a health shock when Baby Boomers are in need of care may increase the interest of insuring against long-term care costs. It is already possible to nd

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countries that traditionally have let the public sector provide for long-term care, but are now open to private market alternatives, such as Australia, Germany, Sweden and the UK. The uncertainty that the future brings concerning the development of technological aid, changing public programs and health improvement contributes to the difculties of developing a private healthcare insurance market. Apart from the uncertainty of how public programs will be designed, lack of information on todays design may indeed negatively impact the development of a healthcare insurance market. Misinformation on public programs and their coverage may contribute to a reduction in the purchase of individual insurance. For instance, in the USA, public programs such as Medicare and Medicaid assist individuals with healthcare coverage, but these programs are based on income, leaving the middle class and the wealthy outside the program. The wealthy, however, tend to self-insure, but the middle class seems to be misinformed regarding eligibility, leaving a large number of people believing that their costs will be covered (Doerpinghaus and Gustavson, 2002; Finkelstein and McGarry, 2003; Mitchell et al., 2006). Such misinformation may act as a brake, creating an underdeveloped healthcare insurance market. The demand for long-term care will be based on societys attitudes on how best to care for the elderly and how in practice the elderly will be cared for. An alternative such as home care may become more or less important. Since the population in general is getting healthier, it is possible to assume that within a household there may be someone able to care for the individual at home, leaving less room and need for institutional care. Such uncertainty about future demands may indeed hamper the market. However, taking different options such as home care or institutional care under consideration may contribute to a new set of products appealing to different groups. Hence, even if the elderly are cared for at home, some care requires help from medical professionals, or such help may at least be desirable. Researchers have proposed an arrangement of combining private long-term care insurance with annuity products (Warshawsky et al., 2002; Murtaugh et al., 2001, Mitchell et al., 2006). Monthly payments provided by the annuity product would be raised if the person insured is disabled. Such a two-in-one product solution may attract a larger public than if each product were sold separately. Brown et al. (2001) believe that such a solution would limit the adverse selection of annuity product buyers, a major risk for sellers of annuities. The adverse selection risk is that buyers tend to be healthier and have lower mortality than the public in general. Concluding discussion Population ageing is a fact. Increasing life expectancy and low fertility rates are the main ingredients of this demographic change. The life cycle models clearly predict a higher overall asset accumulation level and a higher savings level, at least initially, in an ageing population. Other life cycle behaviour models point out that we are also becoming more risk-averse as we age, while evidence shows that at the same time we are increasingly exposed to age-related risks. We have suggested here a few alternative ways of handling the changing needs of bank customers as their age-structure evolves over time. At the core is the fact that since we can expect a much longer time in retirement than was earlier the case, we must also save more money during our years in the workforce, else we will have

to lower our standards of living substantially during the last part of our lives. One alternative option is, of course, that we all work longer and postpone retirement. This is a realistic option. If people postpone their retirement sufciently to compensate for the prolonged time in old age due to increased life expectancies, then we might not have a problem. Individuals will then still be able to support themselves until the end of their lives. However, there is no clear-cut evidence in the literature of retirement age being postponed, or for that matter of retirement being rsa kringskassan, set earlier. A report from the Swedish Social Insurance Board (Fo 2006) shows that there has been a slight trend towards postponing retirement in many OECD countries, although not in all. Iceland, Japan, Ireland and Poland have seen lower retirement ages between 1996 and 2004. However, the delayed retirement trend is not very strong. For example, in Italy, the average retirement age in 1996 was 59.3 years, while it was 59.5 years in 2004, a growth of only 0.2 years over a period of eight years. It is not easy to predict how the current middle-aged generation will adjust its retirement age. The large Baby Boomer generation that is slowly entering retirement age has had the advantage of high lifetime earnings because of good macroeconomic times. Moreover, they have also had generous pensions plans and advantageous loan opportunities, coupled with low ination rates (see Dahlberg and Nahum, 2003). These are indications that this group does not have strong economic incentives to postpone retirement age. With an increase in demand for funds to be available after retirement, there will also be an increase in demand for different investment options while there still is an income stream. This is one area where banks can contribute. Firstly, it might be a good idea to offer widespread information on how best to invest according to expected longevity and willingness to take risks. Secondly, banks can revise/improve the different alternatives offered. Investment packages currently offered by banks need to adapt to changing needs. As mentioned earlier, combined annuity and life insurance packages might be one option, especially if based on longevity indices[8]. As mentioned earlier, changes in the age structure can strain the nancial markets. Banks can contribute to creating nancial stability in their role as intermediaries, although with new tasks, as discussed in the introduction. With the Baby Boomer generation reaching retirement age and selling off their assets, banks can potentially cushion an eventual asset price meltdown. They can contribute to the openness of capital markets and increase capital ows across countries, and make use of the fact that countries have different age structures and thus market structures. The future winner on the banking market is the one that is the rst to restructure and adapt to these demographic challenges and reap additional commercial benet. Finally, is this all a zero-sum game? Is the only consequence of a potentially increased savings rate among retirees-to-be that they will consume less during middle age and more during retirement than what would otherwise be the case? Alternatively, will society as a whole reap the benets? Our belief is that the latter is the case. If the infrastructure to facilitate a prosperous retirement is in place, the stress on the welfare system will diminish and more resources will be available for other areas of the public sector. Thus, we believe that it is in everyones interest banks, individuals and society at large that these institutions work well.

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Notes 1. See, for example, Obstfeld and Rogoff (1996) and Krueger (2004) for an overview of life cycle modelling. The analysis here follows Krueger (2004). 2. We here assume that b1 r 1, which allows us not to make a specic assumption about the form of the utility function. 3. Depending on the structure of the pension system, assuming that increased longevity is coupled with good health, individuals might be inclined to postpone retirement age, in which case the effect on savings is ambiguous. 4. In this example, population growth is parameterised to decrease from 1 per cent to 0 per cent. This special case entails that the population stops growing, and that the age structure of the population goes from having a slight surplus of youngsters to having an equal share of all age groups. In the nal stage, the aggregate savings in the economy thus equals zero, as the share of borrowers in the population equals the share of lenders. 5. Recent examples are opposition to purchases of US rms by companies from China and Dubai, as well as rising protectionist signs in China (see the US-China Business Council report at www.uschina.org/info/forecast/2007/foreign-investment.html). 6. For now, data are only available on the US population. 7. The data do not provide information on all 18 wealthiest countries used earlier in this study. Hence, in this particular case, we have chosen to display a limited number of countries since the basic idea is to only illustrate how assets are composed in some of the wealthiest countries. 8. This applies to the European market, as the Securities Exchange Act of 1934 in the USA limits banks from engaging in insurance markets.

References Agarwal, S., Driscoll, J.C., Gabaix, X. and Laibson, D.I. (2006), Financial mistakes over the lifecycle, manuscript, Harvard University, Cambridge, MA. Allen, F. and Santomero, A.M. (2001), What do nancial intermediaries do?, Journal of Banking & Finance, Vol. 25 No. 2, pp. 271-94. Beaudry, P. and Collard, F. (2003), Recent technological and economic change among industrialized countries: insights from population growth, Scandinavian Journal of Economics, Vol. 105 No. 3, pp. 441-63. ngspriser stabilt samband?, Statistics Sweden, Berg, L. (2006), Konsumtion och tillga available at: www.scb.se/Grupp/Ekonomi/_Dokument/Konstillg.doc Brown, J.R., Mitchell, O.S., Poterba, J.M. and Warshawsky, M. (2001), The Role of Annuity Markets in Financing Retirement, MIT Press, Cambridge, MA. dit Suisse First Boston introduces Cre dit Suisse Longevity Index (SM), Business Wire (2005), Cre 12 December, available at: http://ndarticles.com/p/articles/mi_m0EIN/is_2005_Dec_12/ ai_n15929654/pg_1 Case, K., Quigley, J. and Shiller, R. (2005), Comparing wealth effects: the stock market versus housing market, Advances in Macroeconomics, Vol. 5 No. 1, pp. 1-34. Cox, S.H. and Lin, Y. (2005), Securitisation of mortality risks in life annuities, Journal of Risk and Insurance, Vol. 72 No. 2, pp. 227-52. Creighton, A., Jin, H., Piggott, J. and Valdez, E.A. (2005), Longevity insurance: a missing market, The Singapore Economic Review, Vol. 50 No. 1, pp. 417-35.

Dahlberg, S. and Nahum, R.-A. (2003), Cohort effects on earnings proles: evidence from Sweden, Working Paper No. 2003:11, Economics Department, Uppsala University, Uppsala. m, S., Shorrocks, A.F. and Wolff, E.N. (2006), The world distribution of Davies, J.B., Sandstro household wealth, paper presented at the WIDER Project Meeting on Personal Assets from a Global Perspective, Helsinki, 4-6 May, available at: www.wider.unu.edu /research /2006-2007/2006-2007-1/wider-wdhw-launch-5-12-2006/wider-wdhw-report-5-12-2006.pdf Doerpinghaus, H.I. and Gustavson, S.G. (2002), Long-term care insurance purchase patterns, Risk Management and Insurance Review, Vol. 5 No. 1, pp. 31-43. Faruqee, H., Laxton, D., Muir, D. and Pesenti, P. (2006), Would protectionism defuse global imbalances and spur economic activity? A scenario analysis, Working Paper No. 12704, National Bureau of Economic Research, Cambridge, MA. Finkelstein, A. and McGarry, K. (2003), Private information and its effect on market equilibrium: new evidence from long-term care insurance, Working Paper No. 9957, National Bureau of Economic Research, Cambridge, MA. rsa kringskassan Genomsnittlig pensionsa lder I de nordiska Forsakringskassan (2006), Fo nderna med internationell utblick, Rapport: Analyserar 2006:11, Fo rsa kringskassan, la Stockholm. Groome, T.W., Blancher, N., Ramlogan, P. and Khadarina, O. (2006), Population ageing, the structure of nancial markets and policy implications, Reserve Bank of Australia Conference Volume, Reserve Bank of Australia, Sydney. Krueger, D. (2004), The effects of demographic change on aggregate savings: some implications from the life-cycle model, Capital Markets in the Long Term: Demography, Economic Development and Funded Pension Systems, Center for Financial Studies Conference, Center for Financial Studies, Frankfurt, pp. 71-82. McCarthy, D. and Mitchell, O.S. (2002), Estimating international adverse selection in annuities, North American Actuarial Journal, Vol. 6 No. 4, pp. 38-54. McCarthy, D. and Mitchell, O.S. (2007), International adverse selection in life insurance and annuities, in Tuljapurkar, S., Ogawa, N. and Gauthier, A. (Eds), Riding the Age Waves: Responses to Ageing in Advanced Industrial States, Elsevier, New York, NY. McCarthy, D., Mitchell, O.S. and Piggott, O.S. (2002), Asset rich and cash poor in Singapore? Retirement provision in a national dened contribution pension fund, Journal of Pension Finance and Economics, Vol. 1 No. 3, pp. 197-222. Mankiw, N.G. and Weil, D.N. (1989), The baby boom, the baby bust, and the housing market, Regional Science and Urban Economics, Vol. 19 No. 2, pp. 235-58. Mitchell, O.S., Piggott, J., Sherris, M. and Yow, S. (2006), Financial innovation for an ageing world, Demography and Financial Markets, Australian Reserve Bank Conference, Australian Reserve Bank, Sydney. Modigliani, F. and Brumberg, R. (1954), Utility analysis and the consumption function: an interpretation of cross-section data, in Kurihara, K. (Ed.), Post-Keynesian Economics, Rutgers University Press, New Jersey, NJ, pp. 388-436. Murtaugh, C., Spillman, B. and Warshawsky, M.J. (2001), In sickness and in health: an annuity approach to nancing long-term care and retirement, Journal of Risk and Insurance, Vol. 68 No. 2, pp. 225-53. Obstfeld, M. and Rogoff, K. (1996), Foundations of International Macroeconomics, chapter 1, MIT Press, Cambridge, MA.

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Organization for Economic Co-operation and Development (2004), Tax favoured retirement savings plans: a review of budgetary implications and policy issues, Working Paper No. 1 on Macro-Economic and Structural Policy Analysis, Economics Department, Organization for Economic Co-operation and Development, Paris. Warshawsky, M.J., Spillman, B.C. and Murtaugh, C.M. (2002), Integrating life annuities and long-term care insurance: theory, evidence, practice, and policy, in Mitchell, O.S., Bodie, Z., Hammond, P.B. and Zeldes, S. (Eds), Innovations in Retirement Financing, The University of Pennsylvania Press, Philadelphia, PA, pp. 198-221. About the authors Jessica Lindbergh received her PhD from the Department of Business Studies, Uppsala University, Sweden. She is currently a researcher at the Centre for Banking and Finance at the Royal Institute of Technology. Her research areas are demography, banking, and small and medium-sized enterprises business development. She is the corresponding author and can be contacted at: jelindbe@infra.kth.se da Nahum received her PhD from the Department of Economics, Uppsala University, Ruth-A Sweden. She has been afliated to the Institute of Future Studies and been a visiting scientist at the Harvard School of Public Health. She is currently a researcher at the Centre for Banking and Finance at the Royal Institute of Technology. Her research areas are macroeconomics, demography and health. Soa Sandgren received her PhD from the Department for Infrastructure, Royal Institute of Technology, Sweden. She has since held a visiting appointment at the Department of Economics, the Norwegian Institute of Science and Technology, and is currently a researcher at the Centre for Banking and Finance, Royal Institute of Technology and at the Department of Economics, Uppsala University. Her research areas are microeconomics, savings, human capital and education.

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Basic values and objectives regarding money


Implications for the management of customer relationships
Margit Raich
Department of Strategic Management, Marketing and Tourism, University of Innsbruck, Innsbruck, Austria
Abstract
Purpose The study seeks to identify basic values and objectives from different bank retailing customers by asking them about their views on topics that deal responsibly with money. Based on their experiences, perceptions and expectations, those values and objectives that are of utmost relevance for them regarding their money life are identied. Design/methodology/approach The study is of a qualitative nature, using a total of 60 surveys with open-ended questions to acquire data that are evaluated by the qualitative rule-based method ltigung von Komplexita t), a tool for analysing textual qualitative data. GABEKw (GAnzheitliche BEwa Findings The results show a holistic picture of peoples views concerning money and the role of retail banks. Three main topics are identied: banks and customers responsibilities; trustworthiness; and support service. These issues are discussed based on the basic values and objectives discovered in the context of customer relations. Research limitations/implications The study adds to the discussion of customer relationship management. A more detailed analysis of the results will bring additional illuminating information concerning the main topics identied. The use of a representative sample would allow a precise comparison of sub-categories. Practical implications Alternative research approaches can be useful in identifying the value systems of customers that can be transformed into a companys strategy and its marketing activities. Originality/value In a descriptive account of customers values and objectives concerning money the study shows how this can help us to gain new insights for the management of continuing customer relationships. Keywords Banking, Money, Qualitative research, Customer service management, Relationship marketing Paper type Research paper

Management of customer relationships 25


Received 27 April 2007 Revised 4 October 2007 Accepted 10 October 2007

Introduction Those companies that provide their customers with superior value obtain a competitive advantage. Because of growing competition in the nancial services industry, quality has become an essential issue. The management of service quality can be seen as one of the major challenges for banks. In this regard, relationship marketing is able to focus on value concepts and to consider how value is added to nroos, 1996; Zineldin, 2005; Roig et al., 2006). customer needs (Ravald and Gro Molina et al. (2007) stated the relevance of integrating the consumer perspective in the analysis of relationships. Customers are not primarily connected to the broader service system, but rather to the people in the service organisation (Aldlaigan and Buttle, 2005). Retail banks success depends on the way employees respond to customers expectations

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and needs. Kaynak and Harcar (2005) also emphasise the importance of bank employees because customers usually evaluate the bank based on their experiences with its staff. In this regard, attributes like friendliness, competence, know-how, courtesy, empathy, etc. support perceptions of a positive employee attitude to customers (Kaynak and Harcar, 2005; Gill et al., 2006; Roberts and Campbell, 2007; Baumann et al., 2007). For this reason it is important to develop strategies concerning relationship management that best meet customers needs. Organisations should know what the customer wants, and expect to give value to their chosen set of customers. But which one can offer customers the most value? Value is the result of individual judgments of customers concerning the bank and its services and products (Huber et al., 2001). Knowledge about customers values is the basis upon which retail banks can guarantee a unique service. In service industries, discussion of customer values is more difcult nroos, 1984; because they are mostly intangible, complex and multidimensional (Gro Parasuraman et al., 1991; Levesque and McDougall, 1996). Additionally, customers perceive nancial services as a high-risk purchase (Babakus et al., 2004). The concern for customers own money is the result of the need for security. In this context the aim of the study is to identify the basic values and objectives from customers of different retail banks by asking them about their views regarding dealing responsibly with money. Based on their experiences, perceptions and expectations, the most relevant basic values and objectives about money life are identied. The results show a holistic picture of peoples views concerning money and retail banks role in this context. After a short introduction, the design of the study, the research methodology and the results of the various analysis steps are presented. In the following section, the main ndings and further research activities are discussed. The paper ends with managerial conclusions. Study This study was carried out in collaboration with an Austrian retail bank founded in 1822 as a savings bank. Because of expansion strategies in the 1980s and 1990s, the retail bank lost its common understanding of its core business, which has led to the abandonment of its regional focus. The investigation was carried out during a one-year brand strategy project with the aim of repositioning to concentrate on the broader public in a rather small, clearly specied area of Austria with a particular range of products adapted to the target group. The objective for the bank in participating in the project was to gain knowledge about how to enforce the relationships and emotional closeness to retail banking customers in order to better meet customers needs in the future. From the scientic point of view the interest was in identifying the customer value systems concerning the topic of dealing responsibly with money, and in this context, to analyse the role of retail banks. In this investigation an interpretative approach was used in understanding the reasons behind retail bank customer behaviour by asking customers about their experiences, intentions, attitudes and desires. Because of the main topic i.e. dealing responsibly with money seven specic open questions were posed including: (1) How have the interviewees learned to handle money? (2) Who supports them in nancial questions? (3) How the bank is supporting them?

(4) What will happen if they inherit a lot of money. (5) Do they believe that their handling of money will change in the future? Two other questions were included because of their relevance to the topic of responsibility. The interviewees were asked to give an example in which someone was irresponsible in dealing with money and what they would recommend if a friend asked how to raise a larger sum of money for investments in housing space or to buy a car. Finally, the people were asked if they wanted to add other aspects. In total, 60 Austrians holding an account at any retail bank were interviewed. The sample was separated into 18 oral interviews and 42 written questionnaires, both with the same open-ended questions. The founder of the qualitative method GABEKw recommends executing about 20 oral interviews. Based on his experiences and the experiences of other researchers using GABEKw, more oral interviews do not provide a surplus value in gaining additional knowledge. The use of 42 extra written questionnaires was applied to summarise the results of the oral interviews. The sample of the investigation is presented in Table I. In qualitative research, the composition of a sample is usually based on the criteria of adequateness for the problem. In agreement with the Austrian retail bank the sample was primarily chosen because of the composition of the retail banks target groups (19-29 years, 30-59 years, more than 60 years). The decision for a sub-division of female and male retail banking customers was based on the decision to obtain a balanced proportion of men and women. Finally, the classication was undertaken in urban and rural areas because of the retail banks branches, which are distributed in urban as well as in rural areas. It should be pointed out that the respondents of the written surveys, although they were asked to answer in whole sentences, sometimes only answered in keywords. This must be taken into consideration in the analysis process, because the basis of the evaluation is full sentences. About 40 per cent of the written data was not applicable for the analysis. For this reason, the results are based on the whole dataset. In a next step, the text from the written portion and the transcribed text from the ltigung von oral interviews were evaluated by GABEKw (GAnzheitliche BEwa
Number Gender Female Male Total Age 19-29 years 30-59 years More than 60 years Total Residential area Urban area Rural area Total 28 32 60 19 24 17 60 30 30 60

Management of customer relationships 27

Table I. The sample

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t). Developed by Josef Zelger, GABEKw is a tool for analysing textual Komplexita qualitative data. It is based on the theory of Wahrnehmungsgestalten (perceptive appearances) by Stumpf (1939), which has been transferred to a theory of linguistic Gestalten by Zelger (1999a). More than 100 projects in different disciplines (e.g. management, psychology, information technology, education and political science, sociology) have been realised with the qualitative GABEKw method. Researchers using this method are interested in gaining new insights into and a new understanding of the situations and processes investigated. For example, Josef Zelger (1999b) supported DaimlerChrysler (formerly DaimlerBenz) in nding a solution for conict due to the implementation of new working time models in the research department. Renate Buber (2000) was interested in the attitudes and evaluations of leaders concerning internal marketing. Margit Raich (2006) analysed the leadership culture of two companies with the aim of improving leader-employee interactions. To this end it is necessary to structure the experiences, knowledge and expressed perceptions of participants that provide a comprehensive view of the individual aspects of the particular situation investigated (Zelger, 2000). The process of analysing data is carried out through the development of a rule-based network of data, which takes both syntax and semantics into account (Zelger, 1999a). The unordered knowledge of the interviewees is collected and systematised by different procedures operated by the researcher. The computer implementation WinRelan (Windows Relationen Analysis) supports the analysis of the unstructured qualitative data. Finally, GABEKw allows a transparent organisation of knowledge based on the natural language processing of individual statements. Study ndings For the representation of linguistic knowledge different forms can be used, such as: . conceptual structures to analyse notions within a social context and for the development of mind maps in the form of association graphs based on verbal information; . linguistic Gestalten as a result of meaningful text groups containing three to nine text units that are coherent and full syntactic and semantic rules the nal result is the Gestalten tree which shows a hierarchical order of Gestalten; . causal assumptions presented in the form of cause/effect graphs; and . assessments as a result of extracting and converting positive, negative and ambivalent evaluations resulting in an evaluation prole (Zelger and Oberprantacher, 2002). The coding process of notions, illustrated in the form of association graphs, is the basis for all other analysis steps. If someone is only interested in peoples evaluations, the researcher after coding the notions will primarily focus on the development of an evaluation prole. For this research project all forms of representation were applied, whereby only those results are extracted that point out essential topics concerning money, responsibility and retail banks. For a better understanding of the ndings, some short descriptions of the methodological procedures are also presented. It must be mentioned that each single statement of the results presented, each line or each arrow

in the gures, or each number in the lists presented can be documented by original statements. Associations of Bank At the beginning of the evaluation, a rst overview of the most important associations concerning Bank is presented. In this step of the analysis process those characteristics or topics are ltered from the interview texts that are connected much more frequently compared to other selected terms. The representation takes place with the help of an association graph that expresses the interviewees association with a phenomenon. The association graph is the result of notional conjunctions used in different situations. It shows linkages between these terms as a result of interviewee systematisations. The characteristics associated with the term Bank are presented in Figure 1. Each linkage of the term is occupied in the interviews by at least nine texts. People connect the term Bank with consultation on nancial matters and credit that is granted by a bank. Banks want to make a prot from the products and services they offer. In this context from the peoples point of view credit was often granted too easily, especially in the case of young people who are not in a position to repay the money. It is the customers own fault if they raise credit, but the bank also takes partial responsibility. Colleagues and other people also play an important role in the information process and consulting regarding nancial questions. Gestalten tree for Bank After the development of conceptual structures, the researcher has the possibility to develop Gestalten trees. The Gestalten tree presents the most important topics named

Management of customer relationships 29

Figure 1. Association graph for Bank

IJBM 26,1

30

by the people interviewed. In a formal structure, sentences are presented as a quantity of lexical expressions. The connections between the sentences arise from at least one expression that they all have in common. With the support of the WinRelan software, the most strongly connected statements could be emphasised. These are sentences where the expressions connected occur frequently (Zelger, 1999a, b). In the group, each sentence has to contain at least three concepts that also occur in other sentences of the same group. The process is carried out as long as the rules are complied with (Zelger, 2000). The Gestalt building process is done again on the next levels. As a result, we get summaries of summaries, rst Hypergestalten and next Hyperhypergestalten (see Figure 2). As a result, the Gestalten tree is developed. It shows, in a descriptive way, the topics that are of great relevance from the participants point of view. Also, the Gestalten tree for Bank shows those topics that are of relevance in the eyes of a retail-banking customer (see Figure 3). It is the result of a cluster analysis using method D2. All concepts and meanings given on the highest level are used within more complex details on the lower ones. On the highest level, at the left-hand side, we nd the most general results. Each result can be sourced from the original answers on the lower levels. In the following, rst the summary Responsibility is described. This shows the role of the retail bank as well of that of individuals concerning the topic of dealing responsibly with money. The second summary refers to Trust, which has been identied as being relevant in the creation of good customer relationships. And nally, the summary Support service is presented because nancial services require a substantial amount of explanatory support. Responsibility. It will mainly be the fault of the people, and especially young people, if they raise credit and then nd themselves in nancial difculty (i.e. they are no longer in a position to repay the sum). However, the banks also have to take responsibility. Bank employees must develop a certain intuition in discovering customers dealing irresponsibly with money. Furthermore, the banks earn money because of the interest

Figure 2. The concept in building Gestalten trees

Management of customer relationships 31

Figure 3. The Gestalten tree

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32

acquired from people in debt. Also, because of investments in shares, many people have lost money. Banks should have more restrictions in allowing credit. Trustworthiness. Customers will trust a bank if its staff is engaged in the effort of personal care. In daily customer-bank interactions, the interpersonal and emotional levels play an important role. A trustful environment is guaranteed because of sympathy, individual supervision and the enlightenment of the customers. If trust is not given, people will organise themselves. Support service. Customer consultants should address the issues of customers and give the impression that they know their eld well. Good consulting is guaranteed by professional competence and by supplying information to the customer by giving helpful tips and passing necessary data. Banks can be very helpful. Because of their interest in earning money, sometimes they neglect customers needs. Especially in the case of credit, banks have to take responsibility and should inform people in detail. The bank must check when someone wants to buy a car or nance an apartment. But nally, each customer should gather enough information for the decision process. Cause-effect relations for Condant and Trust Cause/effect relations are the results of experiences over time or of discussions of people. On the basis of the coding of causal relations, the researcher has the possibility to generate causal network graphics with WinRelan. The coding process leads to the description of complex cause-effect relations. If, in the text, a causal opinion is identied, then the assumed inuence is listed. A variable can lead to an increase or a decrease in an inuenced variable (Zelger and Oberprantacher, 2002). The captions in Figure 4 should help to elucidate the causal net graphics. The variables inuenced are represented as arrows; favourable inuences are represented as arrows with continuous lines, while unfavourable inuences are represented as arrows with broken lines. With the help of colour coding, the variables are assigned specic colours: black for a value; darker grey for higher and lower objectives; light grey for measures; and white is used for other criteria. Because of the research interest, the objective Condant (Figure 5) and the basic value Trust (Figure 6) are presented as examples. A condant is a person who provides advice to customers in all questions regarding money. The condant is engaged in nding the best solutions for customer problems. Engagement is not given if a customer consultant is only interested in the conclusion of contracts. Satised customers dene successful consultants as persons who are helpful as well as honest and sensitive. There is the demand for sympathy, which is expressed

Figure 4. Captions for the causal and value coding processes

Management of customer relationships 33

Figure 5. Causal net graphic for Condant

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Figure 6. Causal net graphic for Trust

by showing interest and by addressing customers as individuals. Sometimes the condant is a good friend. A close personal contact and the feeling of knowing someone well is the basis for a trustworthy relationship. Otherwise, a slow rapprochement is needed to restore condence. At this point, the causal net graphic for Trust is presented. Trust and the relationship with the bank is the result of several aspects that are presented in Figure 5. There will be no need to change bank if trust is guaranteed. In the case of failures in transactions and retried errors, the chance to drift from the bank increases. Several aspects are responsible for the decline of trust in the sense that customers have to take an active part in the relationship; this is evaluated negatively. Trustful relationships are not guaranteed if there is the feeling that a bank earns a lot of money, and if the managers responsible receive large salaries. The media sometimes support this impression. Trust is also the result of professional competence. Customer consultants have to prove themselves because of their know-how. If customers always believe that they have to ght for their rights (e.g. if they have to inform themselves about reductions in interest rates), a trustful relationship cannot be guaranteed. The customer who trusts the bank and its employees is not used to always having to control the organisations activities. Finally, private bank institutions, as well as house banks, create good trustful environments for the customers. Basic value and objectives of retail banking customers Because of the research focus on value systems, the basic values (Table II) and objectives (Table III) of the people interviewed are selected. The basic values and objectives are the result of two analysis steps. First, the colour coding process (see also Figure 4), which depends on the number and direction of causes and effects, can be carried out. For example, because of the rules it has been identied that the variable Trust is only inuenced by effects, i.e. it does not act as cause for effects to other variables. In this case, the researcher has identied a value. Higher objectives are inuenced by many effects and from the variable itself only a very small number of effects go to other variables. In the case of lower objectives, the causes and effects are balanced. Second, the evaluation process reects the value judgments of people, especially as regards what would be desirable or what should be avoided. If someone were to say I was very satised with my previous well-known customer adviser, but he retired this year and a new customer adviser was referred to me that Im not happy with, this would mean that the person consulted reserves previous well-known customer adviser for something good, whereas 2 new customer adviser indicates something bad. This is how the evaluation coding is done. Finally, all individual evaluations are added together, which results in a list of all the criteria evaluated. The evaluation prole for the present situation is shown in Table II. In comparison to the objectives (see Table III), all basic values are evaluated positively by the respondents. In Table II, the basic values presented are listed in sequence of frequency (see numbers in parentheses). For example, in the interview text of all respondents, Trust was named 25 times. Because of the colour coding process, Trust has been identied as basic value. All other basic values have also been developed by this procedure. For example, each term is described by one original statement. Some of the basic values are attributed directly to the bank (Trust, Sympathy, Engagement, Openness, Honesty, Personal care, Be assistant,

Management of customer relationships 35

IJBM 26,1
Trust (25)

36

Joy (16)

Be satised with the things people have (10)

Sympathy (10)

Modesty (9)

Freedom (8)

Engagement (7)

Openness (7) and honesty (3)

Personal care (6)

Be assistant (6) Table II. Positive basic values

Pleasantness (5)

For money issues, I go to my bank. The personal component, e.g. persons who are likeable, is very important for me, because you commit money to a bank; this is for me a matter of trust I bought a bicycle with my rst saved money. I had so much fun with it. If you work hard, than you should indulge something sometimes. You have to spend the money to please yourself When I was young, I did not have much money. When I got more money I also was satised. There was not the need to earn more money. It is also not the case today. It is important for me that I can have a good life The charisma of a person, to go up to a person, that makes the difference. Social competence is more important for me than the professional experience. People have to express feelings for others. Sometimes it happens that they do not greet, do not listen and do not talk, this is not likeable My parents had a modest life. No wealth was expected in our small world. I also think people should not be attached to material things. In life you should have fun with the smaller things. But this joy is not only connected with material things. I hope that I will never have that much money that I am under pressure. I am a frugal person I would like to have that much money that I dont worry and I dont need a bank to nance my whole life. Independence and freedom. Then you are not dependent on other people, on an employer, on an idea, on a company or anything else. You are in a position to say I wont do it. Freedom refers to certain mobility The employees in the bank try to bring out the best regarding my money situation and do not offer me the usual standard products. When I have a request with money, e.g. because of a transaction, they get to the bottom of the problem. They go to great lengths to help me The bank should not only look out for their self-interest, but for the customers good. The have to inform them about all the advantages and disadvantages, e.g. of the different nancing possibilities, and that they inform you if you will overreach because of the amount of credit. And if I am in trouble, e.g. you are not in the position to repay credit, then they should take me aside and talk to me about my situation I have a friend who is working in the bank, he is a competent friend. I have a close relationship, it is very personal, and he knows me and my needs well. For me it is important that someone shows interest and pays attention to me In general in my bank the staff are very helpful and act customer-orientated. The people try to make the best out of my money. They also help me regarding dealing responsibly with money, e.g. they talk with me about where I can save money in my daily life I am looking forward that my money handling is done friendly, quickly, clearly and trouble-free. There exist differences between the banks

Positive objectives Enough money to repay (25) Create reserves (24) Saving (24) Security (15) Plan unforeseen events (15) Compare offers (13) Buy an apartment (13) Vacation (13) Condant (12) Self-organisation (12) Know someone well (11) Do not spend more money than available (11) Do not begrudge (10) Functional thinking (9) Wait for purchasing (9) Work hard for money (8) Property (8) Professional competence (7) Spend money on meaningful things (7) Partial spending and partial saving (7)

Negative objectives Buy a car with credit (11) Live over the standard (11) Spend money without thinking (10) Status symbol thinking (9) Spend too much (8) Allow credit easily (7) Blow money (7) Overdrawing an account (6) Temptation consumption (6) Other suspect nancial service provider (5) Gambler (5) Contact with the bank (5) Over-check an account (5) Run into debt (4) Bank and rip-off (4) Credit (4) Always buy something new (4) Risk (3) Disinterest (3) Calculate optimistically (3)

Management of customer relationships 37

Table III. Positive and negative objectives

Pleasantness). Some basic values can only be realised by the people themselves (Joy, Be satised with the things people have, Modesty and Freedom). The rst group of values can be categorised in large part to the Hyperhypergestalt Trustworthiness, while a few of them are categorised to Support service, and the second group is part of the Hyperhypergestalt Responsibility. The attributions were taken because of the composition of the Gestalten tree, because each basic value is recovered in one of the lower levels of the Gestalten tree. The same process is carried out with the objectives. Table III shows the frequency of the rst 20 named positive and negative evaluated expressions for the present situation. In comparison to the basic values, most positive and negative evaluated objectives can be categorised in using the same system of assignment to the Hyperhypergestalt Responsibility. Also in this case, most are attributed to retail banking customers (e.g. Enough money to repay, Plan unforeseen events, Live over the standard), and some to the retail bank (e.g. Professional competence, Allow credit easily, Risks). A small number of objectives for example Condant, Self-organisation, Know someone well or Other suspect nancial service provider can be categorised to the Hyperhypergestalt Support service. Discussion and implications The purpose of this paper has been to identify the basic values and objectives of customers as regards the topic of dealing responsibly with money, and in this context the role of banks. The people interviewed expressed their experiences and wishes relating to their own behaviour as well as their requests to retail banks. In particular, the basic values and objective systems were associated with three identied relevant themes:

IJBM 26,1

(1) responsibility; (2) trustworthiness; and (3) support service. The ndings can be summarised under three headings: (1) From the respondents point of view, as result of the objectives, not only do customers take responsibility for their nancial transactions (customer responsibility), but the retail banks also have to pay attention to this topic in the context of customer behaviour (retail bank responsibility); (2) the basic values of the retail-banking customers are mainly reected in the demand of a banks trustworthiness; and (3) the basic values of retail banking customers also refers to individual responsibility in the daily handling of money (customer responsibility). Zineldin (2005) argues that banks do not sell products; they sell their reputation with every customer relationship. From this point of view, the following valuable implications can be derived from the basic values and objectives. Responsibility The issue of Responsibility is mostly expressed by objectives. Dealing responsibly with money is attributed to the individual as well as to the retail bank. Individuals have to handle their own money life carefully and should avoid getting into nancial difculties. Retail banks have to create a feeling of security for their customers concerning their money transactions. The retail banks responsibility mainly refers to the careful granting of loans, but they should also avoid activities that give the impression of only wanting to make as much prot as possible by selling as many products and services as possible. They should try to maximise customers funds and at the same time protect them from risks and damage. If a retail bank follows this principle, a stronger commitment from customers can be obtained. In summary, the relevant tasks of retail banks are seen as rst the creation of securities and second the prevention of nancial troubles. Trustworthiness Money transactions are a business of personal relationships. In nancial services relationships are one of the major factors in customer satisfaction and customer loyalty (Leverin and Liljander, 2006). The basic values have shown the importance of trust, which is the result of long-term relationships based on personal as well as economically successful relations (Harrison, 2003). Also, Liang and Wang (2007) identied a positive correlation between investments in relationship management and customer satisfaction: a continuously satised exchange process supports the rise of customer trust. As Parasuraman et al. (1991) mentioned, the human element in service delivery plays an important role and refers to different attributes like moments of truth, empathy, responsiveness, reliability, etc. Customers commitment also depends on the way in which these attributes, i.e. these affective and emotional components, are exercised by staff (Morgan and Hunt, 1994; Buttle and Burton, 2002; Molina et al., 2007). Finally, a high priority towards personal orientation produces a feeling of exclusiveness for the customer. An interesting nding is the emphasis of a condant, a

38

person representing at the same time a friend and expert in one person. In context with the condant, the respondents mentioned trust, sympathy, engagement, openness, honesty, personal care, helpfulness, and pleasantness. As Baumann et al. (2007) stated, such positive affective attitudes are signicantly connected with the behavioural intentions of customers. The named attributes lead to less control and allow more free space for all participating parties in the customer relationships, as well as facilitating decision processes for the customers and employees of the retail bank. Support service Support service primarily refers to retail banks consulting activities. Because nancial services are intangible, services and products must be transparent and understandable in their composition and handling. For this reason, the standardisation of products and services will contribute to a guarantee of an ongoing performance level, i.e. that the customers can expect a service level without undesired questioning by the service providers (Sasser and Fulmer, 1990). Such kinds of organisational behaviour have a strong impact on the image and goodwill of the organisation, but also on the customers evaluation of the service quality as well as on customer loyalty (Zemke and Schaaf, 1990; Bloemer et al., 1998). Chen et al. (2005) argue that not only a friendly interaction with customers improve the service empathy, but also the provision of information concerning nances (e.g. information about interest rates) has a positive impact on customer satisfaction. As a consequence of the ndings, customer consultants have to act as competent managers of information and provide relevant data to customers. Finally, because of the basic values and objectives identied that are linked to retail banks responsibilities, customer consultants have to encourage responsible behaviour in their customers. Managerial implications The results suggest a number of practical implications for retail banks and their management of relationships. An investigation of experiences, perceptions and expectations regarding dealing responsibly with money refers to customers need for security relating to their money life. This topic was chosen to support banks switching from thinking in terms of products to thinking in terms of customer relationships and corporate social responsibility. The research has shown that an alternative questioning method contributes to delivering important information for future retail bank strategies. In the case of the Austrian retail bank the knowledge was integrated in a new brand strategy and in the formulation of brand principles as well as in the creation of guidelines for future interaction with customers. The ndings also deliver valuable implications for public relations activities in supporting image campaigns and can be used for training measures in teaching employees in the frontline to rethink and improve their interactions with customers by developing a certain feeling for essential customer needs.
References Aldlaigan, A. and Buttle, F. (2005), Beyond satisfaction: customer attachment to retail banks, International Journal of Bank Marketing, Vol. 23 No. 4, pp. 349-59. Babakus, E., Eroglu, S. and Yavas, U. (2004), Modeling consumers choice behavior: an application in banking, Journal of Service Marketing, Vol. 18 No. 6, pp. 462-70.

Management of customer relationships 39

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Baumann, Ch., Burton, S., Elliot, G. and Kehr, H.M. (2007), Prediction of attitude and behavioural intentions in retail banking, International Journal of Bank Marketing, Vol. 25 No. 2, pp. 102-16. Bloemer, J., de Ruyter, K. and Peeters, P. (1998), Investigating drivers of bank loyalty: the complex relationship between image, service quality and satisfaction, International Journal of Bank Marketing, Vol. 16 No. 7, pp. 276-98. hrungskra ften zum internen Marketing eine Buber, R. (2000), Die Einstellung von Fu empirische Untersuchung mit GABEK, in Buber, R. and Zelger, J. (Eds), GABEK II, Zur Qualitativen Forschung On Qualitative Research, Studienverlag, Innsbruck/Wien, pp. 259-301. Buttle, F. and Burton, J. (2002), Does service failure inuence customer loyality?, Journal of Consumer Behaviour, Vol. 1 No. 3, pp. 217-27. Chen, T., Chan, P.-L. and Chang, H.-S. (2005), Price, brand cues, and banking customer value, International Journal of Bank Marketing, Vol. 23 No. 3, pp. 273-91. Gill, A.S., Flaschner, A.B. and Shachar, M. (2006), Factors that affect the trust of business clients in their banks, International Journal of Bank Marketing, Vol. 24 No. 6, pp. 384-406. nroos, C. (1984), A service quality model and its marketing implications, European Journal Gro of Marketing, Vol. 18, pp. 35-44. Harrison, T. (2003), Why trust is important in customer relationships and how to achieve it, Journal of Financial Service Marketing, Vol. 7 No. 3, pp. 206-9. Huber, F., Herman, A. and Morgan, R.E. (2001), Gaining competitive advantage through customer value oriented management, Journal of Consumer Marketing, Vol. 18 No. 1, pp. 41-53. Kaynak, E. and Harcar, T.D. (2005), American consumers attitudes towards commercial banks. A comparison of local and national bank customers by use of geodemographic segmentation, International Journal of Bank Marketing, Vol. 23 No. 1, pp. 73-89. Liang, Ch.-J. and Wang, W.-H. (2007), An insight into the impact of a retailers relationship efforts on customers attitudesand behavioral intentions, International Journal of Bank Marketing, Vol. 25 No. 5, pp. 336-66. Leverin, A. and Liljander, V. (2006), Does relationship marketing improve customer relationship satisfaction and loyalty?, International Journal of Bank Marketing, Vol. 24 No. 4, pp. 232-51. Levesque, T. and McDougall, G.H. (1996), Determinants of customer satisfaction in retail banking, International Journal of Bank Marketing, Vol. 14 No. 7, pp. 12-20. . (2007), Relational benets and customer Molina, A., Martin-Consuegra, D. and Esteban, A satisfaction in retail banking, International Journal of Bank Marketing, Vol. 25 No. 4, pp. 253-71. Morgan, R. and Hunt, S. (1994), The commitment-trust theory of relationship marketing, Journal of Marketing, Vol. 58, July, pp. 20-38. Parasuraman, A., Berry, L.L. and Zeithaml, V.A. (1991), Understanding customer expectations of service, Sloan Management Review, Vol. 32 No. 3, pp. 39-48. Raich, M. (2006), How to accept complexity: how to demand simplicity: a holistic view of leadership: a case study, International Journal of Learning and Change, Vol. 1 No. 2, pp. 180-200. nroos, C. (1996), The value concept and relationship marketing, European Ravald, A. and Gro Journal of Marketing, Vol. 30 No. 2, pp. 19-30.

Roberts, B. and Campbell, R.C. (2007), Being new-customer friendly: determinants of service perceptions in retail banking, International Journal of Bank Marketing, Vol. 25 No. 1, pp. 56-67. Roig, J.C.F.R., Garcia, J.S., Tena, M.A.M. and Monzonis, J.L. (2006), Customer perceived value in banking services, International Journal of Bank Marketing, Vol. 24 No. 5, pp. 266-83. Sasser, E.W. and Fulmer, W.E. (1990), Creating personalized service delivery systems, in Bowen, D.E., Chase, R.B. and Cummings, T.G. (Eds), Service Management Effectiveness, Jossey-Bass, San Francisco, CA, pp. 213-33. Stumpf, C. (1939), Erkenntnislehre, Band 1, Johann Ambrosius Barth, Leipzig. Zelger, J. (1999a), Wissensorganisation durch sprachliche Gestaltbildung im qualitativen Verfahren GABEK, in Zelger, J. and Mair, M. (Eds), GABEK. Verarbeitung und Darstellung von Wissen, Studienverlag, Innsbruck/Wien, pp. 41-87. rfnissen durch Zelger, J. (1999b), Qualitative Erforschung von Mitarbeiter- und Kundenbedu GABEK anhand eines Beispiels bei DaimlerBenz, in Hinterhuber, H.H. and hrung, Gabler Verlag, Wiesbaden, Matzler, K. (Eds), Kundenorientierte Unternehmensfu pp. 185-217. chen Zelger, J. (2000), Serielle und parallele Wissensverarbeitung. Die Simulation von Gespra durch GABEK, in Buber, R. and Zelger, J. (Eds), GABEK II, Studienverlag, Innsbruck/Wien, pp. 31-91. Zelger, J. and Oberprantacher, A. (2002), Processing of verbal data and knowledge representation by GABEK-WinRelan, Forum: Qualitative Social Research, p. 3. Zemke, R. and Schaaf, D. (1990), The Service Edge, Penguin Books, New York, NY. Zineldin, M. (2005), Quality and customer relationship management (CRM) as competitive strategy in the Swedish banking industry, The TQM Magazine, Vol. 17 No. 4, pp. 329-44. Further reading Taylor, S.A. and Baker, T.L. (1994), An assessment of the relationship between service quality and customer satisfaction in the formation of consumers purchase intentions, Journal of Retailing, Vol. 70 No. 2, pp. 163-78. About the author Margit Raich is a Research Assistant and Lecturer in the Department of Strategic Management, Marketing and Tourism in the Unit for Strategic Management and Leadership at the University of Innsbruck, Austria. She holds a PhD in Management Studies. Her major research areas are leadership, organisational behaviour and qualitative research methods. She currently teaches strategic management and organisational behaviour and has published several articles. She has also presented her work at international conferences. Her work is based on cooperation with companies of different industries. She is co-organiser of the International Working Seminar on Production Economics, the GABEKw Symposium and the Entrepreneurial Leadership Symposium. Margit Raich can be contacted at: margit.raich@uibk.ac.at

Management of customer relationships 41

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IJBM 26,1

Industry-embedded nancial decision making


The case of a fashion rm
Sara Jonsson
Centre for Banking and Finance, School of Architecture and the Built Environment, Royal Institute of Technology (KTH), Stockholm, Sweden
Abstract
Purpose The purpose of this paper is to study organisational characteristics and formations that are important to the establishment of a strong embedded relationship between the small to medium-sized enterprise (SME) and the nancier, which in turn inuences the rms nancial decision-making process. Design/methodology/approach The study is conducted as a longitudinal, single case study of a fashion rm. The rm prefers equity to debt nancing, thus constituting an interesting case of deviation from the pecking order theory of nance. The present paper investigates the rationale behind the rms nancial decision making. Findings The ndings suggest that identity eld embeddedness is relevant in the rms nancial decision-making process because eld identication facilitates the formation of embedded relationships between the SME and the nancier. The notion of belonging to the same identity eld as the supplier of equity nance, while experiencing a distance to the bank, motivates the rm to prefer the more costly equity nancing to bank nancing. The notion of perceived similarities with the investor seems to set expectations of access to private information. Research limitations/implications Banks need to increase their knowledge about different industries and systematically process and store such knowledge to alleviate what SME customers may perceive as a distance to the bank. Banks could also increase their marketability to SMEs by acting as mediators to other organisations, such as industry organisations, authorities and consultants. Originality/value The study contributes to the literature on how social relations affect SMEs nancial decision making and the bank-rm relationship. Keywords Financing, Decision making, Fashion industry, Banks, Small to medium-sized enterprises Paper type Research paper

42
Received 29 April 2007 Reviewed 13 September 2007 Revised 20 October 2007 Accepted 24 October 2007

International Journal of Bank Marketing Vol. 26 No. 1, 2008 pp. 42-56 q Emerald Group Publishing Limited 0265-2323 DOI 10.1108/02652320810847101

Introduction Small to medium-sized enterprises (SMEs) and new businesses have become increasingly important for economic development (e.g. Denis, 2004). A central concern for these rms is the capital structure problem: What mix of securities and nancing sources should be used to nance the business? Loan nancing is the most important source of external nancing for most European enterprises, 99 per cent of which have fewer than 250 employees. It has been recognised that access to loan nancing depends on the closeness of the relationship between enterprises and banks (European Commission, 2001). The embedded nance literature is a promising new line of research that addresses this issue. It has found that when the bank is embedded in the social structure of the SME and there is a strong bank-rm relationship, both the SME

and the bank benet. SMEs that have embedded ties with bankers can overcome information problems and accumulate social capital that can be used to access capital at prices that make bank nancing more attractive to rms. By establishing a strong, embedded relationship with their SME customers, banks also receive many benets, including an enhanced ability to reduce the costs associated with writing loan contracts, to retain clients, and to decommodify nancial capital (Uzzi and Gillespie, 1998; Uzzi, 1997). The importance of developing and maintaining the bank-rm customer relationship has been emphasised in the bank-marketing literature (e.g. Ennew and Binks, 1996; Madill et al., 2002; Proenc a and de Castro, 2005). Although past studies in different lines of research have generated knowledge regarding the importance of banking relationships, some questions need further investigation, such as what factors may be important to the establishment of relationships between SMEs and nanciers, which in turn may affect the SMEs choices of nanciers. Adapting an embedded perspective on nancial decision-making, this article addresses a question that has not been discussed previously: are there specic organisational formations or characteristics that are of importance to the establishment of embedded rm-nancier relationships? How do such characteristics affect the formation of embedded ties to nanciers, and how does they affect the rationale behind the SMEs nancial decision making? Because there is little previous knowledge about this subject, exploratory research is needed. This article presents a new framework for thinking about how SMEs make nancial decisions, taking into account the rms organisational identity. To illustrate the framework, I present a longitudinal study of a jewellery design rm that follows its nancial decision-making process. The rm is categorised as a fashion design rm. Financing has been found to be an urgent problem for fashion rms (Sundberg, 2006), which motivates further investigation of the nancial decision-making process for fashion SMEs. Managerial practices and organisational patterns that are typically observed in fashion industries are frequently at odds with our established views of managing organisations. The main difference is that in these organisations identity contains contradictory elements: normative artistry and utilitarian economics coexist. The ndings presented in this article contribute to an increased understanding of rm nancial decision-making and thus provide new insights into the capital structure problem. In contrast to the pecking order theory of nance, which suggests that rms follow a pecking order from most to least preferred internal funds, friends and family, bank and equity markets (Myers, 1984; Myers and Majluf, 1984) this study offers an alternative explanation to how rms may hierarchically order their dependence on different sources of nancial capital. The ndings and framework suggested in this article also provide clues as to how banks could market themselves to start-up rms. Background Strong, embedded relationships shift actors motivations away from the pursuit of immediate economic gains towards the enrichment of relationships through trust and reciprocity (Powell, 1990; Smitka, 1991). The importance of establishing trust (or condence) in the bank-rm relationship has been discussed in the bank marketing literature (e.g. Gill et al., 2006; Hawke and Heffernan, 2006). Uzzi and Gillespie (1998) showed that social structure and relationships based on trust play an important role in

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the capital structure of SMEs and the bank-rm relationship. They determined that the quality of the relationship between an organisation and its lender affects the SMEs nancial decision making. Firms will alter their level of borrowing if the bank-rm relationship is rich in trust and reciprocity. The rationale for this is that if the bank trusts the rm, the bank can lower its monitoring costs, which in turn enables the bank to offer capital at prices that are more competitive than would have been possible in the absence of an embedded relationship. Research has shown that identity is also an important component in the formation of relationships and social structure because it assigns value to the transaction and enriches the exchange of social capital between partners in the network (Portes and Sensbrenner, 1993). Organisational identity is a key intangible aspect of any organisation. It affects not only how organisations dene themselves but also how problems are dened and resolved (e.g. Dutton et al., 1994; Dutton, 1997). Discrete identity elds, sets of actors clustered around socially constructed identities, affect the construction of an organisations resources and core capabilities (Hunt et al., 1994). Porac et al. (1999) dene identity construction as an explicit claim that the organisation is of a particular type. Institutional theorists have used the term eld to denote the grouping of organisations that are similar, have common practices or share a certain focus of attention, such as a market. DiMaggio and Powell (1983) dene organisational elds as those organizations that, in the aggregate, constitute a recognized area of institutional life: key suppliers, resource and product consumers, regulatory agencies, and other organizations that produce similar services or products. According to DiMaggio and Powell (1983), mutual information processing within a group of organisations is a vital sign of eld formation. Larson (1992) and Helper (1990) reported that thicker information on strategy, prot margins and production know-how is transferred through embedded ties. Uzzi (1996, 1997) refers to such information as ne-grained information. Exchange of thicker, or ne-grained, information is unlikely in the absence of trust because information could be used opportunistically (Helper, 1990; Larson, 1992). Based on previous research, there is reason to believe that identity elds may have an impact on the formation of embedded relationships. Previous research has shown that the quality of rm-nancier relationships affects the nancial behaviour of SMEs (Uzzi and Gillespie, 1998). Therefore, it is possible that identity elds may inuence the nancial decision making of SMEs, an issue that has not previously been addressed. Because current knowledge only takes us this far, exploratory research is necessary. In subsequent sections, I rst describe the exploratory approach used to illustrate the issue. Next, I describe the nancial decision-making process of a jewellery design rm, noting how relationships with the bank and an investor are affected by the rms identity and how the rm relates rm identity to the perceived identity of the nanciers. I then suggest a framework for thinking about how identity elds may affect the SMEs nancial decision making. I conclude with a discussion of the SMEs nancial decision making and the effects on the capital structure and suggest implications for banks. Methodology The study was conducted as longitudinal, single embedded case study (Yin, 2003). The purest form of a longitudinal eld study, daily participant observation, was not

feasible. I could visit the research site only once or sometimes twice a week. Therefore, some data were obtained through retrospective reports gathered shortly after events occurred. However, a longitudinal study involving a series of multiple interviews about recent events offered the obvious benets of proxy in time to current events, thereby increasing the likelihood that I could determine the sequence and nature of events accurately. Whereas multiple retrospective studies increase the external validity of a research design, a longitudinal, real-time study can increase internal validity by enabling the researcher to track cause and effect (Leonard-Barton, 1990). A case study methodology is a preferred method when how or why questions are being posed, when the investigator has little control over events, and when the focus is on a contemporary phenomenon within some real-life context. The rationale for conducting a single case study was that the rm constituted a case of deviation from the pecking order (Yin, 2003). According to Siggelkow (2007), it is often desirable to choose a particular organisation precisely because it allows one to gain certain insights that other organisations would not be able to provide. Although individual cases cannot prove a theory, they can sufciently point to possible omissions in the theory. Time sets a frame of reference for what changes are seen and how those changes are explained. The researchers theoretical framework suggests justications for the beginning and ending of data collection (Pettigrew, 1990). The framework may focus on major social dramas or breakpoints in a rms history, which indicate the beginning of periods of continuity and change (Pettigrew, 1985). The time frame of this study covered the critical period beginning when the rm recognised the need for external nance and continuing through the decision-making process. Data collection For a period of 13 months, during which I followed the rm in their nancial decision-making process, I gathered data addressing archival sources through both semi-structured and unstructured methods. Archival sources. Public information about the rm was reviewed, including press accounts and material generated by the rm (e.g. promotional material). Semi-structured data collection. Semi-structured data collection included a number of semi-structured interview sessions with the designers and their bankers. I conducted seven semi-structured interviews with the two designers and two separate interviews with their two bankers. Interviews averaged from one to two hours in duration, were tape-recorded and transcribed within 24 hours with my own reections added. Data collection from interviews with the designers provided a sequence of events for the history of the rm, insights into how they had reasoned during past decisions concerning the nancing of the business and how they reasoned during the time period when I studied the rm, as well as insights into future goals and visions of the business. The objective of these interviews was to understand why certain decisions and choices were made and how these decisions were related to the designers description of their business, mission, and objectives. The interviews conducted with the bankers were intended to provide insight into how the bankers perceived the designers and their business, and how this inuenced their decision to offer nancing to the rm. Unstructured data collection. Unstructured data collection included notes taken as part of observations at the rm during its daily operations, including meetings with

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partners, economic consultants, and their mentor. Observations at the rm normally lasted from one to three hours. The objective of these observations was to gain an understanding of the identity of the rm and how this inuenced decisions about and relations with the bank. Observations were also made during meetings between the rm and the bank. These observations allowed an encompassing view of the dynamics of business-nancier relationships and aimed to capture the interplay between the rm and the bank. The observations of meetings between the bank and the rm were tape-recorded, transcribed and complemented by my own reections. After the rms meetings with the bank, I conducted interviews with the designers to investigate their reasoning and perceptions of the meetings. A compilation of the interviews and observations are presented in Table I. The case In this section, the rms nancial decision-making process is analysed. In addition to the two founders of the rm, the actors involved in this process included the two bankers representing the bank where the rm is a customer and the investor who entered after the rm was granted debt nancing and offered equity nancing. The chronology of the nancial decision-making process is described in Figure 1. The rms description of its business and its need for nance According to one of the two designers, their business idea was to create high qualitative jewellery, with a mix of fashion, art, and craft, and to launch two collections a year, following the product life cycle of the fashion industry. The objective for setting up the business was to be able to freely express their artistic visions. Early on, the rm received a great deal of attention in the media, in newspapers, in magazines and on television, where it was portrayed as an example of the recent hype and success of Swedish fashion design. The designers rhetoric invoked their alignment with the artistic world. For example, they launched their rst collection in an art gallery to demonstrate their artistic ambition. With their rhetoric, the designers claimed their artistic identity whilst downplaying their economic identity, and commensurate with their identity claims, they dened core capabilities in terms of intangibles, such as artistic talent. The designers, however, also expressed a different set of claims about the identity of their rm, which was to generate prots. In a newspaper article, they expressed their vision in the following way: By founding a protable company we are trying to create our own space in the commercial market. Thus, they were aware of the necessity to negotiate a balance between an idealistic, artistic-vision driven perspective and the revenue-driven realistic view. The designers expressed an intention for the rm to grow and to cover markets in New York and Tokyo. External nancing would be needed to achieve this goal. To nance their rst collection, they each made a private investment of SEK 10,000 and a family member granted the rm a loan of SEK 40,000, with interest, that should be reimbursed in two years. Their spouses covered their private expenses. The university where they had studied assigned a mentor to the rm. This mentor gave them a small loan (SEK 20,000) when they opened their shop. Encouraged by their mentor, the designers decided to apply for bank nancing: He told us we needed nancing to grow.

Date The designers The designers Semi-structured interview at the rm

Actors

Interview

Observation

2006/03/09 2006/03/16-2006/04/10

2006/04/13-2006/04/19 Banker 1, the designers The designers The designers Semi-structured interview at the rm

2006/04/19

Six observations at the rm, observation of daily operation Two observations at the rm, observation of daily operation Observation of bank meeting taking place at the rm Three observations at the rm, two observations of daily operation, one observation of a meeting with the rms economic consultant Semi-structured interview at the rm Eight observations at the rm, observation of daily operation Semi-structured interview at the bank Observation of bank meeting at the bank Semi-structured interview at the rm One observation at the rm, observation of daily operation Semi-structured interview at the bank Seven observations at the rm, observation of daily operation Semi-structured interview at the rm Nine observations at the rm, observation of daily operation

2006/04/20 2006/04/27-2006/05/05

2006/05/09 2006/05/15-2006/06/21 Banker 1 Banker 1, Banker 2 The designers The designers Banker 2

The designers

2006/05/22 2006/06/28 2006/07/03 2006/08/16

2006/08/21 2006/08/23-2006/10/04

2006/10/11 2006/10/11-2006/12/05 The designers The designers

2007/0/1/22 2007/04/18

Semi-structured interview at the rm Semi-structured interview at the rm

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Table I. Compilation of interviews and observations

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Figure 1. Chronology of the nancial decision-making process (gures are in SEK)

The rms perception of the meetings with the bank The rm initially applied for and was granted a bank overdraft of SEK 50,000 and a bank loan of SEK 150,000. The designers accepted the overdraft but decided to postpone the bank loan because of perceived unfavourable interest rates. In these meetings, they also voiced a problem they faced in their business: they needed to nd a suitable supplier because the supplier they were currently using was too costly. In conversations with the bankers, the designers emphasised how their artistically driven core capabilities were perceived by other actors and expressed the rms capabilities in terms of intangibles: the design and artistic edge. The bankers were informed of recent events and activities such as participation in magazine and TV interviews. The designers also mentioned that the rm was one of three nominees for a prestigious fashion award. These tactics seemed to imply manifestations of rm identity and an intention to emphasise success in the design community. Their intention had been to communicate their intangible artistic core capabilities. However, they believed these artistic capabilities were not acknowledged as key or unique resources by the bankers. One designer commented that We mention[ed] our appearance in magazines and the attention our design has achieved, but the bankers are more interested in the gures. The designers did describe the bankers as professional and as having good intentions: We do think they want us to succeed. At a later stage, the designers wanted to extend the bank overdraft and apply for a larger bank loan. Financing was needed to arrange the upcoming fashion show that would launch their third and, so far, most important collection. The show would take place during Fashion Week in August, and in this week the winner of the previously mentioned award would be announced. Because of an increased demand from stores, they also wanted to build up a stock and, hence, place a large order with their supplier for which they needed nancing to make a required advance payment. The designers also wanted a small nancial buffer. This application was rejected; however, the initial bank loan offer and bank overdraft remained.

The banks perception of meetings with the rm The bankers perception of the rm was that the designers acted very professionally. They described the meetings as open and transparent: The rm brought their business plan and budgets and shared information, for example on their strategy and prot margins. The bankers dened the core capabilities and resources of the rm in different terms to those used by the designers. Their rhetoric invoked utilitarian economic resources. One of the bankers stated, The designers show economic thinking, in terms of being careful with their scarce resources. This is important when establishing trust in a rm. Besides being capable of running a business they are skilful in PR and marketing. Another banker explained, I do not know much about the rms market but from the banks perspective it is the people behind the start-up that are the most important when evaluating a company. The bankers emphasised that normally the bank would not grant an overdraft or a loan to a business like the rm because it had not yet generated a prot, it had not been in business long enough to show satisfying sales gures, and it had no security in terms of xed assets. The reason for not extending the bank overdraft and bank loan was that the bankers were concerned about the uneven cash ow, and they cautioned that artistic talent alone would not overcome economic issues: cash ow was the most important factor, one of the bankers stated. The designers explained that large uctuations in cash ow are common in the fashion industry. However, the bankers decided that the existing line of credit and the size of the bank loan would remain xed. The bank had already stretched the criteria for what would normally be accepted as grounds for a positive nance decision. Financial decision making takes a new turn enter the investor Shortly after the rm was denied the extended bank overdraft and bank loan, the rm won the award. Commensurate with the contradictory identity elements of fashion rms, the jury explained, The rm is appointed the newcomer of the year because they have in a short period of time managed to balance unique design, high quality, and a distinguished business thinking. The award meant increased interest from the press, both national and international. For example, the rm received a one-page article in the top Swedish business newspaper, where it emphasised its need for nancing and business expertise. In the article, one of the designers commented that We are looking for a partner with experience and nance that wants to grow with us into a protable company. The award resulted in an increase in sales volume and an increased number of retailers. Shortly after winning the award, the rm received two large orders from two department stores, but the problem of nding a suitable supplier remained. After learning that the rm had won the award, an auction house specialising in high-quality jewellery, contacted the rm. The rm and the auction house set up a meeting to discuss possible forms of cooperation. The designers explained their business situation and stated what they saw as their most urgent problem: To obtain external nance in order to invest in growth-promoting activities, such as participating in international trade shows and being able to make the advance payment to the supplier. They also needed to nd a suitable supplier who was less costly but who could maintain satisfactory quality. The representative from the auction house declared that his rm admired the rms artistic qualities; hence, he voiced what the

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rm had portrayed as their core capability. However, he admitted that he was not able to give the rm the name of a specic supplier right away. The auction houses main objective was to become a private investor in the rm; in exchange for a 30 per cent share of the company, it was willing to give the rm SEK 200,000 and help the rm in its operations and in expanding its business. The rms nancial decision The bank overdraft and the bank loan would have covered the expenses and investments for which the rm needed external nancing; however, the rm chose not to accept the banks offer. Instead, the rm accepted the investors offer and was content with the terms of the agreement. The designers described their decision as motivated by a perception of sharing similar values, such as the appreciation of high-quality design. Furthermore, the designers observed that We are in the same business, which makes it easier to understand each other. The bank only seemed interested in how much we sell each day or month. Another rationale for the nancial decision was that the auction house might be able to assist the rm in its operations and in nding solutions to market-oriented problems, such as nding suitable suppliers. One of the designers explained that Even though they could not recommend a supplier immediately, they would probably know how to nd a supplier because of their experience in the business. Thus, alluding to artistic identity attributes legitimized the private investor in the minds of the designers. In contrast to the bank, the auction house focused on the rms design capabilities and what the rm identied as its core capability its artistic talent. Another factor that had inuenced their nancial decision was the notion of being dissimilar to the bank: In contrast [to the auction house], we do not feel that we have much in common with the bankers. It should be noted that the initial loan offer and bank overdraft would have covered the expenses for the show and advance supplier payments. Theory development identity eld-embedded nancial decision In this study, the rationale for preferring equity instead of bank nancing is explained by the notion of being closer or more similar to the investor than to the bankers and the bank. In the bank marketing literature, it has been found that perceived similarities between customers and bankers do play an important role in building an initial relationship and can contribute towards the establishment of trust (Gill et al., 2006). For the rm, the perception of closeness or similarity is derived from the notion of belonging to the same eld, of sharing identity attributes and values. It can be anticipated that when actors cluster around socially constructed identities, there is a void between groups of actors. Weber (1946) used the term sphere to distinguish different groups of actors. Fashion designers may be considered members of what Weber referred to as the aesthetic sphere, which is characterised by the importance put on aesthetic value. Weber was one of the rst to write about the clashes between the economic and aesthetic spheres. According to Weber, the rm considered the bank to be a member of the economic sphere, which may explain the perceived distance from the banker. The investor, on the other hand, could be considered as a member of the same sphere. Applying bank marketing terminology, the rm perceived the investor to be similar, whereas the banker was perceived as dissimilar. The investor was perceived to be embedded in the same aesthetic sphere, whereas the bankers were not.

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Organisations tend to incorporate organisational forms, structures and practices that are socially legitimate that is, isomorphic or consistent with institutions operating in that environment (Meyer and Rowan, 1977; DiMaggio and Powell, 1983). Kostova (1996) investigated the effect of a countrys specic institutional environment on organisational practices. Organisations operating in different countries may experience institutional distance as a consequence of the difference/similarity between countries institutional environments. Hence, organisational practices reect the institutional environment of the country where they have been developed and established. This institutional distance between countries can be identied by a set of quantiable measures. Applying the notion of institutional distance to the concept of identity elds may help identify a quantiable measure of the distance between different elds. Hence, this quantiable measure can verify that rms operating within the same institutional environment or eld form embedded ties more easily than rms operating in different institutional environments. The notion of sharing the same identity attributes seems to promote not only actual but also perceived components of embeddedness. In parallel to Glynn (2000), I found that information processing, eld formation and perception of similarity are mutually reinforced through social interactions and the language of the professions. The fact that the rm and the investor are in the same industry facilitated communication between the parties because the social relationships permeated information with meaning beyond its face value. Such information is time-saving because educating potential investors takes time, energy and money (Stiglitz and Weiss, 1981). Furthermore, this study indicated that the notion of belonging to the same identity eld conveyed the perception that the investor could provide the rm with valuable information. For example, the designers expressed an expectation that the investor would be able to suggest a supplier to suit the rms specic requirements. Similar identities also convey a perception, on the part of the rm, that the investor could consider the rm from a more holistic perspective than the bank could. In addition to providing the rm with external nancing, the investor could address other problems. This notion could also be expressed as a higher degree of what Seal (1998) refers to as competence trust in the investor than in the bankers in relation to the ability to assist the rm in its business development. Previous research has found that embedded ties develop primarily from third-party referrals and previous personal relationships (Uzzi, 1996). The evidence from this study suggests, however, that the perception of belonging to the same identity eld sets expectations of trust and transfer of private information between the newly introduced parties. Therefore, eld identication facilitates the formation of embedded relationships between the SME and the investor. The ndings made in this study suggest that other factors in addition to purely monetary ones need to be considered in the context of SMEs nancial decision making. The notion that customers of nancial bank services make their choice of service supplier based on factors other than price has also been recognised in the bank marketing literature (e.g. Molina et al., 2007). Discussion According to nancial economics, debts convey less transaction costs than equity. First, the lenders require a lower rate of return than ordinary shareholders because

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debts nancial securities present a lower risk than shares for the nance providers because they have prior claims on annual income and in liquidation. In addition, security is often provided. Second, the transaction cost associated with raising and servicing debts is generally less than for ordinary shares. For SMEs, the rationale for preferring debt to equity is primarily motivated by a notion of losing control of the rm (e.g. Sogorb-Mira, 2005). Applying the cost of capital as a rationale for preferring one certain source of nancing to another, rms generally prefer retained earnings to debt nance. However, research has indicated that this order of preference can be revisited as a consequence of a strong embedded bank-rm tie that conveys debt nancing at lower prices than in the absence of embedded bank-rm relationships, thus making the rm more prone to debt nancing (Uzzi and Gillespie, 1998). As evidenced in this study, factors other than the cost of capital or loss of control may affect the rms nancial decision making and inuence the SME towards equity rather than debt nancing. The perceived similarity of identity elds was an important prerequisite for the establishment of embedded relationships between the SME and the nancier, which in turn affected the rms nancial decision making. Why did the rm in this article prefer equity nancing to debt nancing? Did the bank fail in its marketing efforts in this case? Relationship marketing has become a prominent theory in research focusing on the marketing of nancial services to both retail and business markets (e.g. Ennew and Binks, 1996). The analysis put forth in the present paper suggests that the perception of belonging to the same identity eld as the investor induced an embedded relationship and set expectations of trust and ne-grained information transfer, which made the investor a more adequate nancier than the bank. The framework presented in this paper offers an alternative and complementary explanation for the SMEs nancing structure. In parallel to the embedded nance literature, I offer an alternative explanation to nancial theory, suggesting that the quality of the relationship between an organisation and the supplier of capital affects the pecking order of SMEs. The framework offers a complement to the embedded nance literature by proposing a way of thinking about the context in which embedded relationships between SMEs and suppliers of equity are formed. It also offers insights into the bank marketing perspective, in terms of what factors may inuence the bank-rm relationship. In this study, I have focused on the demand side of nance. Addressing the supply side of capital to SMEs, various studies have shown that the availability and cost of nancing, especially long-term investment capital, are some of the most important constraints on the formation and development of SMEs (e.g. Binks et al., 1992). As conrmed in this study, banks usually consider rms without xed assets and satisfying cash ow to be too risky. Therefore, business angels or private investors are often the only sources of early stage capital for businesses that have exhausted personal and family sources. Normally, the rm would not be in a position to make a nancial decision based on its own preferences. The case presented in this article is unique, however, in the way the rm had the opportunity to choose which supplier of nance to employ. In addition to the risks of losing property or control of the rm, one argument for preferring private investors to bank nancing could be to avoid the requirement to pay interest to the bank regardless of the cash ow of the business. Another argument in favour of a private investor could be access to the private investors business network

and entrepreneurial experience. Paul et al. (2007) found that for start-up rms, rather than equity being viewed as expensive, it is viewed as good value because a well-chosen investor can add business skills and social capital in the form of commercial contacts and access to relevant networks. In the case presented in this article, however, the rm was promised neither private information nor network connections. The designers rationale was explained by expectations of ne-grained, holistic, private information transfer. Such expectations may be explained by the fact that the owners of small rms often control all rm activities, and therefore do not separate problems posed to their business. There are numerous studies on how rms search for solutions to problems (e.g. Cyert and March, 1963; DiMaggio and Powell, 1983). The framework suggested in this article indicates that the process of searching for solutions to nancing problems may affect, and be affected by, the search for non-nancing information, such as nding suitable suppliers. The goal of this study was to outline a new framework for explaining the nancial decision-making process of SMEs and to use an in-depth case analysis as an illustration. Clearly, more empirical work needs to be done to discover how embeddedness affects the nancial decision-making process of SMEs. For example, the correlation between nancial and non-nancial benets, such as cultural capital generated by embeddedness in an identity eld, needs further investigation. Managerial implications The creative industries are a growing market segment and there is a potential for banks to create protable relationships with rms in this segment. A question that needs to be addressed, however, is how bank-rm relationships can be created with an SME that perceives the bank to be distant or dissimilar. It has been suggested in this article that this distance or dissimilarity may partly be caused by what the rm perceives as the banks lack of knowledge about the rms context, and hence a lack of what Seal (1998) refers to as competence trust regarding the rms business context. This implies a need for the bank to increase its knowledge about different industries and to process and store such knowledge systematically. The banks actual and potential SME customers naturally operate in a variety of different industries and display a variety of different characteristics. Consequently, it may not be feasible for every individual banker to have complete knowledge of every industry. However, closer cooperation with other organisations and institutions, such as industry organisations, trade organisations, authorities or consultancies, would enable the bank to offer its SME customers information and resources in addition to nancial resources, and thus to be a mediator to other actors that may be important to the SMEs business development. For example, by cooperating with the Swedish Fashion Council or the Swedish Trade Council, the bank presented in this article might have been able to address the rms supplier problem, and thereby reduce the rms perceived distance to the bank. Banks could also make organisational changes and allow some bankers to become industry specialists. The fashion industry specialist should interact with fashion industry representatives and attend certain events, such as Fashion Week. In this way, the fashion industry specialist could be a link to the aesthetic sphere. Furthermore, this specialist could be a valuable resource for the bank in its credit decisions regarding fashion rms. The benet would be that the SMEs perception of the bank-rm relationship would improve. Banks could benet by developing new

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mediating services to SMEs that aim to solve more than their nancial problems. This approach would be an effective marketing tool and should increase customer loyalty.
References Binks, M.R., Ennew, C.T. and Reed, C.V. (1992), Information asymmetries and the provision of nance to small rms, International Small Business Journal, Vol. 11 No. 1, pp. 35-46. Cyert, R.M. and March, J.G. (1963), A Behavioral Theory of the Firm, Prentice-Hall, Englewood Cliffs, NJ. Denis, D.J. (2004), Entrepreneurial nance: an overview of the issues and the evidence, Journal of Corporate Finance, Vol. 10, pp. 301-24. DiMaggio, P. and Powell, W.W. (1983), The iron cage revisited: institutional isomorphism and collective rationality in organizational elds, American Sociology Review, Vol. 48, pp. 147-60. Dutton, J.E. (1997), Strategic agenda building in organizations, in Zuhr, S. (Ed.), Organizational Decision Making, Cambridge University Press, Cambridge. Dutton, J.E., Dukerich, J.M. and Harquail, C.V. (1994), Organizational images and member identication, Administrative Science Quarterly, Vol. 39, pp. 239-63. Ennew, C.T. and Binks, M.R. (1996), Good and bad customers: the benet of participating in the banking relationship, International Journal of Bank Marketing, Vol. 14 No. 2, pp. 5-13. European Commission (2001), Enterprises access to nance, Commission Staff Working Paper, SEC(2001) 1667, European Commission, Brussels. Gill, A.S., Flaschner, A.B. and Shachar, M. (2006), Factors that affect the trust of business clients in their banks, International Journal of Bank Marketing, Vol. 24 No. 6, pp. 384-405. Glynn, M.A. (2000), When cymbals become symbols: conict over organizational identity within a symphony orchestra, Organization Science, Vol. 11 No. 3, pp. 285-98. Hawke, A. and Heffernan, T. (2006), Interpersonal linking in lender-customer relationships in the Australian banking sector, International Journal of Bank Marketing, Vol. 24 No. 3, pp. 140-57. Helper, S. (1990), Comparative supplier relations in the US and Japanese auto industries: an exit voice approach, Business Economic History, Vol. 19, pp. 153-62. Hunt, S.A., Benford, R.D. and Snow, D.A. (1994), Identity elds: framing processes and the social a, E., Johnston, H. and Guseld, J.R. (Eds), construction of movement identities, in Laran New Social Movements: From Ideology to Identity, Temple University Press, Philadelphia, PA, pp. 185-207. Kostova, T. (1996), Success of the transnational transfer of organizational practices within multinational companies, doctoral dissertation, University of Minnesota, Minneapolis, MN. Larson, A. (1992), Network dyads in entrepreneurial settings: a study of the governance of exchange processes, Administrative Science Quarterly, Vol. 37 No. 1, pp. 76-104. Leonard-Barton, D. (1990), A dual methodology for case studies: synergistic use of a longitudinal single site with replicated multiple sites, Organisation Science, Vol. 1 No. 1, pp. 248-66. Madill, J.J., Feeney, L., Riding, A. and Haines, G.H. (2002), Determinants of SME owners satisfaction with their banking relationships: a Canadian study, International Journal of Bank Marketing, Vol. 20 No. 2, pp. 86-98.

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Meyer, J.W. and Rowan, B. (1977), Institutionalized organizations: formal structure as myth and ceremony, The American Journal of Sociology, Vol. 83 No. 2, pp. 340-63. Molina, A., Martin-Consuegra, D. and Esteban, A. (2007), Relational benets and customer satisfaction in retail banking, International Journal of Bank Marketing, Vol. 25 No. 4, pp. 253-71. Myers, S.C. (1984), The capital structure puzzle, Journal of Finance, Vol. 34 No. 3, pp. 575-92. Myers, S.C. and Majluf, N.S. (1984), Corporate nancing and investment decisions when rms have information that investors do not have, Journal of Financial Economics, Vol. 13, pp. 187-221. Paul, S., Whittam, G. and Wyper, J. (2007), The pecking order hypothesis: does it apply to start-up rms?, Journal of Small Business and Enterprise Development, Vol. 14 No. 1, pp. 8-21. Pettigrew, A.M. (1985), Contextualist research and the study of organizational change processes, in Mumford, E., Hirschheim, R., Fitzgerald, G. and Wood-Harper, A.T. (Eds), Research Methods in Information Systems, North Holland, Amsterdam. Pettigrew, A.M. (1990), Longitudinal eld research on change: theory and practice, Organizational Science, Vol. 1 No. 3, pp. 267-92. Porac, J.F., Wade, J.B. and Pollock, T.G. (1999), Categorization and identity in CEO compensation: the politics of the comparable rm, Administrative Science Quarterly, Vol. 44 No. 1, pp. 112-44. Portes, A. and Sensbrenner, J. (1993), Embeddedness and immigration: notes on the social determinants of economic action, American Journal of Sociology, Vol. 98, pp. 1320-50. Powell, W.W. (1990), Neither market nor hierarchy: network forms of organization, in Staw, B. and Cummings, L.L. (Eds), Research in Organizational Behavior, JAI Press, Greenwich, CT, pp. 295-336. Proenc a, J.F. and de Castro, L.M. (2005), Stress in business relationships: a study on corporate bank services, International Journal of Bank Marketing, Vol. 23 No. 7, pp. 527-41. Seal, W.B. (1998), Relationship banking and the management of organizational trust, International Journal of Bank Marketing, Vol. 16 No. 3, pp. 102-7. Siggelkow, N. (2007), Persuasion with case studies, Academy of Management Journal, Vol. 50 No. 1, pp. 20-4. Smitka, M. (1991), Competitive Ties: Subcontracting in the Japanese Automotive Industry, Columbia University Press, New York, NY. Sogorb-Mira, F. (2005), How SME uniqueness affects capital structure: evidence from 1994-1998 Spanish Data Panel, Small Business Economics, Vol. 25, pp. 447-57. Stiglitz, J. and Weiss, A. (1981), Credit rationing in markets with imperfect information, American Economic Review, Vol. 71, pp. 393-410. det svensk modedesign, available Sundberg, G. (2006), Mode Svea en genomlysning av omra at: www.newsdesk.se/pressroom/sostockholm/event/view/6118. Uzzi, B. (1996), The sources and consequences of embeddedness for the economic performance of organizations: the network effect, American Sociological Review, Vol. 61 No. 4, pp. 674-98. Uzzi, B. (1997), Social structure and competition in interrm networks: the paradox of embeddedness, Administrative Science Quarterly, Vol. 42, pp. 35-67.

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Uzzi, B. and Gillespie, J.J. (1998), Interrm relationships and the organization of a rms nancial capital structure: the case of the middle market, Sociology of Organizations, Vol. 16, pp. 107-26. Weber, M. (1946), From Max Weber: Essays in Sociology, Routledge, London. Yin, R.K. (2003), Case Study Research: Design and Methods, Sage Publications, Thousand Oaks, CA. About the author Sara Jonsson is a PhD student at the Centre for Banking and Finance, Royal Institute of Technology, Stockholm, Sweden. Her research focuses on banks relationships to small and medium-sized rms (SME) and more specically the role of the bank in the growth of fashion rms. She also studies the internationalisation of SME networks. Sara Jonsson can be contacted at: sara.jonsson@infra.kth.se

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Collaboration to improve local business services


lje Project in Sweden The Norrta
Amy Rader Olsson
Centre for Banking and Finance, School of Architecture and the Built Environment, Royal Institute of Technology (KTH), Stockholm, Sweden
Abstract
Purpose The purpose of this paper is to test the effectiveness of collaborative dialogue to support small business development in small communities. Design/methodology/approach The paper employs a case study involving collaboration using both an interpersonal network structure and an inter-organizational project structure. Findings the paper nds that collaboration mobilizes local resources to ll structural and relational gaps in the local institutional environment for SMEs. Research limitations/implications The research agenda for collaborative planning should include studying institutional factors that can hinder some actors such as small businesses from participating. Originality/value The paper provides practical experience of banks as community development actors, and identies a potential conict in normative collaboration theory between inclusiveness/diversity and a higher level institutional focus. Keywords Community development, Small to medium-sized enterprises, Banks, Sweden Paper type Research paper

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Received 29 April 2007 Revised 4 October 2007 Accepted 10 October 2007

Introduction This paper discusses how banks can collaborate with other actors to develop local economies. The paper analyses collaborative dialogue as a strategy for improving the lje, local institutional environment for small businesses, based on a case in Norrta Sweden. The case provides support for the innovative potential of collaborative dialogue across a diverse group of actors, but also suggests that the institutions developed for collaboration, as well as higher level institutional focus, may impose prohibitively high costs on some participants. This can hinder the very diversity and inclusiveness that dene collaboration. Small businesses in small communities Local retail banks could provide an institutional link between small businesses and local business services and would likely prot from doing so. The local retail bank is often a small rms main interface with larger nancial systems. Small, close-knit communities can engender closer bank relationships with small and medium-sized
ran Collert Foundation for its generous support for this The author would like to thank the Go research.

International Journal of Bank Marketing Vol. 26 No. 1, 2008 pp. 57-72 q Emerald Group Publishing Limited 0265-2323 DOI 10.1108/02652320810847110

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enterprises (SMEs) (Howorth and Moro, 2006). This suggests that banks, with their local knowledge and experience, could both offer a wider and more tailored portfolio of products and services to small businesses and even broker connections to other businesses and business services. Banks could then prot from a growing local market, and because growing individual rms offer increased opportunities to sell nancial services. Start-ups and ventures, critical to local economic development, are also important potential clients for local banks. However, retail banks rarely act in this capacity. Indeed, recent studies show that most retail banks maintain a neutral and reactive stance in SME relationships (European Commission, 1996; UK Competition Commission, 2003). SMEs account for two thirds of employment and almost 60 per cent of added value in the European Union. However, despite any number of programs and research devoted to improving the preconditions for small business development, SMEs seem to be under-serviced (European Commission, 2003). Small communities in particular may lack the diversity of services, programs and resources necessary to support small businesses. Municipalities often have programs to support small businesses, but seldom the resources or expertise to give each business the tailored, long-term support it needs (Gibb, 1993). Banks have the potential to develop SMEs, but do not seem to take advantage of this prot opportunity. Infrastructure gaps and institutional mismatch Why dont more banks act as institutional intermediaries for small businesses? Two possible reasons are gaps in the local service infrastructure for small businesses, and a mismatch in the norms, codes of conduct, and organizational cultures of banks and SMEs. SMEs may expect their local retail bank to compensate for the gaps in the local nancial infrastructure (such as risk capital) or provide services such as business consulting, accounting, or strategy advice (European Commission, 1996). However, retail banks are generally not in the business of providing the risk capital or tailored business strategy advice required by these rms. The bank-SME relationship also reects an institutional mismatch. Silvers (2006) lje, study of relationships between banks and SMEs in the Municipality of Norrta Sweden nds evidence of unexploited gains from a closer bank-SME relationship, hindered by their respective institutional structures. Bank representatives operate within large, inexible, centralized organizations. Change comes slowly and decisions are highly restricted by rules, norms and procedures. Bank services are standardized and difcult to tailor protably. Small businesses, by contrast, are nimble, decentralized organizations. They trade on their uniqueness and utilize informal, long-term relationships in interpersonal networks. Therefore, the meeting between a bank representative and a small business owner is a meeting between disparate institutional and organizational structures (Silver, 2006). Similar ndings suggest that this phenomenon is not limited to Sweden (European Commission, 1996). Transforming the local institutional environment: a theoretical framework To examine this issue more closely, we must distinguish between infrastructure and institutions. For the purposes of this article, the infrastructure for small business development refers both to the to the facilities and resources available to small

business (services, capital or information) and the institutional environment. Institutions are rules, norms and codes of conduct that govern access to or use of resources, as well as the structures governing relationships among individuals or rms (Figure 1). Following Norths (1990) denition, this distinguishes institutions from organizations: organizations are political, economic, social or educational bodies characterized as groups of individuals bound by some common purpose to achieve objectives (North, 1990, pp. 4-5). Organizations act within the rule frameworks set by institutions. Using this framework, we can argue that communities seeking to improve the conditions for small business development should examine both the resources available to small businesses as well as the formal and informal institutions that affect access to resources. Institutions may structure relationships among organizations as well as interpersonal relationships. In a small community, institutions governing personal relationships such as trust may be as important to small business development as those structuring professional interactions such as contract provisions (Gibb, 1993; Howorth and Moro, 2006; Eriksson, 2006). Institutions are often described as being manifest at several nested and interacting scales, with a speed of institutional change related to scale. At a societal scale are deeply embedded and slowly changing norms and values. Below this level are several nested levels of formal and informal rules and regulations, from national regulations and cultural norms to regional, local, or branch-specic rules and norms. These may be slow to change or may change more quickly. Organizations and individual behavior are structured in response to these institutions and can change quickly (Williamson, 1998). Similarly, we can conceptualize relations among individuals or organizations at various institutional levels (Healey, 2007). In sum, small business access to and efcient use of resources is a function not only of the potential and capacity of the business itself, but of the capacity of institutions structuring its relationships (a social/relational perspective) and interactions (a structural/organizational perspective). Collaborative dialogue for improving local institutional capacity Collaboration theorists argue that an exploratory arena for common learning and discourse can improve institutions that support development. This concept is well developed within community planning theory and has also been given empirical support in business situations (Saxenian, 1994). It is argued to be particularly applicable in situations requiring an innovative approach, or for which results are uncertain (Senge, 1990; Forester, 1999). Innes and Booher (2003b) argue that the

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Figure 1. The relationship between infrastructure and institutions affecting SME development

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central way to assess long term collaborative planning is in terms of the degree to which it helps to build capacity of an organization or governance system to be self-organizing, intelligent, innovative and adaptive to changing conditions (pp. 10-11). In this article, collaboration is analyzed in terms of its ability to build capacity of the institutional environment for small businesses. Collaborative planning is dened by its emphasis on common exploratory learning achieved through dialogue among diverse and interdependent actors (Innes and Booher, 2003a). Collaborative dialogue has been argued to improve the capacity of institutions to mobilize and maintain supportive conditions for households and rms (Cars et al., 2002), and to help develop innovative solutions to development issues (Healey, 2003, 2007). Collaborations build networks that help participants quickly identify partners and form coalitions that can facilitate collective action. Over time, collaborative dialogue builds new institutions among participating partners that can help them adapt to changing situations creatively (Innes and Booher, 2003a). Collaboration may help diverse stakeholders move beyond individual or organizational interaction or conict to focus on the institutions that structure relationships: through learning how to collaborate, a richer and more broadly based understanding and awareness of locality relations and conicts can develop, through which collective approaches to resolving conicts may emerge (Healey, 1999). In other words, collaboration can help raise the level of analysis to focus on those institutions that structure specic situations. Figure 2 describes how collaborative dialogue can transform institutions. Collaborative dialogue builds relationships among stakeholders and in doing so

Figure 2. The role of collaborative dialogue in transforming institutions affecting small business development. Left side adapted from Williamson (1998); right side adapted from Healey (2007)

directly transforms social/relational institutions; for example, it typically builds trust, a common sense of problems and a common vision of goals (Healey, 1999, 2003; Forester, 1999). This increases the capacity of these stakeholder relationships to address current issues and also meet future challenges. Moreover, collaborative dialogue can transform the structural aspects of institutions and the resulting institutional arrangements (such as organizations) that develop to facilitate interactions among stakeholders. For example, collaborations often create (and are embedded in) interpersonal or inter-organizational networks. Collaborative dialogue can also identify structural gaps that hinder access to resources. For example, small businesses may not be aware of the support programs available to them. Collaboration among stakeholders can therefore help identify both relational and structural issues, suggest solutions, and in some cases even implement change directly (Healey, 2007). Collaborative dialogue for SME development? The literature on collaborative dialogue suggests that banks, SMEs and community leaders could create new institutions for identifying common goals and developing new initiatives to improve the institutional environment for SMEs. This includes promoting better bank-SME communication, but also providing nancial and business services that complement those offered by retail banks. Collaborative dialogue focuses on nding areas of commonality as well as difference between specic banks and small businesses but also among these actor types in general. In this sense, collaboration raises the level of dialogue from a dyadic bank-SME relationship to a level representing the local institutional environment for SMEs. The literature on collaborative dialogue suggests some criteria for success (for a review, see Innes and Booher, 2003a). The rst is an agreement among participants to engage in authentic dialogue, as free as possible from positioning, strategic sharing of information, and other misleading or manipulating tactics. This often requires a facilitator judged by participants to be impartial and objective. The agenda for the collaboration must be open-ended without predened rules other than a commonly determined goal. Participants must be diverse and inter-dependent, representing various and perhaps conicting interests but with a common acceptance that problems require a collective resolution approach. This study examines a case in which collaboration was pursued among a number of local stakeholders with a common interest in improving the local institutional capacity to support small business development. The literature suggests two working hypotheses to test. Institutional theory suggests that by raising the level of analysis to focus on the institutional environment for small businesses, collaboration has improved the operational situations in which SMEs and banks interact. Collaborative planning theory suggests that we will nd evidence of social or inter-organizational network development leading to innovative practices and initiatives. Case study methodology Flyvbjerg (2006) argues that even a single, context-specic case study can be an lje case ts important analytical tool for testing social science hypotheses. The Norrta the general criteria for collaborative dialogue well, and is therefore a good candidate for a critical case used to test the robustness of current theories of collaborative dialogue and its role in transforming institutions.

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A total of 17 interviews were conducted during the period October 2006-March 2007 with follow-up interviews in selected cases in September 2007. Interviews were in-depth, open-ended discussions based on a common series of general questions. Respondents described their own background, their understanding of project goals, and their experience working with it. Particular emphasis was placed on understanding motivations for participating in the collaboration, network links among participants, and the results of the collaboration. Respondents were asked to estimate their commitment to the project and the value of its results. Finally, respondents were asked to speculate on the future of the collaboration efforts. Materials reviewed include analyses, memoranda and project proposals. There is little documentation of several aspects of the project, such as where and when many meetings occurred or which actors attended them. Therefore, interview notes were used to reconstruct events. Respondents were selected based on their participation in the collaboration effort and their role in the regions development in general. Specic names were generated using a snowball sampling strategy, wherein one respondent generates proposals for further interviews (Patton, 1990). This method was chosen partly due the lack of project documentation, and partly because the identication of information-rich key informants provided insights into the personal and professional links that develop and sustain collaborative dialogue. Respondents identied different key actors, milestones, and priority issues in the projects inception and development. Although this makes the analysis of the case more difcult, it also underscores the thickness and embeddedness of institutional and personal ties among participants. Finally, existing documentation of interviews and analysis from 60 interviews with small businesses and bank representatives was reviewed to understand the particular lje (Silver, 2006; Silver and Vegholm, 2006). challenges to bank-SME relations in Norrta lje Project Case study: the Norrta lje, Sweden is located about one hour north of Stockholm The municipality of Norrta and has a small population (ca. 50,000) with about 17,000 in the city center and the rest in several smaller centers. There are at least 2,000 active small businesses with 2-15 employees, and as many as 4,500 one-man businesses. These range from service rms and shops to innovation rms in the electronics industry. The municipality is average lje is fairly stable and prosperous for Sweden in size and industrial structure. Norrta due to its diverse economic base and proximity to Stockholm. The area is also a popular summer recreation area and in recent decades many professionals have decided to retire there or commute to Stockholm. This has increased the local market for services and has also added a base of residents with secure retirement or other incomes, a strong interest in improving the community, and time to participate in volunteer or other initiatives. lje Project was initiated in 2002 to improve cooperation among municipal The Norrta representatives, academics, local retail banks, and local businesses to promote small lje Project has actually only operated as a formally business development. The Norrta coordinated project since 2005. Between 2002 and 2005 it can more accurately be described as self-organized and interlinked social networks representing issue areas. In 2005, these networks were coordinated under a new institute for applied nancial studies. The social networks continued to provide a structure for interaction among key individuals, while the coordinated initiative had the character of a project designed

to promote interaction among organizations. Therefore, this article will refer to a network structure and a project structure to denote this dual and at times simultaneously operating structure. This dual structure makes it virtually impossible to ascribe results to the network versus the project (as dened by the institute KAFI). However, there are several results that are arguably the result of the collaboration when taken as a whole. Therefore, this article refers to the collaboration when describing results. The discussion section analyses the structure of the network versus the project more closely and attempts to tease out the relative merits and constraints of both for the collaborative process in lje. Norrta Case description Network phase 2002-2005: self-organized interpersonal networks lje traces its origins to The collaboration for small business development in Norrta several simultaneous processes. The rst was the closing of a local military base that had been a major local employer and had also held a signicant plot of land. The municipality (including a municipally owned real estate development company) and some key local individuals, including a local electronics entrepreneur, became convinced that the plot should be redeveloped as a competence park called Campus Roslagen, where academic institutions and related education and technology companies could benet from cluster-type synergies. A researcher studying the potential for such a cluster on behalf of the municipality and the Swedish Agency for Economic and Regional Growth (NUTEK) introduced the issue of risk capital for innovative rms. This led to a venture capital course and the recruiting of select investors to a new angel company, eventually incorporated as RoAF (Roslagens rsa nglar). Affa Around 2002, the Centre for Banking and Finance (CEFIN) began studying the lje (documented in Silver, 2006). relationship between banks and SMEs in Norrta Meanwhile, in 2003 the municipality sought funds from the European Commission to study how nancial actors could become more active participants in SME development. Although the proposal was not funded, it cemented (informal) ties lje municipality, and was an avenue for initiating between CEFIN and Norrta discussions with local banks. Feedback from the ongoing research and interviews provided structure to these discussions. Another researcher, himself a long-time champion of small business issues, invested signicant personal time and effort into engaging key individuals in informal discussions about how to mobilize resources for a project initiative. In sum, between 2002 and 2005 networks of individuals interlinked by personal and professional ties had formed, discussing the campus redevelopment and the role of banks as an engine for community development. Also, the new angel company had begun to recruit investors and to build interest in risk capital development as an issue. In each case, the involvement of university researchers was seen as providing legitimacy and fostering a platform for innovative experiments in collaboration among diverse community actors. Respondents tended to describe this phase in terms of individuals and the importance of their many roles and network ties (professional and social) in moving the project forward.

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Project phase 2005-2007: from network to project, from individuals to organizations In 2004, the Swedish agency NUTEK announced it would support experiments in improving relationships between universities and business. Discussions with the major universities led to the creation of several such experiments, one of which was a new institute for applied nancial research, development and education owned by the university KTHs holding company and linked to the research at CEFIN. The ongoing lje was seen as an important rst project for such an institute collaboration in Norrta ljes banks and and NUTEK support was conditioned on matching funds from Norrta Campus Roslagen. In February 2005, nine partners signed a three-year cooperation agreement which included commitments of funding from three banks, the County lje, and the municipal Administrative Development Board, the municipality of Norrta real estate development company responsible for Campus Roslagen. The Institute (KAFI) would produce research, offer consulting services, and produce seminars, courses and conferences on the subject of local economic and nancial services and their impact on community development. This cooperation agreement was to fund and lje Project per se. support the Institute during its rst years of operation, not the Norrta However, the collaboration project has been and continues to be KAFIs primary focus. In this sense, the creation of KAFI also marked the development of the collaboration from a network structure comprised of individuals to a project structure comprised of organizational representatives. When describing the project period, respondents tend to speak in terms of positions, i.e. individuals as representatives of organizations with roles in the project. However, the social network continued to function during the project period. Currently: networks and project in competition KAFIs coordination helped to identify and facilitate new relationships among participants and foster a common understanding of the issues facing small businesses. In addition, new networks representing specic issue areas have coalesced or matured. However, these new entities also create competition for individual actors time, energies and funds. Respondents report that the collaborations various interest areas are becoming more fragmented, not more integrated. Many prefer to devote their energies to those coalitions and organizations closest to their own interests rather than to the collaboration group as a whole. Several reported that they now feel condent that they could initiate new initiatives with other actors without the structuring support of KAFI or another formal group. Respondents are strongly in support of some form of continued collaboration and information clearinghouse as long as someone else will pay for it. Several of the key individuals with an interest in all of the issue areas (and developing synergies among them) are either less involved, or are due to retire. The cooperation agreement and associated funding for this experiment expires in December 2007. Therefore the future of KAFI is uncertain. However, the new organizations created are developing norms, rules and structures and seem to have stable constituencies. Moreover, the relationships among individual actors seem to be developed enough to ensure ongoing contact even in the absence of a coordinating group. In this sense KAFI as an experiment can be said to have acted as a catalyst for developing some inter-organizational relationships that may be self-sustaining.

Results: a structural/organizational perspective New organizations The collaboration can be credited with forming a new institute (KAFI) and directly affecting the formation of two professional organizations: a mentor organization (RM) and a business service provider organization (FKR) These organizations did not create new resources; rather, they mobilized existing resources and provided a hitherto missing link between these resources and small businesses. The formal organization of KAFI under the universitys holding company served several purposes. It had some autonomy from the universitys nancial structure and regulations, but identied the Institute as part of the academic community. Formalization of the collaboration as an institute helped secure outside funding from banks and municipal and national public sector administrations and authorities. It also helped to structure interactions among the interpersonal networks and associated organizations. Finally, the creation of KAFI helped coordinate research initiatives and researchers within CEFIN. KAFI also created new organizations offering professional services to small businesses and then invited participants from each to participate in KAFIs action group. One was a non-prot mentor organization called Roslagsmentorer (RM). Participating mentors offer ten free hours of advice to small businesses; additional services may be arranged for a fee. The organization currently comprises 23 mentors, of which 22 are men. Most are retired or semi-retired professionals and many have experience owning small businesses. Several small businesses have been in contact with the mentors, including an automobile service station, a bee farmer, a tourism company, and a sh farmer. The mentor organization has also helped the municipality and local banks identify consultants for other projects. However, the organization does not monitor how many small business clients have taken advantage of the free services or have commissioned paid services. A KAFI course in small business service provision attracted 19 certied accountants of which 17 were encouraged by KAFI to form a professional organization. Business Competence in Roslagen (FKR) now has 19 members, of which 16 are women. The municipality funds the rst few hours of FKR member services to small businesses through a voucher worth SEK 1,000 (ca. e110). FKR reports that 36 companies have utilized the voucher as of mid-2007 and that a total of about 100 hours in additional assignments to those small businesses utilizing the voucher have been commissioned through the professional network. Banks expect that the mentor network and the business consultant association will help SMEs better clarify their nancial service needs and opportunities, facilitating their relationship with banks. Meanwhile, the new organizations provide SMEs with the closer, more exible long-term partner relationship they miss from the banks. In this sense, they represent intermediary actors that can bridge the institutional gap between banks and SMEs. Business consultants, themselves often one-man businesses, are professionally trained to help build small businesses and offer exible, personalized service tailored for each business. Mentors, often mid- or late-career executives with enough personal capital to be able to afford offering ten free consulting hours, offer SMEs an objective analysis of their business. Whereas small business owners report being wary that banks will sell them products and services that may not be suited to them, the mentors have no such incentive. Rather, mentors have incentives

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to build viable companies that may then invite them to serve on their boards of directors or buy additional consulting from them. New nancial services The project structure brought angel investment representatives (RoAF), banks and the municipality into closer contact. According to interviewed representatives from KAFI and RoAF, contacts through the project led to the creation of a new nancial instrument, a collateral-free growth loan offered by the local savings bank. The bank has a stated interest in community development but had previously not offered security-free loans to start-ups. The savings bank can reduce the substantial risk in offering a growth loan by exploiting RoAFs risk assessment expertise. RoAFs commitment to invest its own capital was also a signal that investment objects had potential. The growth loan offered by the savings bank is modest but signicant, up to three million Swedish kronor (ca. e325,000). In addition, all three banks note that the angel venture development company and an offshoot investment company called North Star have helped create new companies that will, and do, need a variety of banking and nancial management services. The banks have therefore been able to utilize RoAFs analyses and support of innovation start-ups to build and tailor new services that so far appear to be protable. RoAF, North Star and the growth loan have the provision that the company be located in the lje region or be willing to relocate there. At the time of writing, three growth Norrta loans have been issued. Recently, the savings bank became an investor in RoAF itself. Networks within networks Although the project structure has been described as competing for individual and organizational energies with the interpersonal networks, the project also provides a forum for developing new network relationships among participants such as bilateral, ad hoc or informal initiatives. The difference is that these tend to link organizations rather than individuals. FKR refers clients to the mentor network RM and vice versa. The banks and the municipality produce common small business forums and congresses. The municipality includes information about the new services and organizations for small businesses on its home page and other communications channels. Most actors are primarily focused on one or more of three issue areas: developing small business services risk capital and knowledge industry support, and the development of Campus Roslagen. Although there is considerable overlap in these interests, in practice the rst tends to focus on small or one-man rms in conventional industries while the latter two are concerned with attracting and developing growth rms in innovation industries. Recently, coordination responsibility for the campus development group was ofcially transferred to the municipality. Results: a social-relational perspective Recruitment to networks and to the project Most participants had been recruited to collaborate by a community or business leader they respected. An individual described by many as a pillar of the community was a key recruiter of collaboration participants. His standing was considered by most respondents to be important. I knew that (KL) wouldnt encourage me to be part of

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something that he didnt believe in himself, noted one respondent. Actors were also recruited by professional associates, some external to the group. For instance, the development director of Swedens National Agency for Higher Education gskoleverket) had ties to funding sources at other state agencies as well as to (Ho lje and to the academic community. Some of political and community leaders in Norrta these individuals, in turn, recruited members of their own professional networks. None of the actors interviewed reported knowing all or even most of the other collaboration participants previously. However, all had prior connections with one or more of the organizations involved. Many collaboration participants had served in a variety of different capacities, and recruited other participants from their professional and political networks. Roles among actors When the collaboration was structured as several self-organized social networks, there were no clearly dened roles for participants. In each group, one or more individuals took the personal responsibility to initiate meetings and recruit new network members. When the collaboration was formalized under KAFI, the project required the establishment of positions lled by organizational representatives. These were working groups for the institute, not the project per se. However, many respondents felt that since the institutes primary interest was in the collaboration activities in lje, stafng KAFI meant stafng the project. This confusion is now creating Norrta difculties as KAFI has taken on other projects and the initial funding period is soon ending (in December 2007). Groups were established, titled, and positions assigned to individuals in KAFI. These included a Board of Directors, an analysis and research group, and working groups for various issue areas (closely matching the networks). However, these groups and individual/organizational assignments changed frequently over the course of the project. There are currently two groups with regular meetings: the Board of Directors, and an Action Group comprising all other actors and acting as the main collaborative forum. Within a short period, however, some dening roles were evident. A KTH researcher helped to frame the issues and structure the meetings. Many interviewed participants noted that having a university gure take on this role gave the group an aura of legitimacy and neutrality. The municipal director of the department of business development took on the responsibility for planning meeting agendas. Notably, these roles had not been assigned, nor were they formally compensated. Most of the cost and task of administering meetings, gathering background information, etc., has been borne by KAFI. Now that this initial funding period is coming to a close, both the lje are under future of KAFI as an institute and continued collaboration in Norrta lje to model CEFINs partnership discussion. KAFI is using insights gained from Norrta with other Swedish communities and is moving its base to Stockholm. Meanwhile, a lje is what actor(s) or organization(s) could bear the responsibility key issue in Norrta and/or cost for continuing to steward the collaboration and further developing common products such as information portals or brochures, meetings and conferences. Participation patterns In the network phase, meetings were ad hoc and informal. Once KAFI established a project structure, norms for participation developed over time. In the 2005-2006 period

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there was signicant focus on building a common vision among the many diverse participants. Working groups were merged and/or encouraged to hold common meetings. An analysis of meeting notes from this phase shows that both the number and diversity of participants grew but then started to decrease by late 2006. Interviews suggest that this did not indicate a tapering off of interest, rather that many members preferred to work in smaller topic-specic groups or network informally with other members. Available meeting protocols underscore the uidity with which key individuals entered, exited, and shifted roles within the project (see Figure 3). Committees were formed, renamed or merged. Titles were not used with any consistency. The same individual might appear in one meeting protocol as a representative of KTH, at another as a representative of KAFI, and at a third representing the angel company RoAF. Several small businesses had been interviewed and/or participated in early discussions about SME issues, and were invited to participate in KAFI. However, both large and small businesses found the project too academic in character with little relevance to their practical concerns. Moreover, small companies had little time to spare to attend exploratory meetings. Even the benet of networking with high prole gures in the community or other businesses was considered too insufcient to rationalize their continued participation. This was discussed as a problem in mid-2005 (KAFI Styrelse-och strategigrupp, protokoll Nr. 05/01). However, interviews indicate that the problem was apparent far earlier. lje Project are Currently the small business representatives involved in the Norrta representatives for the small business consultant organization (FKR), the angel venture development company (RoAF) and the mentor organization RM. FKR and RM were lje Project, and RoAF was linked to the project as a condition created within the Norrta of public and bank foundation funding. In other words, small business owners participate only as representatives of larger organizations.

Figure 3. Number and diversity of participants in the lje Project, June Norrta 2005-June 2007

A core group of about nine individuals has been involved throughout the project once it became coordinated under KAFI. About six other participants were active, participating in several meetings, while at least 20 more attended once or sporadically. Some participants moved in and out of the group, participating when the group was discussing a topic of specic interest. During the middle phase of the project, when the project coordinator encouraged larger general meetings with a high diversity of participants, some actors started coming only to smaller working group meetings with a more specic topic. Discussion lje collaboration would seem to t reasonably well the criteria set by Innes The Norrta and Booher (2003a) for collaborative dialogue. A diverse set of actors representing banks, SMEs (representing both growth industries and more traditional rms), municipal representatives, and academics was actively recruited and encouraged to participate. Actors were motivated to act collectively because no actor had the resources, authority or inuence to transform local institutions single-handedly. The agenda for the collaboration group was open-ended. New ideas could be brought up at any juncture by any participant and often resulted in informal working groups, experiments, and new initiatives. Every respondent interviewed described the collaboration process as informal, open and fair, with a free exchange of views and ideas that approximates Innes and Boohers (2003a) denition of authentic dialogue The fact that the group had no budget other than in kind contributions of time and a small budget for administration, courses and a few meeting materials kept conversations focused on creating a common understanding of problems rather than the allocation of common resources. With that in mind, the results of the collaboration in the form of new nancial instruments, organizations and a considerable organizational network are impressive. Though a diverse group of individuals was recruited, small businesses in particular were difcult to retain. In addition, the core group of collaborators is in fact a fairly homogeneous in terms of age (over 55), gender (male), and ethnicity (Caucasian). This lje, as elsewhere, are more is despite the fact that small business owners in Norrta diverse in age, gender and ethnicity. An inclusive entry rule does not therefore necessarily translate into a diverse group of participants. This could be a classic example of diversity-accepting micromotives translating into homogeneous macrobehavior (Schelling, 1978). However, it might also reect institutional factors beyond simple boundary (entry or exit) rules. These are discussed below. Structural/organizational perspective We expected that the collaboration would develop interpersonal and inter-organizational networks. We also expected that the collaboration would identify structural gaps that hinder small businesses from accessing either social institutions (such as networks) or resources (such as credit). The collaboration rst developed as a network of individuals, matured into a project linking organizations, and can currently be described as a project that develops organizations, organizational relationships and inter-organizational initiatives. In other words, it exhibits a dynamic network structure linking both individuals and organizations.

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The collaboration also proved successful in identifying and reducing structural gaps by creating the mentor and business consultant organizations. Respondents specically noted the importance of these organizations in mobilizing a slumbering resource represented by mentors, many of whom are retired or semi-retired and willing to volunteer several hours. When accountants received training offered by KAFI and created a professional organization, they could accept municipal vouchers, thereby improving small business access to consulting services. The benets of lling these gaps are already evidenced. Participating banks are actively referring small company clients to these organizations for help in structuring business plans that can hopefully provide the basis for a more effective portfolio of banking services. A bank representative also reported that her understanding of small business issues had been deepened as a result of the presence of the mentors and the business consultants in the project. Just as important, the collaborations own institutions show a capacity to adapt to changing situations. As the social networks developed and participants began to complain about the plethora of fragmented and ad hoc groups, KAFI formed to structure and coordinate the collaboration. This new structure created new links among participants that had been only very weakly associated previously, such as banks and the angel venture development company. However, the project structure proved less efcient for many individuals and small companies not afliated with larger companies, associations or institutes: these disappeared in the project phase. Social-relational perspective Based on the literature, we expected to nd evidence of social or inter-organizational network development resulting in a higher propensity to cooperate to develop innovative initiatives, due to increased trust and a common understanding of issues. Finally, we conjectured that by raising the level of analysis to focus on the institutional environment for small businesses, the collaboration would improve the operational situations in which SMEs and banks interact. The social-relational perspective on the institutional environment for small businesses focuses on the relationships among stakeholders in the collaboration including small businesses themselves. Here we nd all interviewed respondents claiming increased personal awareness of small business concerns and that the collaboration has helped to build trust, share information and dene a common agenda for change. The effects on the bank-SME relationship are less clear. The mentoring and service organizations may help small business owners adapt better to banking institutions. For example, mentors and advisors can help SMEs create better strategic plans, and as one consultant put it, help them speak in a language that banks can understand. Bank representatives in the collaboration also report having a greater sensitivity to SME challenges. However, both small business owners and collaborating bank managers were reluctant to claim that meetings between a small business owner and her bank representative have improved. As one bank manager noted, It may just be too soon to tell. Nevertheless, this suggests a direction for future research on collaboration as a relational strategy. Collaboration relies on raising the level of analysis from the operational to the strategic level, but also on its inclusion of all key stakeholders. When a stakeholder is a one-man business, he represents both operational and strategic functions within an organization; banks and municipalities can easily assign someone with a

strategic function to a collaboration group. Therefore, a strategic focus may be difcult to combine with a goal of inclusiveness and stakeholder diversity. It could be argued that the interpersonal networks built up trust and common understanding over the rst several years (2002-2005) that the inter-organizational project under KAFI could be used to mobilize organizational resources and create organizational links. This is evidenced by the fact that organizational ties persisted despite the exit of some individuals and the entry of new ones due to career changes. As one bank respondent noted, I got the impression from my previous colleague that this project was prioritized within the bank. Once mature, these inter-organizational ties may persist without the coordinating energies of the project or KAFI. Concluding remarks This case supports the notion that collaboration can improve local institutional capacity to support small business development. The collaboration forged new relationships among a broad group of actors that developed trust, a common understanding of issues, and an interest in nding solutions. These relational institutions helped to actively ll structural gaps hindering stakeholders from interacting by creating new organizations, and also created its own structures for continued collaboration. The collaboration even resulted in new resources (a new nancial instrument) and more efcient use of existing local resources (retired professionals, accountants trained as business consultants). However, the case also suggests that the research agenda for the study of collaboration should include studying institutional factors that can exclude some actors such as small businesses from participating.
References es, C. (Eds) (2002), Urban Governance, Cars, G., Healey, P., Madanipour, A. and de Maghalha Institutional Capacity and Social Milieux, Ashgate, Aldershot. Eriksson, K. (Ed.) (2006), Utveckling av kundrelationer inom bank- och nansmarknader, Studentlitteratur, Lund. European Commission (1996), Second Round Table of Bankers and SMEs: Final Report, European Commission, Brussels. European Commission (2003), Creating an entrepreneurial Europe: the activities of the European Union for small and medium-sized enterprises (SMEs), Commission Staff Working Paper, COM(2003) 26, European Commission, Brussels. Flyvbjerg, B. (2006), Five misunderstandings about case study research, Qualitative Inquiry, Vol. 12 No. 2, pp. 219-45. Forester, J. (1999), The Deliberative Practitioner: Encouraging Participatory Planning Processes, MIT Press, Cambridge, MA. Gibb, A.A. (1993), Key factors in the design of policy support for the small and medium enterprise (SME) development process: an overview, Entrepreneurship and Regional Development, Vol. 5 No. 1, pp. 1-24. Healey, P. (1999), Institutionalist analysis, communicative planning, and shaping places, Journal of Planning Education and Research, Vol. 19, pp. 111-21. Healey, P. (2003), Collaborative planning in perspective, Planning Theory, Vol. 2 No. 2, pp. 101-23.

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Healey, P. (2007), The new institutionalism and the transformative goals of planning, in Verma, N. (Ed.), Institutions and Planning, Elsevier, Amsterdam, pp. 61-91. Howorth, C. and Moro, A. (2006), Trust within entrepreneur bank relationships: insights from Italy, Entrepreneurship Theory and Practice, Vol. 30 No. 4, pp. 495-517. Innes, J. and Booher, D.E. (2003a), Collaborative policymaking: governance through dialogue, in Hajer, M. and Wagenaar, H. (Eds), Deliberative Policy Analysis: Understanding Governance in the Network Society, Cambridge University Press, Cambridge, pp. 33-59. Innes, J.E. and Booher, D.E. (2003b), The impact of collaborative planning on governance capacity, City and Regional Planning Working Paper 2003-03, University of California at Berkeley, Berkeley, CA. North, D. (1990), Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge. Patton, M.Q. (1990), Qualitative Evaluation and Research Methods, 2nd ed., Sage Publications, Thousand Oaks, CA. Saxenian, A. (1994), Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Harvard University Press, Cambridge, MA. Senge, P.M. (1990), The Fifth Discipline: The Art and Practice of the Learning Organization, Currency Doubleday, New York, NY. fo retagaren och lokalsamha llet, research report, Centre for Banking and Silver, L. (2006), Sma Finance, Royal Institute of Technology, Stockholm. ter stor: na r den lilla fo retagen mo ter den stora Silver, L. and Vegholm, F. (2006), Liten mo banken, in Eriksson, K. (Ed.), Utveckling av kundrelationer inom bank- och nansmarknader, Studentlitteratur, Lund. Williamson, O.E. (1998), Transaction cost economics: how it works; where it is headed, De Economist, Vol. 146, pp. 23-58. About the author Amy Rader Olsson is a public policy analyst and regional development planner with over 15 years of professional experience in the USA, Europe and Asia. She is currently a doctoral candidate at the Centre for Banking and Finance, Royal Institute of Technology, Stockholm, Sweden, and a consultant with WSP Analysis and Strategy. Her research interests include institutions for collaborative and communicative policy planning and the governance of metropolitan regions. Amy Rader Olsson can be contacted at: amy.olsson@infra.kth.se

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