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ISSN 1940-1884

nternational Handbook of Academic Research and Teaching

2009 Proceedings
Volume 8
Published by: Intellectbase International Consortium

INTELLECTBASE INTERNATIONAL CONSORTIUM


Academic Conference, Las Vegas, NV, Dec. 17-19, 2009
Intellectual Perspectives & Multi-Disciplinary Foundations

Conference Proceedings
Winter 2009
PROGRAM COMMITTEE
Dr. David King
Conference Chair & Editor
Mrs. Karina Dyer
Australian Affiliate & Senior Executive

Dr. Danka Radulovic

Mr. Ben Murray

Dr. Jiri Strouhal

Academic Associate

Web Manager & Research Associate

Academic Associate

CONFERENCE ORGANIZERS & INTERNATIONAL AFFILIATES


United States

Australia

Europe

Ms. Stephanie Lucero

Mrs. Karina Dyer

Mr. Kevin Kofi

Ms. Tiara Walker

Mr. Graeme William

Mr. Benjamin Effa

Mrs. Erin Murray

Ms. Michelle Joanne

Ms. Christina Maame

Ms. Loria Hampton

Mrs. Wendy Morrell

Mr. Kenneth Obeng

www.intellectbase.org

Published by Intellectbase International Consortium (IIC) Conference Committee:


Intellectbase International Consortium, 1615 Seventh Avenue North, Nashville, TN 37208, USA
ISSN (Print):
ISSN (CD-ROM):

1940-1876
1940-1884

--------- Issued by the Library of Congress, Washington DC, USA


--------- Issued by the Library of Congress, Washington DC, USA

2009. This volume is copyright to the Intellectbase International Consortium Academic Conferences. Apart from use as
permitted under the Copyright Act of 1976, no part may be reproduced by any process without prior written permission.

EXECUTIVE EDITORIAL BOARD (EEB) AND REVIEWERS TASK PANEL (RTP)


Dr. David White
Roosevelt University, USA

Dr. Dennis Taylor


RMIT University, Australia

Dr. Danka Radulovic


University of Belgrade, Serbia

Dr. Harrison C. Hartman


University of Georgia, USA

Dr. Sloan T. Letman, III


American Intercontinental University, USA

Dr. Sushil Misra


Concordia University, Canada

Dr. Jiri Strouhal


University of Economics-Prague, Czech Republic

Dr. Avis Smith


New York City College of Technology, USA

Dr. Joel Jolayemi


Tennessee State University, USA

Dr. Smaragda Papadopoulou


University of Ioannina, Greece

Dr. Xuefeng Wang


Taiyun Normal University, China

Dr. Burnette Hamil


Mississippi State University, USA

Dr. Jeanne Kuhler


Auburn University, USA

Dr. Alejandro Flores Castro


Universidad de Pacifico, Peru

Dr. Babalola J. Ogunkola


Olabisi Onabanjo University, Nigeria

Dr. Robert Robertson


Southern Utah University, USA

Dr. Debra Shiflett


American Intercontinental University, USA

Dr. Sonal Chawla


Panjab University, India

Dr. Cheaseth Seng


RMIT University, Australia

Dr. Jianjun Yin


Jackson State Univerrsity, USA

Dr. R. Ivan Blanco


Texas State University San Marcos, USA

Dr. Shikha Vyas-Doorgapersad


North-West University, South Africa

Dr. Tahir Husain


Memorial University of Newfoundland, Canada

Dr. James D. Williams


Kutztown University, USA

Dr. Jifu Wang


University of Houston Victoria, USA

Dr. Tehmina Khan


RMIT University, Australia

Dr. Janet Forney


Piedmont College, USA

Dr. Werner Heyns


Savell Bird & Axon, UK

Dr. Adnan Bahour


Zagazig University, Egypt

Dr. Mike Thomas


Humboldt State University, USA

Dr. Rodney Davis


Troy University, USA

Dr. William Ebomoyi


Chicago State University, USA

EXECUTIVE EDITORIAL BOARD (EEB) AND REVIEWERS TASK PANEL (RTP) (Continued)
Dr. Mumbi Kariuki
Nipissing University, Canada

Dr. Khalid Alrawi


Al-Ain University of Science and Technology, UAE

Dr. Mohsen Naser-Tavakolian


San Francisco State University, USA

Dr. Joselina Cheng


University of Central Oklahoma, USA

Dr. Rafiuddin Ahmed


James Cook University, Australia

Dr. Natalie Housel


Tennessee State University, USA

Dr. Regina Schaefer


University of La Verne, USA

Dr. Nitya Karmakar


University of Western Sydney, Australia

Dr. Ademola Olatoye


Olabisi Onabanjo University, Nigeria

Dr. Anita King


University of South Alabama, USA

Dr. Dana Tesone


University of Central Florida, USA

Dr. Lloyd V. Dempster


Texas A & M University - Kingsville, USA

Dr. Farhad Simyar


Chicago State University, USA

Dr. Bijesh Tolia


Chicago State University, USA

Dr. John O'Shaughnessy


San Francisco State University, USA

Dr. John Elson


National University, USA

Dr. Stephen Kariuki


Nipissing University, Canada

Dr. Demi Chung


University of Sydney, Australia

Dr. Rose Mary Newton


University of Alabama, USA

Dr. James (Jim) Robbins


Trinity Washington University, USA

Dr. Mahmoud Al-Dalahmeh


University of Wollongong, Australia

Dr. Jeffrey (Jeff) Kim


University of Washington, USA

Dr. Shahnawaz Muhammed


Fayetteville State University, USA

Dr. Dorothea Gaulden


Sensible Solutions, USA

Dr. Brett Sims


Grambling State University, USA

Dr. Gerald Marquis


Tennessee State University, USA

Dr. Frank Tsui


Southern Polytechnic State University, USA

Ms. Katherine Leslie


American Intercontinental University, USA

Dr. John Tures


LaGrange College, USA

Dr. David Davis


The University of West Florida, USA

Dr. Mary Montgomery


Jacksonville State University, USA

Dr. Peter Ross


Mercer University, USA

Dr. Frank Cheng


Central Michigan University, USA

Dr. Van Reidhead


University of Texas-Pan American, USA

Dr. Vera Lim Mei-Lin


The University of Sydney, Australia

Dr. Denise Richardson


Bluefield State College, USA

Dr. Robin Latimer


Lamar University, USA

Dr. Reza Vaghefi


University of North Florida, USA

Ms. Alison Duggins


American Intercontinental University, USA

Dr. Jeffrey Siekpe


Tennessee State University, USA

EXECUTIVE EDITORIAL BOARD (EEB) AND REVIEWERS TASK PANEL (RTP) (Continued)
Dr. Michael Alexander
University of Arkansas at Monticello, USA

Dr. Greg Gibbs


St. Bonaventure University, USA

Dr. Kehinde Alebiosu


Olabisi Onabanjo University, Nigeria

Dr. Mike Rippy


Troy University, USA

Dr. Gina Pipoli de Azambuja


Universidad de Pacifico, Peru

Dr. Steven Watts


Pepperdine University, USA

Dr. Andy Ju An Wang


Southern Polytechnic State University, USA

Dr. Ada Anyamene


Nnamdi Azikiwe University, Nigeria

Dr. Edilberto Raynes


Tennessee State University, USA

Dr. Nancy Miller


Governors State University, USA

Dr. Dobrivoje Radovanovic


University of Belgrade, Serbia

Dr. David F. Summers


University of Houston-Victoria, USA

Dr. George Romeo


Rowan University, USA

Dr. Robert Kitahara


Troy University Southeast Region, USA

Dr. William Root


Augusta State University, USA

Dr. Brandon Hamilton


Hamilton's Solutions, USA

Dr. Natalie Weathers


Philadelphia University, USA

Dr. William Cheng


Troy University, USA

Dr. Linwei Niu


Claflin University, USA

Dr. Taida Kelly


Governors State University, USA

Dr. Nesa LAbbe Wu


Eastern Michigan University, USA

Dr. Denise de la Rosa


Grand Valley State University, USA

Dr. Rena Ellzy


Tennessee State University, USA

Dr. Kimberly Johnson


Auburn University Montgomery, USA

Dr. Kathleen Quinn


Louisiana State University, USA

Dr. Sameer Vaidya


Texas Wesleyan University, USA

Dr. Josephine Ebomoyi


Northwestern Memorial Hospital, USA

Dr. Pamela Guimond


Governors State University, USA

Dr. Douglas Main


Eastern New Mexico University, USA

Dr. Vivian Kirby


Kennesaw State University, USA

Dr. Sonya Webb


Montgomery Public Schools, USA

Dr. Randall Allen


Southern Utah University, USA

Dr. Angela Williams


Alabama A&M University, USA

Dr. Claudine Jaenichen


Chapman University, USA

Dr. Carolyn Spillers Jewell


Fayetteville State University, USA

Dr. Richard Dane Holt


Eastern New Mexico University, USA

Dr. Kingsley Harbor


Jacksonville State University, USA

Dr. Barbara-Leigh Tonelli


Coastline Community College, USA

Dr. Joan Popkin


Tennessee State University, USA

Dr. William J. Carnes


Metropolitan State College of Denver, USA

EXECUTIVE EDITORIAL BOARD (EEB) AND REVIEWERS TASK PANEL (RTP) (Continued)
Dr. Chris Myers
Texas A & M University Commerce, USA

Dr. Faith Anyachebelu


Nnamdi Azikiwe University, Nigeria

Dr. Kevin Barksdale


Union University, USA

Dr. Donna Cooner


Colorado State University, USA

Dr. Michael Campbell


Florida A&M University, USA

Dr. Kenton Fleming


Southern Polytechnic State University, USA

Dr. Thomas Griffin


Nova Southeastern University, USA

Dr. Zoran Ilic


University of Belgrade, Serbia

Dr. James N. Holm


University of Houston-Victoria, USA

Dr. Edilberto A. Raynes


Tennessee State University, USA

Dr. Richard Dane Holt


Veterans' Administration, USA

Dr. Cerissa Stevenson


Colorado State University, USA

Dr. Rhonda Holt


New Mexico Christian Children's Home, USA

Dr. Donna Stringer


University of Houston-Victoria, USA

Dr. Yu-Wen Huang


Spalding University, USA

Dr. Lesley M. Mace


Auburn University Montgomery, USA

Dr. Christian V. Fugar


Dillard University, USA

Dr. Cynthia Summers


University of Houston-Victoria, USA

Dr. John M. Kagochi


University of Houston-Victoria, USA

Dr. Barbara-Leigh Tonelli


Coastline Community College, USA

Dr. Yong-Gyo Lee


University of Houston-Victoria, USA

Dr. Rehana Whatley


Oakwood University, USA

Dr. George Mansour


DeVry College of NY, USA

Dr. Jianjun Yin


Jackson State University, USA

Dr. Peter Miller


Indiana Wesleyan University, USA

Dr. Carolyn S. Payne


Nova Southeastern University, USA

Dr. Ted Mitchell


University of Nevada, USA

Dr. Veronica Paz


Nova Southeastern University, USA

Dr. Alma Mintu-Wimsatt


Texas A & M University Commerce, USA

Dr. Terence Perkins


Veterans' Administration, USA

Dr. Liz Mulig


University of Houston-Victoria, USA

Dr. Dev Prasad


University of Massachusetts Lowell, USA

Dr. Robert R. O'Connell Jr.


JSA Healthcare Corporation, USA

Dr. Kong-Cheng Wong


Governors State University, USA

Dr. P.N. Okorji


Nnamdi Azikiwe University, Nigeria

Dr. Azene Zenebe


Bowie State University, USA

Dr. James Ellzy


Tennessee State University, USA

Dr. Sandra Davis


The University of West Florida, USA

Dr. Padmini Banerjee


Delaware State University, USA

Dr. Yvonne Ellis


Columbus State University, USA

EXECUTIVE EDITORIAL BOARD (EEB) AND REVIEWERS TASK PANEL (RTP) (Continued)
Dr. Aditi Mitra
University of Colorado, USA

Dr. Elizabeth Kunnu


Tennessee State University, USA

Dr. Myna German


Delaware State University, USA

Dr. Brian A. Griffith


Vanderbilt University, USA

Dr. Robin Oatis-Ballew


Tennessee State University, USA

Mr. Corey Teague


Middle Tennessee State University, USA

Dr. Dirk C. Gibson


University of New Mexico, USA

Dr. Joseph K. Mintah


Azusa Pacific University, USA

Dr. Susan McGrath-Champ


University of Sydney, Australia

Dr. Raymond R. Fletcher


Virginia State University, USA

Dr. Bruce Thomas


Athens State University, USA

Dr. Yvette Bolen


Athens State University, USA

Dr. William Seffens


Clark Atlanta University, USA

Dr. Svetlana Peltsverger


Southern Polytechnic State University, USA

Dr. Kathy Weldon


Lamar University, USA

Dr. Caroline Howard


TUI University, USA

Dr. Shahram Amiri


Stetson University, USA

Dr. Philip H. Siegel


Augusta State University, USA

Dr. Virgil Freeman


Northwest Missouri State University, USA

Dr. William A. Brown


Jackson State University, USA

Dr. Larry K. Bright


University of South Dakota, USA

Dr. M. N. Tripathi
Xavier Institute of Management Bhubaneswar, India

Dr. Barbara Mescher


University of Sydney, Australia

Dr. Ronald De Vera Barredo


Tennessee State University, USA

Dr. Jennifer G. Bailey


Bowie State University, USA

Dr. Samir T. Ishak


Grand Valley State University, USA

Dr. Julia Williams


University of Minnesota Duluth, USA

Dr. Stacie E. Putman-Yoquelet


Tennessee State University, USA

Mr. Prawet Ueatrongchit


University of the Thai Chamber of Commerce, Thailand

Dr. Curtis C. Howell


Georgia Southwestern University, USA

Dr. Stephen Szygenda


Southern Methodist University, USA

Dr. E. Kevin Buell


Augustana College, USA

Dr. Kiattisak Phongkusolchit


University of Tennessee at Martin, USA

Dr. Simon S. Mak


Southern Methodist University, USA

Dr. Reza Varjavand


Saint Xavier University, USA

Dr. Ibrahim Kargbo


Coppin State University, USA

Dr. Stephynie C. Perkins


University of North Florida, USA

Mrs. Donnette Bagot-Allen


Judy Piece Monteserrat, USA

Dr. Robert Robertson


Saint Leo University, USA

Dr. Michael D. Jones


Kirkwood Community College, USA

10

EXECUTIVE EDITORIAL BOARD (EEB) AND REVIEWERS TASK PANEL (RTP) (Continued)
Dr. Kim Riordan
University of Minnesota Duluth, USA

Dr. Eileen J. Colon


Western Carolina University, USA

Mrs. Patcharee Chantanabubpha


University of the Thai Chamber of Commerce, Thailand

Mr. Jeff Eyanson


Azusa Pacific University, USA

Dr. Neslon C. Modeste


Tennessee State University, USA

Dr. Eleni Coukos Elder


Tennessee State University, USA

Mr. Wayne Brown


Florida Institute of Technology, USA

Dr. Brian Heshizer


Georgia Southwestern University, USA

Dr. Tina Y. Cardenas


Paine College, USA

Dr. Thomas K. Vogel


Stetson University, USA

Dr. Ramprasad Unni


Portland State University, USA

Dr. Hisham M. Haddad


Kennesaw State University, USA

Intellectbase International Consortium and the Conference Program Committee express their sincere thanks to the following sponsors:
The Ellzy Foundation
The King Foundation
Tennessee State University (TSU)
International Institute of Academic Research (IIAR)

PREFACE
Intellectbase International Consortium (IIC) is a professional and academic organization dedicated to advancing and
encouraging quantitative and qualitative, including hybrid and triangulation, research practices. This volume contains articles
presented at the Winter 2009 Intellectbase International Consortium Academic Conference in Las Vegas, NV USA, Dec. 17-19.
The conference provides an open forum for Academics, Scientists, Researchers, Engineers and Practitioners from a wide
range of research disciplines. It is the eigth volume produced in a unique, peer-reviewed multi-disciplinary format and
intellectual foundation (See back cover of the proceedings).
Intellectbase International Consortium is responsible for publishing innovative and refereed research work on the following hard
and soft systems related themes Business, Education, Science, Technology, Management, Administration, Political and
Social (BESTMAPS). The scope of the proceeding (IHART) includes: literature reviews and critiques, data collection and
analysis, data evaluation and merging, research design and development, hypothesis-based creativity and reliable data
interpretation.
The theme of the proceeding is related to pedagogy, research methodologies, organizational practice, ethics, accounting,
management, leadership, policy and political issues, health-care systems, engineering, social psychology, eBusiness,
marketing, technology and information science. Intellectbase International Consortium promotes broader intellectual resources
and exchange of ideas among global research professionals through a collaborative process.
To accomplish research collaboration, knowledge sharing and transfer, Intellectbase is dedicated to publishing a range of
refereed academic Journals, book chapters and conference proceedings, as well as sponsoring several annual academic
conferences globally.
Senior, Middle and Junior level scholars are invited to participate and contribute one or several article(s) to the Intellectbase
International conferences. Intellectbase welcomes and encourages the active participation of all researchers seeking to
broaden their horizons and share experiences on new research challenges, research findings and state-of-the-art solutions.
SCOPE & MISSION

Build and stimulate intellectual interrelationships among individuals and institutions who have interest in the research
discipline.

Promote the collaboration of a diverse group of intellectuals and professionals worldwide.

Bring together researchers, practitioners, academicians, and scientists across research disciplines globally - Australia,
Europe, Africa, North America, South America and Asia.

Support governmental, organizational and professional research that will enhance the overall knowledge, innovation
and creativity.

Present resources and incentives to existing and new-coming scholars who are or planning to become effective
researchers or experts in a global research setting.

Promote and publish professional and scholarly journals, handbook, book chapters and other forms of refereed
publications in diversified research disciplines.

Plan, organize, promote, and present educational prospects - conferences, workshops, colloquiums, conventions
for global researchers.

LIST OF AUTHORS
Last Name

First Name

Institution

State

Country

Bretherton

Phil

Charles Darwin University

NT

Australia

Brown

Christopher J.

University of North Florida

FL

USA

Buchanan

June

Macquarie University

NSW

Australia

Burke

Rachel

University of Newcastle

NSW

Australia

Campbell

Jeffrey

University of Tennessee

TN

USA

Chang

Phillip

Aramis Technology LLC

CA

USA

Chavez

Joseph

Nova Southeastern University

FL

USA

Chawla

Sonal

Panjab Univeristy

Cherrie

Matt

Azusa Pacific University

Chiu

Shao-I

Taipei College of Maritime Technology

Taiwan

Choi

Chang kon

Chonbuk National University

Korea

Civi

Emin

University of New Brunswick

Canada

Costello

Carol

University of Tennessee

TN

USA

Curci

Ernie

World Disney World Company

FL

USA

Dandy

Roscoe

Nova Southeastern University

FL

USA

Deari

Fitim

South East European University of Tetovo

Dence

Thomas P.

Ashland University

OH

USA

DiPaolo

Peter T.

Nova Southeastern University

FL

USA

Douglass

Richard L.

Eastern Michigan University and


Ashesi University

MI and
ACCRA

USA and
GHANA

Dygos

Derek Kenneth

University of New Brunswick

Elston

Frank

Metropolitan State College of Denver

Erkan

Birol

University of Kilis 7 Aralik

Ferrer

Mario

Central Queensland University

QLD

Australia

Geertsen

Reed

Utah State University

UT

USA

Geng

Lifeng

Lakehead University

ON

Canada

India
CA

USA

Macedonia

Canada
CO

USA
Turkey

LIST OF AUTHORS (CONTINUED)


Last Name

First Name

Institution

State

Country

Gomez

Ramon

Florida International University

FL

USA

Griffin

Thomas E.

Nova Southeastern University

FL

USA

Haddad

Hisham M.

Kennesaw State University

GA

USA

Hansen

David E.

Texas Southern University

TX

USA

Hansen-Brown

Laura J.

Webster University

FL

USA

Haq

Farooq

Charles Darwin University

QLD

Australia

Harris

Alan

University of North Florida

FL

USA

Hu

Hsiu-Yuan

Taipei College of Maritime Technology

Jackson

Carl

Cameron University

OK

USA

Jasani

Hetal

Northern Kentucky University

KY

USA

Jones

Michael

UNIVERSITY OF WOLLONGONG

NSW

Australia

Jung

Wookyung

Changwon National University

Korea

Jung

Jongyun

Changwon National University

Korea

Kim

Jiekwan

Changwon National University

Korea

King

Anita H.

University of South Alabama

AL

USA

Kroff

Michael W.

Montana State University

MT

USA

Kwon

Jasmin Hyunju

Middle Tennessee State University

TN

USA

Lee

Dongpo

Changwon National University

Korea

Lin

Sue-Jen

I-Shou University

Taiwan

Mano

Ronald M.

Weber State University

Utah

USA

Martinez

Jose Gerardo Martinez

Universidad de Puerto Rico

PR

USA

Medhekar

Anita

CQ University

QLD

Australia

Mintah

Joseph K.

Azusa Pacific University

CA

USA

Norman

Scott

Azusa Pacific University

CA

USA

Olagbegi

Olayemi

Kennesaw State University

GA

USA

ii

Taiwan

LIST OF AUTHORS (CONTINUED)


Last Name

First Name

Institution

Park

Youngjin

Inpack Global Inc.

Pfaffenberg

Carl

Stephen F. Austin State University

TX

USA

Pickler

Lee

Baldwin-Wallace College

OH

USA

Radovanovic

Dobrivoje

University of Belgrade

Serbia

Radulovic

Danka

University of Belgrade

Serbia

Reilly

Mike

Montana State University

MT

USA

Rim

Hong

Shippensburg University

PA

USA

Rodgers

Joel E.

Nova Southeastern University

FL

USA

Setaputra

Robert

Shippensburg University

PA

USA

Shafiezadehgarousi

Reza

Azad University

Saveh

Iran

Shin

Kyungwook

Changwon National University

Korea

Singla

R. K.

Panjab Univeristy

India

Smith

Avis

New York City College of Technology

NY

USA

Smith

Lenford A.

Nova Southeastern University

MD

USA

Strouhal

Jiri

University of Economics Prague

Thompson

Jobecka

Utah State University

UT

USA

Toledo

Maria

Nova Southeastern University

FL

USA

Van

Dinh Thi Thanh

Vietnam National University

Weinstein

Lawrence

Cameron University

OK

USA

Wolf

Frank E.

Nova Southeastern University

FL

USA

Wood

Frank E.

Nova Southeastern University

FL

USA

Wu

Tung-Shen

Hsiuping Institute of Technology

Wu

Penn

Cypress College

CA

USA

Yao

Qingshuang

Thermo Fisher Scentific

ON

Canada

Yuan

Fang

Nova Southeastern University

FL

USA

iii

State

Country
Korea

Czech
Republic

Vietnam

Taiwan

LIST OF INSTITUTIONS, STATES AND COUNTRIES


Institution

State

Country

Aramis Technology LLC

CA

USA

Ashesi University

Accra

Ghana

Ashland University

OH

USA

Azad University

Saveh

Iran

Azusa Pacific University

CA

USA

Baldwin-Wallace College

OH

USA

Cameron University

OK

USA

Changwon National University

Korea

Charles Darwin University

NT

Chonbuk National University

Australia
Korea

CQ University

QLD

Australia

Cypress College

CA

USA

Eastern Michigan University

MI

USA

Florida International University

FL

USA

Hsiuping Institute of Technology

Taiwan

Inpack Global Inc.

Korea

I-Shou University

Taiwan

Kennesaw State University

GA

USA

Lakehead University

ON

Canada

Macquarie University

NSW

Australia

Metropolitan State College of Denver

CO

USA

Middle Tennessee State University

TN

USA

Montana State University

MT

USA

Northern Kentucky University

KY

USA

New York City College of Technology

NY

USA

iv

LIST OF INSTITUTIONS, STATES AND COUNTRIES (CONTINUED)


Nova Southeastern University

FL

Panjab Univeristy

USA
India

Shippensburg University

PA

South East European University of Tetovo

USA
Macedonia

Stephen F. Austin State University

TX

Taipei College of Maritime Technology

USA
Taiwan

Texas Southern University

TX

USA

Thermo Fisher Scentific

ON

Canada

Universidad de Puerto Rico

PR

USA

University of Belgrade

Serbia

University of Economics Prague

Czech Republic

University of Kilis 7 Aralik

Turkey

University of New Brunswick

Canada

University of Newcastle

NSW

Australia

University of North Florida

FL

USA

University of South Alabama

AL

USA

University of Tennessee

TN

USA

University of Wollongong

NSW

Australia

Utah State University

UT

USA

Vietnam National University

Vietnam

Weber State University

Utah

USA

Webster University

FL

USA

World Disney World Company

FL

USA

INTELLECTBASE INTERNATIONAL CONSORTIUM


Intellectual Perspectives & Multi-Disciplinary Foundations

EDUCATION
BUSINESS

SCIENCE

MULTI-DISCIPLINARY

SOCIAL

FOUNDATIONS

TECHNOLOGY

&

PERSPECTIVES

POLITICAL

MANAGEMENT
ADMINISTRATION

A Commitment to Academic Excellence.


www.intellectbase.org

TABLE OF CONTENT
LIST OF AUTHORS .............................................................................................................................................. I
LIST OF INSTITUTIONS, STATES AND COUNTRIES ...................................................................................... IV
SECTION 1: BUSINESS & MANAGEMENT
Information Asymmetry and Inter-Firm Relationships: Are there any Linkages?
Mario Ferrer, Anita Medhekar and Phil Bretherton ....................................................................................................... 1
The Interrelationship among ERP, Supplier Coordination, and Procurement Outcome: Exploratory
Findings from a Cross-National Study
Jos Gerardo Martnez Martnez ................................................................................................................................ 11
Golden Parachutes and their Effects on Organizational Financial Decision
Peter T DiPaolo, Ernie Curci and Thomas Griffin ....................................................................................................... 20
A Comparative Study of Vietnamese and American Customers Behavior in Negotiation Style and
Implications for Global Pricing Strategy
Dinh Thi Thanh Van, Lee Pickler, Frank Wolf and Thomas E. Griffin ......................................................................... 31
The Structure of Labor Market and Employment Elasticity
Chang Kon Choi ......................................................................................................................................................... 38
Market Entry Timing in Previously Closed (Communist) Markets: A Model to Analyze U.S. Companies in
the Czech Republic
Frank E. Wood, Thomas E. Griffin, Joseph Chavez and Fang Yuan .......................................................................... 44
Status of Certified Accountants in Czech and Macedonia
Jiri Strouhal and Fitim Deari ....................................................................................................................................... 49
An Overview of Corporate Governance in China
Frank Elston ............................................................................................................................................................... 55
Public and Private Partnership Approach for Applying the Tourism Marketing Mix to Spiritual Tourism
Farooq Haq, Anita Medhekar and Phil Bretherton ...................................................................................................... 63
Organizational and Personality Effects on Job Stress (The Case of Iranian Managers)
Reza Shafiezadehgarousi .......................................................................................................................................... 76
Part II - The Four Factors of Quality: Achieving the Circle of Acceptance and Satisfaction
Avis J. Smith............................................................................................................................................................... 84
The Hospital Leadership Dilemma: You Cant Look at a Frog and tell How High it Will Hop
Joel E. Rodgers, Maria Toledo and Thomas E. Griffin ............................................................................................... 90
I Dont Want to Read About You in The Paper
Ronald M. Mano ......................................................................................................................................................... 94
Cirque du Soleil
Derek Kenneth Dygos and Emin Civi ....................................................................................................................... 102
How do Consumers Categorize Innovative Products? Insights from Multi Dimensional Scaling
Michael W. Kroff and Mike Reilly .............................................................................................................................. 103
Impacts of the Financial Crises on Stock Markets: Empirical Study on the US and Asia
Hong Rim and Robert Setaputra .............................................................................................................................. 104
Revealed Comparative Advantages of Emerging Economies: A Comparative Export Performance
Analysis
Birol Erkan and Emin Civi ......................................................................................................................................... 106

SECTION 2: SCIENCE & TECHNOLOGY


Future Revenues and Cash Flow: Valuation of Wireless Technologies Adoption
Lenford A. Smith, Thomas E. Griffin and Roscoe Dandy .......................................................................................... 108
Network Security: An Undergraduate Course in Network Security for Computer Information Technology
Curriculum
Hetal Jasani .............................................................................................................................................................. 120
The Impact of Interactivity of Online Newspapers
Sue-Jen Lin .............................................................................................................................................................. 129
Combinatory Practices in Software Cost Estimation
Hisham M. Haddad and Olayemi Olagbegi............................................................................................................... 145
The Use of Computer Supported Analysis for Interview Data: A Cross-Cultural Example from the
Electronic Gaming Industry
June Buchanan and Michael Jones .......................................................................................................................... 153
Introducing Eulers Constant into the Calculus Classroom
Thomas P. Dence ..................................................................................................................................................... 163
Health Behavior, Medical Experience and Use of Alternative Medicine
Reed Geertsen and Jobecka Thompson .................................................................................................................. 169
The Use of Interactive Technology for Health Promotion by Caretakers of Preschool Children with Upper
Respiratory Infections
Sue-Jen Lin .............................................................................................................................................................. 178
Influencing Factors for Purchasing Decisions of Organic Food Products
Lifeng Geng and Qingshuang Yao............................................................................................................................ 189
Are Cognitive Abilities of Criminal Psychopaths Lower than Abilities of Non-Criminal, Normal Population?
Danka Radulovic and Dobrivoje Radovanovic .......................................................................................................... 199
Teaching Bing Maps in a College Web Programming Course
Penn Wu and Phillip Chang ...................................................................................................................................... 204
Using Technology in Large Statistics Classes
Ramon Gomez ......................................................................................................................................................... 207
A Study on Development and Economic Analysis of Recoverable Folding Multistage Plastic Box
Embedding RFID Chip
Wookyung Jung, Dongpo Lee, Kyungwook Shin, Jongyun Jung, Jiekwan Kim and Youngjin Park .......................... 211
Relations among Recreation Activity and Physical Fitness of Taiwan Adolescents
Shao-I Chiu, Tung-Shen Wu and Hsiu-Yuan Hu ...................................................................................................... 215
Project UpReach: A New Way for Health Care Delivery to the Developing World
Richard L. Douglass ................................................................................................................................................. 218
Promoting a Culture of Safety in the Vulnerable Diabetes Populations
Anita H. King............................................................................................................................................................. 219

SECTION 3: EDUCATION & SOCIAL ADMINISTRATION


Building a Virtual Learning Community to Engage Online Students: A Model for Instructors - Report of
Phase I of an Ongoing Study
Christopher J. Brown and Laura J. Hansen-Brown................................................................................................... 221
User Model for a Virtual Learning Environment
Sonal Chawla and R. K. Singla................................................................................................................................. 228
Using Online TV and Online Radio to Study Cultural Biases
David E. Hansen ...................................................................................................................................................... 233
Local Food Utilization: A Winner for the Environment and the Restaurant
Carl Pfaffenberg, Jeffrey Campbell and Carol Costello ............................................................................................ 236
College Student Anti-Semitism and Anti-Israeli Sentiment
Lawrence Weinstein and Carl Jackson..................................................................................................................... 245
The Proposed University of North Florida Environmental Hydrology Living Laboratory An Ideal
Framework for Active Learning
Christopher J. Brown and Alan Harris ...................................................................................................................... 248
The Influence of Motivation Upon Discipline in High School Water Polo
Matt Cherrie and Joseph K. Mintah .......................................................................................................................... 257
Paradigm Shift: Producing a Fashion Show with Deconstructionism
Jasmin Hyunju Kwon ................................................................................................................................................ 258
The International Student Program and Australian Higher Education: Students as Catalysts for Change
Rachel Burke ............................................................................................................................................................ 260
High Risk Sport Athletes Perceptions about Aggression
Scott Norman and Joseph K. Mintah ........................................................................................................................ 261

BUSINESS & MANAGEMENT

SECTION 1

M. Ferrer, A. Medhekar and P. Bretherton

Volume 8 Winter 2009

INFORMATION ASYMMETRY AND INTER-FIRM RELATIONSHIPS:


ARE THERE ANY LINKAGES?

Mario Ferrer1, Anita Medhekar2 and Phil Bretherton3


CQ University1, 2, Australia and Charles Darwin University3, Australia
ABSTRACT
This study investigates whether factors within transaction cost economics such as information asymmetry influence inter-firm
relationships. The research proposes that when factors such as high levels of information sharing is present; firms are more
likely to engage in more complex relationships such as collaboration and alliances than more complex and short-term oriented
relationships such as arms length. This study uses data from the Australian road freight transport industry mail survey and
interviews. The preliminary results demonstrate that due to the price driven and commoditised nature of the freight transport
industry, transactions costs via strategic information sharing, decrease as relationship becomes complex. This studys finding
demonstrate that in the sample taken from the Australian freight transport industry, information asymmetry is low if more
information is shared by the firms who are only in relationships that are at arms length. From the managerial perspective, the
study provides clear overview and awareness of inter-firm relationships TC elements specific to Australian road freight
transport industry and how to further improve the business relationships and minimise the risks and costs and overall improve
service delivery, the flow of supply chain, value creation, reduce opportunism, sharing of information and assets in road freight
transport industry.
Keywords: Inter-Firm Relationships, Transaction Costs Economics, Sharing Information, Information Asymmetry, and Freight
Transport.

INTRODUCTION
In the current business competitive environment, being able to manage a diverse array of inter-firm relationships is critical for
the success of any business. The success depends upon the good understanding of the characteristics of tight and loose
relationships such as arms length, cooperation collaboration and alliances. It is equally important to examine the various
transaction cost elements which influence the business relationships when making decisions about what type of relationships
firm should engage in. Firms seek to participate in any type of business relationship if the transaction costs are minimised
whether in a pure market economy or hierarchies and that efficient governance results in competitive advantage (Williamson
1991). Firms in industries such as freight transport choose to engage in either complex relationships to share critical
information, assets and risk to minimise transaction costs and improve business performance (Dyer 1997) or in loose
relationships to minimising switching costs, long term risk and assets commitment.
Freight movement is a vital activity for both the economy and business, as an efficient and effective transport system facilitates
international trade, thereby increasing economic efficiency through gains in trade and specialization (Banister, Stead et al.
2000). In Australia, transport plays a significant role as products need to be moved across long distances because of the size
of the country (7,686,850 sq km) and the dispersion of its raw materials, production and consumption centres. Road freight
carriers in developed economies such as Australia are not only integrating in reaction to the need for scope, scale, and size in
a market measured by competitive networks, but also to respond to other factors, including globalisation of businesses, and
deregulation (Everett 2002; Robinson 2002). Integration strategies, forced to a large degree by mergers and acquisitions, have
been steadily transforming the freight industry through substantial integration in all areas of the supply chains (Harrison 1999;
Burnett 2002) and this has left a few dominant manufacturing and retailing groups. The road freight industry, which operates in
an environment with very slim profit margins and high volume, has been part of this pattern. Concentration within modes, such
as road; rail; air; and sea, in the freight industry has resulted in the main volumes of freight being transported by a fewer large
carriers, as carriers gain economies and shippers gain leverage (Janelle and Beuthe 1997).
In Australia, the freight industry has remained fragmented but its individual sectors are becoming increasingly concentrated
although in recent years some multimodal operators such as Patrick and Toll logistics have emerged. The road sector which
dominates the transport industry (80 percent of value) had a four-firm concentration ratio of eight percent (Australian Bureau of
1

Information Asymmetry and Inter-Firm Relationships: Are there any Linkages?

Statistics 2001; Murray 2002). The Four Firm Concentration Ratio, in this sector, has changed from 13.3 percent in 1998 to
eight percent in 2000 due to ownership rationalisation which means that the road sector is progressively concentrating (Everett
2002). However, small trucking firms with one or two trucks represent almost 65 percent of the industry participants and
account for nearly 12 percent of the industrys operating income while the sales of the top four firms account for only 15 percent
of the market share (Bureau of Transport and Regional Economics 2003). This indicates that the trucking industry is not
homogenous; it approximates perfect competition because it has minimal entry barriers, a large number of firms, and its small
independent truckers are mainly price takers in the freight industry (Ironfield 2001; Bureau of Transport and Regional
Economics 2003).
Transaction cost economics (Williamson 1985, 1996) firm relationships (Dwyer and Oh 1987; Heide and John 1992) advocate
that firms can address issues such as information asymmetry by engaging in relationships that are characterised by sharing
information, resources and risk. This is applicable to industries where product and service differentiation plays a vital role.
Nevertheless, extending the findings of research conducted in these industries might be challenging when applied to price
driven and commoditised industries such as the road freight transport. This paper aims to address this gap by explaining the
existence, variation and inter-relatedness between the elements of transaction costs economics and the formation of different
types of relationships.
This paper is structured as follows. The first section of the paper provides a background to the road freight transport industry
and the research. Section two puts forward a literature review specific to the theory of the firm and transaction cost theory and
one of its significant elements, information asymmetry. In addition, section two explores the various types of inter-firm
relationships first proposed by the relationships marketing literature; however our study focuses on the four (4) types of interfirm relationships as identified in the supply chain literature namely: arms length relationship, cooperative agreements,
collaboration and alliances. Further it recognises that the transaction cost theory is applied beyond the discipline of economics
and provides a critical analysis of an interplay between the transaction cost (TC) elements and the types of inter-firm
relationships specific to road freight transport industry and based on this, a research proposition was made: P1- the lower the
information asymmetry, the closer the type of inter-firm relationship freight firms engage in; Section three explains the research
methodology applied by gathering the quantitative data thorough a self administered questionnaire of inter-firm relationships
operating in the Australian road freight transport industry. Road freight transport was chosen as the research setting in
particular to examine inter-organisational relationships, since this is an industry in which inter-firm relationships, in many cases,
are exhibiting competitive patterns but face problems of survivability because profit margins are becoming much tighter over
time. Section four explains the findings of the research while section five provides some discussion and conclusions specific to
Australian road freight transport industry.

LITERATURE REVIEW
The Australian road freight transport industry has never been without challenges especially in the post deregulated
environment. While in the past many of the challenges were physical and related to the harsh physical environment, current
challenges relate to microeconomic reform, corporatisation and privatisation of the national freight as well as international
freight transport market so the change is pervasive and transforming given the dynamic nature of the business environment. It
is an industry that is extraordinarily complex and vital to the economy and has on its own an enabling role in the supply chain.
Achieving breakthrough improvements in supply chain performance requires a different approach to manage relationships. In
todays freight industry, creating this different way of doing business may be, in some cases, a matter of survival. In other
cases, different approaches to relationships have been adopted to build sustainable competitive advantage, maximise asset
utilisations, retain control of business, and increase profitability.
Participants in the supply chain such as road freight service providers need to realise the importance of understanding the
transaction costs elements that influence the establishment of inter-firm relationships to leverage the complementary strengths
of other firms within their supply chain and function efficiently.

Theory of the Firm


Ronald Coase ( 1937) famous paper on The nature of the Firm, questions the existence of perfect market and argues that
there are transaction costs involved in using the price mechanism in organising the production and determining the price and
economic activity within the institution of the firm. It has been asserted that there is no one theory of inter-firm relations
(Galaskiewicz 1985), rather a compilation of theories can help to better understand inter-firm relationships. Foss (1996) argued
that a theory of the firm is a theory that addresses the issues of the existence, the boundaries, and the internal organization of
the firm. Likewise, there are important questions related to what a firm does, how its boundaries are determined, or why a firm
2

M. Ferrer, A. Medhekar and P. Bretherton

Volume 8 Winter 2009

plays a significant role in economic activities. These questions have been addressed by researchers such as Jensen and
Meckling (1976); Coase (1991); Barney (1991); Williamson (1991); and Teece and Pisano (1994) in their contributions to the
theory of the firm. This theory can be found within the broader analysis of economic organization (Williamson 1975; Ouchi
1980; Podolny 1994) which has attempted to explain the variety of institutional arrangements in the economy and the
conditions that create them.
One of the conditions that firms need to take into consideration when selecting the right business partner is to minimise the
transaction costs of obtaining inputs to produce outputs efficiently (Williamson 1985; Williamson 1991; Artz and Norman 2002).
In order to minimise the cost of producing each unit of service, firms have to operate at the minimum cost function, along with
making sure that inputs such as skilled workers maximise their efforts to improve operational effectiveness. On the other hand,
the firm could still operate at a cost which is above the minimum cost function, given that the firm has the right mix of inputs.
This can occur if the firm obtains the inputs at the lowest cost, along with the workers maximising their potential skills to provide
the service. Optimal inputs can be acquired in three ways which include spot exchange, legal contract and vertical integration
(Williamson, 1996).
Spot exchange, where an informal relationship between a buyer and seller is established in which neither of the party is bound
by any legal or formal relationship between them and buyer can purchase from many suppliers (Gibbons and Murphy 1990;
Lewis and Sappington 1991). Relationships at arms length within the trucking industry are often characterised by spot
exchanges because of the commoditised nature of the industry. Legal Contracts is a formal relationship between a particular
buyer and seller (with input suppliers) and clearly outlines the agreed terms and conditions for exchange to take place over a
period of time (Klein 1978; Lewis and Sappington 1991). However, contracts clearly outlines the obligations of two parties and
are costly to write, incurring high transaction costs, not necessarily taking into account all other unforseen contingencies and
hence can be incomplete but does reduce opportunism and also provide incentives for relationship specific investment.
Vertical Integration is an arrangement where the firm produces the input to make the final output, leading to bureaucratic costs,
delay, diseconomies of scale with large organisations, and they also cannot reap the benefit of specialisation in terms of
purchasing the input from other supplier. Thus vertical integration should be the last option when spot exchange and contracts
fails (Coase 1937).

Transaction Cost Theory


Transaction cost (TC) analysis originated from the field of institutional economics (Coase 1937). However, its application and
reasoning is credited and associated to works of Williamson (1985), and constantly being built on and applied to other
disciplines and critiqued by Ghoshal and Moran (1996); Osborn and Hagedoorn (1997); Jones (2001). Theory acknowledges
that organisations incur costs to gather information about the environment, switching business partners and protecting interests
from opportunism (Dyer 1997). For instance, firms in relationships at arms length would benefit from low switching costs but
the transaction costs, that is, resources deployed to source alternative service providers, cannot be as low as desired (Dyer
1997; Ferrer, Hyland et al. 2007). Although, the cost of opportunistic risk and switching partners arises in collaborative
arrangements, as more assets are meant to be dedicated to the relationships, the transaction costs of activities, such as
procuring and monitoring, are minimised in the long run because negotiations and exchanges are carried out by parties that
hold similar information, thus, asymmetry of information is reduced (Dyer 1997). Finally, the costs associated with penalising
parties that underperformed in terms of agreement, are referred to as enforcement and policing costs, that is making sure that
the other party confirms to the terms of the contract, firms minimises transaction costs, and in case of breach of contract taking
appropriate legal action.

Information Asymmetry
Participants in a relationship can often face the challenge of the inability to get information and at the times they manage to get
access to it which has been related to the issue of information asymmetry. The foundation of asymmetric information was laid
by Akerlof, Spence and Stiglitz in 1970s. Asymmetric information or lemons problem arises from incomplete and different
information between the two organisations such as buyers or sellers, principle or agents involved when making business
decisions in transactions (Akerlof 1970). Under information asymmetry, one party has more or reliable information than the
other party, which can cause imbalance in power. This gives rise to problems such as adverse selection and moral hazard,
which inflates the cost of doing business. Adverse selection arises when an individual has hidden characteristics, that is one
party in the transaction knows all about itself, but which are unknown to the other party(Arrow 1963). For example, the freight
service provider knows its own performance capabilities, e.g., responsiveness and reliability, but the shipper does not. The
freight service providers capabilities are thus hidden characteristics, and in the selection process the shipper might end up
contracting a service with undesirable characteristics which can incur higher TC. Moral hazard is a situation where one party to
3

Information Asymmetry and Inter-Firm Relationships: Are there any Linkages?

a contract or relationship takes a hidden action that benefits one party at the expense of another party (Arrow 1963). An
example of moral hazard, in the freight transport industry would be disincentives created by freight insurance for shippers to
take measures that would reduce the amount of care demanded. An ignorant party has incomplete information about the
outcome of the agreed transaction and ability to retaliate for a breach of contract (Arrow 1963; Raphael, Brander et al. 1998).
In case of information asymmetry one party can enforce by law breach of contract, whereas other party cannot. This problem
can be addressed by signalling and screening methods (Stigler 1961; Akerlof 1970; Spence 1973). Signalling solution refers to
a situation where a credible signal is given to one party, the shipper, by the prospective freight service providers ability to
provide the service responsibly and reliably. Theory of screening refers to a situation where under informed party (e.g. shipper)
can induce the other party (freight service provider) to reveal information about themselves (Spence 1973; Rothschild and
Stiglitz 1976). This might suggest that a possible solution is to provide full disclosure of information to increase trust, reduce
conflict, opportunism, minimise transaction cost, and thus improve long term sustainable inter-firm relationship by having
collaboration (Williamson 1975).

INTER-FIRM RELATIONSHIPS
Inter-firm relationships have traditionally been studied through the use of the governance lens. The relationship marketing
literature was one of the first to propose a range of relationships from transactional, short duration and sharp ending by
performance, to relational exchange, longer duration and reflection on ongoing process (Dwyer, Robert et al. 1987;
Noordewier, John et al. 1990). In an attempt at enhancing the spectrum, some other authors have placed, in an intermediate
location, cooperative orientated relationships (Golicic, Foggin et al. 2003; Rinehart, Eckert et al. 2004). With more adversarial
oriented relationships, the likelihood of future exchange between two parties occurring is low. Conversely, a higher probability
of future interactions exists if the relationships are more collaboratively oriented (Kaufman, Wood et al. 2000).
Although the market response to growing competition has for some years been an increasing trend towards integration, it has
been asserted that not all supply chain relationships that companies enter need to be either collaborative or cooperative
(Duclos, Vokurka et al. 2003). Similarly other authors suggest that supply chain relationships do not need to be one size fits all
as the market and product circumstances are dynamically changing (Dyer, Cho et al. 1998; Bensaou 1999; Lambert and M.C.
2000). Each relationship is characterised by attributes which develop throughout the continuum. Thus, as relationship
management is a situational approach firms need to consider and clearly understand how they vary as one of the determinants
for a portfolio of inter-firm relationship selection and management (Olsen and Ellram 1997; Ferrer, Hyland et al. 2006). Interfirm relationship terms such as collaborative arrangements, partnerships, and alliances are too often used interchangeably by
both academics and practitioners and establishing a practical definition is problematic. This suggests that there is a need to
understand the differences and similarities between the types of inter-firm relationships and their expected benefits and
inhibitors.
The supply chain literature identifies four prominent types of inter-firm relationship. The first inter-firm relationship type
concerns contractual work arrangements defined as arms-length relationships. This type of relationship can best be described
as inter-organisational linkages characterised by dealings that are at arm's-length which involve spot transactions, often
based on auctions or auction like arrangements. In arms-length relationships, detailed written contracts prevent the parties
from operating and making decisions independently, however, in many cases, particularly in the road transport industry in
Australia, contracts are verbal (Dore 1992; Sako 1992). When contracts are written before the initiation of the relationships,
they describe each partners obligations in almost every possible scenario. A second type of inter-firm linkage relates to
cooperative agreements. Cooperation involves the coordination of similar or complementary activities carried out by
organisations in business relationships, aiming at attaining enhanced joint results or individual results with expected reciprocity,
as time progresses. The rationale behind cooperative efforts is based on arrangements to share resources, either tangible or
intangible, as well as the pursuit of other business goals, through the redesign of processes and products (Cousin 2002).
External and horizontal relationships between partners characterise cooperative agreements. Cooperative efforts differ from
arms-length relationships in that they rely on higher levels of trust (Mentzer, DeWitt et al. 2001), moderated levels of power and
are more long-term oriented. Cooperation appears to be one of the inter-firm arrangements affirmed to be directly influenced by
relationship trust between the parties and it is an important motivator for partners to share greater-risk, and coordinated
behaviours (Morgan and Hunt 1994). Partners in cooperative arrangements seek to lower transaction costs by sharing access
to goods, manpower, services and information (Polenske 2004), and research conducted in the manufacturing industry
indicates operational information may be shared among many cooperative firms, because cooperation agreements are nonexclusive.

M. Ferrer, A. Medhekar and P. Bretherton

Volume 8 Winter 2009

The third component of the inter-firm relationships typology is collaboration, which appears to be closer to the alliance end of a
continuum proposed by several authors (Golicic, Foggin et al. 2003; Rinehart, Eckert et al. 2004). This type of relationship is
viewed as a more durable relationship in which parties bring organisations into a new structure with full commitment to working
more closely, with a shared mission, vision and trust. Such relationships require comprehensive planning, seamless linkages
(Krause and Ellram 1997), unified seeking of synergies and goals and well-structured communication channels operating at all
levels. Information exchange plays an important role in improving supply chain collaboration (Lambert and M.C. 2000). Risk
sharing is greater in inter-firm collaborative relationships because each participant commits its resources and power can be
unequal. Gain and risk sharing capabilities come from a willingness to share rewards and penalties across the firms involved.
While resource sharing cooperative firms have equal access to these resources, in collaborative agreements the firms tend to
gain unique and often unequal access to some of these resources (Polenske 2004). This can explain the motivation of firms to
collaborate to not only improve performance by reducing costs but also by controlling the market. Alliances are the fourth
relationship type that the literature discusses. Alliances can be described as a structured mode of inter-organisational
arrangement that involve exchange relationships between parties without necessarily having to create a new entity (Dickson
and Weaver 1997). Alliances are intended to be long-term, develop new resources or skills, and seek to enhance the
competitive position of each partner. It has been asserted that the success or failure of a supply chain alliance is driven by
commitment and trust between the parties (Whipple and Frankel 2000). Trust must exist in an alliance since there is interdependency between the parties to mutually achieve goals which are a pre-requisite for their initial creation, as a partner may
be a competitor or be involved in other alliances with a firms competitors. Likewise, trust needs to exist for allies not only to
share critical strategic information but also for each ally to consider that its long-term need will be better fulfilled (Moore 1998).
Some other attributes that motivate alliance formation are the maximisation of a companys ability to offer more attractive
services, share efficiency increases, risk or cost rationalisation and power balance.

THE INTERPLAY BETWEEN TC ELEMENTS AND INTER-FIRM RELATIONSHIPS


Transaction cost theory is applied beyond the discipline of economics (Barney 1990; Ghoshal and Moran 1996; Wang 2002;
Ziedonis 2004) to get a better understanding of business strategies and supply chain relationships. The two basic assumptions
of TC analysis (Simon 1957; Hill 1990; Rindfleisch and Heide 1997) include bounded rationality and opportunism . These two
assumptions limit the extent to which the two partners in a business relationship will behave rationally under the condition of
uncertainty. Governance mechanisms as determined by the firms and markets can minimise transaction costs depending on
the type of inter-firm relationship. In the extant literature of the firm, transaction cost elements; such as information asymmetry,
loss of resource control and transaction specific capital determines the quality, extent and type of inter-firm relationship
(Williamson 1985; Clemons and Row 1992; Clemons, Reddi et al. 1993; Dyer 1997). This study attempts to bring the
transaction costs and inter-firm relationships theories together and examines how various work arrangements in the freight
transport industry are influenced by the key elements of transaction cost; information assymetry. The degree of complexity of
business relationship usually determines the governance structure, terms of contract and resources commitment (Heide and
John 1992; Gulati 1995; Dyer 1997; Bunduchi 2005). For instance, in the manufacturing industry the more complex the relation
becomes, the higher the likelihood that some elements of transactions costs can be present (e.g., low switching costs, high
asset specificity). Nevertheless, the specific characteristics of the researched industry, i.e. freight transport industry, can play a
role in understanding how TC elements explain the development of inter-firm relationships.
Transaction cost analysis is based on the assumptions that, in case of arms length type of relationship, where there is spot
exchange, information sharing is low (high information asymmetry) or not required, as contracts are well defined, and buyers
and sellers interact in the market. It is a one off contract and both the parties are protected. Conversely, in long-term
cooperative, collaborative and alliances type of relationships there is more strategic information sharing, information asymmetry
is low and TC and opportunistic behaviour is minimised (Williamson 1979; Buvik and Halskau 2001). Market is the ideal
governance mechanism under transaction cost theory.
Proposition 1:

The lower the information asymmetry, the closer is the type of inter-firm relationship freight firms engage in.

RESEARCH METHODOLOGY
This research is undertaken with an exploratory purpose as the problem of inter-firm relationships among freight businesses
has had little previous empirical academic investigation. According to Sekaran (Sekaran 2003) exploratory study is undertaken
when there is a lack of understanding of the problem which leads to an unstructured problem design. Quantitative data were
gathered through a self administered mail questionnaire of inter-firm relationships operating in the Australian road freight
transport industry. Inferential and descriptive analysis of quantitative data will enable the researchers to examine the nature of
the relationship between different variables that measure the constructs of transaction costs (e.g. information sharing,
5

Information Asymmetry and Inter-Firm Relationships: Are there any Linkages?

resources sharing) and inter-firm relationships. Using the surveys research technique facilitates gathering information from a
selected group of people by using questionnaires as an instrument to ask questions and record answers (Neuman 2003). Road
freight transport was chosen as the research setting to examine inter-firm relationships since this is an industry in which work
arrangements, in many cases, are exhibiting competitive patterns but face problems of survivability because profit margins are
becoming much tighter over time and lack of managerial skills to attain booth operational and transaction costs. A sample of
1000 trucking firms was identified. A total of 1000 road freight firms were contacted, via mail, in the first round of the survey. A
total of 73 usable surveys were completed, giving a response rate of 7.3 percent In order to increase the response rate, a total
of 60 road freight managers, chosen as a convenience sample, were contacted again for the second round of the survey
questionnaire. A total of 47 usable surveys were completed, giving a response rate of 52.2 percent. Data from both rounds
were combined into one sample. Therefore, based on a total of 1000 distributed, 120 were used in the study, for an overall
response rate of 12 percent. The research was designed to aim at subject respondents with knowledge about inter-firm
relationships. This demanded that the managers, managing directors or chief executive officers complete the survey.
Respondents were asked to respond to a series of questions related to factors that promote or inhibit inter-firm relationships.
Freight transport managers were required to provide a response selected from Likert-like scales to measure the independent
variables and from a numerical scale (anchored by (1) and (5)) to measure the dependent variables. Demographic information
about the company or division and the respondent were collected. The main purpose of the study was to explore the
relationships among transaction economy elements and the type of inter-firm relationship. Information asymmetry was
measured through the variable sharing information.
Sharing has been conceptualised as reciprocity, or a mutual exchange between parties. The review of the prompted this study
to identify two key dimensions of sharing in the trucking industry: sharing information, three levels were differentiated, being
operational, tactical and strategic (Mentzer, Min et al. 2000; Chantrasa 2005).The extent of sharing between members of the
road transport supply chain was measured through an 80-item Likert-type scale instrument, adapted from the extant literature,
devised to reflect the opinions of participants in the road freight transport industry regarding the importance and frequency of
sharing. Respondents were asked to indicate the frequency of use of sharing using a five point Likert-type scale (1 indicating
very frequently and 5 indicating never). They were also asked to rate the importance of sharing using a five point Likert-type
scale (1 indicating very important and 5 not very important). The internal consistency reliability test yielded Cronbachs
Alpha values of = 0.950 for Sharing importance and = 0.910 for Sharing usage.
The first step in the data analysis was to perform a factor analysis to reduce the dimensionality and to identify the most
important clusters set of items that group together while at the same time eliminating the items that are less representative.
The emerging factors clusters were named by using the previous knowledge about the theory. Next, Cronbach alpha
coefficients of the emergent factors were calculated and were used to assess convergent validity. Correlation coefficients were
computed to assess the strength and direction of the relationships between the variables and the types of inter-firm
relationships.

FINDINGS
The size of the respondent firms varied considerably. The smallest companies (12 percent) were trucking companies with an
annual turnover of less than $1 million. The largest companies (ten percent) were freight service providers with an annual
turnover of between $50.1 million and $1 billion (Figure 1). This indicates the sample is not restricted by firm size.

1% 3%
1%
3%

3%
6%

6%

Annual turnover
Annual
turnover
Annual
turnover

Less than AUD$1


Less
than
AUD$1
million
Less
than
AUD$1
million

1%

6% 12%
12%

million

AUD$1.1 million - AUD$5


million
AUD$1.1
million

- AUD$5 million
AUD$1.1 million - AUD$5 million

12%

AUD$5.1 million - AUD$10 million

AUD$5.1
million
- AUD$10 million
AUD$5.1 million
- AUD$10
million

AUD$10.1 million - AUD$50


million
AUD$10.1 million

29%

29%

29%

AUD$10.1 million - AUD$50

36%
13%

- AUD$50

AUD$50.1 million -million


AUD$100
million
million

36%

36%

AUD$50.1 million - AUD$100

AUD$50.1
million
- AUD$100
AUD$100.1
million
- AUD$500.1
million
million
million

Over
AUD$1 billion
AUD$100.1
million
AUD$100.1
million
- AUD$500.1

13%

13%

million

million

Over AUD$1 billion


Over AUD$1 billion

Figure 1: Firms size by annual turnover

- AUD$500.1

M. Ferrer, A. Medhekar and P. Bretherton

Volume 8 Winter 2009

For the category of service provided, 35.9 percent of the responding firms carried heavy bulk cargo and chemicals, 19.2
percent carried containers, 13.3 percent carried refrigerated cargo, 7.5 percent shipped vehicles, and 29 percent transported
other types of cargo. Furthermore, of the entire sample, approximately 25.8 percent of respondents acted in the capacity of
CEOs, 29.2 percent were Managing Directors, 18.3 percent were Operations Manager, 3.3 percent were Owner Drivers, and
19.2 percent performed the role of Regional Manager. This is not a representative sample of the industry as some sub-sectors
were deliberately excluded. As the research was looking at businesses that were likely to be in supply chain relationships with
a variety of trucking businesses, i.e., removalists were not taken into consideration as their work arrangements are based
essentially on contract and are unlikely to form more complex relationships.
Correlation analysis has been performed to identify whether a relationship existed, and of what type, between the variables that
formed the transaction cost factor (e.g., sharing information, sharing resources) and the types of inter-firm relationships.
Table 1 shows the results of testing the variable sharing for their correlation with each of the types of relationships. The results
indicate than only the variable arms length relationships is correlated positively at a significant level (p < 0.05) with the variable
sharing information (Sharing-info). The positive coefficient associated with sharing information and arms Length (r = 0.18, p <
0.05) shows that the more freight businesses interpreted the sharing of information as being important, the more they are likely
to engage in relationships of arms length type. Interestingly, the variable sharing information was not significantly correlated
with much closer and long-term orientated relationships such as collaboration and alliances, as the theory would suggests.
These are surprising results given that any closeness in the relationships would prompt organisations to share critical
information.
Table 1:

Correlation of sharing information and inter-firm relationships

Sharing info

Arms Length

CooperativeR

CollaborativeR

Alliances

.188(*)

0.044

-0.078

0.093

Sig. (2-tailed)

0.04

0.633

0.399

0.314

120

120

120

120

Pearson Correlation

** Correlation is significant at the 0.01 level (2-tailed).


* Correlation is significant at the 0.05 level (2-tailed).

DISCUSSION AND CONCLUSIONS


This research provides insights into the transaction costs that can be examined in an important but under-researched context
that is the Australian freight transport industry. As this is an exploratory research, its preliminary results should be interpreted
with much caution. Nevertheless, some conclusions can be drawn from this study. In addressing research proposition one
which states that the lower the information asymmetry, the closer the type of inter-firm relationship freight firms engage in, is
important to note that the literature argues that sharing information is essential to minimise both information asymmetry and
transaction costs (Williamson 1979). Furthermore, high levels of information sharing can be obtained by engaging in long-term
orientated relationships such as collaboration and alliances. This studys finding demonstrate that in the sample taken from the
Australian freight transport industry, information asymmetry is low if more information is shared by the firms who are only in
relationships that are at arms length. Surprisingly, there was no evidence of significant relationship between information
sharing and long-term relationships such as cooperation, collaboration and alliances which suggest that information asymmetry
is present in these types of work arrangements, resulting in high transaction costs. The findings seem to contradict the theory
(Noordewier, John et al. 1990; Rindfleisch and Heide 1997) and reject proposition one. Nevertheless, these can be explained
by the price driven and commoditised nature of the trucking industry. Freight transport businesses, of similar characteristics as
the sample, are often considering that the service most of them provide is a commodity which can be easily procured
elsewhere so information is only shared based on what has been specified in the contract terms. Likewise, the findings also
suggests that moral hazard can be present as the result of lack of strategic information sharing (e.g., plans for growth,
acquisitions) between freight service providers. In this case, hidden critical decisions about the business relationships future
can be made preventing the ignorant party from retaliating for breach of the contract (Akerlof 1970; Raphael, Brander et al.
1998).
From the managerial perspective, the study provides clear overview and awareness of inter-firm relationships TC elements
specific to Australian road freight transport industry and how to further improve the business relationships and minimise the
risks and costs and overall improve service delivery, the flow of supply chain, value creation, reduce opportunism, sharing of
information and assets in road fright transport industry. It focuses on one proposition, but also identifies the benefits and costs
7

Information Asymmetry and Inter-Firm Relationships: Are there any Linkages?

of close relationships and TC elements. This study also points out that in road freight transport industry given the arms length
type of relationships, the business partners shared critical information and there is bilateral dependence between the two
parties. However, there are more opportunities for switching partners in road freight transport industry, thus it is in the interest
of the managers to provide value adding service to avoid opportunism by the shippers in terms of switching partners, reliability
of service, timely delivery, knowledge and know-how and personal interactions between two parties (Ulaga and Eggert 2005).
Transport industry should monitor their own service quality, performance, reputation and delivery to prevent shippers from
switching to another freight provider, irrespective of risk owing to opportunism of switching business partner.

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THE INTERRELATIONSHIP AMONG ERP, SUPPLIER COORDINATION, AND


PROCUREMENT OUTCOME: EXPLORATORY FINDINGS FROM A CROSSNATIONAL STUDY
Jos Gerardo Martnez Martnez
Universidad de Puerto Rico, USA
ABSTRACT
Global procurement has increased in importance exponentially, as it has become a corporate weapon to maintain or gain
market share. Organizational and environmental factors have significantly contributed on this change in procurement activities.
Hence, in todays international business dynamic, the procurement function cannot be viewed in isolation in a firm; it is
important that the procurement function operates in conjunction with the corporation, and that the procurement strategies are
consistent with corporate competitive strategy.
What's more, in the competitive global environment, to a greater extent, firms formulate procurement goals and implement
them with enterprise resource planning (ERP) and supplier coordination. Yet, despite the growing interest in the area of global
procurement, limited numbers of empirical studies, particularly cross-national studies, are available and little attention has been
paid to the competitive environment and internal enterprise resource planning (ERP) and external collaborative supplier
practices. This paper examines how do international companies implement their procurement strategic goals through ERP
systems and supplier coordination. It focuses on how a firms operational procurement outcomes demonstrate high levels of
improved performance. Also, it presents a research model that describes key constructs, their interrelationships, and empirical
tests of these relationships based on International Manufacturing Strategy Survey (IMSS) data. Theoretical and managerial
implications are discussed as well.
Keywords: Enterprise Resource Planning (ERP), Supplier Coordination, and Procurement Performance

1. INTRODUCTION
Currently, the purchasing function has changed from playing a supporting role to becoming a strategic activity, and now makes
a significant contribution to the competitive advantage of an organization (Quayle, 2002; Carr and Smeltzer, 1997; Croom and
Brandon-Jones, 2007). However, in spite of the attention paid to procurement, there is a lack of literature, particularly crossnational studies, regarding the interrelationship among ERP systems, supplier coordination, and procurement outcomes.
Considering all the changes and challenges that firms and supply chains are facing, the present research study makes an
important contribution to the extant body of literature concerning supply chain. This theoretical framework will help practitioners
and academicians in understanding how ERP systems and supplier coordination impact international companies procurement
outcomes. It also lays a foundation for future research.
The next section (two) of this article discusses the theory development and hypotheses investigated in this study. This will be
followed by section three, a discussion of our research methodology and section four, data analysis and results. Section five of
the article discusses the implications of the findings and conclusions. Finally, section six concludes the article with a discussion
of our research limitations and future research opportunities.

2. THEORY DEVELOPMENT
Figure 1 illustrates the research framework for this study. It depicts the relationship among supplier coordination, ERP system,
and procurement performance. ERP system influences both supplier coordination and procurement performance. Supplier
coordination, in turn, influences on procurement performance. Table 1 provides constructs definition and is followed by the
theoretical foundation for the hypothesized relationships under study.

11

The Interrelationship among ERP, Supplier Coordination, and Procurement Outcome: Exploratory Findings from a Cross-National Study

Figure 1: Research Framework


Supplier
Coordination

ERP
System

Procurement
Performance

Table 1: Constructs Definition


Construct

Definition

Literature Base

ERP System

The extent to which a firm uses ERP systems to coordinate with


suppliers the integration of business processes and functions such
as material management, production planning and control, and
supply management.

Fox (2003; Al-Mashari et al. (2003); Mabert et al.


(2001); Van Everdingen et al. (2000); Edwards
et al. (2001); Bendoly and Schoenherr (2005)

Supplier
Coordination

The degree to which a firm seeks to integrate and coordinate


procurement requirements across and within business units with
suppliers who are located worldwide.

Kotabe and Murray (2004); Moncza et. al.


(2005); Faes et al (2003); Rozemeijer (2003);
Trent and Monczka (2002)

Procurement
Performance

The extent to which operational procurement outcomes


demonstrate high levels of improved performance in lead time,
cost, labor-productivity, and capacity utilization.

Gebauer et al. (1998); Quintens et al. (2006);


Craighead et al. (2007); Choi and Krause (2006);
Knudsen (2003); Fitzgerald, (1997); Rozemeijer,
(2003)

2.1. ERP System


Today's global business environments are characterized by unprecedented competitive pressures and sophisticated customers
who demand innovative and speedy solutions. Understanding and optimizing business processes is a cornerstone of success
in these fast-changing environments. Global distribution channels, numerous international plant sites, and closely integrated
sourcing arrangements have changed the way hundreds of companies do business. According to Jacobs and Bendoly (2003) a
key component of managing these organizations is Information Technology (IT). Over the past few years, many companies
have embraced a new class of planning and resource management software systems to integrate business processes and
functions such as material management, production planning and control, and supply management (Fox 2003). These package
systems are broadly classified as Enterprise Resource Planning (ERP) systems (Al-Mashari et al., 2003).
Furthermore, numerous studies have concluded ERP systems can bring benefits in operational efficiency and reduced costs to
organizations and enforce a discipline of best practice and consistency (Robinson and Wilson, 2001; Bose et al. 2008). The
suppliers have access in real time to information regarding orders, supply plans and the quality of their supplies. Once the
services offered to each supplier is the possibility of having online the entire history of its orders. In the same way, company
buyers can evaluate different offers, archive orders in a shared database and, above all, activate a series of automated
procedures during the procurement cycle, which reduce or even eliminate many of the activities, which have fewer added
values (Mabert et al., 2001; Van Everdingen et al., 2000; Edwards et al., 2001; Bendoly and Schoenherr 2005). Based on the
previous literature, the researcher suggests:

Hypothesis 1:

ERP system has a direct impact on supplier coordination.

In fact, adopting ERP systems as the primary platform for sharing and exchanging of organizational information and providing
access to it through internet technology is considered a hallmark of leading organizations (Davenport, 2000). Moreover, not
only implemented internally, but ERP systems are also being extended to include internet capability, customer relationship
management (CRM), supply chain management (SCM) and support for the electronic market places (Sammon et al., 2001).
Researchers pointed various benefits the organizations gain because of adopting ERP (Al-Mashari et al., 2003; Fox 2003).
This view is based on the idea that an ERP system is not simply a tool that provides a single output, but rather an infrastructure
that supports the capabilities of all other information tools and processes utilized by a firm. In recent series of case studies,
12

J. G. M. Martnez

Volume 8 Winter 2009

Palaniswamy and Tyler (2000) and Bose et al. (2008) emphasize this point. The authors state that ERP systems provide critical
functionality by integrating information technologies relevant throughout the enterprise. Besides, the process of ERP system
implementation forces organizations to increase their understanding of their core capabilities and make necessary changes to
business processes that may otherwise have been ignored. Therefore, not only the package but also the process of
implementation should be viewed as an opportunity to attain and maintain positions as market leaders.
The possibility of connecting many-to-many in real time offered by Internet allows sellers and buyers the opportunity to
communicate and carry out transactions online. The advantage of carrying out electronic business are cost reduction, improved
productivity, and customer service and the possibility to redesign inefficient company processes and increase the management
and control of the relationships with the various players along the supply chain (Weller, 2000; Tan, 2001; Craighead, et al.
2007).
Thanks to the new web-based application, it is possible to reduce the lead time of the supply process and increase the
reliability of the entire system. Furthermore, by improving efficiency, administrative costs are reduced and the resources
dedicated to procurement are optimized (Bendoly and Schoenherr, 2005). Based on the previous literature, the researcher
suggests:

Hypothesis 2:

ERP system has a direct impact on procurement performance.

2.2. Supplier Coordination


Real global sourcing refers to the integration and coordination of procurement requirements across worldwide business units
(Monczka et al., 2005; Rozemeijer, 2003; Faes et al., 2003) and with other functional groups, particularly R&D, manufacturing
and marketing, within business units (Kotabe and Murray, 2004; Monczka et al., 2005). However, the integration and
coordination of procurement requirements across business units (external interfaces) is challenging and difficult to master
(Rozemeijer, 2003). The same can be said about the internal interfaces within individual business units.
Close cooperation inside the firm between purchasing and other departments is needed to facilitate foreign outsourcing (Mol et
al., 2004; Quintens et al., 2006). To achieve maximum procurement benefit, firms often have to challenge entrenched systems
and behaviors that work against collaborative efforts between and within business units (Trent and Monczka, 2002). This
context raises a variety of questions concerning the nature, the organization, and the impact of global sourcing. How to source
globally and how to manage a global supply base (i.e., how to develop effective business relationships with suppliers who are
located worldwide) have become critical competences (Kotabe and Murray, 2004).
In many of today's globalizing industries, procurement is one of the strategic functions with the highest potential impact on a
firm's long-term profitability (Leenders et al., 2002). Cammish and Keough (1991), Keough (1993), and Kotabe and Murray
(2004) emphasize on the importance of giving procurement a strategic role in the organization, and they agree that achieving
world-class status in procurement requires many efforts in leadership, recognition of procurements importance, and new
metrics for procurement performance. Gebauer et al. (1998) and Quintens et al. (2006) establish that effective business
relationships with suppliers impact procurement performance in term of cost, time, labor productivity, and capacity utilization.
Frohlich and Westbrook (2001) and Humphreys et al. (2005) stress the strategic importance of integrating operations with
suppliers and customers in supply chains by providing empirical evidence of the impact of upstream and downstream supply
chain integration on performance improvement. Strategic alliances are no longer a strategic option but a necessity in many
markets and industries (Praise and Henderson, 2001; Cagliano et al., 2006). Four elements of more cooperative relationship
discussed in the literature are supply base reduction, single sourcing, strategic partnerships, and early supplier involvement in
product design (Stanley and Wisner, 2002; Adenfelt and Lagerstrm (2006). Stanley and Wisner (2001) empirically test the
relationship between cooperative procurement/supplier partnerships and service quality to external customers by analyzing the
mediating effect of procurements service quality performance. Fynes and Voss (2002) provide further empirical evidence of the
impact of buyer-supplier relationships on performance by analyzing it as a moderating variable in the relationship between
quality practices and performance. Based on the previous literature, the researcher suggests:

Hypothesis 3:

Supplier coordination has a direct impact on procurement performance.

13

The Interrelationship among ERP, Supplier Coordination, and Procurement Outcome: Exploratory Findings from a Cross-National Study

2.3. Procurement Performance


Easton, Murphy et al. (2002) present a summarized history of the procurement performance measurement in the literature,
supporting mainly short-term gains until the late 1980s and early 1990s. One problem with those traditional metrics where that
they worked to improve the procurement performance at the expense of other departments performance, not achieving a
global organizational measure of performance but a local measure working alone.
The global competitive environment drives organizations highly dependent on the success of supplier selection process. Any
deficiency in coordination of the process will lead to excessive delays and poor customer service (Chung et al., 2004). In fact,
suppliers are manufacturer's external organizations or business partners, and indeed their performance will decide the future
performance of the whole supply chain (Samli and Browning, 2003).
At a tactical level, procurement involves numerous activities, consisting of many material and information flows. It is not as
simple as to just convey a need from an internal customer to a supplier and deliver the item to the internal customer. Instead,
this process consists of activities that are continuously changing in intensity, duration, and quality, thus producing variations in
performance (e.g., time, cost, labor productivity, and capacity utilization), efficiency, and effectiveness of the purchasing
departments work (Craighead et al., 2007; Choi and Krause, 2006). Therefore, the key elements that should be investigated in
the procurement performance measurement system are resources, procedures, and output (Knudsen, 2003).
Porter (1980) states that procurement, as one of the functions of the firm, impacts the ability of the firm to achieve its goals,
and therefore, it impacts the firm performance. Further studies (Carr and Smeltzer, 2000) suggest the importance of achieving
higher levels of procurement performance in order to improve the firms performance. The impact of procurement performance
on firm performance is widely supported also from the practitioners point of view.
The current globalized market trend identifies the necessity of the establishment of long-term business relationship with
competitive global suppliers spread around the world. As companies are seeking ways of reducing costs, speeding time-tomarket and improving product quality, supplier performance plays a critical role in maintaining the competitiveness of value
chains (Fitzgerald, 1997; Rozemeijer, 2003). Sanchez-Rodriguez, Martinez-Lorente et al. (2003) provide evidence of a
significant positive relationship between procurement performance and firm performance using a structural equation model.

3. RESEARCH METHODS
Data were collected to test the relationship under study in 2005 during the International Manufacturing Strategy Survey (IMSS),
a global research project. The IMSS was started in 1992 to gather data related to manufacturing strategies in a global setting.
In nations where English is not commonly used, the questionnaire was translated into the local language by research
coordinators and a typical full-time university faculty in the areas of operations and supply chain management, thus ensuring
reliable translation by someone familiar with the concept of business and operations strategy practices. Further information
about the survey administration of IMSS can be found in Voss and Blackmon (1998), Frohlich and Westbrook (2001), and
Cagglino et al. (2006).
Data were collected by national research groups within the global network using a standard questionnaire. Seven hundred
sixty-one (761) plant managers or manufacturing executives completed a standard survey instrument, representing firms with
more than one-hundred (100) employees, from twenty-four (24) countries throughout the Asian Pacific, European, North
American, and South American regions. All firms included in the study are considered to be manufacturers according to
International SIC (Standard Industrial Classification) code standards. Specific manufacturing industries included: (1) fabricated
metal products, (2) machinery and equipment, (3) office, accounting, and computing equipment, (4) electrical machinery, (5)
radio, television, and communication equipment, (6) medical, precision, and optical instruments, (7) motor vehicles, trailers,
and semi-trailers, (8) other transportation equipment, and (9) other miscellaneous manufactured products. Firms were
contacted prior to mailing to assess participation interest. The response rate varied by country, however, all exceeded 25%,
which is commonly considered as adequate for a survey method research.

4. DATA ANALYSIS AND RESULTS


The purpose of the study guided the procedure to select items relevant to measure the concepts (Cagliano et al., 2006).
Exploratory factor analysis deemed suitable to identify and distinguish factors among variables (Hair et al., 2006). In addition,
all of the measures were theorized and supported by virtue of literature review as discussed earlier and displayed in Table 1.

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Volume 8 Winter 2009

4.1. Measures
All the items displayed in Table 2 exhibit factor loadings. SPSS 16.0 was adopted for the analysis. Factor loadings were the
result of utilizing Principle Components Analysis extraction method with Varimax rotation. The analysis filtered factors with
Eigenvalues > 1.0, while the absolute coefficient values were suppressed at < 0.4 as these values are considered small (Hair
et al., 2006) and not indicative of cross-loadings. Factor loadings were also analyzed for convergent and discriminant validity.
Three factors emerged in the analysis, all with loadings above 0.6, an evidence of well defined structure (Hair et al., 2006).
Table 2: Factor Analysis and Reliability Results
ES
Loadings

SC
Loadings

PP
Loadings

ERP System
To what extent are the following management areas supported through the use of
Enterprise Resource Planning systems? (1-no use; 5-high use)
ES1

Material management

0.916

ES2

Production planning and control

0.852

ES3

Purchasing and supply management

0.918

Supplier coordination
How do you coordinate planning decisions and flow of goods with your key/strategic
suppliers? (Level of adoption: 1-none; 5-high)
SC1

Share inventory level knowledge

0.712

SC2

Share production planning decisions and demand forecast knowledge

0.651

SC3

Order tracking/tracing

0.726

SC4

Agreements on delivery frequency

0.623

SC5

Dedicated capacity

0.715

Procurement Performance
How has your operational performance changed over the last three years? (deteriorated
more than 10% - 1; Improved more than 50% -5)
PP1

Procurement lead time

0.742

PP2

Procurement costs

0.840

PP3

Labor productivity

0.785

PP4

Capacity utilization

0.711

Eigenvalue

2.466

2.425

1.844

Cronbach's alpha

0.893

0.751

0.772

Composite reliability

0.749

0.895

0.779

Average Variance Extracted

0.556

0.781

0.610

*Varimax rotation method was used for Factor analysis.

Reliability was tested using Cronbachs alpha. All of the factors scored adequately, well over accepted standard of 0.7
suggested by Hair et al. (2006) for confirmatory research. In addition, most factor loadings exceeded 0.7 and Cronbachs
alphas and composite reliabilities are all above 0.7, demonstrating convergent validity (Bagozzi and Yi, 1988). Factor loadings
also demonstrated adequate discriminant validity among the factors as no cross-loadings exceeding 0.4 are present.
Furthermore, all Average Variance Extracted (AVE) values are above 0.5.

4.2. Measurement Model


Analysis of Moment Structures (AMOS 5) was employed to test the measurement model as it is customary for theoretical
model testing (Hair et al., 2006). Hair et al. (2006) recommend the use of one absolute fit index, one incremental, and the chisquared result as measures for the overall fit of the measurement model. Absolute indices directly measure how well the
specified model reproduces the observed data (Kenny and McCoach, 2003; Hair et al., 2006). The Root Mean Square Error of
15

The Interrelationship among ERP, Supplier Coordination, and Procurement Outcome: Exploratory Findings from a Cross-National Study

Approximation (RMSEA) test is an absolute fit index which considers values < 0.05 to demonstrate good-fit (Hair et al., 2006).
The RMSEA found in our model was 0.037, which is considerably lower than 0.05.
Incremental fit indices differ from absolute fit indices in that they examine fit of a specified model relative to some alternative
baseline model, commonly referred to as a null model. The Comparative Fit Index (CFI) and the Tucker-Lewis Fit Index (TLI)
were employed in this study as they are widely accepted as incremental model fit indices which consider values > 0.9
associated with a model that fits well (Hair et al., 2006). The CFI and the TLI obtained from the analysis of our research model
were 0.97 and 0.96 respectively, which show strong evidence of incremental fit.
The Chi-squared is a key model fit test which examines the extent that a perfect fit exists between observed and estimated
covariance matrices. Chi-squared increases as the extent that a perfect fit is not the case, as such, the objective here is for
model fit performance to result in a small Chi-squared/degrees of freedom (X2/df), typically < 3.0. It turned out to be 2.01 in our
model, which shows that the research measurement model is a good fit. All measurement model fit indices fell within the
acceptable ranges for scientific investigation. Table 3 summarizes the research model fit indices.
Table 3: Measurement Model Fit Indices
X2/df

NFI

CFI

RFI

IFI

TLI

RMR

RMSEA

2.01

0.95

0.97

0.93

0.97

0.96

0.067

0.037 (.029, .044)

4.3. Structural Model


Figure 2 summarizes the structural equation modeling (SEM) that tests the relationships posited in the study (Anderson and
Gerbing, 1988; Swink and Song, 2007). Hypothesis, namely H1, was empirically supported at a p < 0.001 level, and the other
two, namely H2 and H3 were supported at a p < 0.05 level. ERP system has a direct impact on both supplier coordination (H1)
and procurement performance (H2). Finally, supplier coordination has a direct impact on procurement performance (H3).
Figure 2: Structural Equation Model Results
H3
=0.26
t=5.46
ERP
System
H4
=0.10
t=1.95

Procurement
Performance

Supplier
Coordination
H5
=0.13
t=1.99

Fit indices: X2/df: 1.878 (X2=135.217, df=72); CFI: 0.979; NFI: 0.957; RMSEA: 0.03

5. IMPLICATIONS AND CONCLUSIONS


In the twenty-first century, it will no longer be single companies competing against each other. The individual company must
position itself into a competitive supply chain and the different supply chains will compete against each other. The big return in
ERP investment and future revenue and profit growth comes from integrating the company to its entire supply chain. A
company will compete in the market based on the overall strength of its supply chain.
This study suggested that good management of supplier involvement and an agile supply chain can lead to better supplier
performance, improved manufacturing, and product and process improvements that in turn enhance customer satisfaction and
firm performance. External environment or culture may have an impact on using ERP systems in the company. One reason is
that the use of ERP is not pervasive. If partnering suppliers do not use ERP, the company is also reluctant to use it either to
integrate supply chain across companies.
This research shows that ERPs main added value is its combination of financial control with multi-facility coordination, but ERP
does not deliver supply planning and demand and demand planning functionality for the company. The systems are not
designed to support internal supply chains. However, integration of supply chain management and ERP gives the company the
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Volume 8 Winter 2009

opportunity to build effective processes with suppliers they trust, so they can get the maximum return on relationship with all
their suppliers on a continuous basis.
The main conclusion from the study is that individual company should look at an effective purchasing function as one of the
competencies essential to supply chain success. It is found that breaking the traditional decentralized system and introducing
the concept of a single, integrated plan, which a company could work together with their suppliers lead to cost reduction and
increased efficiency. This unique practice is suited to new market requirements.

6. LIMITATIONS AND FUTURE RESEARCH OPPORTUNITIES


The study extends previous scholarly research on how a firms operational procurement outcomes demonstrate high levels of
improved performance through ERP systems and supplier coordination. In doing so, a large-scale, multi-industry sample of
manufacturing firms was investigated, reducing concerns regarding generalizability. That said the study is certainly not without
limitations. First, it addresses the traditional research questions of what and how. The primary limitation of this study is
consistent with any scientific investigation employing survey method in that while this approach is very useful for hypothesis
testing, it requires further in-depth inquiry of why the findings resulted. Second, the sample under study excludes service
firms, which are fundamentally different from manufacturers given the role of the customer as a co-producer in the
product/service. As such, a rich research opportunity exists to investigate how ERP systems and supplier coordination may
impact a service firms operational procurement outcomes differently from that which occurs in a manufacturing environment.
Third, while this study examines a broad array of firms from around the world, a comparative cross-cultural study could improve
scholarly understanding of not only differences in firms approaches, but also best practices. Finally, scholarly findings should
be regularly replicated intentionally at first and later as a routine research task.

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Trent, R. J. and Monczka, R. M. (2002). Pursuing competitive advantage through integrated global sourcing. Academy of
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19

Golden Parachutes and Their Effects on Organizational Financial Decision

GOLDEN PARACHUTES AND THEIR EFFECTS ON ORGANIZATIONAL


FINANCIAL DECISION

Peter T DiPaolo1, Ernie Curci2 and Thomas Griffin3


Nova Southeastern University1, 3, USA and World Disney World Company2, USA
ABSTRACT
Businesses owners are looking at structure from the wrong perspective. It is NOT an organization it is an ORGANISM.
Business should be like an amoeba. It must adapt and change to meet the needs of external environment and market
demands.
Because the market is composed of many biological factors, the most significant being the participants that are the
shareholders and customers, organizational decisions become very complex.
Some of the problems this paper will attempt to identify are the costs and problems associated with Golden Parachutes and do
they reinforce the culture and policies needed to support the behavior of the members of the organization in order to maximize
the wealth of the investors?
It will also talk about the effects of value driven management to promote control of the market and fend off competitors and the
dangers of failing to protect markets with continually adding value drivers and allowing competitors entry.
Finally, it will investigate whether the executive perquisites, such as golden parachutes, make a difference in maximizing
investor wealth by comparing the earnings of different firms.

INTRODUCTION
This paper addresses the Golden Parachute and their effects on corporate performance. Golden Parachutes and executive
compensation have long been the focus of many research studies. In the current business environment, it is becoming
increasingly important for shareholders to understand how theses executive perquisites affect organization decisions. Because
investors continually search for different ways to increase executives commitment to the firm, this study will investigate some
of the correlates of Golden Parachutes and executive compensation and their effect on certain financial criteria. The research
contained in this paper is an extension, not a replication of previous works on Golden Parachutes that can be a critical factor in
a firms success.

STATEMENT OF PURPOSE
The purpose of this research was to evaluate the empirical data that has been collected on the relationship between Golden
parachutes and company performance to determine to what extent Golden Parachutes predict organizational commitment and
positive company performance.

REVIEW OF THE LITERATURE


Theories that affect Golden Parachutes
Agency theory
The theory of Agency predicates the expectations of representation by executives and others that represent the interests of an
organization for the well-being of the owners. When an executive takes on the responsibilities of an organization, their prime
purpose is to support, maintain, and maximize the financial performance of all assets. This responsibility is the fiduciary
responsibility and is extended to all members of the organization that are involved with the financial activities of the
organization.
When a CEO decides to expose an organization to public investors and other sources of investment it assumes a liability to
preserve and protect those investments made by individuals and institutions external to operations and internal information.
The source of sharing this information about the operations and performance are the various financial reports that have to be
released to share any organizational information. The fiduciary responsibilities associated with the agency theory are the

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P. T. DiPaolo, E. Curci and T. Griffin

Volume 8 Winter 2009

protection that investors rely on to make certain that their investment is safe and that the organization is operating in the best
interest of the investor.
Essentially, the executive body and board of directors are ultimately responsible to the shareholders and other investors. There
seems to be some confusion by the average investor, there is a lack of concern and little activism on the part of shareholders
and owners to make sure that the executives and board members perform and deliver the expected results, and when they fail
to achieve these results there are not many alternatives or actions that can be initiated to resolve the problems or remove
members from their positions.
As owners of an organization, shareholders and other members that have ownership of an organization need to be more active
and have to demand performance and take appropriate action for rewarding and punishing the executives and board for the
results that are delivered. Failure to take action by owners will only make an organization vulnerable to takeover, merger, or
acquisition, bankruptcy and diminished returns on their investment.

The prestige
CEOs of large organizations have several real benefits. The brand that they represent is established and recognized which
allows them a certain amount of prestige. A recognized brand can also promote a trust with the general public and an
expectation on ethical perspective and fortitude. This reliance allows the CEO to operate without restraints that an organization
without this trust might. The CEO must maintain and promote the purpose and cooperation of all constituencies internal and
external to grow the organization and increase the value of goodwill. The CEO has to protect these assets from diminishing
returns and exposure to harm.
Everything from the company name to recognized properties, trademarks, and brands perpetuate value that can be converted
into financial and material gains for an organization. These elements provide much of the core of the competitive advantage
that companies use to promote, solidify, and enforce their market position and continue to expand as opportunity presents.
Just as the activities of the members of an organization can leverage these assets to maximize their value the unexpected
misgivings and misbehaving of the members and failure of control of the CEO can negate any value and cause the erosion of
the value that may have previously existed. This can cause diminishing returns and loss in value for brand and other properties
that held value for the organization.
In the events that became evident in the Enron scandal, there is a direct correlation between the behavior of the CEO and the
members of the organization and the harm to the organization, its value, and the shareholders equity. The impropriety and
violation of trust and violation of laws and procedures caused the greatest loss in value and worth in a company in the U.S. and
lead to the exposure of the dangers of power that a CEO has over the value and performance of an organization. Ken Ley is
now known infamously for his part as the CEO whose failure to protect and maintain the value for shareholders and
constituencies by making selfish financial decisions.
These activities and behaviors caused the elimination of value for all the constituencies of Enron. The local communities and
other ancillary services that relied on Enron for their survival and existence were essentially destroyed because of the harmful
effects caused by this behavior.
The unfortunate element is that this has not been an isolated incident, this has become the introduction of a stream of events
of CEO behavior that has lead to the NY attorney General Eliot Spitzer levying charges against these guys and other members
of the executive body that have been associated with these situations. This has lead to a parade of CEOs being brought up on
criminal and other charges associated with fraud and embezzlement.
The bizarre thing is that these CEO do not feel that they have done anything wrong. They fail to see how they are responsible
for protecting the organization and its integrity from the damage associated with their behavior. They have the perspective that
they own this entity and that they should be able to do what they want, when they want and how they want to with any and all
of the property contained within. This perspective destroys all shareholder value and trust and therefore it may take an
incredible effort to recover the previous levels of trust and value.
Events like these create a stigma that remains in the psychology of all the constituencies involved with the organization. Even
after the recovery and the perception of conditions, returning to normal there is still a concern in the long-term memory of
anyone that had been previously harmed or was aware of the events that did harm. This psychological dilemma is similar to the
psychological contract that employees have with their organization or the deprecation mentality that was common among
21

Golden Parachutes and Their Effects on Organizational Financial Decision

Americans that survived the Great Deprecation and found it difficult not to save every penny they made waiting for another
deprecation to occur. As with these other psychologies, the Executives a Thief psychology forces members of all
constituencies to expect improper behavior and cheating by the CEO. While things are going well and everyone is satisfied
there is no mention of this perspective but as soon as things are not going as planned and there is uncertainty about the
activities and performance of the organization, the rumblings and innuendo about cheating and stealing starts to become more
vocal, causing question about the legitimacy of the activities of the CEO. This is more exaggerated when members of an
organization are being laid off or having their pay cut while the CEO and other executives are still receiving bonuses and other
beneficial compensation.
These events can create the stress on an organization and the CEO that can be the distraction that a competitor can use to
penetrate the market hold and barriers that had existed by the organization and can be used as the force needed to gain
cooperation of the constituencies that had previously been an active part of the organization. This penetration by a competitor
can be converted into a barrier or obstacle for the organization to have to overcome to regain its previous position, but because
of the psychology associated with the events that lead to this situation it can never regain all of its constituents and will remain
vulnerable to continued approaches by this and other competitors because of the inappropriate actions of the CEO.

Establishing an identity
There are a number of CEOs that have found ways to differentiate their organization and secure their market position. Jack
Welch at General Electric examined the value of having all the different operations and decided that GE would be a market
leader or that operation would be sold or closed. This strategy allowed GE to focus on reinforcing their position in the market
and recapture the value of operations liquidated that were no longer essential to his plan. CEOs that have this ability and vision
continually adapt and change to meet the changes of various markets and capitalize on them to maximize value. This creates
confidence for the constituencies and promotes confidence in the executive and management teams.
Some CEOs are brought into organizations to turn the operation around and attempt to regain value in the organization. This
may require the elimination of jobs and the downsizing of the organization to reform the operation. In many cases, these CEOs
lose focus on value growth and expansion, diversification and focus on reducing the organization to a small operation that has
little or no strategy for increasing its value. This was the case for Sunbeam
It is now time for shareholders and other investors in organizations to stand up and be heard. However, what should they be
asking? How do they make intelligent suggestions and recommendations for measuring the results and compensation for the
CEO? These are difficult questions to answer. Some of the questions are as follows:

What are the problem and costs associated with Golden Parachutes?
What financial results should be the mechanisms for determining the compensation for the CEO?
How should shareholders manage their CEO?
What processes and rights do stockholders have?
Should the organization have to outperform the market?
Should the organization have an overall percentage goal as a marker?
What should government do to regulate how a CEO distributes funds from an organization when they are essentially
bankrupting it?
What funds should be legally available to them for compensation or bonus?
Economic Value Added (EVA) a new method of measuring the real profitability of an organization.
Is there a valid and reliable succession plan for the CEO?

Executive compensation
The issue of executive compensation and fiduciary responsibility has been elevated to one of the most paramount topics in
American business, law, and justice. There are indictments issued almost daily against CEOs all over the country. There is
pressure mounting not only at the state level by New York Attorney General Eliot Switzer, but also at the federal level by SEC
chairman Cox who has been receiving a great deal of criticism for salaries of CEO escalating while the organizations
performance is diminishing.
The evidence exposed about CEO behavior declares that there is something very wrong with the return on investment for
shareholders while the CEOs are seeing financial rewards that are astronomical. While shareholders of some organizations are
losing money on the value of their stock and the dividends returns of 1% or 2% are not even adequate to make the investment
acceptable, while the CEOs are receiving compensation gains of tens of percent to several hundred percent. This is causing a
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P. T. DiPaolo, E. Curci and T. Griffin

Volume 8 Winter 2009

concern surrounding the information and activities that is available for CEOs and other executives that are exercising stock
options to receive incredible financial gains while the average shareholder of the organization is incapable of having the
Upward mobility long an American right in recent years has become limited to a select few. Corporate CEOs have enjoyed
record levels of compensation and corporations have seen record profits, as more and more middle-class Americans are
experiencing stagnant wages and vanishing benefits.

CEO compensation is out of orbit: At the 350 largest public companies. The average CEO compensation is $9.2 million.
Compensation for oil and gas execs increased by 109 percent between 2003 and 2004.
In 2004, the average CEO received 240 times more than the compensation earned by the average worker. In 2002,
the ratio was 145 to 1. (Center for American Progress, 2005)

Some major concerns for shareholders is how safe is their investment, is everything being done to maximize overall value of
the assets that have been given to management, who is responsible for any failures of negative results, will the organization
meet the expectations of the shareholder and will it lead or be a top performer in its industry market. When shareholders invest
in an organization they have to decide whether to accept the risk for a return that will outperform other investments and
alternatively, risk free market securities. The expectation is that the organization that they choose will meet this expectation and
additionally espouse the values of the shareholder.

Golden Parachute Decisions


According to an article in the CCH Financial Planning Toolkit (2007), the term "golden parachute" is a wonderfully descriptive
term for a defensive measure used by a company to prevent hostile takeovers. With golden parachutes, employers enter into
agreements with key executives and agree to pay amounts in excess of their usual compensation in the event that control of
the employer changes or there is a change in the ownership of a substantial portion of the employer's assets. Top executives
are provided with a financial soft landing in the event that a takeover results in discharge. The company initiating the hostile
takeover, on the other hand, will either have to pay this associated increased costs when acquiring the corporation or back
down from the takeover.

Strategic motives
One of the strategic motives for Golden Parachutes is to promote stability for mergers. In their article in Ideas and Trends,
Kefgen and Mahoney (1997) indicate that because of the increased merger activity, executive pay and golden parachutes are
now being scrutinized more to determine their affect on stability and performance.
Beyond the IRS defined benefits, golden parachutes provide a number of other advantages. One is that they assist in attracting
and retaining top management talent. The security of a golden parachute makes it easier to attract executives to a takeover
target, and in times of heavy M&A activity, that includes just about every company. As golden parachutes become more
prevalent in employment agreements, not offering them will put companies at a strict disadvantage.
Another quality of golden parachutes is that they act as a deterrent to anti-takeover tactics. The presence of a parachute allows
management to evaluate a takeover bid more objectively. Without a golden parachute provision in place, executives might
selfishly implement costly defensive tactics to save their jobs, regardless of what is in the best interest of shareholders.
A third argument is that golden parachutes actually dissuade takeover attempts by creating a change of control liability that
renders the takeover financially unsound. Historically, this has simply driven up the cost of parachute payments. According to
our HCE survey of lodging corporations, the average parachute is now equivalent to approximately two years of total
compensation and is extended to only the top 10 to 15 executives in the organization.
Whether a golden parachute dissuades a takeover or not, it can benefit a corporation by attracting top executives, thwarting
costs associated with takeovers and promoting stability. (Kefgen & Mahoney)

Economic motives
In an attempt to curtail golden parachute activity many activist shareholders are seeking to limit the amount the plans can pay
without separate authorization. The shareholders are actually the owners of the company and they feel that they are entitled to
approve these larger optional compensation plans.
In an article in Brown Digest For Compliance Professionals (2007) abstracted from M&A Lawyer (Vol. 11, No.2, Pgs. 9-13)
corporate/securities attorney Jonathan Gordon and executive compensation attorneys Jeremy Goldstein and David Kahan
23

Golden Parachutes and Their Effects on Organizational Financial Decision

report that many companies seek to deflect public opprobrium or avoid bruising shareholder fights by adopting limitations
voluntarily. Most limitation policies cap severance payments at a multiple of the executive's base earnings, and then exempt
certain types of payment from the computation. The capped amounts often include cash, stock, and the present value of posttermination perquisites and periodic payments. Typical exclusions cover equity vesting and long-term bonus settlements and
other compensation earned before termination, and payments from benefit plans in which employees other than the executives
participate.
The article also claims that the adoption of a golden parachute limitation plan gives the board an opportunity to reflect on and
articulate its compensation philosophy for senior executives. In practice, the authors find, the pressure to adopt almost anything
that deters shareholder resolutions and lawsuits overwhelms the opportunity for reflection. Companies are left with plans that,
through vagueness, rigidity, and other flaws, hamper sound compensation policy and invite litigation. The chief complaint is that
policies cannot, in their typically terse wording, address the many hard-to-categorize situations, such as gross-ups for federal
excise tax on golden parachute payments and prorated bonuses for the year of termination. Moreover, if shareholders meet
only annually, they cannot approve exceptions in advance of the termination event, which (for acquisitions) often must be kept
confidential until the last minute. Any exceptions a board might authorize to a parachute capfor example, to secure a key
executive of an acquired companycould trigger shareholders' lawsuits claiming that the company violated its own policy.
(Brown Digest For Compliance Professionals, 2007)
The authors (Brown Digest For Compliance Professionals, 2007) also note that compensation policy is a matter which
corporate law leaves to the board, and a rigid compensation policy dependent on shareholder overrides may violate directors'
fiduciary duties. Companies are well advised to resist shareholders' demands to adopt such policies. Since managements must
respond to shareholder initiatives under the SEC proxy rules, it may seem prudent to offer a plan as an alternative to a
shareholder-proposed one. Yet, the authors stress, a well-articulated compensation philosophy is a better solution than
arbitrary limits on compensation. If the board nevertheless feels it must adopt a limitation on golden parachutes, the plan
should give the directors the final word on how to interpret it and how and when to grant exceptions.
In an earlier study by Berkovitch and Khanna (1991, p. 149) they developed a economic model of the acquisition market in
which the acquirer has a choice between two takeover mechanisms: mergers and tender offers. A merger is modeled as a
bargaining game between the acquiring and target firms; whereas a tender offer is modeled as an auction in which bidders
arrive sequentially an compete for the target. At any stage of the bargaining game, the acquiring firm can stop negotiating and
make a tender offer. In equilibrium, there is a unique level of synergy gains below which the acquiring firm makes only a merger
attempt as it expects to lose in the competition resulting from a tender offer. For synergy gains above this level, tender offers
can occur. However, to get tender offers, target shareholders must give their managers gold parachutes that give higher
payoffs in tender offers than in mergers.

Behavioral motives
While working stiffs suffered another real pay cut in 2005, it was another year of record-setting raises for America's CEOs. A
Pearl Meyer & Partners survey of large companies found the median CEO received a 10.3 percent raise last year to $8.4
million. In addition, those at the top got packages that were truly jaw dropping. CEO William McGuire's accumulation of $1.6
billion worth of UnitedHealth Group's stock options was so huge and fortuitously timed that the Securities and Exchange
Commission has taken an interest. Moreover, drivers around the country fumed when they learned that Exxon's retiring CEO
Lee R. Raymond not only took home $49 million just for last year but also is now collecting a pension worth $98 million. (Clark,
2006)
It has gotten so bad that a few chagrined CEOs, worried about the effect of this entire largess on investors and workers, have
started to hand back some of the goodies. One of these is Edward J. "Ned" Kelly, CEO of Mercantile Bank, who earlier this
year canceled a standard golden parachute contract that would have given him three times his annual salary and bonusa
total of $9 millionif he had sold the bank holding company. Kelly is a veteran of boardrooms who has served on the
compensation committee of Constellation Energy Group and now heads the audit committees of CSX and the Hartford. (Clark,
2006)
When asked why he does not have one he said that that he was confident he could get another job because of his unique
background and that he believed that if you are being paid for performance, there is no need to worry about finding another job.
An example of Golden Parachutes gone wrong is Bob Nardellis Reward for a job badly done at Home Depot. Nardellis
handsome reward has brought the inequities of extreme capitalism into the spotlight, says Chandran Nair. (Nair, 2007)
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P. T. DiPaolo, E. Curci and T. Griffin

Volume 8 Winter 2009

There was no surprise when Bob Nardelli decided to quit as chairman and chief executive of Home Depot. The worlds biggest
home improvement retailer suffered falling sales and a slide in its share price on his watch. What sent eyebrows arching was
the size of his payout: Nardelli walked away with $210 million.
The size of his severance package prompted editorial outrage in many of the worlds leading newspapers. It drew anger from
labor unions, which described the payout as extreme and obscene. It has moved leading investors to launch an
unprecedented campaign to curb such packages. If he has done nothing else, Nardelli has helped bring worries about
extreme capitalism to mainstream consciousness. These golden parachute agreements are the norm, with executives paid
huge sums regardless of their companys performance. They embody the kinds of excess that poison capitalism and
globalization in many peoples minds (Nair, 2007). Interestingly, these excesses are uncommon in Asia, for all its flaws. It is
Asian shareholders and business leaders vital challenge to keep them from taking root even while they clean up their
corporate governance act. (Nair, 2007).

Disney: an example.
In the investigation for how CEOs are compensated there is great concern for the behavior of the trustees of the boards of the
organizations that are awarding these salaries. It has been a concern of a number of experts and is evident as an abuse but
despite all the scandals with CEOs and financial abuses, this practice remains at the forefront of abuses that are continued. In
an article in Tulsa world, it is documented that Michael Eisner is compensated at a rate that diametrically opposes his
performance from 1991 to 2002.
For instance, Walt Disney Co.'s outgoing CEO Michael Eisner was paid $38 million above the industry average from 1991
through 2002. That's even though the company's performance declined when compared with others in the business, according
to Robert Daines, a Stanford University law professor who co-authored a study on the link between CEO skill and pay. (Beck,
2005)
For CEOs who dodge the bullet or are doing a fine job, the trappings remain handsome: Paychecks for American CEOs grew
7.2 percent in 2003 and 10 percent in 2002, according to a survey of 350 companies conducted by Mercer Human Resource
Consulting. The median CEO compensation in 2003 was $2.1 million. Mercer's latest survey, with 100 companies reporting so
far, shows their CEO pay was up 25.3 percent in 2004.
No tears. That such largeness comes with strings attached--you might be fired if you underperform--would hardly seem unfair
to the average salaried worker. "If you want job tenure, there's a great position in the mailroom," says Minow.
However, not in Disney's mailroom, at least not for Magic Kingdom kingpin Eisner. Last week he announced that his 21-year
reign over the House of Disney will end in September, a year earlier than planned. Eisner has long been a poster boy for
outlandish executive compensation, having taken home over $1 billion during his tenure at Disney. Though he transformed the
company from a sleepy but well-known brand into a media and entertainment powerhouse, the board seemed to want to know
what he had done for shareholders lately. "Eisner overstayed his welcome," says securities analyst Dennis McAlpine. "He did
very well when he had things he could do, but after he got those cleared up, what was he going to do for an encore, go after
the window washers?" (Beck, 2005)
Figure 1 shows the financial performance of The Walt Disney Company. Figure 2 is the evaluation of the gain in financial
performance of the organization and the rate in change in Michael Eisners salary. These results show a dramatic discrepancy
between organizational performance and the CEOs compensation.
Fig 1:

Financial performance
1999

2000

2001

2002

2003

2004

Percentage in change of
revenue from previous year

N/A

7.9727%

-0.6041%

0.6237%

6.8380%

13.6396%

Percentage of change in
Michael Eisner's Salary

N/A

6654.67%

43.80%

-98.62%

0.10%

628.16%

Michael Eisner's Salary

$750,000

$50,660,000

$72,848,000

$1,004,000

$1,005,000

$7,318,000

25

Golden Parachutes and Their Effects on Organizational Financial Decision

Fig. 2:

Change in income, salary, & revenue.


7000.00%
6000.00%
5000.00%
4000.00%

Change in Net Income

3000.00%

Change in Mr. Eisner's Salary

2000.00%

Change in Revenue

1000.00%
0.00%
-1000.00%
Change in Net
Income

2000

2001

2002

2003

2004

5.51% -46.11 0.08% 0.08% 0.31%


%

Change in Mr. 6654.6 43.80% -98.62 0.10% 628.16


7%
%
%
Eisner's Salary
Change in
Revenue

7.9727 -0.6041 0.6237 6.8380 13.639


%
%
%
%
6%

In the data above, there is valid and reliable measure or formula for evaluating the organizations financial performance to the
value or compensation of the CEO, this is a measurement of change in percentage of financial activity. In this data, a modest
or expected level of gain in the results of the organization translates into astronomical compensation for the CEO and negative
results present no real harm to the compensation. The discrepancy between the financial results and CEO compensation fails
to discern any specific, measurable, logical, or identifiable pattern that is predictable or a calculation for consistency.
In an examination of the organizational assets and value it is apparent that there is a reason for concern for shareholders and
that excess compensation for management has caused financial challenges for the organization and has diminished the value
of the stock.
In 2001 The Walt Disney Company experienced some financial difficulty and initiated a Voluntary Separation Period (VSP), this
gave members of the organization the opportunity to decide their own fate and volunteer to accept a severance package.
During this time and continuing for the next fiscal year there were additional freezes on wages for members of the organization,
but Mr. Eisners salary increased dramatically and then dropped to just over his base of $750,000.00 but still in excess of his
base salary, while other members didnt receive any rise in compensation and stock holders continued to receive only $0.21
per year from the period of 2000 through 2002.

Financial results
Shareholders invest in a firm to achieve positive financial gain. This is in either dividends or the increased value of a stock in
the growth of the stock price. As a measure of these results, shareholders will use an Expected Rate of Return calculation that
is the sum of the original cost of the stock, the dividend it pays, and the percentage gain that they are anticipating. In figure 3
below the 1999, stock price for The Walt Disney Company is calculated with varying percentage returns expected from that
time through to 2005. Based on figure 4 the results of the actual return on the investment are evident.
Fig. 3:

Expected stock price


Expected Stock Price based on actual 1999 price
1999

2000

2001

2002

2003

2004

2005

8% Rate of Return

$29.56

$31.92

$34.48

$37.24

$40.22

$43.43

$46.91

7% Rate of Return

$29.56

$31.63

$33.84

$36.21

$38.75

$41.46

$44.36

6% Rate of Return

$29.56

$31.33

$33.21

$35.21

$37.32

$39.56

$41.93

5% Rate of Return

$29.56

$31.04

$32.59

$34.22

$35.93

$37.73

$39.61

4% Rate of Return

$29.56

$30.74

$31.97

$33.25

$34.58

$35.96

$37.40

1% Rate of Return

$29.56

$29.86

$30.15

$30.46

$30.76

$31.07

$31.38

26

P. T. DiPaolo, E. Curci and T. Griffin

Fig 4:

Volume 8 Winter 2009

Actual return

The REAL price of Disney Stock


on the first trading day of the year

$29.56

$29.88

$27.94

$21.45

$17.26

$23.67

$27.85

In the trend of stock value prices for The Walt Disney Company stock price from 1999 2005 (Figure 5) the results are
sporadic and inconsistent and for this period inclusive would result in a yield that translates into a negative value for their
owners. The year-to-year comparison of results has some extreme variances for each period, which would result in extremely
negative losses of extremely positive gains. This pattern would be exceptionally difficult for investors to prepare for or predict to
take advantage of for the desired gain. The CEO on the other hand has the information that would be necessary to execute a
stock option for their optimal gain.
Fig 5:

Performance items
Year

1999

Percentage change in value from


1999 to any other year
Percentage gain/loss in stock
value compared to previous year

0.00%

Over timeframe 1999-2005


gain/loss

2000

2001

2002

2003

2004

2005

1.08%

-5.48%

-27.44%

-41.61%

-19.93%

-5.78%

1.08%

-6.49%

-23.23%

-19.53%

37.14%

17.66%

6%

The performance and value of The Walt Disney Company has demonstrated unacceptable results and has performed
negatively. The risk-free rate for investing in market securities is about 4% at that level The Walt Disney Company should have
achieved a stock price of 37.40 in 2005. In figure 6 below, it is evident that it failed to achieve a positive return for investors. For
every $1000.00 invested in The Walt Disney Company stock there is a loss of $57.85 for the period of 1999 2005.
Fig 6:

Performance & value units


1999

Percentage gain/loss in stock


value

2000

2001

2002

2003

2004

2005

1.08%

-6.49%

-23.23%

-19.53%

37.14%

17.66%

Over the lifetime gain/loss

-6%

1%

4%

5%

6%

7%

8%

Loss based on expected % gain

-11.25%

-25.54%

-29.70%

-33.58%

-37.22%

-40.63%

$1000 invested in 1999 is in 2005


valued at

$942.15

1%

4%

5%

6%

7%

8%

$1,061.52

$1,265.32

$1,340.10

$1,418.52

$1,500.73

$1,586.87

Expected return on $1000


invested in 1999 on Disney Stock
to value in 2005 at a given
percentage rate

Compensation
The CEO of any organization receives a base salary; this is the compensation he receives regardless of his performance and is
the obligation of the owners or shareholders and secondary components are added based on performance of the organization.
This is essential for attracting and maintaining any executive in any organization. The secondary or additional components in
the compensation for a CEO are stock options, perquisites, profit sharing, and other incentives that are of value by the CEO.

27

Golden Parachutes and Their Effects on Organizational Financial Decision

The board of directors compensation committee are responsible for putting a package together that will be rewarding and
satisfactory for both the shareholders and the CEO. They are charged with the fiduciary responsibility of maximizing value for
the shareholders and acting as an agent to protect them. In the recent past, the compensation committees have not been
acting with due diligence for the shareholders. There are now some activities and behavior of the CEO that is noticeable to the
boards of directors at all organizations. In the recent legal action by ENRON shareholders suing the Board of directors and the
out of court settlement there is now concern for how a CEO should be compensated and the board can now be held
accountable for not acting carefully. (Benjamin, 2005)
First, academic research indicates that shares of companies with what are perceived to be good corporate governance
provisions tend to outperform other stocks. Second, "investors view governance as a risk factor, says Patrick McGurn,
executive vice president of Institutional Shareholder Services, which tracks corporate governance issues. The firing of CEOs
who don't perform according to shareholder expectations is discussed.
So perhaps it is no surprise that the list of ousted executives includes both those whose sin was failing to deliver on their
promises to shareholders--like Hewlett-Packard's Carly Fiorina and Disney's Michael Eisner--as well as those whose sin was,
well, real, such as Boeing's Harry Stonecipher, who lost his job after acknowledging an affair with a subordinate. Such
entrenched imperial leaders as AIG's Maurice "Hank" Greenberg are not above boardroom discipline as soon as a whiff of
scandal arises. Even the Japanese, whose love of ritual and respect for hierarchy are legendary, are getting into the act: Sony
directors replaced CEO Nobuyuki Idei with Welsh-born American Howard Stringer in an attempt to shake up the company and
boost its sagging stock price.(Benjamin, 2005)

Perquisites
As part of any compensation plan in an organization, all members receive some perquisites or benefits that are not necessarily
financial rewards. These can be intrinsic or extrinsic, or tangible or intangible but still allow the individual to exercise these
benefits based on achievement or as part of affiliation with the organization. These are personal use of organizational assets,
prestige of being the figurehead or leader of the firm, discretionary use and distribution of organizational assets, access to
organizational knowledge and information, and other activities. Although a dollar figure could be associated with these items, it
is usually not a consideration in any financial representation of compensation for the CEO.
These benefits should have an associated weight for offsetting some of the compensation for the CEO as acquisition would
have a real cost if not accessible within the organization. These items should also carry value to the CEO or should not be
available for use and should be part of a conversion into other savings or revenue for shareholders.
Association with a successful organization will provide numerous opportunities for the executive to enhance their value to the
organization while increasing their earning potential from external sources. These will have to meet with approval of a
committee to make certain that they are not in violation of the contract with the organization and will not diminish the value of
the executive to the organization.

CONCLUSIONS
The failure to reinforce value driven management elements that have diminished the value and return of the organizational
assets must be a concern for the shareholders and anyone that has authority to plan and deliver a compensation package for a
CEO. How a CEO is measured and compensated must be based a number of elements and there should be safeguards in
place to protect the interests of both the CEO and investors in the organization.
There is a formula for extracting the economic performance of an organization that should include the Cost of Capital,
Plowback Rate, ROA, ROE and change in EPS from one year to the next, and based on these element the formula for CEO
compensation can be derived.(Keown, 2003) In addition to this the potential for stock options can be allowed with placing
controls that would force the escrow of those funds for a period of one to two years to be used for preventing CEOs from using
them as an escape plan and the results of any actions that the CEO may have taken to harm to organization, which in turn
could be used to penalize the CEO and offset the harm to investors by recapturing part or all of these funds.
The behavior of the board should be of concern to the shareholders, as they are the responsible party for releasing the
financial assets that make up the compensation package and affect the other financial activities affecting the performance of
organizational assets. A process for governing the board or making them directly responsible for the harm to shareholders
must be established and enforced.

28

P. T. DiPaolo, E. Curci and T. Griffin

Volume 8 Winter 2009

To present a fair and balanced presentation of the material a request of Michael Eisner to participate in this research was
offered. Due to his schedule and other conflicts, he was not able to offer any essential information that might provide insight
into the intricacies of the responsibilities of a CEO and justification for the compensation schedules that are evident in this
analysis and reflected in the position in firms across the U.S.

REFERENCES
Beck, R. (2005) News Analysis: Benchmarking inflates CEO salaries; [FINAL HOME EDITION] Associated Press. Tulsa
World. Tulsa, Okla.:
Benjamin, M, Lim, P.J. Streisand, B. (2005) Giving the boot; Boards with new backbone are dumping imperial CEOs U.S.
News & World Report. Washington: Vol.138, Iss. 11
Boyd, R. (2005) SEC to CEOs: Reveal all; New York Post, New York, N.Y
Berkovitch, E., & Khanna, N. (1991). A Theory of Acquisition Markets: Mergers vs Tender Offers, and Golden Parachutes.
Retrieved from University of Michigan, School of Business Administration, Ann Arbor Web Site:
http://http://rfs.oxfordjournals.org/cgi/content/abstract/4/1/149
Brown Digest For Compliance Professionals. (2007). Limits on Golden Parachutes May Please Activists ut Harm the Company.
Retrieved
from
Brown
Digest
for
Compliance
Professionals
Web
Site:
http://www.bowne.com/securitiesconnect/details.asp?storyID=1472http://
Burton, Christian E., and Burton, John A. (2005). How CEO Pay Took Off While Americas Middle Class Struggled. Washing
DC: Center for American Progress.
Cch Financial Planning Toolkit. (2007). Golden Parachutes. Retrieved July 30, 2007, from CCH Wolters Kluwer Buisness Web
Site: http://www.finance.cch.com/text/c40s10d490.asp
Clark, K. (2006, May 17). Thanks, but I don't want a Golden Parachute. Retrieved from US New and World Report Web Site:
http://http://www.usnews.com/usnews/biztech/articles/060517/17kelly.htm
Garsten, E. Struggles at General Motors: Kerkorian targets GM Offer. Retrieved from CNN Money.
http://www.detnews.com/2005/autosinsider/0505/09/A01-172472htm
Kefgen, K., & Mahoney, R. (1997). Golden Parachute Packages Promote Stability in Heavy Merger Market. Retrieved from
Ideas and Trends Web Site: http://www.hotel-online.com/Trends/HVS/Kefgen?ParachutesPromoteStability.html
La Monica, P. R. Icahn calls for for Time Warner Breakup, Buyout. Retrieved from Detroit News.
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Nair, C. (2007). Executive Pay: Shooting Holes in Golden Parachutes. Retrieved from Ethical Corporation Magazine Web Site:
http://www.ethicalcorp.com/content.asp?ContentID=4945
Keown, A.J., Martin, J.D., Petty, J.W., Scott, Jr., D.F., (2003) Foundations of Finance; The logic and Practice of Financial
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Michael Eisner Salary Information
2004 http://www.forbes.com/static/execpay2004/LIRC3YW.html?passListId=12&passYear=2004&passListType=Person&unique
Id=C3YW&datatype=Person
2003http://www.forbes.com/finance/lists/12/2003/LIR.jhtml?passListId=12&passYear=2003&passListType=Person&uniqueId=C
3YW&datatype=Person
2002http://www.forbes.com/finance/lists/12/2002/LIR.jhtml?passListId=12&passYear=2002&passListType=Person&uniqueId=C
3YW&datatype=Person
2001http://www.forbes.com/finance/lists/12/2001/LIR.jhtml?passListId=12&passYear=2001&passListType=Person&uniqueId=C
3YW&datatype=Person
2000http://www.forbes.com/finance/lists/12/2000/LIR.jhtml?passListId=12&passYear=2000&passListType=Person&uniqueId=C
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3YW&datatype=Person

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Golden Parachutes and Their Effects on Organizational Financial Decision

BIOGRAPHY
Ernest Curci
Ernest Curci, II is a 30 year veteran of businesses in the IT, Construction Trades and Hospitality industry. Currently he is a
Technical Specialist for The Walt Disney World Company in their IT domain in the Content Management arena. He holds an
MBA from Nova Southeastern University with a specialization in Leadership and is currently perusing a Doctorate of Business
Administration (DBA) from Kennedy Western University. As an Owner, Manager, Consultant, and Project Manager for
companies like Computer Associates and Disney as well as other SMBs and Government Agencies he has experienced the
challenges that businesses have in all delivering products and services in every situation. His education has lead him to
explore more creative and efficient solutions for the organizations that he supports

Dr Peter T DiPaolo
Dr. DiPaolo currently serves as an Assistant Professor of Finance and Economics at the H.Wayne Huizenga School of
Business and Entrepreneurship teaching courses for both the Masters of Business Administration and the Undergraduate
Business Programs and is the lead instructor for several undergraduate business courses.
Dr DiPaolo became a full-time instructor after more than 30 years as an engineer, executive, consultant, and educator in the
information technology industry where his unique combination of behavioral and quantitative skills reinforced by an advanced
education in business management, led to a proven record of bringing successful products to the marketplace, the
development of several strategic business plans, and the ability to become an effective educator and mentor. During his
corporate career, DiPaolo patented a mechanical sorting apparatus he developed for the Burroughs Corporation and was the
first in the Modular Computer Systems Corporation to be promoted to the position of Corporate Fellow, the apex in engineering
titles, recognizing his outstanding contributions to the science and technology of the company.
Dr. DiPaolos undergraduate degree (Villanova University) is in Mechanical Engineering and his MBA and DBA (Nova
Southeastern University) degrees are in Business Administration with Management as a major. His doctorate dissertation
research was on the topic of Capital Budgeting Techniques in Direct Foreign Investment.

Dr Tom Griffin
Dr Griffin is a Professor of Decision Sciences at Nova Southeastern University. He has held numerous academic leadership
positions including academic dean. He has extensive manufacturing management background and held positions as VP of
Corporate Quality System and President. He has published in Quality Management Journal, International Journal of Production
Research, Journal of Managerial Issues, etc.

30

D. T. T. Van, L. Pickler, F. Wolf and T. E. Griffin

Volume 8 Winter 2009

A COMPARATIVE STUDY OF VIETNAMESE AND AMERICAN CUSTOMERS


BEHAVIOR IN NEGOTIATION STYLE AND IMPLICATIONS FOR GLOBAL
PRICING STRATEGY
Dinh Thi Thanh Van1, Lee Pickler2, Frank Wolf3 and Thomas E. Griffin4
Vietnam National University1, Vietnam, Baldwin-Wallace College2, USA
and Nova Southeastern University3,4, USA
ABSTRACT
Many researchers have sought to explain how different customers behavior might be different across cultures. One way that
customers always exercise to maximize the benefits in an offer is by negotiation. Understanding how customers negotiate will
help organizations offer appropriate pricing strategies that retain profitable businesses in the context of globalization. This
research, using the authors primary data, examines negotiation skills of American and Vietnamese customers. Two samples,
taken separately from the U.S. and Vietnam, were used to test several hypotheses. The results confirmed that cultural
differences lead to different negotiation styles and perception. Consequently, theoretical and practical implications of these
findings about global pricing strategies as well as directions for future research are discussed.

INTRODUCTION
With the tremendous growth in international markets during the last few decades, managers are increasingly trying to enter
foreign markets. Theory suggests that price sensitivity and shopping practices differ substantially between cultures (Ackerman
& Tellis, 2001). Negotiation is one shopping practice that people normally use to create and maximize opportunities in
business, in the marketplace, and with others (Levison, Smith, & Wilson, 2000). Global pricing to offer an effective marketing
mix, has to take into account how customers in different cultures evaluate high and low prices (Johansson, 2006).
Understanding a foreign customers own style, characteristics, prejudices, and how he or she would negotiate the best deal are
the key factors for a successful global manager when setting up appropriate prices.
Studies about negotiation skills across cultures have been done for years to help managers effectively respond in foreign
markets (Graham & Sano, 1984). However, few studies have been conducted in the Vietnamese market. Vietnam is a
developing country in the Southeast Asian region, which attracts masses of foreign direct investment (FDI). U.S.-related FDI
actually increased significantly in 2003, two years after implementing the Bilateral Trade Agreement in 2001 (Prasso, 2005).
Especially since Vietnam became a member of the World Trade Organization in 2007, FDI has increased steadily. In 2008, the
amount of disbursed capital soared to $11.5 billion; up 43.2% compared with 2007 (The China Post, 2008); thus demonstrating
the importance of understanding how differences in cultures, gender, experiences, and other characteristics could affect
Vietnamese customers negotiating behavior. Therefore, the study explores and compares the differences between Vietnamese
and American customers negotiation styles to find out how these are reflected within both cultures. Content provides
knowledge of implications for managers in cross-culture marketing.
The paper is divided into five sections. The first section discusses customer type, conceptual framework of cross-culture
customers negotiating behavior, and how culture differences influence a customers negotiation style. The second section
develops the studys hypotheses. The studys methodology is discussed in the third section and results are analyzed in section
four. The last part of the paper discusses theoretical and practical implications for global pricing strategies as well as
recommendation for direction of future research.

CUSTOMER TYPES
Effective managers making pricing decisions must understand buying behaviors associated with different types of customers.
One way of segmenting customers is relative price sensitivity. Customers will choose alternatives for better prices. Some
customers pick sellers based on differentiated brand value; other customers prefer to establish a long term trusted relationship
with the sellers. Nagle and Holden (2002) specified four types of customers: price, relationship, value, and convenience.
Price buyers: They prefer obtaining a deal and make the purchasing decision with the seller providing the lowest price. They
accept the lower level of quality as well. Price buyers start the buying process with the bottom line in mind. The suppliers
31

A Comparative Study of Vietnamese and American Customers Behavior in Negotiation Style and Implications for Global Pricing Strategy

cannot negotiate to offer a trade-off between price and other specs. There are several supplier strategies used such as raising
the value of the product, or effective communication to increase willingness to buy. However, research suggests that most price
buyers will never change, so managers should not try to participate with them in a price resolution without gaining any profit.
Because price buyers are usually a large market segment, negotiation takes an important role in order not to lose these tough
customers.
Relationship buyers: They already have a strong preference of one particular brand and have good experience with the brand
and do not want to try alternatives. They value a consistent product with high quality and performance. A loss in trust could
lead to switching the seller. For these buyers, maintaining the existing relationship by reminding the past performance is
critical. Trying to understand their source of value will help companies to serve and satisfy in the future. Not only focusing on
experience, managers should also place an emphasis on future commitment.
Value buyers: These seek both value and quality products. They might try negotiating different alternatives to get the best
trade-offs between price and other variables. They often are the largest market of any business. Unlike price buyers who focus
on only price, value buyers are aware of the quality of option for each price and carefully analyze the economic value in each
offering. Value buyers are also willing to try new products and services if they feel the value is acceptable. This brings more
opportunity for sellers. When negotiating with value buyers, the unique value of each sale should be pointed out. It is always
hard to convert these into loyal customers. However, negotiation skills of salespersons for each situation will be critical. By
recognizing customer needs for either lower price or commitment to the seller, salespersons will reduce much selling effort
when price negotiations occur.
Convenience buyers: These do not try to distinguish the differences between brands. They minimize the effort of evaluating
price or negotiating when time is critical. However, in order to be profitable, a company should have price differences for
different types of customers (Nagle &Holden, 2002).

High

Pain
of
Price

Value
Buyers

Price
Buyers

Convenience
Buyers

Relationship
Relationship
Buyers
Buyers

Low

Low

High

Value of Differentiation

Graph 1: Customer Segmentation by Value Perception


(Adapted from the Strategy and Tactics of Pricing, Thomas T. Nagle and Reed K. Holden. 3th edition, page 106)

CULTURE DIFFERENCES INFLUENCE CUSTOMERS NEGOTIATION STYLE


Negotiation is a joint decision-making process in which two or more parties have conflict of interests (Bazerman & Lewicki,
1984). Research has shown that having different cultural backgrounds will distinguish one individual negotiation style from
another. Culture affects the range of strategies that negotiators develop as well as the tactics they implement (Salacuse, 1995).
Culture is defined as a group-level phenomenon in which beliefs, values, and behavioral expectations are shared and learned
among members. Faure (1999) and Sebenius (2002) agreed that identifying central values and norms help in the
understanding of how these norms and values influence negotiation within a culture (Ready, 2005). Cross-cultural comparisons
in customers behavior differentiate the particular values and norms among cultures. Identifying how these differences influence
buying decisions needs to be made.

32

D. T. T. Van, L. Pickler, F. Wolf and T. E. Griffin

Volume 8 Winter 2009

According to McGinnis (2005), a widely accepted framework for assessing cultures was developed, beginning in the 1980s, by
the work of Geert Hofstede, a Netherlands native who did his research within large, multinational corporations. There are four
dimensions of culture that distinguish one individuals negotiation style from another:
Individualism/Collectivism: Each society will place an emphasis on individual or group value. Individualistic societies
encourage its members to be independent and look out for themselves. Collectivist societies emphasize the groups
responsibility for each individual. Hofstede suggested that relationships in collectivism would play a critical role. Negotiation is
also about building a long-term relationship for future negotiation. In individualistic societies, negotiators are considered
interchangeable; and yet competency is the focus in negotiation. Collectivist society values price consciousness and
sophistication in money handling differ from Americans in an individualistic society that traditionally does not have the same
values. As a result pricing tactics may differ in response to or to attract consumers of different cultural orientation. Price
conscious shoppers would take more time and search alternatives for the best trade they can get (Ackerman &Tellis, 2001).
Vietnamese customers are more likely to be value customers. Most stores in Vietnam allow bargaining. Therefore, price setting
for this market should be realistic. Americans on the other hand value time and more likely to be convenience customers.
Power Distance: describes the degree in which a society accepts unequal power distance. In less power distance cultures, the
equality among people will be greater. Decision making is more likely to spread throughout the organization. In cultures with
high power distance, there is little consultation between superiors and subordinates. Hofstede suggested that leaders in high
power distance would finalize the important decisions (McGinnis, 2005). People in different status levels of a society will have
different styles of negotiation and purchasing. For instance, in a higher power distance culture like Vietnam, consumers have a
fear of embarrassment or "losing face" when using coupons to buy goods (Huff et al., 1998). This is a very important indicator
for American managers when using a pricing strategy in a sale promotion for customers from different cultures
Masculinity/Femininity refers to the values more likely to be held in a society. Masculine societies are characterized as
emphasizing the importance of things and money. Feminine cultures are characterized by concerns for relationships, nurturing,
and quality of life. The motives for luxury consumption in different level of power distance societies are different. In a feminine
society, the meaning of the good is more important than the price itself (Ackerman & Tellis, 2001). So when negotiating,
businesses should place an emphasis on the symbolic meaning of the good rather than trying to reduce the price. Furthermore,
Hofstede (1989) said that this dimension influences negotiation by having more competitiveness between masculine
negotiators, and more empathy between feminine negotiators (McGinnis, 2005).
Uncertainty avoidance: This dimension concerns individual levels of tolerance with unstructured situations. In societies with
high uncertainty avoidance, negotiators prefer stability, structure, and precise managerial direction. These will implement and
follow stable rules in negotiation. In contrast, negotiators in low uncertainty avoidance societies are comfortable with ambiguity;
unstructured situations (McGinnis, 2005; Ready, 2005). Research has shown that the saving rate of Asian people is higher
than that of most Western society (Ackerman &Tellis, 2001). Asians are known as being risk adverse. As a result, they tend to
search and negotiate for a better tradeoff between price and value more than Americans do.
In their research, Ackerman and Tellis (2001) also found that consumer shopping practices across culture are very different in
retail stores. Since collectivism and low level of power distance customers are willing to bargain and negotiate for small items,
retailers normally, come up with very small margins and daily price changes (Ackerman & Tellis, 2001). This also demonstrates
what an American business should consider when setting prices in the Vietnamese market. Vietnamese seem to be more
naturally price customers due to their cultural characteristics.

THE STUDYS HYPOTHESES


Vietnam is one of Asias most diverse travel locations. The signing of the U.S.-Vietnam Trade Agreement in July 2000 after
three years of negotiations has opened a new page in Vietnam-U.S. trade relation history. The agreement has created
opportunities for U.S. investors in Vietnam. The agreement also gave Vietnamese businesses access to the U.S. market on the
same terms as other nations (Prasso, 2005). In the global economy, the negotiations between Vietnamese and U.S. partners
has grown to be a norm. In order to target the new Vietnamese market, American managers should recognize their
counterparts negotiation styles. This study examines whether research findings about factors of influence across cultures are
applied to Vietnamese and American students negotiation styles. Based on the theoretical analysis of factors that influence
ones personal negotiation style in the above section, this study tries to explore and confirm the extent to which Vietnamese
and American students have differences in their negotiation skills. Specifically, the hypotheses of this study are as followings:
Hypothesis 1a: Both Vietnamese and American students have the same assessment about winner, loser in negotiation.
33

A Comparative Study of Vietnamese and American Customers Behavior in Negotiation Style and Implications for Global Pricing Strategy

Hypothesis 1b: Both Vietnamese and American students feel that they are effective negotiators.
Hypothesis 1c: Both Vietnamese and American students think their cultures encourage negotiation.
Hypothesis 1d: Both Vietnamese and American students think men are better negotiators than women.
Hypothesis 2a: Both Vietnamese and American students feel like negotiating when they feel there is a high probability of
winning.
Hypothesis 2b: Both Vietnamese and American students set bottom line before they begin negotiating.
Hypothesis 2c: Both Vietnamese and American students continually consider the other partys limitations during the
negotiation.
Hypothesis 3a: Both Vietnamese and American students feel comfortable negotiating with women more than with men.
Hypothesis 3b: Both Vietnamese and American students are more successful in negotiations with women than with men.

METHOD
Sample
Two samples were used to test the hypotheses in this study. The first sample consisted of 456 responses from students at a
Midwestern university in the U.S. The second sample consisted of 390 responses from students at the National University in
Vietnam. All students who participated in this study are either juniors or seniors. The percentages of males and females are
approximately equal in the U.S. sample, whereas 34% are males and 66% are females in the Vietnamese sample. The
students reported their most negotiated items in Table I.
Students who participated in the study were volunteers. The questionnaires in both samples contained no identifiers and were
therefore completely anonymous. American students filled out on-line surveys at the web server of University of Wisconsin,
Eau Claire. The English version was translated into Vietnamese, and then being reverse- translated to firmly confirm the
relevant content and items. Vietnamese students filled out paper surveys in Vietnam. The Vietnamese paper surveys were
converted into an electronic format to match with the American online surveys.
Table I : Most Often Negotiated Items
Negotiated Items

Country surveys conducted


US

Vietnam

Work related issues

41

10.1%

67

27.3%

Pricing/Purchasing issues

71

17.6%

34

13.9%

Domestic issues

52

12.9%

13

5.3%

Not specific issues

59

14.6%

46

18.8%

Social issue

97

24.0%

14

5.7%

Study related issues

14

3.5%

30

12.2%

Relationship issues

0.7%

12

4.9%

67

16.6%

29

11.8%

404

100.0%

245

100.0%

Money/Financial issues
Total

Measures
All items in the questionnaire were assessed on a 1 to 7 Likert scales where 1= strongly disagree and 7= strongly agree. A
single item was used to measure students negotiation skills and their perceptions toward negotiation. Survey items are
designed based on negotiation perception of a student customer. For example, sample items are In negotiation, there is
usually a winner and losers or I feel that I am an effective negotiator.

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D. T. T. Van, L. Pickler, F. Wolf and T. E. Griffin

Volume 8 Winter 2009

Analysis
To test the hypotheses, this study used independent-sample t-test for the difference between means in the SPSS software. To
do this, however, the study first tested for the assumption of equal variances by using Levenes F-test. All results revealed that
there were unequal variances between two samples. Thus, the study reports here all the results under the assumption of
unequal variances.

RESULTS
Table II reported the means, standard deviations, and mean differences of the Vietnamese and U.S. samples. Table II also
reported the t-tests and the significant levels for the mean differences between two samples. All the means for each factor in
both U.S. and Vietnamese samples varies from 3 to 6, indicating that there are differences in negotiation styles. In addition, the
level of difference of each item varies between U.S. and Vietnamese students. The specific results for hypothesis testing are
as follows:
Table II: Negotiation Perception and Skills
Items testing
In negotiation, there is usually a
winner and a loser
I feel that I am an effective
negotiator
I grew up in a family culture that
encouraged negotiation
In general, men are better
negotiators than women
I will only negotiate when I feel
there is a high probability of
winning
I determine my bottom line
position before I begin
negotiating.
I continually consider the other
partys limitations during the
negotiation
I am more comfortable
negotiating with women than I am
negotiating with men.
I am more successful in
negotiations with women than I
am in negotiations with men

Country
surveys
conducted

Mean

Std.
Deviation

US

457

3.66

1.497

Vietnam

388

4.35

1.966

US

455

5.08

1.258

Vietnam

378

4.67

1.438

US

457

4.53

1.522

Vietnam

378

4.28

1.645

US

456

3.01

1.551

Vietnam

380

3.64

1.881

US

454

3.94

1.413

Vietnam

374

4.44

1.713

US

454

5.05

1.327

Vietnam

382

5.57

1.575

US

455

4.57

1.207

Vietnam

380

4.91

1.452

US

454

3.80

1.487

Vietnam

381

4.39

1.654

US

456

3.75

1.373

Vietnam

372

4.03

1.553

Mean
Difference

t-test

Sig.
(2-tailed)

.57

-5.74

.000

.05

4.33

.000

.63

2.29

.022

.59

-5.29

.000

.93

-4.65

.000

.57

-5.25

.000

.61

-3.66

.000

-.13

-5.44

.000

.43

-2.74

.006

Negotiation Perception
There is difference between Vietnamese and American students in the perception about negotiation before they negotiate or
buying an item. Hypothesis 1a (t=-5.741, p<.001) suggests that Vietnamese students agree that there are winners and losers in
negotiation, while American counterparts think more about win-win outcomes. Hypothesis 1b (t= 4.335, p<.001) suggests that
both American and Vietnamese students think they are effective negotiators and purchasers. However, American students are
more confident with mean = 5.08. Hypothesis 1c (t= 2.29, p<.05) suggests both American and Vietnamese students believe

35

A Comparative Study of Vietnamese and American Customers Behavior in Negotiation Style and Implications for Global Pricing Strategy

their cultures support negotiation. Hypothesis 1d (t= -5.294, p<.001) also point out both Vietnamese and American students
disagree that men are better negotiators.

Negotiation Skills in General Context


Hypothesis 2a (t=-4.65, p<.001) suggests that there is a significant difference in the perception between Vietnamese and
American students. Vietnamese students with mean = 4.44 agree that they only negotiate when they feel there is a high
probability of winning, while American counterparts will negotiate in any circumstance. Hypothesis 2b (t=-5.25, p<.001)
suggests that both Vietnamese and American students set a bottom line before they begin negotiating. Hypothesis 2c (p=-3.66,
t<.001): Both Vietnamese and American students continually consider the other parties limitations during the negotiation.

Gender difference
Hypothesis 3a (p=-5.44, p<.001) shows that Vietnamese and American students have different feeling when negotiating with
women and men. Vietnamese students agree that negotiating with women is more comfortable than with men, while American
students feel comfortable negotiating with both. Hypothesis 3b (t=-2.7, p<.05) suggests that there is a significant different
between Vietnamese and American students in negotiating experience with women and men. U.S. students with mean = 3.75
disagree that they are more successful in negotiation with women than with men, while Vietnamese students feel they have
more successful experiences in negotiating with women.
Overall, all hypotheses are supported. This indicates that differences in culture lead to different negotiation skills in purchasing
decisions.

DISCUSSION AND IMPLICATION


Emerging as one of Asias new industrialized countries, Vietnam represents a fascinating prospect for Western businesses
interested in investing in a country rich in economic opportunity, as well as political and cultural history (Engholm, 1995;
Naisbitt, 1996). A fast growing population (85.7 million in mid 2007) and a more than 90% literacy rate among those less than
30 years of age strengthen Vietnams move toward a market economy. The market liberalization process, begun in 1986, was
further enhanced by Vietnams entrance into the Association of Southeast Asian Nations (ASEAN), a trade agreement signed
by the U.S. and Vietnam in 1995, and the countrys membership in The World Trade Organization (WTO) in 2007. For Western
investors in general and American investors in particular, Vietnam has become a potential marketplace. Differences in values
and beliefs create challenges for American managers in entering the market. This study explored and compared the
differences between Vietnamese and American perceptions about customers negotiation styles. It also examined factors
hidden behind the two cultures that influence the purchasing decision. Specifically, the study, by using samples from U.S. and
Vietnam, tested several hypotheses about Vietnamese and American levels of perception and factors influencing negotiation
styles.
The findings in this study show the importance of cultural context in the problem-solving approach. Because in high context and
collectivist cultures such as Vietnam, it is suggested that negotiation is relationship-oriented, and concentrates on a long-term
single source relationship. The implication is that it is collaborative and will lead to some mutual satisfaction with their foreign
counterparts. In a low culture context and highly individualistic American society, on the other hand, focus is more on results
(Anonymous, Lecture 3, 2005). The American culture values openness, objectivity, fairness, cooperation, reason, and mutual
trust. The results of this study show that American and Vietnamese students have certain cultural perceptions before they
begin a negotiation. American students are very open to a win-win solution approach and Vietnamese students seem to accept
a different approach based on their culture. It might suggest a merging of global culture between the East and the West. Both
parties are trying to understand and open to each others problem-solving approach.
Pricing globally is much more challenging than pricing in a domestic market. Many factors need to be considered to determine
the actual price of the product. This final price might be quite different from the intended price since in global marketing it is not
easy to control the final price due to regulations, exchange rates, number of agents, and especially local customers behavior
(Johansson, 2006). Again, the findings in this study indicates some important practical implications for both Vietnamese and
American managers who are doing or will implement business transaction in the Vietnam market. There are general tactics and
strategies to set the right price that could improve the sales based on different types of customers. However, when entering
new foreign market, managers need to be aware of cultural factors that could influence their pricing strategies. While it is
helpful to use cultural dimensions as guidelines in decision making, these should not be considered as absolute measure to
prejudice individuals about a specific culture.

36

D. T. T. Van, L. Pickler, F. Wolf and T. E. Griffin

Volume 8 Winter 2009

Getting into the Vietnam market, American managers will interact not only with local customers, but also with prospective
employees and foreign businesses. Because the findings suggest that negotiation style is primarily driven by differences in
cultures, this information is critical in hiring and training prospective cross-cultural salespersons and marketers. Companies in
Vietnam and the U.S. should provide assistance to improve the negotiation skills and experiences of their employees. They
might hold cross-culture training sessions for their marketing staffs and sale managers before entering a foreign market.

LIMITATIONS AND CONCLUSION


There are limitations noted for this research. First, the study used student samples in both Vietnam and the U.S. Although
students in this study were those who reported having some work experience and negotiation participation, it is not accurate to
generalize those students negotiation styles to the whole population. Of all the students who answered the questions about the
most negotiated items, there are only 17.6% of American students who stated they negotiated on pricing and purchasing
issues, while this number of Vietnamese students is 13.9%. Second, because the measurement of perceptions and negotiation
skills was based on single items, which were, created by culture experiences, it may not capture the concepts and thus not
yield precise results. Future research can therefore address these limitations to achieve additional information.
Future research needs to be conduct with a focus on business to business negotiating processes. Some business to business
research has been done by (qut. Graham et al., 1994; Graham et al., 1988; Schurr & Ozanne, 1985; Clopton, 1984).
Despite these limitations, this paper still provides worthy information about the Vietnamese and American customers
perceptions and their negotiation behavior. In addition, the study shows how cultural differences affects those perceptions and
the negotiation skills. This is important for both Vietnamese and American managers who are and will be doing business in
Vietnam.

REFERENCES
Ackrman, David & Tellis, Gerard. (2001). Can culture affect prices? A cross- cultural study of shopping and retail prices.
Retailing. 77, 57-82.
Anynomous. Cross cultural negotiations lecture 3:The incredible shrinking world. Retrieved February 26, 2009 from
http://www.tristate.edu/faculty/herbig/pahccne.htm
Bazerman, H. Max & Lewicki, J Roy. (1983). Negotiation in organization. California: Sage Publications Ltd.
Bies, J. Robert, Lewicki, J. Roy, & Sheppard H. Blair. (Eds).(1999). Research on negotiation in organizations. Connecticut: Jai
Press INC.
Engholm, C. (1991). When Business East Meets Business West: The Guide to Practice and Protocol in the Pacific Rim. New
York: John Wiley & Sons.
Graham, L. John & Sano, Yoshihiro. (1984). Smart bargaining: Doing business with the Japanese. Massachusetts: Harper &
Row, Publishers, Inc.
Huff, C. Lenard & Dana, L. Alden. (1998). An investigation of consumer response to sales promotions in developing markets: A
three country analysis. Advertising Research. 38. 3.
Johansson, K. Johny. (2006). Global Marketing: Foreign Entry, Local Marketing, and Global Management. (4th). Singapore:
McGraw Hill.
Kolb, M. Deborah & Williams, Judith. (2003). Everyday negotiation: Navigating the hidden agendas in bargaining. San
Francisco: Jossey Bass.
Levison, C. Jay, Smith, A. Mark, & Wilson, R. Orvel. (1999). Gurerrilla negotiating: Unconventional weapons and tactics to get
what you want. Toronto: John Wiley & Sons, Inc.
Nagle, T. Thomas & Holden, K. Reed (2002). The strategy and tactics of pricing: A guide to profitable decision making. New
Jersey: Prentice Hall.
Prasso, Sheridan. (2005). Vietnam. Business Week. 3922.
Salacuse, W. Jeswald (1995). The top ten ways culture affects negotiation style. Retrieved February 26, 2009, from
http://fletcher.tufts.edu/salacuse/topten.html.
The China Post (2008). Foreign direct investment in Vietnam triples in 2008. The China Post. Retrieved February 20, 2009,
from http://www.chinapost.com.tw/business/asia/vietnam/2008/12/27/189529/Foreign-direct.htm

37

The Structure of Labor Market and Employment Elasticity

THE STRUCTURE OF LABOR MARKET AND EMPLOYMENT ELASTICITY

Chang Kon Choi


Chonbuk National University, Korea
ABSTRACT
Recently, job creation problem is one of most challenging tasks in both developing and developed countries. It is often argued
that job creation by economic growth is not so large as in the past. To understand this issues, so far, many papers looked at
data of GDP and employment growth to estimate the so called employment elasticity or employment intensity of growth,
which is defined as growth rate of employment divided by growth rate of GDP. They find indeed that the measured value of
elasticity has decreased in most countries. While there have been many empirical studies about that issue, no study has
identified the structural determinants of employment elasticity. That is, while most studies estimate the empirical elasticity, they
did not look upon the question of what determines the employment elasticity. This paper aims to address the question. This
papers goal is to employ an equilibrium labor market model and to find the structural determinants of employment elasticity.
This paper shows theoretically that employment elasticity is determined by the structure of technology and preference, thus,
the labor demand and supply. The theoretically derived formula of employment elasticity allows us to identify its determinants.
In testing and applying the theoretical result, first, some calibrated values of parameters and estimated values of labor supply
structure found in other studies are applied to the theoretically derived formula to calculate the employment elasticity. And we
compare the empirically estimated elasticities and theoretically calculated ones. Secondly, we try to identify which determinant
has contributed to change (allegedly, decrease in most empirical studies) in the employment elasticity.

I. INTRODUCTION
This paper aims to examine the employment effect of economic growth, which is called employment elasticity or employment
intensity of growth.1 While there have been many studies about that issue, no study has identified the structural determinants
of employment elasticity. Most studies look only at empirical data of output growth and employment growth and estimate the
empirical value of the elasticity. This papers goal is to employ an equilibrium labor market model in addressing this question
and to find the structural determinants of employment elasticity. It will allow us to look at how labor market structure is related
to the job creation and employment effect of economic growth.
Recently, most countries have persistent job shortage and unemployment problem. And apparently, since the employment
does not increase enough while the economy grows, the phenomenon has been called as Jobless growth. Due to the chronic
high unemployment in many countries, it has become an important and imminent question in Macro or Labor Economics to
understand how employment growth is related to economic growth.
Among many previous studies, following ones are some examples of recent papers in this line research. Kapsos (2005) looks
at the growth rate of GDP and employment in many countries and estimates employment elasticity. Kapos (2005) finds that the
elasticity has indeed decreased in some countries. Seyfried (2006) estimates that employment elasticity is in the range from
0.31 to 0.61 in specific states with an average estimate of 0.47 for the whole U.S economy. Padalino and Vivarelli (1997) is

an empirical study on the G-7 economies over the period 1960-1994.2 Piacentini and Pini (2000) estimate the
employment elasticities - both in aggregate and in individual economic sectors - for the G-6 + Sweden over the
period 1960-97.3 So far, however, no paper has tried to identify structural determinants of employment elasticity with respect
to economic growth. While looking at empirical data of output and employment and estimating the elasticity, the basic
underlying premise in the most previous studies is that employment effect of growth is (mainly) determined only by
1
2

It is measured as employment growth with respect to output growth. Here, for a convenience, employment elasticity is used to denote it.
They derive several interesting results. For example, they find that job creation in North America has been much greater than in Europe. Importantly, they argue that long
run evolution has to be distinguished by short run correlation; while North America and Europe structurally differ in their job creation capacity in the long run, both of them
keep on showing a strong and statistically significant short run correlation between growth and employment.
During 90s, negative elasticities were found in Italy, Germany, UK and Sweden. Unlike other countries, Japan did not experience a decrease in the employment elasticity.
They also compare elasticity in manufacturing and services.

38

C. K. Choi

Volume 8 Winter 2009

technological factor (so, labor demand), not giving attention on other side of market (so, labor supply). That is, most studies are
based on an implicit presumption that labor-saving technology may reduce the employment elasticity as the economy grows.
The problem is that they do not distinguish the role of labor demand and labor supply, and ignore the most basic fact that
employment is determined in the labor market as intersection of labor demand and supply.4 In sum, there are two problems in
this line of research. One is that there has been no theoretical modeling effort of identifying the structural determinants of
employment elasticity, and the other is that they do not look at both sides of labor market jointly. This paper aims to address
these shortcomings.
Like other elasticity in the economy, the employment elasticity of output growth should be affected by structural characteristics
of the economy, the preference and technology structure. More specifically, this paper emphasizes that in identifying its
determinant, we need to distinguish labor demand and labor supply effects in determining employment elasticity of output
growth. Thus, it points out that it could be wrong to ascribe the apparently decreasing employment elasticity only to laborsaving technology, but necessary to look at the other side of labor market, labor supply.
The results of this paper are following. First, this paper shows theoretically that employment elasticity is determined by the
structure of technology and preference, thus, the labor demand and supply structure. The theoretically derived formula of
employment elasticity allows us to identify its determinants. Secondly, in testing and applying the theoretical result, some
calibrated values of parameters and estimated values of labor supply structure found in other studies are applied to the
theoretically derived formula to calculate the employment elasticity. And we compare the empirically estimated elasticities and
theoretically calculated ones. This exercise shows that values of employment elasticity obtained in two different ways do not
match well. Extending the methodology to other variable of labor market, we look at how wage increases as output grows, for
which wage elasticity of output growth is calculated and estimated. Thirdly, we try to identify which determinant(s) is (are)
responsible for changes in empirically estimated values of employment elasticity. Finally, reversing the application of the
method, it is shown that the theoretically derived formula of employment elasticity may be used to infer the structure of labor
supply in the aggregate labor market.
This paper is developed as following. In section 2, using a simple model of growth and labor market, we derive employment
elasticity as a function of structural parameters. In section 3, we calibrate the structural parameters and calculate the
theoretical values of employment elasticity and compare them with empirical values estimated from data of output and
employment growth. In section VI, concluding remarks close the paper.

II. A MODEL FOR GROWTH AND EMPLOYMENT


2.1 Growth and Labor demand.
There are infinite number of workers supplying labor and firms demand labor. It is assumed that production structure is
following, which satisfies constant returns to scale: 1 .

Y AF ( K , N ) AK N .................................................................................................................................. (1)
Here, Y , K , N , A are output, capital stock, employment and technology shock respectively. The labor demand condition is
following, equalizing marginal productivity to real wage.

AFN ( K , N ) (1 ) A(

K
) W ..................................................................................................................... (2)
N

To focus on the effect of economic growth on labor demand, we use the concept of labor per capital,

L
n , which simplifies
K

the labor demand function as following.

(1 ) An W ................................................................................................................................................... (3)
Capital accumulation through economic growth affects labor demand as following.

To my knowledge, Kennan (1988) and Choi (2006) are only studies of dealing with the identification problem in understanding labor supply and demand.

39

The Structure of Labor Market and Employment Elasticity

n 1 ( 1) ln

<0 ....................................................................................................................................... (4)

( 1)n 1
It means that labor demand per capital decreases as the value of gets larger. As mentioned above, this parameter is the
elasticity of output with respect to capital and affects the convergence speed in transitional dynamics of neoclassical growth
model. In other words, one can see that the same parameter may affect both the growth rate and job creation in the growing
economy.

2.2 Determinants of Employment elasticity


Note that the above discussion is concerned only with labor demand, but not with employment. Since the employment is
determined in the labor market equilibrium of labor demand and supply, we need to specify labor supply and demand functions
as following.

N S N S (W , ) .................................................................................................................................................. (10)

AFN ( K , N D ) W ............................................................................................................................................... (11)


In (10), N , are labor supply and other structural determinants of labor supply respectively. First, the equilibrium
employment is determined by substituting (11) into (10).
S

N N S ( AFN ( K , N ), ) ................................................................................................................................. (12)


Using this employment equation, one can derive elasticity of employment with respect to capital.

NK

S NW NK
(1 S NW NN ) .......................................................................................................................................... (14)

Here, NW = labor supply elasticity with respect to real wages,5 NK and NN are elasticity of marginal product of labor with
respect to capital and labor respectively. Employment elasticity with respect to output growth may be defined as following.
S

NY

S NW NK KY

(1 S NW NN ) .......................................................................................................................................... (15)

This derivation shows us that the employment elasticity is affected by preference and technology structure. There are four
factors determining the elasticity: the elasticity of labor supply with respect to real wages, elasticity of marginal product with
respect to labor, elasticity of marginal product with respect to capital, elasticity of output with respect to capital. The first one is
from preference structure and the other three from technology structure. Important point is that employment elasticity with
respect to output growth is determined both by preference and technology structure.
Next, one can also derive wage elasticity of output growth (hereafter, call wage-output elasticity) as following.

WY

NK KY
(1 S NW NN ) .......................................................................................................................................... (16)

Interestingly enough, we can see that the same four factors determining employment elasticity also determines wage-output
S
S
elasticity. Other factors except NW are affecting both elasticities in the same direction. As the value of NW gets bigger,
however, employment elasticity increases while wage-output elasticity decreases. The larger the value of NK , NN and KY
is, the bigger the employment elasticity is, which is a quite intuitive result.

To be more specific, if we assume that production function is Cobb-Douglass, employment and wage-output elasticity is
simplified as following.
5

Unless specified otherwise, for simplicity, it is called labor supply elasticity.

40

C. K. Choi

NY

WY

Volume 8 Winter 2009

S NW

(1 S NW ) .............................................................................................................................................. (17)
1

(1 S NW ) .............................................................................................................................................. (18)

These derivations are more readable than (15) and (16). Employment elasticity has a negative relationship with capital
coefficient and a positive relationship with wage elasticity of labor supply. On the other hand, wage-output elasticity has a
negative relationship with capital coefficient and the labor supply elasticity. This result is intuitively right. As the elasticity of
labor supply with respect to wage becomes more elastic, the resulting increase of labor demand from economic growth may be
transformed into more employment rather than higher wage.

III. EMPIRICAL RESULT AND INTERPRETATIONS


3.1 Data and Specification
Here, we look at data of Korean economy: time series of GDP, employment and wages in the aggregate labor market. Sample
period is from 1971 to 2005 and data are yearly data. And for a calibration exercise, Cobb-douglass production function is
assumed

3.2 Empirical Results


Table 1 summarizes the estimation results for the whole economy. First of all, one can see that the employment elasticity has
decreased since 1970s until the end of 1990s. However, it has been rising again since 2000. Thus, the so called jobless
growth is not found during 2000s. While the employment elasticity was 0.31 from 1991 to 1996, it has rebounded to 0.38 since
2000. Wage-output elasticity has been larger than employment elasticity, but has decreased since 2000.
Table 1: Empirical result: Employment and wage elasticity
Workers
Employed

Real GDP
(Billion Won)
Growth rate of
Employment

Real
Wages
Growth rate of
GDP

Growth rate
of Wage

Employment
Elasticity of
Output

Wage Elasticity
of Output

1971~1980

12,030

3.62

107,617.2

7.3

368,567

6.86

0.49

0.93

1981~1990

15,668

2.84

223,583.4

8.7

614,789

6.18

0.34

0.71

1991~1996

19,668

2.40

418,577.6

7.7

1,045,960

6.72

0.31

0.93

1997~1999

20,481

-0.84

514,432.5

2.4

1,225,344

0.73

-0.35

0.30

2000-2005

22,075

2.01

578,664.5

5.2

1,450,969

4.41

0.38

0.85

Note: The period 1997-1999 is separated because of economic crisis in Korea


We also estimate employment elasticity for individual industry.

The theoretical derivation of (17) and (18) allows us to calculate both elasticities based on other structural parameters. First, it
is assumed that capital coefficient in the technology is 0.4. Concerning the elasticity of labor supply with respect to wage in
the aggregate labor market, there are only a few studies in Korea, one of which is Choi (1995). For example, when the number
of workers employed is used, Choi (1995) estimates the labor supply elasticity with respect to wage to be from 0.06 to 0.12.
Using these values about economic structure, the calculated employment elasticity is in the range of [0.05, 0.11], which is quite
different from the estimated one in the range of [0.3, 0.5]. Choi (1995)s estimate of labor supply elasticity becomes 0.18 when
total hours worked are used for quantity of labor. Using this value, the employment elasticity is calculated to be 0.17 which is
not close to the estimated value.
Other study of Choi (2006) estimating labor supply and demand jointly suggests that wage elasticity of labor supply is about
0.48. This value implies that employment elasticity is 0.40, and is very close to the above empirically estimated value which is
in the range of [0.3, 0.5]. The former elasticity looks consistent with the latter one.

41

The Structure of Labor Market and Employment Elasticity

Secondly, looking at the empirical result for each individual industry, one can see that estimated employment elasticity is
different for different industry. And it is shown that while the value has been decreased for some industries (like mining,
manufacturing), it has been increased for others (like finance, insurance and education). Under the assumption of CobbDouglas production function, the main determinants of employment elasticity are the elasticity of labor supply with respect to
wage and capital coefficient. One possible conjecture is that if the elasticity has been changed (decreased or increased) mainly
because of change in labor supply elasticity, one can observe corresponding change in wage growth with respect to GDP
growth. Otherwise, no remarkable change in the latter would be observed. This conjecture is easily applicable to the result in
table 2 since capital coefficient can be estimated using the ratio of labor income to GDP while the estimation of labor supply
elasticity is controversial. Table 3 contains estimated value of capital coefficient for each industry. Following this conjecture,
first, among industries having experienced an increase in the employment elasticity, one can see that the capital coefficient has
decreased in the industries of finance and insurance, real estate and service while it has not changed in the industry of
electricity, gas and water. Thus, one sees that unlike the former, the labor supply elasticity has increased in the latter.
Secondly, among industries having experienced a decrease in the employment elasticity, only mining and manufacturing
industries has been accompanied with a remarkable increase in capital coefficient. This outcome implies the labor-saving
technology improvement in these industries, but not in other industries.
Table 2:

Employment Elasticity (Industry)

I = Agriculture, Forestry and Fishing, II =Mining, III= Manufacturing, IV= Electricity, Gas and Water, V=Construction, VI=Whole
sale, retail restaurant and hotel, VII=Transport, Storage and Telecommunication, VIII= Finance and insurance, IX =Real estate
and services, X= Government and Military service, XI=Education, XII=Health and Social services
I

II

III

IV

1971~80

0.17

0.54

0.88

1981~90

0.38

0.30

0.51

0.49

1991~96

-3.24

6.55

0.24

1997~99

-0.60

2.61

2000-05

-0.65

12.06

VI

VII

VIII

IX

XI

XII

0.33

0.52

0.52

0.06

9.63

1.07

0.33

0.53

1.48

0.96

1.05

0.26

0.35

21.59

1.27

0.65

0.42

0.47

2.74

9.15

0.68

0.20

0.05

1.20

0.78

0.01

0.33

1.24

5.95

-6.08

2.02

-0.24

0.92

Table 3: Capital Coefficient (Industry)


I = Agriculture, Forestry and Fishing, II =Mining, III= Manufacturing, IV= Electricity, Gas and Water, V=Construction, VI=Whole
sale, retail restaurant and hotel, VII=Transport, Storage and Telecommunication, VIII= Finance and insurance, IX =Real estate
and services, X= Government and Military service, XI=Education, XII=Health and Social services
Total

II

III

IV

VI

VII

VIII

IX

XI

1993

0.40

0.72

0.35

0.85

0.38

0.37

0.31

0.61

0.82

0.20

0.66

1994

0.42

0.78

0.40

0.86

0.37

0.38

0.37

0.63

0.82

0.22

0.67

1995

0.43

0.85

0.43

0.88

0.38

0.40

0.37

0.64

0.79

0.20

0.68

1996

0.41

0.84

0.44

0.86

0.38

0.51

0.35

0.64

0.77

0.13

0.65

1997

0.41

0.82

0.46

0.87

0.35

0.54

0.38

0.63

0.76

0.12

0.64

1998

0.43

0.84

0.53

0.90

0.48

0.59

0.40

0.63

0.77

0.08

0.59

1999

0.44

0.37

0.85

0.58

0.90

0.47

0.38

0.39

0.63

0.74

0.13

0.56

2000

0.42

0.46

0.87

0.58

0.90

0.37

0.41

0.42

0.59

0.70

0.13

0.41

2001

0.42

0.43

0.85

0.58

0.90

0.39

0.43

0.46

0.62

0.65

0.11

0.29

2002

0.40

0.36

0.83

0.58

0.91

0.32

0.46

0.34

0.65

0.65

0.06

0.29

2003

0.39

0.72

0.83

0.59

0.86

0.32

0.57

0.38

0.62

0.62

0.06

0.30

2004

0.39

0.49

0.84

0.60

0.87

0.32

0.61

0.38

0.60

0.59

0.07

0.25

2005

0.36

0.61

0.81

0.60

0.88

0.30

0.70

0.37

0.59

0.53

0.19

0.15

2006

0.34

0.72

0.79

0.62

0.86

0.23

0.75

0.34

0.56

0.48

0.34

0.11

42

C. K. Choi

Volume 8 Winter 2009

IV. CONCLUSION
This paper shows that one can identify the structural determinants of employment elasticity with respect to output growth. It is
shown that the elasticity is determined by preference and technology parameters. So, this paper point out that the apparently
labor-saving technology alone may not be responsible for the slow increase in employment for GDP growth. It point out that we
should also look at the other side of labor market, labor supply. We found that the elasticity of labor supply with respect to wage
is another important determinant of employment effect of economic growth. It means that a policy helping workers to supply
labor or encouraging them to participate in labor market is very useful.

REFERENCE
Choi, C.K., 1995, The Theory and evidence of Intertemporal Substitution in Labor Supply Function, Journal of Korean Labor
Economic Associations, 18, 1.
Choi, C.K., 2006, Building an identified Equilibrium Model of Aggregate Labor Market, Journal of Korean Econometric
Association, 17, 4
Kapos, Stepen, 2005 The employment intensity of growth: Trends and macroeconomic determinants ILO.
Dpke, J. 2001. The employment intensity of growth in Europe. Kiel Working Paper No. 1021, Kiel Institute of World
Economics.
Islam, I. and Nazara, S. 2000. Estimating employment elasticity for the Indonesian economy. ILO Technical Note, Jakarta.
Mazumdar, D. 2003. Trends in employment and the employment elasticity in
Manufacturing, 1971-92: an international comparison. Cambridge Journal of Economics 27:563-582 .
Padalino, S. and Vivarelli, M. 1997. The employment intensity of economic growth in the G-7 countries. International Labour
Review: Summer 1997; 136, 2.
Piacentini, P. and Pini, P. 2000. Growth and Employment, in Vivarelli, M. and Pianta, M. 2000 (eds). The Employment Impact
of Innovation: Evidence and Policy, London, Routledge, 44-76
William Seyfried, Examining the Relationship Between Employment and
Economic Growth in the Ten Largest States Southern Economic Journal

APPENDIX
Conversely, one can use the formula of employment elasticity in conjecturing the elasticity of labor supply with respect to wage.
That is, we can infer it by equalizing the calculated and the empirically estimated employment elasticity. As the value of the
latter is in the range of [0.3, 0.5], the labor supply elasticity of wage is inferred to be in the range of [0.5, 0.8] with the calibrated
value of 0.4 . These values are too larger than the empirically estimated values, making the comparison inconsistent.
Nest, wage elasticity of output is calculated by (16), which is from 0.97 to 0.95 depending on the labor supply elasticity of wage
from 0.06 to 0.12. The value of 0.48 in Choi(2006) implies it to be 0.84. These values are very close to the empirically
estimated wage elasticity in Table.

43

Market Entry Timing in Previously Closed (Communist) Markets: A Model to Analyze U.S. Companies in the Czech Republic

MARKET ENTRY TIMING IN PREVIOUSLY CLOSED (COMMUNIST) MARKETS: A


MODEL TO ANALYZE U.S. COMPANIES IN THE CZECH REPUBLIC

Frank E. Wood, Thomas E. Griffin, Joseph Chavez and Fang Yuan


Nova Southeastern University, USA
ABSTRACT
Multinational enterprises who desire to enter previously closed (communist) markets will benefit from research finding on
market entry timing. Understanding and employing the most effective methods and efficient timelines for market entry can be
critical to the success of multinational enterprises who seek to benefit from these potential opportunities. The knowledge of
antecedents, strategies, and outcomes from recent similar market entry attempts by others will be indispensable to future
market entry success.

MARKET ENTRY TIMING


History has witnessed the conversion of several Communist countries into open market economies. Fari, Kearny, and Bell
(1996) found that these new markets have created opportunities for many industries as business activities change from
government sponsored operations to private enterprises. Communist countries that move to become open market economies
can benefit greatly from crucial investments by foreign companies (Alter, 1994).
A study by Isobe, Makino, and Montgomery (2000) shows that, Emerging economic regions have been playing a critical role in
global economies. Since their market liberalization and privatization policies were formally set forth, these areas have attracted
many foreign investors (United Nations Conference on Trade and Development [UNCTAD], 1997).
The remaining Communist states in the world are the People's Republic of China, Laos, Vietnam, North Korea, and Cuba
(Aneki, 2008). Of special interest to multi-national enterprises are the potential opportunities that will arise when Cuba converts
to an open market economy. From a vantage point of geographic proximity and previous emigrant and cultural relationships,
Cuba will be especially significant. Cuba has recently begun timid steps toward a more market-oriented approach. It is argued
that the centerpiece of a new strategy should be a rapid privatization which can be designed to absorb the monetary overhang,
widely distribute assets and control, and protect the social safety net that has characterized the Cuban economy (Pastor &
Zimbalist, 1995).
Understanding and employing the most effective methods for market entry will be of prime interest and paramount to the
success of multinational enterprises desiring to benefit from this potential opportunity. Knowing the antecedents, strategies,
and outcomes from recent similar market entry attempts by others would be indispensable to future success. Research states
findings suggest the timing of entry affects competitive position, specifically the ability and competencies of a firm to realize its
objective in attaining or sustaining a competitive advantage (Green, Barclay, and Ryans, 1995).
In an effort to understand the effect of timing of entry in these countries on the success of creating sustainable competitive
advantage from FDI, an evaluation of recent country changes would be useful. Most previous studies have examined the
determinants and performance of the timing and resource commitment of entry in a domestic context. Of the studies that have
examined these issues in an international context, most have focused on either North American multinationals entering foreign
countries or foreign firms investing in North America (Isobe et al., 2002).
One country that can provide new insight and that also matches the criteria of evolution from a Communist market to an open
market, is the Czech Republic. As reported by the United Kingdoms Foreign & Commonwealth Office (FCO), . . . in 1989, the
Czechoslovakian Velvet Revolution saw the Communists ousted and a democratic government installed with Vaclav Havel as
President. Differences between the Czechs and Slovaks led to the Velvet Divorce on 1 January, 1993, and the formation of the
Czech Republic. The Czech Republic became a member of the European Union on 1 May 2004 (Foreign & Commonwealth
Office, 2007).

44

F. E. Wood, T. E. Griffin, J. Chavez and F. Yuan

Volume 8 Winter 2009

The FCO continues, the Czech Republic is one of the most stable and prosperous of the post-communist states. Economic
growth has been driven, in particular, by high levels of foreign direct investment (FDI), domestic consumer spending, and
Czech exports. Some 70% of trade is with the EU, notably Germany. Unemployment stands at 7.1 % (FCO, 2007).
In an effort to provide a basis of strategy for multinational enterprises future entry to previously closed markets, this research
uses appropriate current market indicators to show correlation and effect of market entry timing on sustainable competitive
advantage. Is there a first-mover advantage for FDI in these countries or is there benefit from waiting for others to experience
the learning curve? The purpose of this study is to identify the effect of market entry timing on the competitive position of
multinational enterprises that enter markets previously closed (Communist) to outside investment.

THEORETICAL BACKGROUND
When considering international expansion, three questions are posed to multinational enterprises: which market to enter, how
to enter, and when to enter (Gaba, Pan, & Ungson, 2002). Gaba et al. found that . . . studies have focused on the first two
questions, with particular attention to the prevalence, sequence, trade-offs, and effectiveness of different modes of entry (Kim
and Hwang, 1992; Woodcock, Beamish, and Makino, 1994; Madhok, 1997). In contrast, research on the third question the
timing of entry has received relatively little attention.
Prior research on the timing of market entry used ownership advantages to determine modes of entry (Hymer, 1976).
According to John Dunning, . . . refer to my own work of the late 1950s through to the early 1970s, which I think is best
depicted in my Oxford Economics Papers article in 1973. Here I reviewed the different approaches to explaining the growth of
MNE activity, focusing on the interaction between the competitive (which I called ownership) advantages of such firms, relative
to the indigenous firms in the countries in which they were investing and the locational attractions of the countries in which the
investment might be made (2003). Dunnings work generated additional studies that featured ownership advantages and
subsequent research geared to timing of entry (Buckley and Casson, 1981) and modality. These two elements of timing and
modality were augmented with empirical studies and, according to Dunning, created an eclectic framework that combines the
ownership and internalization advantages of firm and location advantages of counties (1988).
Later studies (Agarwal and Ramasqami, 1992) used Dunnings eclectic framework that joined a firms advantages of ownership
and internalization with location advantages of countries to explain firms market entry strategies. Markets in transition
represent untapped opportunities, and firms can use these strategies to gain the above-stated advantages of ownership and
internalization.
As stated in the IMF Working Papers, Ideal conditions for flexible open market operations exist in few developing or transition
economies. Nevertheless, open market operations of one sort or another can and should be undertaken in markets that may
not be entirely ideal but are at varying stages of development toward a deregulated, competitive system (Axilrod, 1997). The
attractiveness of market conditions in transition economies is a matter of academic debate, leading to widely differing
assessments of the balance of risks and returns associated with market entry and development by businesses (Fallon & Jones,
2004).
According to a study by Green et al., New products entering a new or existing market make an impact on the market from their
time of entry. A premise of entry strategy research is that the decisions a firm makes around a products entry, namely, the
product entry strategy, will affect the long-term performance of the product in a market (Green, Barclay and Ryans, 1995).
Previous research on timing included studying the order of entry into international markets (Mascarenhas, 1992, 1997). These
studies relied heavily on self-reported, after the fact, PIMS data. A problem with this methodology exists in that self-reporting
created biases (Lieberman & Montgomery, 1998), and many firms were claiming first mover status.
Building on extant theory and empirical studies, this research seeks to expand practical knowledge in the understanding of
timing of market entrys effect on competitive advantage in newly transitional markets. The hypothesis of this research is that:
H1. Using current market share as a measure of sustainable competitive advantage for U.S. companies in the Czech Republic;
there is a positive relationship between early entry and market performance/share.
The future application of these findings will be useful to firms desiring to enter yet-to-be open market economies. The ensuing
regression analysis can be used to predict future success for multinational enterprises in creating sustainable competitive
advantage as a function of market entry timing in newly open markets.
45

Market Entry Timing in Previously Closed (Communist) Markets: A Model to Analyze U.S. Companies in the Czech Republic

The Research Problem


The purpose of this study is to identify the effect of market entry timing on the competitive position of multinational enterprises
that enter markets previously closed (Communist) to outside investment.

Delimitations
1. This study would be limited to US companies with business operations in the Czech Republic.
2. The study would focus on dates of entry into the Czech market (since becoming an open market economy).
3. This study would not research or draw conclusions about individual companies other entry factors such as economies of
scales, market familiarity, or other FDI history.

RESEARCH METHODOLOGY & DATA ANALYSIS


The methodology for this research consists of analyzing a population of American companies that are currently registered to
conduct business in the Czech Republic, determining date of market entry, and finally noting current market share.
The list of companies will be derived from company listings from the Embassy of the Czech Republic in Washington, D.C. On
their web database, 486 American companies are shown to be registered in the Czech Republic. For the purposes of this
study, the businesses will be grouped by category: goods or services. Of the 486 firms, the sample for this study would
segregate the companies into of service-related firms and goods-related firms. Note that each category has different
challenges to new market entry, it becomes important to compare like firms in order to reach valid conclusions. The year a
company enters the Czech Republic market will be assigned a value.
For example:
Year of Entry

Value

1990

1991

1992

1993

The appropriate assigned value for each company (based on year of entry) will be used as the independent variable. Market
share, expressed as a percentage, will be the dependent variable. Statistical analysis of these two data points will be derived
from correlation and through regression analysis.
The year of entry into the Czech Republic for each of the companies is derived from secondary data that can be resourced
from the Czech Business Web Portal: Official Registers. Each companys market share (a percentage) will be calculated from
each companys annual Czech sales divided by the total countrys annual sales for that product/service category. These data
will come from two secondary sources. The samples annual company sales are resourced also from the Czech Business Web
Portal: Official Registers ARES, Access to Registers of Economic Subjects. The product/service category annual sales are
resourced through the Global & NTDB (National Trade Database). The NTDBs Industry Analysis by Country report allows the
query to drill down to only Czech Republic industry reports where annual data is found. Market share of companies in the
Czech Republic can also be determined from data listings in Major Market Share Companies: Eastern Europe, Middle East and
Africa (2008).
To provide a context of terminology usage in this study, a discussion of applicable operative terminology meaning is needed.
The use of the phrases multinational enterprise, international business and foreign direct investment has, over the past
decades, experienced interchangeable uses (Wilkins, 1970). The major point of contention in the definition stems from whether
the enterprise/business is a firm or an activity. Business historians have defined enterprise/business as a firm (Toyne & Nigh
1997, 31-50), but have since conceded to include activity as a valid meaning. For the purpose of this study, multinational
enterprise refers to both firms and activities engaged in cross border operations.
Research on market entry has evolved over the past years to include the international arena. Studies on First-Mover
Advantages (Lieberman and Montgomery, 1988) and resource-based perspectives (Wernerfelt, 1984) have given attention to
the potentially important strategy. Luo (1998) has argued that ordinal ranking is sufficient and appropriate for analyzing
46

F. E. Wood, T. E. Griffin, J. Chavez and F. Yuan

Volume 8 Winter 2009

oligopolistic market structures (i.e. few producers and competitors) in that one can readily identify first movers from followers
(Gaba, Pan, Ungson, 2002). For this study, ordinal ranking will be used to determine the order of market entry.
To understand how competitive advantage emerges, a cursory understanding of what competitive advantage is necessary.
Competitive advantage can be defined as:
When two or more firms compete within the same market, one firm possesses competitive advantage over its rivals when it
carries a persistently higher rate of profit (or has the potential to earn a persistently higher rate of profit) (Grant, 1991). For the
purpose of this research, competitive advantage is defined as the ability of an enterprise to outperform competitors on the
primary performance goals of profitability and/or market share.

SUMMARY
Multinational enterprises who desire to enter previously closed markets will benefit from these findings. Understanding and
employing the most effective methods and efficient timelines for market entry can be critical to the success of multinational
enterprises who seek to benefit from these potential opportunities. The knowledge of antecedents, strategies, and outcomes
from recent similar market entry attempts by others will be indispensable to future market entry success.

REFERENCES
Agarwal, S. & Ramaswami, S. (1992). Choice of foreign market entry mode: Impact of ownership, location and internalization
factors [Electronic version]. Journal of International Business Studies, 23(1), 1.
Alter, R. (1994). Investing in Eastern Europe: Catalyst for transition. Organization for Economic Cooperation and Development
[Electronic version]. The OECD Observer, (186), 28.
Aneki Services (2008). Retrieved June 24, 2008 from http://www.aneki.com-/communist.html.
Axilrod, S. (1997). Transformations to Open Market Operations. IMF Working Paper, 95/146. Retrieved June 11, 2008, from
http://www.imf.org/external/pubs-/ft/issues5.
Buckley, P. & Casson, M. (1981). The optimal timing of a foreign direct investment [Electronic version]. The Economic
Journal, 91(361), 75.
Czech
Business
Web
Portal:
Official
Registers.
(2008)
Retrieved
June
16,
2008.http://www.businessinfo.cz/en/section/company -information/1001058/.
Coe, N., & Wrigley, N. (2007). Host economy impacts of transnational retail: The research agenda [Electronic version]. Journal
of Economic Geography: Transnational Retail and Supply Networks, 7(4), 341-371.
Czech
Business
Web
Portal

BusinessInfo.cz
(2008)
Retrieved
June
23,
2008
from
http://www.businessinfo.cz/en/section/companyinformation/1001058.
Dunning, J. (2003). Some antecedents of internalization theory [Electronic version]. Journal of International Business
Studies, 34(2), 108.
Embassy of the Czech Republic (2008.) American companies doing business in Czech Republic. Retrieved Jun 18, 2008 from
http://www.mzv.cz/wwwo-/default.asp?ido =15698&idj=2&amb=87&ParentIDO=10651.
EuroMonitor
International
(20080
{Electronic
version].
Retrieved
June
19,
2008
fromhttp://www.euromonitor.com/Major_Market_Share_Companies_Eastern_Europe_Middle_East_and_Africa .
Fallon, G., & Jones, A. (2004). Marketing in Russia by UK businesses: Lessons from a survey of trade missioners to Moscow
{Electronic version]. Journal of Small Business and Enterprise Development, 11(2), 174-185.
Farra, F., Kearney, A.T., & Bell, D. (2006, July). Globalization strategies: How to crack new markets [Electronic
version]. European Business Forum, (25), 40-45.
Gaba, V., Pan, Y., & Ungson, G. (2002) Timing of entry in international market: An empirical study of U.S. Fortune 500 firms in
China [Electronic version]. Journal of International Business Studies, 33, 39-55.
Globus & National Trade Database (2008) Industry sector analysis reports by country. Retrieved June 24, 2008 from http://0www.stat-usa.gov.novacat.nova.edu/mrd.nsf/vwISA_Country?OpenView&Count=-1.
Grant, R. (1991). The nature and source of contemporary advantage [Electronic- version]. Contemporary Strategy Analysis,
(pp. 173-174). Malden, Massachusetts: Blackwell Publishers.
Green, D., Barclay, D., & Ryans, A. (1995). Entry strategy and long-term performance: Conceptualization and empirical
examination [Electronic version]. Journal of Marketing, 59(4), 1. Hymer, S. (1976) The International Operations of national
firms, Cambridge, MA: MIT Press.
Isobe, T., Makino, S., & Montgomery, D. (2000). Resource commitment, entry timing, and market performance of foreign direct
investments in emerging economies: The case of Japanese international joint ventures in China [Electronic
version]. Academy of Management Journal, 43(3), 468-484.
47

Market Entry Timing in Previously Closed (Communist) Markets: A Model to Analyze U.S. Companies in the Czech Republic

Lieberman, M., & Montgomery, D. (1998). First-mover (dis) advantages: Retrospective and link with the resource-based view
[Electronic version]. Strategic Management Journal, 19, 1111-1125.
Pastor Jr., M., & Zimbalist, A. (1995). Waiting for change: Adjustment and reform in Cuba [Electronic version]. World
Development, 23(5), 705.
United Kingdom Government (2007) Czech Republic. Foreign & Commonwealth Office. Retrieved June 18, 2008 from
http://www.fco.gov.uk/en/about-the-fco/country-profiles/europe/czech-republic?profile=economy&pg=2.

48

J. Strouhal and F. Deari

Volume 8 Winter 2009

STATUS OF CERTIFIED ACCOUNTANTS IN CZECH AND MACEDONIA

Jiri Strouhal1 and Fitim Deari2


University of Economics Prague1, Czech Republic and
South East European University of Tetovo2, Macedonia
ABSTRACT
Changes in economic environment in the beginning of 90s of last century in Central and Eastern Europe have led towards new
requirements for accountants. By the year 1997 have existed in the Czech Republic just certification for auditors (CPAs). Due
to the aim of some standardization and harmonization of the knowledge of all professional accountants (not only auditors), the
certification system based on the British ACCA professional scheme was started in the Czech Republic from 1997. Adepts who
fulfill all examination criteria are associated in their professional organization Chamber of Certified Accountants CR. Members
of this Chamber are subject to a system of continued professional education (CPE) in line with the requirements of IFAC
(International Federation of Accountants).
The accounting profession in Macedonia is not adequately organized. Two accounting and auditing associations compete to
represent the professional community: Association of Accountants and Auditors and Macedonian Association of Certified
Auditors, which was established more recently. Both membership are voluntary and do not confer any privileges on members.
Unfortunately these associations lack the capacity to sustain themselves as modern professional organizations and therefore
some changes in the future are proudly awaited.
This paper is primarily aimed at the requirements for the fulfillment of the continued professional education as well as to show
the requirement for becoming certified professional in Czech Republic and Macedonia.
Keywords: Accounting Profession; Professional Development; IFAC; Czech Republic; Macedonia (FYROM)

1. INTRODUCTION
According to Fisher and Murphy (1995) accounting is firmly established as an important profession and as a major employment
destination. In addition they believe that there is some ambivalence regarding the image of the accounting profession as well
as the status of accounting as an academic discipline. Due to the aim of some standardization and harmonization of the
knowledge of the professional accountants, the certification system based on the British ACCA professional scheme was
started in the Czech Republic in 1997. It was developed under the supervision of the Czech Ministry of Finance, EU PHARE
and of course the British ACCA.
The education and examination system was arranged in order to follow the original International Education Guideline 9 (IEG 9).
This Guideline with the UNCTAD Qualification Guideline (from 1983) has been taken into account while forming education and
examination systems.
It shall be stated that the International Education Standards (IES) stress or shape newly the tendencies which have been
influencing the development of the accounting profession in the last decade (especially professional ethics, development of
communication and interpersonal abilities, ICT etc.).
During the period 1997 2008 was used three level system of the certification in Czech which especially stresses the attention
of the triumvirate Accounting Law Taxes. Each adept should fulfill the following papers:
technician level
P1 Financial Accounting
P2 Law System in the Czech Republic
P3 Quantitative Methods and ICT
P4 Economics
P5 Tax System in the Czech Republic
49

Status of Certified Accountants in Czech and Macedonia

executive level (equivalent of the German Bilanzbuchhalter level)


P6 Financial Reporting
P7 Tax System in the Czech Republic (Advanced)
P8 Financial Management
P9 Management Accounting
P10 Quantitative Methods and ICT (Advanced)
P11 Law System in the Czech Republic (Advanced)
expert level
P12 Financial Strategy
P13 IFRS
P14 Financial Analysis
P15 Auditing
Table 1:
Exam

Precision Ratio at the Exams (2003 2007, in %)


12/2007

6/2007

12/2006

6/2006

12/2005

6/2005

12/2004

6/2004

12/2003

6/2003

P1

55.22

64.62

83.33

73.97

64.29

63.51

86.81

77.97

65.38

80.67

P2

66.38

78.75

55.43

76.60

66.67

62.80

86.02

83.03

71.38

62.14

P3

51.72

55.56

69.09

55.00

61.90

69.80

55.80

47.50

28.31

67.86

P4

59.38

19.18

51.82

38.83

63.38

64.08

51.05

41.88

61.08

65.92

P5

80.00

86.61

78.63

67.52

84.62

66.67

60.43

64.68

71.34

62.45

P6

86.90

84.78

64.18

75.79

89.90

85.39

71.43

70.24

95.83

79.52

P7

73.17

72.41

69.47

68.75

59.38

60.26

76.32

57.33

86.72

67.83

P8

78.85

84.75

75.86

80.82

61.90

73.33

66.67

48.84

65.05

62.50

P9

81.20

67.03

58.88

57.48

37.21

52.90

33.09

41.06

35.54

20.00

P10

54.17

76.92

73.08

85.70

88.20

70.00

80.00

63.30

60.71

77.42

P11

82.35

96.23

56.72

85.94

91.67

73.17

81.25

99.12

74.04

68.13

P12

68.75

68.75

52.17

60.87

65.52

59.09

53.33

56.52

56.67

65.38

P13

25.00

71.43

94.44

87.50

96.30

60.00

84.00

70.59

77.78

90.91

P14

93.33

100.0

94.12

93.75

100.0

77.78

99.45

100.0

94.74

95.24

P15

100.0

100.0

100.0

100.0

100.0

87.50

100.0

100.0

100.0

100.0

(Source: Institute of the Union of Accountants CR, 2003 - 2007)

There can be seen differences in the precision ratio of some exams given especially by the changes of the examiners. Quite
surprising could be the jump in the paper P4 (period 12/2006 to 6/2007) the reason was the change of the scheme of exam.
Same reason could be named for the paper P13 and the difference between the periods 6/2007 and 12/2007. From December
2007 is used for this exam the ACCA paper Diploma in Financial Reporting (DipIFR). On the other hand there could be named
exams from the 3rd level with the very high precision ratio Financial Analysis and Auditing. Its especially given by the good
professional knowledge of the adepts of the 3rd level.
It shall be stated that the system respect the IEG 9 recommendation that experts involved in the developing and reviewing
exam papers should not participate in the pre-qualification education courses. With respect to this limitation there is and effort
to assure the experts rotation in their functions. It necessary to eliminate the possibility that an expert staying too long at the
position of examiner can become exhausted regarding the extend of assessed knowledge.
To be able to enter this system it is necessary to be educated minimally at the high school (having a school-leaving exam). For
the finalizing of all of the levels its also necessary to fulfill the practical experience: 2 years for technician level, 4 years for
executive level and 6 years for the expert level. On the other hand it is also possible to apply for the system of the controlled
practice: 1 year for technician level, 2 years for executive level and 3 years for the expert level.

50

J. Strouhal and F. Deari

Volume 8 Winter 2009

Currently, after 10 years of the running of this scheme, it could be made first findings:
more than 9 300 adepts of certification;
4 326 certified accountants in Czech
3 105 technician accountants (72 %)
1 036 executive accountants (24 %)
185 expert accountants (4 %)
From the winter examination period of the year 2008 were established following changes (also due to new ACCA professional
scheme) just 2 level system and fewer exams:
executive level
P1 Financial Accounting
P2 Law System in the Czech Republic
P3 Quantitative Methods and ICT
P4 Economics
P5 Tax System in the Czech Republic
P6 Financial Reporting
P7 Professional Ethics
P8 Financial Management
expert level
P9 Management Accounting
P10 IFRS
P11 Financial Management (Advanced)
P12 Marketing Management
P13 Auditing and Corporate Governance
There is also introduced the new paper for adepts of the executive level about the professional ethics. Also due to the
compatibility with ACCA there is awaited that the level for the successful passing of the paper will be 50 %. Until July 2008
there has been used the limit of 60 %.

2. CZECH CHAMBER OF CERTIFIED ACCOUNTANTS (KC)


All certified accountants are encouraged to enter the Czech Chamber of Certified Accountants. This body associates
professionals holding certificates of any of the three degrees of the certification system. The primary goals of the Chamber of
Certified Accountants are to contribute to the development and improvement of the accounting profession in the Czech
Republic by implementing an accounting professional certification system, providing the continued professional education of
accountants, issuing a Code of Ethics and other standards regulating the activities of professional accountants, supervising
professional accountants adherence to standards, collaborating in the development of accounting professions and in the field
of accounting methodology and the assertion of legislative regulations of the accounting profession with other professional
organizations and schools both bilaterally and within the scope of the National Accounting Board.
According to the Statute of the Chamber of Certified Accountants, the supreme body of the Chamber is the Assembly of the
Chamber, regular sessions of which are held on a yearly basis. The primary tasks of the Assembly include approving the
Statute of the Chamber, Code of Ethics, Assembly Rule of Procedure, Disciplinary and Electoral Regulations of the Chamber
and other standards regulating the rights and obligations of certified accountants; electing and removing members of elected
bodies of the Chamber prior to the expiration of the electoral term; electing delegates to participate in the assembly of
delegates of the Association; approving candidates for membership in the Senior Committee and Audit Committee of the
Association; approving the budget and income from the operations of the Chamber; discussing and approving the Report on
the Activities of the Committee of the Chamber, Report of the Audit Committee of the Association and Auditors relating to the
Chamber, and Chamber Disciplinary Commission Report; discussing and approving other standards of the Chamber; deciding
on the dissolution of the Chamber; and rendering decisions on other issues falling within the competence of the Chamber
reserved by the Assembly.
The executive body managing the activities of the Chamber in the periods between two assemblies, the Board of the Chamber
reports to the Assembly. The Board has seven members electing the Chairman, two Vice-Chairmen and other officers from
51

Status of Certified Accountants in Czech and Macedonia

their midst. The Chairman and the Vice-Chairman are the representatives of the Chamber authorized to act on its behalf. The
Board decides on all issues relating to the Chamber, namely: preparation of underlying materials for the session of the
Assembly and the execution of its resolutions, preparation of a draft budget, and liability for the Chambers economic
operations, preparation of draft standards of the Chamber, adoption of decisions regarding any appeals against the decisions
of the Disciplinary Commission, and establishment of executive bodies or professional councils of the Chamber. Other bodies
of the Chamber include the Disciplinary Commission and Auditors.

3. ACCOUNTING PROFESSION IN REPUBLIC OF MACEDONIA


Audit companies granted certificates to work, are registered in the Register of Audit Companies, and maintained at the Ministry
of Finance. The audit company, other than auditing, may perform activities from the area of providing accounting services and
advice, financial activities, operation analysis, evaluation of the subjects value, organization and introduction of internal audit,
tax advice, organization and control of the business activity of legal entities, as well as other similar activities.
Registered auditor must satisfy the following requirements:
1.
2.
3.
4.

High level of education graduated economist;


Passed exam for registered auditor and acquired certificate for registered auditor;
Not convicted for crimes which might make him inappropriate for the audit profession;
To declare a statement that in the course of performing his work, he shall apply the regulations determined by the Code
of Ethics for the Professional Accountants of the International Accounting Association.

A candidate for passing the exam for the title of registered auditor should have at least 5 years of working experience in the
field of accounting or financial activities, i.e. 3 years of working experience in the field of audit and control.
To receive a license becoming certified state auditor in Macedonia, each candidate has to follow these exams:
-

Accounting and financial reporting;


Accounting for state and nonprofit organizations;
Methodology of auditing;
Law and professional regulation;
Auditing technology information basic;
Ethic codec of professional accountants and auditors.

According to ROSC6 (2003) in Macedonia there are some necessary changes that should be done at accounting profession,
parts of which are presented as following:
The auditing profession in FYR Macedonia is not adequately organized. Two accounting and auditing associations
compete to represent the professional community: (a) the Association of Accountants, Financial Workers, and Auditors
(Sojuz), which was established in 1956; and (b) the Macedonian Association of Certified Auditors, which was established
more recently. Both membership are voluntary and do not confer any privileges on members. These associations lack the
capacity to sustain themselves as modern professional organizations.
In the absence of a robust professional organization, the Ministry of Finance regulates the auditing profession. The
Ministry of Finance is sponsoring draft legislation recognizing the profession as self-regulated and independent and
requiring a professional organization to regulate professional performance as a matter of public interest. In the meantime,
the Ministry remains the regulatory body, as evidenced by its prominent role in the organization and conduct of
professional examinations and licensing of auditors.
The auditing profession is in disarray and the Ministry of Finance lacks the capacity to regulate it effectively, which
severely hampers the auditors watchdog function. The financial architecture of Macedonia is missing one of the required
pillars to ensure the reliability of financial statements: a reliable, independent auditing profession whose ultimate
allegiance is to a companys creditors, shareholders, and other stakeholders. The Ministry of Finance does not have the
resources to organize and monitor continuing professional education; enact and implement auditing standards and a
professional code of ethics for auditors; and control the quality of audit activity and auditors professional conduct. These
fundamental activities, which are generally handled by a professional organization, are simply not addressed in
Macedonia.
6

Report on the Observance of Standards and Codes (ROSC)-FYR Macedonia. (2003). Accounting and Auditing, June 24, pp. 4-5.
52

J. Strouhal and F. Deari

Volume 8 Winter 2009

Although approximately 900 companies are required to be audited, there are only 24 licensed auditors in public practice
and only 11 audit firms are registered with the Ministry of Finance. This shortage is exacerbated by the December 31
year-end. Reducing the number of firms that must be audited, by taking maximum advantage of the EU Fourth Directives
auditing exemption for small- and medium-size enterprises when there is no public interest requirement for the audit of
financial statements, would help resolve this issue. Establishing a well-functioning professional organization would also
help address the shortage of auditors. Macedonia has enacted the 1998 version of the International Federation of
Accountants (IFAC) Code of Ethics for Professional Accountants, however the existing auditor independence
requirements are not enforced. The Audit Law prohibits a statutory auditor from performing bookkeeping, appraisal, or tax
services for a client contemporaneously with the audit of the financial statements of the client.
The Macedonian legislation relating to the liability of audit firms and auditors is vague and untested. Under the Audit Law,
an auditor or an audit firm is obliged to provide auditing services duly and carefully and to observe the rules of the
profession. An auditor has so-called objective liability for any damages incurred in connection with the services the
auditor provides, and may be released from such liability only if he/she proves having exercised all reasonably required
efforts. However, the Law fails to say expressly whether parties other than the audited company (e.g., creditors,
investors, or any person relying in good faith on the auditors opinion) may have a direct recourse against the auditor. In
the absence of such provision, Macedonian lawyers contend that third parties would be in a difficult position to prove
before a Macedonian court that they have privacy and legal standing to pursue the claim for damages against the auditor.
It is also uncertain whether the auditor is liable for damages vis--vis the regulatory authorities other than the National
Bank. This issue appears even more significant considering a lack of landmark Macedonian court decisions on these
matters. The ROSC team is unaware of any civil or criminal decision of Macedonian courts on a claim against auditors.
The Audit Law requires audit firms to take out professional indemnity insurance, but the amount of insurance coverage is
not in the public domain. In the event that the auditors insurer does not satisfy the plaintiffs claim for damages, plaintiff
may initiate judicial proceedings against the audit firm and against any or all of the auditors (individuals) who have
participated in providing the audit services. Audit firms are incorporated as a limited liability company with very low share
capital, which offers little protection to claimants.

4. CONTINUAL PROFESSIONAL DEVELOPMENT OF ACCOUNTING PROFESSIONALS


The Chamber of Certified Accountants implements a system of continual professional development (hereinafter referred to as
the CPD system) in compliance with International Education Standard IES 7 and CCA Regulation No. 7/2006. The CPD is
obligatory for all certified accountants; newly certified accountants are obliged to join the education system from the year
following the year of their certification. The appropriate fulfillment report must be handed over (in written or electronic form) by
31 January of the subsequent year.
The main goal of the CPD system definitely lies in the improvement and refinement of the professional knowledge and skills of
certified accountants, as well as the development of their professional and ethical values.
The CPD can be broken down into two parts: structured and non-structured. The structured part of the CPD represents active
forms of education, e.g.:
lectures, seminars and courses; the actual length (not more than 7 hours per day) is registered in the CPD system;
professional university education in the field of economics,
professional teaching activities; 30 and 10 hours are registered in the CPD system with the full and partial teaching load,
respectively;
professional lecturing activities; the actual length (not more than 10 hours per course) is registered in the CPD system;
and
professional publishing activities; one hour per standard page is registered in the CPD system.
The non-structured part of the CPD lies in the self-study of the literature and magazines (e-sources are of course included as a
possible and from the accountants point of view major alternative), discharge of the office of a member of an expert board,
council or committee in a professional association provided that the member concerned takes an active part in the activities of
such bodies.
Members of the Chamber of Certified Accountants are obliged to complete 40 hours of the CPD per year; of this, at least 30
hours must be structured education. Should a member fail to comply with this obligation in a given period of time, the fulfillment
of the obligation may be postponed to the subsequent two years, with at least 120 hours of the CPD completed in all three
53

Status of Certified Accountants in Czech and Macedonia

successive periods. It is deemed that the CPD may be terminated only in the event of the given members terminating the
discharge of his/her profession.
The Accounting Profession desires a wider range of capabilities (over and above technical ability) that accounting graduates
should possess, e.g. the ability to manage stress, an awareness of personal values, a basic knowledge of psychology,
communication skills, motivation, persistence, empathy and a sensitivity to social responsibility (Scott et al., 1998). The
profession has a responsibility towards members to encourage the cultivation of some of these skills and not focus so severely
on only technical ability. The current accounting education is often focused on the acquisition of knowledge and an overemphasis on technical knowledge in order to pass the professional examinations, rather than focusing more on the utilisation of
knowledge and more holistic attributes (Bayou and Reinstein, 2000; Koch and Kriel, 2005).

REFERENCES
Bayou, M.E. and Reinstein, E. (2000). The dual role of critical thinking in accounting education, Advances in Accounting
Education, Teaching and curriculum innovations, 2.
Fisher, R. and Murphy, V. (1995). A Pariah Profession? Some Students Perceptions of Accounting and Accountancy, Journal
of Higher Education, 9 (1).
Koch, E. and Kriel, M. (2005). An argument for integrating language or language-related skills in the accounting curriculum,
Journal of Higher Education, 19 (3), 218-229.
Scott, M.R. et al. (1998). A discriminant analysis profile of the early development of professional accounting capabilities, Issues
in Accounting Education, 13 (2), 341356.
Directive of the Czech Chamber of Certified Accountants No. 7/2006, defining the system of continued professional education,
amended by Directive No. 9/2007
Guideline on National Requirements for the Qualification of Professional Accountants UNCTAD/ITE/EDS/9, Intergovernmental
Working Group of Experts on International Standards of Accounting and Reporting (ISAR), www.unctad.org
Internal documents of the Chamber of Certified Accountants
International Education Guideline 9: Prequalification education, Assessment of Professional Competence and Experience
Requirements of Professional Accountants, www.ifac.org
International Education Standards for Professional Accountants, IFAC 2003, www.ifac.org
www.icu-praha.cz (official website of the Institute for Certification of Accountants CR)
www.kcu.cz (official website of the Czech Chamber of Certified Accountants)

54

F. Elston

Volume 8 Winter 2009

AN OVERVIEW OF CORPORATE GOVERNANCE IN CHINA

Frank Elston
Metropolitan State College of Denver, USA
ABSTRACT
The paper reviews the meaning and importance of corporate governance, the institutional structures that exist, and the
corporate governance problems that typically arise. A significant problem with achieving good corporate governance lies with
the agency problem. Overcoming this problem therefore is crucial. Key characteristics of good corporate governance emerge.
Good corporate governance depends upon company specific structures such as the board of directors as well as market
information flows. Corporate governance is examined in its peculiarly Chinese setting. The paper traces the development of
reform in China and how it has impacted corporate governance. Developments such as domestic listing and foreign listing are
examined as to their impact on corporate governance. Chinese corporate governance still faces many challenges. Corporate
governance is often weak because of a variety of problems. Among these are fragmented stock ownership, lack of a bond
market, and poor quality information. Improving monitoring and the incentive structure remain significant challenges. Capital
formation and securitization are often politically driven. State owned companies may have multiple masters, whose priorities
may not lead to value creation. At the same time describing Chinese markets involves a moving target. Substantial changes
have occurred in the last decade improving corporate governance and more changes will surely come soon.
Keywords: China, Corporate Governance

CORPORATE GOVERNANCE PROBLEM


Corporate governance can be defined or described in a variety of ways. Riepe (2006, p. 44) defines corporate governance as
simply a system by which companies are directed and controlled. To a significant degree weak corporate governance means
that the organization is not creating as much value as it would with improved corporate governance. This paper will examine
corporate governance in general and corporate governance particularly in China.
One might wonder whether good governance is worthwhile. Does good governance pay? In theory, it should increase the
market valuation of companies by improving their financial performance, reducing the risk that boards will make self-serving
decisions, and generally raising investor confidence. Indeed, surveys suggest that institutional investors will pay as much as 28
percent more for the shares of well-governed companies in emerging markets (Newell & Wilson, 2002, p 20). The market
rewards firms for improving corporate governance. The reward for good corporate governance is large. By moving from worst
to best in corporate governance, companies in our sample could expect, on average, to experience roughly a 10 to 12 percent
increase in their market valuation (Newell & Wilson 2002, p 22). Higher valuations in emerging market companies result from
policy changes that improve corporate governance (Morey, Gottesman, Baker, & Godridge, 2009). Newell and Wilson (2002, p.
21) found that companies with better corporate governance did have higher price-to-book ratios, indicating that investors will
pay a premium for shares in a well-governed company. La-Porta, Lopez-de-Silanes, Schleifer, and Vishny (2002) show that
the better protection of small shareholders or minority shareholders the higher the valuation of the company. Doidge, Karolyi,
and Stulz (2002) demonstrate that foreign firms listed in the US have greater value than comparable foreign firms not listed in
the US. Therefore, improvement of corporate governance in China would be a very significant event for China as well as the
world.

Problems with the Modern Corporation and Efforts at Reform


Despite the benefits to financial markets and to all economies, weak corporate governance may be a persistent problem. This
section discusses the corporate governance problems that arise in the modern corporation and how they might be ameliorated.
Managers and shareholders have diverging interests. Managers frequently can follow their own interest at the expense of the
shareholders (Berle & Means, 1933). This is the agency problem. Shareholders are usually passive, especially when the
ownership of a corporation is greatly dispersed. They suffer a distinct information deficit when compared to the managers.
Moreover, each shareholder does not have enough at stake to monitor the firm and to seek any appropriate remedies.
55

An Overview of Corporate Governance in China

Consequently, corrective action is not taken even when there are sufficient benefits for the shareholders as a whole. This
phenomenon results from the free rider problem (Grossman & Hart, 1980). The agency problem can worsen when the firm
enjoys ample amounts of free cash flow (Jensen, 1989). With sufficient cash the firm may have the wherewithal to spend the
money unwisely from the viewpoint of shareholders. This could entail spending on corporate executive perks such as corporate
jets, on unwise value destroying acquisitions, or unwise corporate expenditures. Also with ample amounts of free cash a firm is
not so beholden to lenders who provide outside monitoring.
One antidote to the agency problem is greater alignment of managerial and shareholder interests so that managers would
more likely engage in shareholder value creation. This greater alignment may occur when managers hold large amounts of
stock or stock options. It could also arise when salaries reflect manager performance. Jensen and Murphy (1990), however,
show very little connection between compensation and performance. Another solution to the problem of inadequate incentives
for managers is through the market for corporate control. Manne (1965) envisioned takeovers as an essential remedy to
ineffective shareholder control. The takeover itself would remove the value destroying management while the threat or real
possibility of a takeover would discipline management toward value creation.
In 1992 the British Cadbury Committee reported on corporate structure and practice. Specifically the Committee recommended
that British boards have a minimum of three outside directors and that different people hold the positions of CEO and Chair of
the Board of Directors. Not only did much of British industry adopt these recommendations, but the Committee has shaped the
development and research in corporate governance for decades. While compliance has been voluntary, the London Stock
Exchange added impetus to companies adopting the Committees recommendations when it required listed companies to
comply or explain why they were not complying with the recommendations. Dahya, McConnell, and Travos (2002) found that
outside directors constituted 47% of the total, a sharp rise from the pre-Cadbury 26%. Moreover, companies with a joint
CEO/Chair position fell from 37% to 15%. Those companies that moved toward the three outside director minimum enjoyed
improved performance (Dahya & McConnell, 2007). Specifically, the return on assets improved by almost two percentage
points. However, the separation of CEO and Chair positions did not appear to make any operational difference (Dahya &
McConnell, 2007). Independence of directors is necessary but not sufficient when the directors are not competent for the task
at hand. In the recent financial crisis it appears that boards of leading financial firms included unqualified outside directors.
Guerrera and Larsen (2008, p. 9) note the sorry state of the boards of eight leading US financial institutions: More than twothirds of the occupants of those board seats had no significant recent experience in the banking business. Fewer than half had
any financial services industry experience at all.
Efforts in the United States to improve corporate governance have not always been so welcomed. In the wake of the Enron and
WorldCom accounting scandals, Congress passed the Sarbanes-Oxley Act in 2002. It demanded certain measures such as
CEO certification of accounting statements that remain controversial. Whether it represents a step forward for US corporate
governance is unclear given the costs of implementation. Compliance to Sarbanes-Oxley is expensive, notably for small
companies (Switzer, 2007). As a generality, effective regulation requires cost effective and enforceable measures. However
debatable particular steps may be, governmental policies and country conditions can make a considerable difference in the
efficacy of corporate governance. Among critical country factors are the legal structure, GNP per capita, and stock market cap
to GDP. (Doidge, Karolyi, & Stulz, 2007). The last two items are widely used as indicators of developed countries. Newell and
Wilson (2002, p. 21) organize corporate governance characteristics into four major groups: accountability, disclosures and
transparency, independence, and shareholder equality. In turn accountability incorporates transparent ownership, board size,
board accountability, and ownership neutrality. Disclosure and transparency entails two things: broad, timely, and accurate
disclosure and accounting standards. Independence depends on dispersed ownership, independent audits and oversight, and
independent directors. Shareholder equality refers to one share, one vote. Bebchuk, Cohen, and Ferrell (2009) try to make
corporate governance more concrete by considering what matters in corporate governance. In an article with that phrase as the
title they found six governance items of most importance: staggered boards, limits to shareholder amendments to by-laws,
supermajority requirements, poison pills, and golden parachutes. These six items that matter in corporate governance concern
the effective power of shareholders and the ability of outsiders to do takeovers.

CORPORATE GOVERNANCE AND REFORM IN CHINA


After the fall of communism in certain eastern European countries, the changes were sweeping. Poland is an example, where
under development guru Jeffrey Sachs the reforms became known as shock therapy. In contrast the Chinese approach has
been characterized as gradualist. They have preferred to build upon the existing structure rather than to tear it down. This can
be illustrated by the over arching philosophy of the system. As long as Mao lived China could only be rigidly socialist and in fact
under Maoism revolutionaries had to strive continually to achieve true socialism as bourgeois tendencies tended to creep back
into the system. In contrast under Deng Xiaoping China became less ideological and yet did not cleanly break with the ideology
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of socialism. State owned enterprises continue to dominate the commanding heights of the economy. And it is this part of the
economic system that has had substantial corporate governance problems. Thus with the desire to adopt a more market
oriented system while continuing to pledge fealty to the socialist system China has embarked on incremental, but continuous
change. In contrast, the desire to maintain the socialist system in Eastern Europe was decidedly less of an imperative.
In 1992 Deng toured the Southern Chinese area known as the Pearl River Delta. There he endorsed the idea of a Special
Economic Zone, a Chinese version of free trade zones. While this trip to the South may have been a small step its
consequences have been monumental, as anyone can attest who has spent any time in the Pearl River Delta. Yet, moving
society away from the socialist model would be incremental. The 14th Party Congress in 1992 endorsed the socialist market
economy (Chiu & Lewis, 2006, p. 41) and the 15th Party Congress of 1997 upgraded the role of private ownership as a way to
achieve socialist goals (Chiu & Lewis, 2006, p. 48). For the first time in the history of the Peoples Republic of China outright
privatization was possible. In adhering to a gradual reform approach, however, the large state owned enterprises were not
privatized. They were publicly traded, but the bulk of ownership and control resided in the state (Wong, 2006, p. 392). These
state owned enterprises represent most of heavy industry in China (Chiu & Lewis, 2006, p. 56). The state has retained the
control of the commanding heights of the Chinese economy.
With the gradualist approach regulation remains, but evolves. Gradualism should not be taken as a permanent adoption of a
mixed economy that eschews the more open and free versions of capitalism. It is a process that allows for change at a slower
pace than shock therapy. At the same time the Chinese authorities are aware of the pitfalls associated with a fast pace of
liberalization (Yue & He, 2008, p. 199). Mindful of the Asian crisis of the late 1990s, they have adopted a cautious approach
most notably in respect to financial liberalization (Yue & He, 2008, p. 199). For instance they have allowed convertibility of the
Renminbi, but limited to particular institutions such as the qualified foreign institutional investor and qualified domestic
institutional investors (Yue & He, 2008, p. 199). This way they can test the waters, incrementally moving from socialism
towards capitalism. With the recent worldwide financial crisis the Chinese may be less anxious to liberalize their financial
markets and to open them to foreigners. The result may be an even slower pace to gradualism. It may also mean a greater
commitment to extensive regulation as a long term end.
In contrast to the gradualist, wise Party, mixed economy model is the thesis put forward by Yasheng Huang, who argues that
increasing private property rights and private entrepreneurship propelled the Chinese economy in the 1980s and 1990s. The
great advances were associated with the rural economy especially in the 1980s:
What actually happened is that early local experiments with financial liberalization and private ownership, in the
1980s, generated an initial burst of rural entrepreneurialism. Those earlier gains --- not the massive state-led
infrastructure investments and urbanization drive of the 1990s --- laid the true foundation for the Chinese miracle
(Huang, 2009, p. 150).
Huang (2008, p. 36) distinguishes between the security of property and the security of oneself. Rights in property today in
China are not well defined and secure, but security of oneself is much greater today than in the China before 1980. This is a
great improvement in incentive for entrepreneurship and can explain in part the Chinese miracle.

Shareholding System
In looking at corporate governance one can examine outside control or monitoring mechanisms such as governmental
regulation, industry self-regulation, Party influence, transparency, lenders, rating agencies, and investment bankers. Within the
firm one can examine the effectiveness of the shareholding system and the board of directors. In general the system of
shareholding has resulted in ineffective control (Chiu & Lewis, 2006, p. 132). Moreover, just as the shareholding system
provides weak corporate governance the board of directors is not particularly important in corporate governance in China (Fan,
Lau, & Young, 2007). According to Huang and Orr (2007, p. 108): In Chinas state-owned enterprises, the board of directors
often seems to have no more than the ability to rubber stamp the big decisions. In the year 2000, only 8 of 3,000 corporate
directors in China were considered independent and of these eight several had just lent their name to the firm (Green, 2003,
p. 185). From this situation improvement should not be too difficult. The China Securities Regulatory Commission now requires
listed firms to have three independent or non-executive directors (Green, 2003, p. 185).
The Chinese shareholder system can be compared to those in US and the corporatist models in Germany and Japan (Chiu &
Lewis, 2006, p. 141-146). The US model of corporate governance emphasizes disclosure and shareholder rights, whereas the
corporatist model emphasizes concentrated ownership and cross holdings. In terms of the US market model and the European
control model, Coombes and Watson (2001, p. 90) place China closer to the European control model. In light of that
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An Overview of Corporate Governance in China

perspective Coombes and Watson (2001, p. 92) suggest these reforms for Chinese corporations: greater transparency,
internationally recognized legal standards, enhanced shareholder rights, more effective board practices, and listing on a major
international stock exchange. Ferreira and Laux (2007) show that firms that are not particularly susceptible to takeovers are
likely to exhibit reduced flow of information. Chinese firms would fit the model of very low likelihood of takeover. Green (2003,
p. 150) attributes the low rate of hostile takeovers to the need to seek governmental approval. The low incidence of hostile
takeovers does not facilitate the removal of incompetent managers nor aligning the interests of shareholders and managers.
The Chinese stockholding system is itself a problem in securing better corporate governance. Ironically, its evolution, if not
creation, was aimed at improving corporate governance. Expanding ownership by selling stocks raises capital. It also partly
privatizes state owned companies, a step which may help improve corporate governance. Opening ownership to Chinese
individuals, who lack good avenues for investing, leads to partial privatization of state owned companies. But this step may lack
the muscle to install effective corporate governance. An investment stake from a single foreign firm, however, is promising for
two reasons: the concentrated ownership of a new owner and the expertise of that owner. One example is the investment of
Blackstone into BlueStar, whose chief executive Ren Jianxin saw as a pivotal development of BlueStar, transforming the
corporate governance and incentive system (Koch & Ramsbottom, 2008, p. 7).
Chinese shareholding consists of three major forms: state shares, company or legal person shares, and private shares. Legal
person shares can be thought of as indirect government shares. As a general rule these shares cannot be sold so that large
state owned companies are not privatized. Less than one-third of listed companies shares are actually listed and traded.
(Chiu & Lewis, 2006, p. 112 and 132; Wentao, 2007, p. 203). This situation of having no trading by the large dominant
shareholders, but trading by the small relatively powerless shareholders is unique (Shi & Yong, 2007, p. 3). China lacks the
control and efficiency improvements that may result from activity of private equity firms and other activist institutions such as
Calpers and TIAA-CREF. Shareholder rights in China have been treated as something of an oxymoron. A landmark study of
shareholder rights rated Chinas shareholder rights lower than those of other transitional economies (LaPorta, Lopez-deSilanes, Schleifer, and Vishny, 1998). Moreover, enforcement of shareholder rights is not good (Tenev & Zhang 2002).
Generally people believe that this system of shareholding has a deleterious impact on corporate governance. (Wentao, 2007,
p. 205). Besides this fragmentation of shareholders, the type of individuals holding and trading stocks in China is not conducive
to effective governance. Chinese stock markets are dominated by a multitude of small individual investors who are neither well
informed nor protected. (Eun & Resnick, 2009, p. 88). About 75 percent of the liquidity on the Shanghai Stock Market is
estimated to be in the hands of individual investors who bring something of a gambling mentality to their trades. (Trippon,
2009, p. 3). Without effective protection of minority shareholders, controlling shareholders are able to extract private benefits to
the detriment of other shareholders (Albuquerue & Wang, 2008). Nonetheless, in analyzing corporate governance some
scholars advocate de-emphasizing shareholder rights and instead focusing on decision making (Chiu & Lewis, 2006, p. 132;
Pound, 2000, p. 81).
There is another way in which some scholars view the apparently defective shareholding system in China as posing less of a
problem for corporate governance. La Porta et al. (1998) consider concentration of ownership as a partial substitute for
shareholder rights. Their idea is that where ownership is concentrated it has the power and the incentive to monitor firm and
management performance to effect needed changes. The dominant shareholder for many large Chinese firms is the state. With
the dominant shareholder monitoring the firm there will be spillover benefits accruing to the other shareholders, who are not
expending resources in monitoring so that the level of monitoring will be suboptimal (Schleifer & Vishny, 1986). Moreover, it is
not clear that the state owned enterprises are sufficiently motivated to monitor and that the party or state interest coincides with
other shareholders. Ordinary shareholders are interested in value creation, whereas the government qua shareholder may be
interested in societal and Party goals such as maintaining employment. Apart from the incentive to monitor the ability to monitor
may not be as great as one might assume. Chiu and Lewis (2006, p. 132) report that generally those entrusted with managing
state assets lack the requisite information to do a good job so that the SOEs continue to operate without effective oversight.
Private firms may be expected to have better performance because of the incentives for value creation, while state owned firms
may be expected to perform less well. Indeed, Bai, Liu, Lu, Song, and Zhang (2004) demonstrate that when the largest
shareholder is the government market value suffers. Yet, other research purports to show that problems develop in the mixed
control case. When the state is a dominant shareholder it can monitor management with a degree of effectiveness. With mixed
control, state and private, there is no dominant shareholder to mitigate the agency problem. Ng, Yuce, and Chen (2008)
showed with a sample of 4315 firms during 1996-2003 that mixed control firms performed significantly worse than state or
private controlled firms. Still others have emphasized whether the executives of a firm manage the firm like a private enterprise
despite significant government ownership (Farrell, Gao, & Orr 2004, p. 28). Farrell, Gao, and Orr (2004, p. 28) cite the cases of
Haier and TCL, two state owned enterprises in the consumer electronics industry. This industry can be characterized as very

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competitive with ease of entry. One might reason that competitive conditions have influenced the state to adopt a private
enterprise like management.
The story of mixed control does not just involve divided control between state and private interests, but it also arises when
control is divided among state entities. In 2003 the Chinese government established the State Assets Supervision and
Administration Commission (SASAC) to make decision making and governance more timely, effective, and rational. The
establishment of SASAC in March 2003 represented a significant departure from the previous anarchic situation where
hundreds of government ministries and other bureaucratic entities got to have their say in the daily operations of SOES [state
owned enterprises] (Fernandez-Stembridge & Huchet, 2006, para. 4).

Stock Exchange Listing


The integration of Chinese companies into the world economy continues. The listing of companies on exchanges facilitates the
raising of capital and the improvement of corporate governance, particularly if they become listed on foreign exchanges.
Regardless of the motivation for listing, it can serve as a gatekeeper, whereby Chinese companies are subject to greater
assessment and transparency. In fact before the actual listing companies are subject to scrutiny. Initially local governments
under the Chinese quota system had the central role of determining which firms could proceed to public trading. Naturally many
listed firms were not the best firms. By 2000 the securities firms became the important player in determining which firms could
go public. For the securities firms and the market to accept candidates, the firms had to be cleaned up. Listing standards in
China are not as high as those on foreign exchanges.
As of late 2009 forty six Chinese companies were listed on the New York Stock Exchange. Such listing requires firms to meet
and to continue to meet certain standards. By listing on foreign exchanges Chinese companies are immediately exposed to
outside pressure and to objective measures of performance. (Desvaux, Wang, & Xu, 2004, p. 102) Non-US firms may elect to
meet the domestic standards or the Alternate Listing Standards. The Alternate Standards allow foreign firms to meet minimum
stockholding standards on a world rather than a North American basis. Large Chinese firms usually easily meet the size and
earning requirements, domestic or Alternate Standards. For instance under the Alternate Standards a foreign firm must show a
minimum of 5,000 shareholders (100 or more shares), 2.5 million public shares, and $100 million market value. Also the foreign
firm must meet minimum amounts of one of the following three: earnings, operating cash flow, or revenues and market cap. In
general the obligation to continue to meet standards entails a somewhat lower level to achieve the initial listing. In addition to
NYSE Chinese companies are listed on the Nasdaq and the OTC market. NYSE standards are the highest. Both Nasdaq and
NYSE have required the provision of financial statements at international standards. Yet, some believe that public listing failed
its primary objective of effecting changes in corporate governance. (Walter & Howie, 2003, p. 115).

Governmental And Societal Parameters


The role of the Communist Party in China (Gongchan Dang) is pervasive. This is true in regard to formal structures.
Appointment of the CEO and other senior executives of large SOEs must be approved by the Party organization (Chiu &
Lewis, 2006, p. 175). Chiu and Lewis (2006, p. 120) regard SOE managers as political appointees of the Party, like mayors,
ministers and Politburo members. The Party also exercises control apart from the formal structure. The Party is like an
invisible force that makes the important decisions (Huang & Orr, 2007, p. 108). Yet it can be very visible and very human: Any
one party secretary in a small city can have a huge impact (Thornton quoted in Barton & Huang, 2007, p. 104). Chinese
companies explicitly recognize the long-term importance of their government relationships, routinely meet with officials at all
levels of government (especially the highest), and constantly look for areas where the governments agenda and their own
interests overlap (Grant, 2006, p. 31). Many managers are oriented toward the state and Party. They may define success in
terms of output and employment rather than profits or value creation (Desvaux et al., 2004, p. 98). Moreover, the dictates of a
market economy may be decidedly unpalatable to many managers. The government and management of banks may not wish
to cutoff distressed borrowers or demand restructuring (Berger, Nast, & Raubach, 2002, p, 142). Indeed many Chinese banks
had excessive levels of nonperforming loans at the beginning of this century to a significant degree because they had made
loans at the behest of the government to state controlled entities. Influential organizations and people meddle in the lending
decisions of banks (Bekier, Huang, & Wilson, 2005, p. 112). Moreover, fraud was involved in about a third of new
nonperforming mortgages (Bekier et al., 2005, p. 114).
The political character of the management and of the firm interferes with achieving the rule of law. Improvements of corporate
governance would require the triumph of the rule of law, which at a minimum means that the identity of the person or company
should not impact government support, formal or informal. Thus SOEs should not enjoy preference over private firms, domestic
firms over foreign firms, or firms or people associated with certain ethnic groups over others. If the rule of law is not observed
then the allocation of capital would be adversely impacted. Regulation could prevent egregious cases of fraud, require greater
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An Overview of Corporate Governance in China

transparency, and in general improve corporate governance. Yet regulation can be counter productive and regulatory agencies
can become corrupt. Green (2003, p. 213) concludes that many of the institutions set up by the government actually foster that
corruption and poor governance rather than act to limit and resolve it.
Any examination of business or more specifically corporate governance must come to grips with the role of Chinese culture. To
get what one needs or get things done the Chinese may rely on guanxi (connections). Guanxi may bring success in the job
market and may continue to operate in business relationships. For example, many industrial managers in the mid 1980s owed
their jobs to the personal connections they held with bureaucratic superiors and depended on these connections for bail-out
from serious economic problems that plagued their firms (Su, 2003, p. 44). While western business, of course, is not immune
from the role of connections, guanxi has played a most prominent role over the centuries in China. Formal structures may
count for less than informal guanxi created structures in actual decision making (Seligman, 1999, p. 180). Guanxi gains greater
significance in a society with weak legal development, especially regarding commercial relationships. Peerenboom (2002)
writes extensively about the China with weak legal development, lacking the rule of law. As Chinese business develops,
matures, and integrates itself in the world the role of guanxi may erode. Grant (2006, p. 30) acknowledges the role of guanxi,
but notes that fewer decisions affecting businesses are being made for the first time, and precedents can be difficult to break
no matter whose ear a senior executive can bend. Moreover, players on both sides of the table are much more professional
than they were a decade ago. Guanxi may also play an interesting role in mitigating the effects of corruption. As a whole
corruption has a negative effect on economic growth. . . . However, this negative effect may be reduced when corruption
interacts with a higher level of social trust (Li & Wu, 2007, para. 30). China is a country with substantial social trust built on
guanxi. This means that the bribes can be extended beyond friends and family, perhaps to the highest bidder who has the
most efficient business operation (Li & Wu, 2007, para. 9). In this guanxi society corruption can be more efficiency enhancing
than in the society with weak social connections.
Another very important Chinese cultural attribute that affects corporate governance is mianzi (face). Chinese are said to
emphasize greatly the need to save face. This of course refers to oneself, but can also entail avoiding confrontation with others
where they might risk losing face. Berger et al. (2002, p. 142) relate the story in which Chinese bank officers were too
embarrassed to telephone delinquent borrowers to inquire why payments were late. Where bank officers have greater
incentive to monitor risk, where they have their own wealth or bonuses at stake, they might very well be more effective at
monitoring despite cultural inhibitions in doing so. In other words, cultural considerations are real, especially where
countervailing incentive effects may be weak. To the extent that corporate governance improves in China, certain cultural
effects like mianzi may recede in importance.
Discipline exercised by outside parties can be an important way in which corporate governance works. These may consist of
the legal system as well as various financial and market interests. Reforms in the legal system have attempted to enhance the
role of the latter. For instance, the 1999 Securities Law changed the allocation system for IPOs toward greater supervision
from securities firms and away from state bureaucratic processes. Securities firms can play a significant role in producing
information about a firm. Such information flows shape attitudes and decisions of investors and potentially the government and
the firm itself. So far, institutional investors, such as mutual funds, pension funds, and insurance companies, who can produce
high quality information about listed companies and effectively protect shareholders rights, play a relatively minor role in China
(Eun & Resnick, 2009, p. 88). There is a distinct lack of bond issues (Wentao, 2007, p 209-210). The same types of
infrastructure projects that are financed by revenue bonds in the US are financed by equity in China (Walter & Howie, 2003, p.
107). Thus bond analysis and bond ratings are not as plentiful in China as they are in the US. As few Chinese firms issue debt
to the public, there is very little market driven assessment of these securities and hence of the firm by investment analysts and
rating agencies. Other sources of information are the firms, financial press, and accounting statements. The Chinese
government appears open to greater information flow and citizen access to information (Bandurski, 2007, para. 7). But much of
the actual information flow from firms appears to be public relations (Bandurski, 2007, para. 8). Nonetheless, slowly new rules
requiring greater disclosure and accounting standards are improving corporate governance (Green, 2003, p. 184).

SUMMARY AND CONCLUSIONS


Corporate Governance refers to the way corporations are governed or directed. Better corporate governance should enhance
market value and should result in better allocation of capital and well-being of society. Corporate governance in China has
been particularly weak. Corporations, especially the SOEs which dominate the commanding heights of the economy, are
riddled with inefficiencies, agency and incentive problems. Generally these can be laid at the footsteps of the government and
the Party. Nonetheless, Chinese corporate governance has made notable strides. One of these is the foreign listing of Chinese
companies, which has aided firms in improving corporate governance. Table 1 below highlights some of the key corporate
governance factors in the context of China.
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Volume 8 Winter 2009

Table 1: Corporate Governance Factors in China


Factor
Accounting
Board of directors
Bondholders
Concentration of ownership
Guanxi

Possible Impact
Disclose condition of firm, improve accuracy of pricing
and allocation of capital
Discipline, monitoring
Discipline, monitoring
Overcome free rider problem, monitor, effect change
Override economic factors, overcome bureaucratic
obstacles, inadequate monitoring and management

Lenders

Discipline, monitoring

Mianzi
Party

Override economic factors

Property rights

Incentives for efficient use of capital

Regulation

Require disclosure, protect minority shareholders

Rule of law

Efficiency and rationality

Security firms

Screen firms for IPOs, research

Shareholders
Takeover

Monitor, control for value creation


Discipline from threat or actual change

Agenda other than value creation

Impact in China
Improving
Weak but more independent directors
Very few debt securities
Not dynamic as large owner is state
May help to offset partially the deleterious
impacts of corruption
State owned banks provide substantial
funding to SOEs, apparently politically driven
Profit incentive, if strong, may offset it
Extensive power over SOEs
Unclear, but mild improvement overall;
substantial increase in personal security
Some streamlining and improvement, but also
corruption
Weak, but slowly developing
Greater role; previously government had main
role in taking firms public
Shareholder rights weak, little activism
No credible takeover threat

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PUBLIC AND PRIVATE PARTNERSHIP APPROACH FOR APPLYING THE


TOURISM MARKETING MIX TO SPIRITUAL TOURISM

Farooq Haq1, Anita Medhekar2 and Phil Bretherton3


Charles Darwin University1, 3 and CQ University2, Australia
ABSTRACT
This conceptual paper discusses the growing importance of spiritual tourism in particular as a separate niche market segment
in the world economy. This paper presents the view that considerable potential exists for spiritual tourism product if marketed
effectively. The paper proposes the application of the public and private partnership approach (PPP) from economic theory to
design effective marketing strategies for spiritual tourism. In this paper, the PPP framework is presented as to effectively apply
the tourism marketing mix for marketing spiritual tourism. Further, all elements of the tourism marketing mix are separately
analysed and their application for spiritual tourism is discussed, which critically suggests their usefulness to create and apply a
new PPP framework-model for marketing strategy for spiritual tourism. The important role of PPP as a critical element of the
marketing mix for spiritual tourism is an outstanding contribution of this research paper. This study suggests that PPP will
enhance the competitive advantage of the spiritual tourism product through collaboration, and partnerships between the
various stake holders. The research offers a unique combination of economics and marketing theories to illustrate the
significance, growth and economic sustainability of spiritual tourism in the 21st century and beyond.
Keywords: Spiritual Tourism, Marketing Mix, Strategy, Public and Private Partnerships

INTRODUCTION
The significance of tourism in the world economy has grown stronger over the years and people are still indulging in various
types of tourism even during the current global economic recession (Rosentraub & Joo 2009; Smith 2009; Vu & Turner 2009;
Cohen 2008). Tourism expenditure is also growing and contributing to monetary circulation in the world economy. Tourism
expenditure was observed to be US$533 billion in 2003 and it has been increasing by 4% annually since 1995 (Fleischer &
Rivlin 2009; Kulendran & Dwyer 2009). Tourism has consistently been ranked as one of the fastest growing industries in the
world and the largest industry in terms of employment (Vu & Turner 2009). Despite the 2008 slowdown in tourism growth,
global tourist arrivals grew by 2% and reached 924 million, an increase of 16 million over 2007 (WTO 2009).
Tourism has become one of the worlds largest service sector industries with enormous potential for further growth; however, it
is sensitive to external factors, like terrorism, natural disasters and infectious diseases which can cripple the local economy at
destinations in the poor developing countries. Therefore it is important to have a diverse basket of tourism destinations and
types such as recreational, historical, cultural and spiritual religious, supporting the tourism industry in general. Religious
tourism according to Timothy and Olsen, (2006) is one of the ancient forms of non economic travel. According to World
Tourism Organisation WTO (2004), 689 million people travelled to foreign countries in 2000, out of which nearly 40 million
people travelled for spiritual purposes from Christian, Muslim and Hindu families and there is a growing trend in the spiritual
tourism market segment (mosques, churches, synagogues, temples, cultural and historical sites linked with spirituality) along
with cultural and heritage tourism, spending US $ 478 billion. Factors such as globalisation, education, high disposable income,
industrialisation, opening up of foreign markets, better advertising and strategic marketing policies and techniques have
contributed to the growth of tourism as an important service sector for the economy.
Throughout history, oral, archaeological and written records document peoples involvement with spiritual experiences and their
journeys to engage in spiritual activities (Blomfield 2009; Timothy & Olsen 2006; Sharpley & Sundaram 2005; Rountree 2002;
Shackley 2002; Rinschede 1992; Burton 1855). The term spiritual tourism is largely unheard of in both the academic literature
and the tourism trade press, yet more people visit Mecca, the Vatican and/or Bethlehem/Jerusalem per year than attend the
World Cup, for example. Currently there are no industry recognised standard marketing strategies that could be applied to this
growing spiritual tourism product. The research study in this paper suggests that the tourism marketing mix could be applied by
adopting the PPP framework derived from economic theory as an important business framework for effective marketing of
spiritual tourism (Montanheiro, Kuznik & Ochojski 2003).
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Public and Private Partnership Approach for Applying the Tourism Marketing Mix to Spiritual Tourism

This paper is structured as follows. The first section of the paper provides a background introduction to the growing importance
of the spiritual tourism industry in general as a separate niche market segment in the world economy. Section two puts forward
a literature review specific to the spiritual tourism, tourism marketing mix strategies and the public and private partnership
theory. Section three explores the tourism marketing mix proposed by Morrison (2002) based on product, price, place,
partnership, promotion, people, packaging and programming and analyses its application for spiritual tourism . Section four
applies the public and private partnership approach as an important business framework for effective marketing of spiritual
tourism with examples. Section five provides some conclusions and directions for future research.

LITERATURE REVIEW
Spiritual Tourism
It has been observed by various authors that spirituality in general has recently become an important subject of research in
social and business areas (Cochrane 2009 ; Simpson, Cloud, Newman & Fuqua 2008; Pesut 2003; Delbecq 2000; Konz &
Ryan 1999). The mounting interest in spirituality has influenced a number of industries around the world (Brownstein 2008;
Fernando & Jackson 2006; Heintzman 2003; Mitroff & Denton 1999). The tourism industry is one of the industries which have
been affected by this growing interest in spirituality (Andriotis 2009; Cochrane 2009; Finney, Orwig & Spake 2009; Geary 2008;
Tilson 2005; Cohen 1972). Spiritual tourism is growing and is an important segment of a massive tourism industry catering to
needs of spiritual tourists in particular and facing competition as well as problems of survivability with other segments of the
tourism industry. Spiritual tourism is a new concept but it is certainly not a new phenomenon. Based on the review of the
literature, the interviews with spiritual tourists in Australia, Pakistan and the UK, this research defined a spiritual tourist as
someone who visits a specific place out of his/her usual environment, with the intention of spiritual meaning and/or growth,
without overt religious compulsion, which could be religious, non-religious, sacred or experiential in nature, but within a Divine
context, regardless of the main reason for travelling (Haq & Jackson 2009, p. 145).Therefore, this study considers spiritual
tourism as a type of travel taken by people from any religious background, with the goal of achieving spiritual development by
realising a better connection with God, the High Spirit or the Supreme Being.

Marketing Mix Strategies for Spiritual Tourism


The marketing mix based on 4Ps has been reviewed and analysed repeatedly over the years by various marketing scholars
(Constantinides 2006; Moller 2006; Hakansson & Waluszewski 2005; Rafiq & Ahmed 1995; Gronroos 1989, 1997). Booms &
Bitner (1981) who acknowledged the gap left in the marketing mix for services, they added 3 more Ps for services marketing
that included process, physical evidence and participants. In marketing tourism products and services, Morrison (2002) is
recognized as the authority to derive the 8Ps of the marketing mix, the application of this marketing mix to spiritual tourism will
be discussed in this paper.
Gronroos (1997) has criticised the adoption of the marketing mix in marketing strategy theory and suggested the paradigm shift
towards relationship marketing. In his study he completely relied on relationship marketing as the only solution and failed to
realise the virtues of the marketing mix. Moreover, relationship marketing has been criticised for being too conceptual and
failing to provide any testable theory (Palmer & Wilson 2009). The social marketing concept has also been observed to be
missing in the marketing mix (Dann 2009). However, Rafiq and Ahmed (1995) and Borden (1964) illustrated the usefulness of
the marketing mix as a generic marketing strategy. Constantinides (2006) also analysed the potential application of the
marketing mix and its value to real world marketing. Various authors have analysed the potential application of the marketing
mix and its value to real world marketing (Constantinides 2006; Moller 2006; Rafiq & Ahmed 1995). There is a significant gap in
the literature on tourism marketing strategy as little research has been conducted on the marketing strategy applicable to
tourism products and this area warrents considerable attention (Das & DiRienzo 2009; Hassan & Craft 2005; Riege & Perry
2000; March 1994; Chon & Olsen 1990).
A number of public and private tourism organisations have been aggressively marketing tourism products and services at
national and international levels. Thus, marketing tourism products is of great interest to a range of stakeholders involved with
the business of tourism (Tribe 2008). However, it should be noted that regardless of the potential, there is a lack of empirical
research into tourism marketing (Li & Petrick 2008; Buhalis 2000; Riege & Perry 2000; Chon & Olson 1990). The research on
tourism marketing has been limited by being conducted within specific settings or about specific products and this applied
research has prevented generic concepts being derived from the research. Spiritual tourists are special interest tourists
undertaking travel to achieve specific objectives and they have very specific needs. It has been suggested that since services
inherently have an intangible nature and they have intensive customer interaction, customer orientation plays a critical role in
terms of commercial success for service organisations (Dann 2009; Wagner, Hennig-Thurau & Rudolph 2009; Daniel & Darby
1997).
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Public and Private Partnership


From a traditional Keynesian policy approach of totally publicly funded projects, to a Monetarist approach of totally privately
funded projects, along with Porters idea which is based on the premise that each group will look after itself almost in
competition on the notion of being strategically desirable cannot be totally suitable today. PPP is justified on the basis that the
gains from bringing together the key players improves quality and availability of goods and services without requiring additional
tax to fund new projects.
Various forms of the Public-Private Partnership (PPP) instrument are now widely used to deliver infrastructure and other public
good type services (Montanheiro, Kuznik & Ochojski 2003, Medhekar 2003 and 2005; Barczyk & Montanheiro 2001). It
accounts for a very diverse range of cooperative or collaborative efforts that, implies a commonality among them which does
not exist (Schaeffer and Loveridge 2002).The term PPP has at least six distinctive meanings. PPP as management reform,
problem conversion, moral regeneration, risk shifting, restructuring the public service and as power sharing (Linder 2000). The
Ministry of Public Affairs in British Columbia (1999) defines PPP in the following terms:
Public-Private Partnerships (PPPs) are arrangements between government and private sector entities for the purpose
of providing public infrastructure, community facilities and related services. Such partnerships are characterised by
the sharing of investment, risk, responsibility and reward between the partners. (cited in Schaeffer and Loveridge
2002, p.170).
Public-Private Partnership defines cooperation between the public sector or government and the private sector, non profit
organisations and international groups and institutions. Partnerships are essential for planning and implementing federal, state
and local government tourism related infrastructure initiatives necessary for supporting sustainable tourism development.
Initially, it was the government sector that played a major role in infrastructure provision in general. Since the privatisation
initiatives begun in the 1980s by the Reagan and Thatcher governments, which were then adopted widely, the public sector
was keen to shift the provision of health, education, telecommunications and transport services etc, to the private sector and
non-profit organisations to keep expenditure under control and reduce debt. Now after the mass privatisations of the 1980s and
1990s, there is a move towards partnerships between the private and public sectors on a large scale in the UK, European
Union, Canada, Australia and more recently in many developing countries. Provision of Infrastructure has been opened up to
competition in many countries developed and developing, encouraging the private sector participation due to high deficit in the
public sector to finance all infrastructure facilities. Thus high congestion cost, budgetary and fiscal deficits, inadequate
provision, poor quality and maintenance of transport infrastructure facilities can be avoided by encouraging Public Private
Partnership (PPP) or Private Finance Initiatives (PFI) similarly adopted by other developed countries(Montanheiro, et al. 2003;
Mbone-Enie 2003, Markell 2009).
The public sector was also criticised for inefficiency, bureaucratic delays and red tape, high costs and budget deficits. It was a
general belief that government had failed in the provision of public goods and services and that the private sector would
provide similar goods of better quality at a lower cost. This led to privatisation initiatives around the world in major developed
countries. But in many cases, privatisation without proper regulation and corporate governance resulted in private sector failure
and the collapse of many large firms. Given these failures, a new form of governance PPP of a cooperative nature is often
necessary for the provision of public goods and services including spiritual tourism destination related infrastructure to achieve
common goals and objectives of sustainable growth of this market segment. Sustainable partnership in spiritual tourism
involves sharing of responsibilities, planning, developing objectives, product innovation, promotion, packaging, and marketing,
undertaking financial risks, accountability and implementing programs.

DISCUSSION
Application of the Marketing 8Ps, to Spiritual Tourism
To ensure that there was a first-order fit between the proposed marketing strategies and the marketing activities selected to
implement each strategy, the discussion of spiritual tourism marketing strategies for specific groups in this paper adopted the
tourism marketing mix classified by Morrison (2002). It has been suggested that despite its simplicity and applicability, the
marketing mix requires modification but it has not been suggested how this modification should take place or how it would
improve the existing concept (Constantinides 2006; Moller 2006; Hakansson & Waluszewski 2005). The elements of the
tourism marketing mix and their application for spiritual tourism is discussed below.

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Public and Private Partnership Approach for Applying the Tourism Marketing Mix to Spiritual Tourism

The product consists of what is being offered to the spiritual tourists and its features and benefits (Yuan, Cai, Morrison & Linton
2005; Lee, Morrison, Lheto, Webb & Reid 2005; Feng, Morrison & Ismail 2003). Although the spiritual tourism product has long
been in existence, with the recent increase in interest in spirituality it seems likely that spiritual tourism is on the move towards
the growth phase (Piedmont & Leach 2002). Adopting the perspective of McKercher (2002), spiritual tourism could be viewed
as a broad concept that involves tangible and intangible products. The tangible items include churches, mosques, temples,
shrines and other centres with a spiritual focus. The intangible products and services include organized spiritual events,
seminars, festivals and gatherings with spiritual motives. Moreover, the spiritual tourism product consists of uni-religious, multireligious and non-religious brands linked to the attitudes and understanding of the spiritual tourists. These products offer
different value to different spiritual tourists, for example, religious fulfilment, understanding various spiritual traditions, religious
or non-religious spiritual growth in a sense of knowing better or getting closer to God, the High Spirit or the Supreme Being.
Product differentiation plays an important role in a competitive advantage strategy although differentiation by itself is not
sufficient to engineer a competitive advantage (Tollin & Jones 2009). Spiritual tourism being part of the broader industry of
tourism, it has to be differentiated from other tourism products. Spending money on product innovation, development,
improvement, promotion and distribution to achieve a dominant position in the market is a critical strategy for spiritual tourism
(Read, Dew, Sarasvathy, Song & Wiltbank 2009).
People play an important role in a marketing strategy for a service product (Dev, Zhou, Brown, & Agarwal 2009, Lee et al.
2005). In spiritual tourism many people interact with the tourists at various places during the experience. These people range
from the travel agents to the destination guides who have the opportunity to transform transaction to relationships (Palmer &
Wilson 2009). These people need to be selected and trained so that they meet tourists expectations. The spiritual destination
guides should be well trained, educated and informed about the religious traditions, history and culture connected to the place
and the visitors. The training programs should also focus on English or any other relevant language skills. Well trained people
during the spiritual tourism process will be able to build good communication channels to facilitate the delivery of messages
between service providers and buyers of spiritual tourism products (Farrell & Oczkowski 2009; Hunt, Arnett & Madhavaram
2006; Lindgreen 2001; Gronroos 1997). An effective interaction of the people with the spiritual tourists will lead to strong
relationship marketing that will result in long term marketing of spiritual tourism of the particular destination (Li & Petrick 2008;
Moliner, Snchez, Rodrguex & Callarisa 2007).
Packaging and programming has become an established element of the marketing mix for services (Alzua et al. 1998;
Morrison, Hsieh & O'Leary 1994). Packaging combines all types of relevant services presented as a single-price offering
(Moliner et al. 2007; Nishimura, King & Waryszak 2007; Morrison 2002). Programming presents the design and delivery of
special activities, events, or programs to motivate customers to spend more and provide more value in a package (Mowlana, &
Smith 1993; Morrison 2002). The spiritual tourism programs should offer spiritual education and knowledge about various
traditions leading to global spiritual unity and growth by seeking God, the High Spirit or the Supreme Being. Packaging for
spiritual tourists should be designed for two issues, the religious and non-religious segments and the individual and group
segments. The group segments need to be further divided into familiar groups such as family or friends, and the unfamiliar
groups where strangers meet and travel together for spiritual growth.
Place refers to the distribution of spiritual tourism products and services to spiritual tourists (Yuan, Cai, Morrison, & Linton
2005; Feng, Morrison & Ismail 2003). Several authors in tourism marketing agree that the distribution of any type of tourism
product is critical for the success of marketing the product (Huang, Chen & Wu 2009; Pearce, Reid & Schott 2009; Smith 2007;
Pearce & Schott 2005). A recent study revealed that tourism distribution intermediaries generally consist of third party
websites, control reservation offices, global distribution systems, travel agents, wholesalers, switch companies, direct sellers
and inbound operators (Pearce, Tan & Schott 2007). The tourism literature suggests that the distribution system is becoming
more and more complex due to the evolution of many new intermediaries (Kavaratzis & Ashworth 2008; Pearce & Schott
2005). The rise of the internet as a distribution channel has been accepted, though it is still more appreciated as an information
channel (Huang et al. 2009). These latest trends have created two major practices in tourism distribution, intermediation and
disintermediation. Intermediation stresses on the expansion of distribution channels, while disintermediation emphasises upon
the contraction of distribution channels (Clerides, Nearchou & Pashardes 2008). In spiritual tourism, the operators need to
carefully select only one option depending upon the destination. For example, for spiritual tourism to Mecca or the Vatican,
intermediation should be used. While, for spiritual tourism to the shrine of a specific Catholic Saint or a Shiite Muslim,
disintermediation would be preferred.
Promotion of tourism products involves communication between tourists, tourism operators and other stakeholders (Feng,
Morrison & Ismail 2003; Yuan, Cai, Morrison & Linton 2005). Effective communication develops product awareness and
persuades tourists to purchase specific products (Scott 2008; Iyer, Soberman & Villas-Boas 2005; Buhalis 2000; Mahajan &
Muller 1999). Advertising, personal selling, sales promotion, merchandising, public relations and publicity are tools of promotion
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Volume 8 Winter 2009

and should be selected thoughtfully by the tourism operators. Various types of promotional techniques; above the line
(television, radio, the internet and print media) and below the line (participation in tourism fairs, festivals and conferences)
could be used for marketing tourism (Buhalis 2000). The adoption of both above and below the line promotional techniques has
been suggested for reaching particular spiritual tourism market segments. Above the line techniques would include
participation in travel programs on television, advertisements in religious and spiritual magazines and on relevant websites.
Below the line techniques would involve participation in multi-faith/religious/cultural festivals and seminars to attract the spiritual
tourism coming from different back grounds.
Pricing is critical as it underpins the profit element in a marketing strategy (Sousa & Bradley 2009; Cassidy & Guilding 2007;
Jiang 2007; Lee et al. 2005; Pellinen 2003; Morrison, Hsieh & O'Leary 1994). The literature suggests that, in general, pilgrims
or religious tourists are not price conscious (Timothy & Olsen 2006; Sharpley & Sundaram 2005; Shackley 2002; Eade 1992;
Rinschede 1992). Many authors have proposed various types of pricing techniques that could be applied for tourism products
but it has been recognised as a complex process (Sousa & Bradley 2009; Cassidy & Guilding 2007; Pellinen 2003; Buhalis
2000). This paper recommends using the price bundling strategy in order to cater for all spiritual tourists visiting for various
reasons. It is further suggested to select from the two options of discriminatory pricing techniques to attract the regular spiritual
tourists, and target pricing to attract the specific tourist segments interested in spirituality and related affairs (Sousa & Bradley
2009; Cassidy & Guilding 2007; Buhalis 2000).
Partnership brings about operating efficiencies among various stakeholders involved in the spiritual tourism industry; the
partnership strategy must benefit all partners (Tilson 2005; Feng, Morrison & Ismail 2003; Augustyn & Knowles 2000; Alzua,
OLeary & Morrison 1998; Selin & Chavez 1995). A means of ensuring that all the significant partnership elements have been
incorporated in the partnership strategy is to work through the five stage partnership model checklist (Selin & Chavez 1995).
The first stage requires the development of a shared common vision, an examination of existing networks, determining
leadership and setting incentives. The second stage advocates problem setting based upon recognition of interdependence
and common problems. The third, direction setting stage consists of setting ground rules for goal achievement, searching for
information on options and organising of sub-groups. The fourth stage of partnership structure establishes the relationship
between the partners, linking them specifically to a monitoring system. The outcome stage delineates the programs, results
and rewards desired from the partnership strategy. While presenting partnerships as part of marketing strategies for spiritual
tourism, the public and private partnerships between the tourism operators, government agencies, destination managers local
community and religious organisations are very significant and their applications are discussed in the next section. The
important role of PPP as a critical element of the marketing mix for spiritual tourism is an outstanding contribution of this
research paper.

PPP Approach as a Strategy for Marketing of Spiritual Tourism


The application of public and private partnership approach for tourism in general (McKercher 2002; Tilson 2005; Markell 2009;
APEC 2002; Montanheiro, et al. 2003; WTO 2009; GOI 2008) and spiritual tourism in particular, is critical for planning, product
and destination development, infrastructure provision, pricing, determining demand, promotion, packaging and programming.
The growing demand for tourism and need for spirituality at a time of war, economic instability, natural disasters and global
financial crisis, which is healing to the human soul as well as the increasingly high cost of provision of meeting infrastructure
needs by the public sector, requires PPP strategy for marketing and long term sustainability of spiritual tourism. Public and
private sector partnership application to the tourism industry in general is very recent since 2002, mainly due to the competitive
nature of the tourism industry, as it is assumed that it may escalate the cost (OECD 1997 & 2006). Moreover, the application of
PPP to spiritual tourism marketing is a unique aspect of this research study. Proper application of PPP brings the stakeholder
resources together in terms of expert knowledge, capital and innovative ideas. The tourism industry benefits from PPP
particularly in terms of coordination, organising, planning, management, quality delivery of the product and problem solving by
identifying common goals, problems, partnership programs to achieve these goals and evaluation of partnership programs,
outcomes and incentives. This study suggests that PPP enhances the competitive advantage of the spiritual tourism product
through collaboration, and partnerships between the various stake holders: public( government and its departments and
Government Business Enterprises) , private, local community, business organisations and international bodies such as (World
Tourism Organisation (WTO), World Travel and Tourism Council (WTTC) , Asia Pacific Economic Cooperation (APEC) , Asia
Pacific Tourism Association (PATA) NGO and industry (UNESCAP 2004; Bramwell and Lane, 2000).
Spiritual tourist destinations such as Mecca, Vatican in Rome, Lady of Fatima in Portugal, Jerusalem and other religious places
around the world, require private finance initiatives (PFI) and public and private partnerships (PPP) (Augustyn & Knowles
2000). These will support the provision of tourist infrastructure to underpin the economys growth, international
competitiveness, environmental and sustainable development of spiritual tourism destinations as a niche market. According to
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Public and Private Partnership Approach for Applying the Tourism Marketing Mix to Spiritual Tourism

Tilson (2005), a partnership approach that is church-state collaboration where the community organisations, companies,
government representatives, government organisations, come together to form a collective and consensual approach to
investment into the communitys future is essential for the success of spiritual destinations. The main function of the public
sector is to provide key infrastructure and supporting services, innovation, training, education, employment and destination
management, pricing, promotion and marketing of the (Elliott 1997; Mbone-Enie 2003) spiritual tourist destination for its longterm sustainability and economic viability.
Support from the private sector in the development and management of, and provision of essential spiritual tourism products
such as hotel accommodation, travel-airlines, tours, retail shops meals and handicrafts, restaurant, safety and security etc to
the spiritual tourist is critical. For example, South Asia foot-step of Lord Buddha circuit integrated with eco-tourism has been
identified by the ADB (2008) report, which will appeal to spiritual tourist and Buddhist pilgrimage, representing 376 million
Buddhists, which is approximately 6% of world population. The governments of South Asian countries along with the private
sector are working in partnership in developing and promoting this new product. This paper also suggests that spiritual tourism
is going to treble in the next 20 years and PPP and PFI for infrastructure investment is necessary. Wide range of stake holders
(see Table-1 ) from the demand side and from the supply side can be categorised (APEC 2002, p.2) to provide investment in
infrastructure, through the development of budget hotels as well as other tourist facilities and amenities required for spiritual
tourist.
Table -1: Stakeholders in the tourism industry
Supply Side (SS)

Demand Side

Category

Examples

Resource owners

Traditional landholders

Resource managers

National park managers

Providers of infrastructure

Construction, design, power, gas, water, waste treatment, roads

Planners & development control

Local govt authorities

Deliverers of product

Enterprise operators-hotels, airlines, hire cars, attractions, tour


operators, travel agents, farm stays, convention centres,
restaurants, museums, sporting ( world cups) and religious events
e.g. Hajj, youth catholic congress

Destination developers and marketers

Tourism commissions; local government

Employees

Managers, hospitality, planning , communication, ICT, Finance,


construction

Tourist

Domestic and international- e.g. package holidays, eco-tourist,


business travellers, backpackers visiting friends and relatives,
conferences, cultural, spiritual and medical tourists.

Source: Adapted from (APEC, 2002, p. 2)

Long term sustainability of any tourism project and particularly spiritual tourism cannot be achieved without PPP between the
various stake holders. Zamani-Farahani & Henderson (2009) in their paper discuss the effects of Iran and Saudi Arabias state
religion-Islam on tourism development, policies, management, marketing where PPP is essential for its success along with
community involvement in Muslim countries. In 2008, nearly 1.73 million foreign pilgrims performed Haj along with
approximately 750,000 Saudi pilgrims. Increase in demand for religious tourism from worlds 1.8 billion Muslims continues to
drive Saudi Arabia real estate growth in Jeddah for Pilgrims visiting the holy cities of Mecca and Medina to perform Umrah and
Haj are expected to reach 8 million by 2010 according to Saudi Government. Given the high, risk free and guaranteed return on
investment according to a study carried out by Proleads research house for Cityscape Saudi Arabia, throughout the Kingdom of
Saudi Arabia, there are 812 active projects in real estate, leisure and entertainment and infrastructure sectors with a total
budget of $543 billion, supporting spiritual tourism market.
Saudi Arabia's real estate sector now contributes an estimated 5.1%, or SAR 55 billion, to the kingdom's GDP, with forecasts
for further growth of 5.8% by the end of this year. Land that surrounds the holy sites is being developed and the property
market is now attracting residential, commercial infrastructure and real estate such as roads, railways, ports, hospitals clinics
retail etc given that in 2008, 1.5 million pilgrims arrived by air, 131,000 by land, and nearly 23,000 by sea. Therefore PPP has
promising opportunities for developing spiritual tourism related infrastructure (Cityscape 2009). Across the Mena region there is
an increasing realisation that spiritual tourist infrastructure needs cannot be met by the public sector alone and (PFI) in
infrastructure as well as PPP is necessary. Most countries preferred model of private involvement goes beyond mere
subcontracting, but stops short of full privatisation. PPP strategy with the public and private partners sharing project risks and,
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Volume 8 Winter 2009

in many cases, asset ownership, is increasingly applied. This process should be strengthened by ongoing reforms in public
sector transparency, sound fiscal practices, regulatory reform and a commitment to open markets for the success of PPP PFI
in the countries participating in the MENA-OECD Initiative (OECD 2006).
In case of India, there are many examples of successful PPP for spiritual tourism initiatives. From the Himalayan spiritual
destinations of Buddhist monasteries and Hindu temples such as Vaishnu-Dewi in Kashmir to the temples, mosques, sikh
temples and colonial churches in India, is seen as having great potential for the growth and development of spiritual tourism
destinations by the government at the state and central level for employment generation and earning foreign exchange
revenue. World Tourism Organisation (WTO) prepared a holistic infrastructure plan for PPP, with the Government of India,
State Government of Uttarakhand, Tourism Board of Uttarakhand to promote eco tourism, adventure tourism, and spiritual
tourism, as three mantras to be followed up by the state, so that adventure, nature and spiritual experience all can be
enjoyed by the Indian and international tourist (Sagar 2007; GOI 2008). Further, states of Kerala, Rajasthan and Goa, have
also capitalised on marketing eco-tourism, medical and spiritual tourism and recognised the benefits PPP can bring to the state
through mutually beneficial partnerships (Varkey 2006; Chandran 2007; GOI 2008). The state Government of Rajasthan is also
actively involved in organizing new festivals to promote Rajasthan as a 'Year Round Tourism Destination', by implementing the
PPP model in key tourism projects in the state, offering historical monuments and temples for adoption to private sector etc
(GOI 2008; GOR 2009). Similarly in the State of Uttar Pradesh places like Varanasi-Sarnath, Bodhgaya, Rajgir and the
Nalanda triangle is developed to be promoted on a PPP model for spiritual tourism besides yoga, spiritual and meditation
ashrams which form part of spiritual experience to present India as a symbol of religious destinations with a spiritual trial
(Varkey 2006; GOI 2008).
The State Government of Jharkhand has given priority to the development, promotion and marketing of its eco, spiritual and

rural tourism segments through PPP, to put it on the global tourist destination map by 2010.On average 1.25 million domestic
tourists from the states of West Bengal, Orissa, Bihar and Madhya Pradesh visit Jharkhand, of which one million are spiritual
tourist visiting the temples of Deoghar or Baidyanath Dham. The state government along with the private sector is constructing
star category budget accommodation, as well as improving and investing in road-rail infrastructure network, electricity and telecom connectivity to the state capital under the PPP model. To attract foreign tourists into Jharkhand region, the state
government along with the private sector has not only embarked on an aggressive marketing and tourism promotion exercise
by participating at major travel and tourism conferences such as World Tourism Market London in 2008 and ITB Berlin event in
2009, but also identified the famous Ranchi-Netarhat-Betla circuit for developing an inter-religious circuit in Parasnath temple
situated at 4431 ft above sea level about 190 Km from its capital Ranchi , the most sacred place for the believers of Jain
religion and attracts Jain tourists throughout the year (Chavan 2008).
Application of PPP approach to 8 Ps of marketing mix should be applied and integrated in such a way that the objective of
planning, developing, promoting and marketing spiritual tourist destinations is achieved in a sustainable manner. To innovate
and develop this new product (spiritual tourism and the goods and services that complement spiritual tourism) it is important to
have a PPP marketing strategy by involving all public and private stake holders (see Table-2). Market research along with PPP
is required to identify the key customers, people who are going to generate demand for the spiritual-religious tourist product
locally, nationally and internationally as well as the suppliers of the various spiritual tourist products. PPP is necessary to get
the support of the local people as well to open their religious places of worship of historical importance to the tourist from all
over the world and capitalise on their spiritual significance. Further educational institutions also play a key role in providing
training and education to travel agents, tour guides and operators about the spiritual destination, its geography, history and
culture in partnership with the religious organisations and scholars.

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Public and Private Partnership Approach for Applying the Tourism Marketing Mix to Spiritual Tourism

Table-2: Applying PPP to 8Ps of Marketing


8 Ps of
Morrison:
Tourism
marketing
mix

Examples of 8 ps

Applying Public & Private Partnership Approach

Product

Tangible and intangibles, Development of product Spiritual


destinations, Church, Mosques, souvenirs (pictures, religious
beads statues), multi faith/ religious/cultural annual festivals,
events, fairs and conventions.

PPP is essential (collaboration, coordinated marketing, cooperation


& consensus) to develop product, innovate, restore, preserve and
market, cultural, historical and spiritual monuments and destinations
for tourism. Investment in Infrastructure, human and capital (tangible
and intangible).Improve and enhance product quality.

Price

Entry ticket, air-road travel cost, accommodation, Price


Discrimination, cost-plus pricing, average cost &, marginal
cost pricing, competitive pricing, bundling pricing.

PPP for determining the price for domestic and international tourists,
discriminatory pricing for spiritual tourists and target pricing for
specific tourist groups & related affairs. Government and the private
tourism product operators and providers to have consensus on
pricing price discrimination for different groups ( so every one can
visit)

Place

Distribution of products and services, third party websites,


control reservation office, global distribution systems, travel
agents, wholesale and retailers, switch companies, direct
sellers and inbound-outbound tourism operators of spiritual
tourist destinations.

Selection of disintermediation or intermediation for distribution of


spiritual tourism product. PPP to develop infrastructure facilities
(physical, building transport, roads as well as website, brochures
etc) needed to support the Spiritual tourism business at the point of
destination as well as at the source of tourist to provide necessary
travel services for planning the trip.

People

Local, national and international tourists. Spiritual tourism


operators involved in spiritual tourism processes; travel
agents, religious leaders, family and peer groups & tour
guides at the source as well as destination.

Govt to provide infrastructure investment such as road, rail airways


(easy access) for the private sector providers of accommodation
restaurants, retail business to function well. Training of the tourism
operators, guides etc-HRM

Promotion

Advertising religious destinations, places of worship, annual


religious festivals and conventions, conferences, promotion
objectives, message, media and budget. Usages of TV, radio
programs, relevant magazines, travel news and internet
websites.

PPP required at all levels by participating in trades conventions and


world tourism fairs and conferences. Marketing strategy off and online involving all stake holders involved in spiritual tourism business.
Coordinated marketing by web-sites, posters, print, TV& radio-above
the line and fair, festivals & conferences below the line.

Packaging

Packaging spiritual destinations along with air fare, overnight


in transit stop over visits to spiritual places, accommodation,
business travel and conferences, adopting product
differentiation (religious and combined with non-religious
segments, price discrimination (individual, pensioners, adults,
children, families, strangers and groups on a spiritual
journey).

PPP for packaging and branding spiritual tourist destinations and


tours for example to Mecca, Kerala as destination for medical and
spiritual Tourism, Rajasthan as year around tourism destination,
state of Punjab and Uttar Pradesh have been developed and
marketed as spiritual tourist triangles, Banding Greece, through
PPP measures.

Programming

Information about spiritual programs to attract people to


specific destinations and events to understand global
spirituality, for global peace and spiritual culture and
traditions. Preparing special travel itinerary by travel agents
(brochures) similar to other types for skiing, cruising etc
available in detail. Program for Hajj, Hindu religious festival in
India, carnivals of various catholic saints, world religious
conventions etc.

Education and training in spiritual tourism education, religious


studies, history and culture for the tourism operators, web site
designers and tour guides.

Partnership

Government departments & agencies (tourism, religious


affairs, cultural heritage, travel and communication,
infrastructure rail-road, airways) Private sector (businesses,
wholesale and retailers of tourism service providers, religious
organisations, destination managers. Partnership essential for
identifying common goals, problems, partnership programs to
achieve these goals and evaluation of partnership programs,
outcomes and incentives.

Enabling partnership with private sector, NGOs and international


organisations. PPP between Governments at all levels, Government
departments, Government business enterprises, WTO, private
sector businesses, NGO, local business communities, local
population, police, defence force, Religious organisations and
institutions, community organisations, educational institutions, travel
agents, key religious leaders, private business philanthropy and
support for planning, development, implementation, pricing,
maintaining, preserving and marketing cultural heritage and spiritual
destinations to the world.

Source: (Designed for this paper)

Price determines the value and quality of the spiritual tourist destination that the consumers are willing to pay compared to
other substitute type of tourist activities available. People may be willing to pay $5000 or more for a specialist tour to holy place
of Jerusalem, Mecca, Lady of Fatima or Vatican, because the perceived value, benefit and spiritual experience gained will be
70

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Volume 8 Winter 2009

more than the cost of the tour to the spiritual tourist. PPP is essential to determine the price in case of spiritual destinationsplace, so that all people (low or high income) have ability to pay to consume these spiritual tourist products and have tangible
and intangible spiritual experience. Thus resorting to price discrimination in case of spiritual tourism is essential as it will
provide access to all income groups based on their ability to pay, otherwise people belonging to low income groups can be
excluded from such spiritual experience. Generally, a unique destination does command a high value; however, in case of
spiritual destinations, in spite of being unique, like a visit to Mecca, or Vatican, PPP is essential to set different prices so that
people from different groups (age, income) can have spiritual experience and are motivated to visit. PPP can be used as a
distribution channel (direct to the tourist-consumers and indirectly through intermediaries like tourism service and providers and
operators and travel agents, online advertising for package tours etc) to market the spiritual destination in the local, domestic
and international market to the spiritual-religious oriented tourist. Promotion, packaging and programming the spiritual
tourism segment as a new product by itself and bundling with either cultural, heritage, historical or eco-tourism destinations to
the niche market, requires public and private partnership at all levels to get the spiritual message across to all potential spiritual
oriented consumers as well as tour operators nationally and internationally. The aim is to target these consumers and inform
and educate them about the spiritual tourism destinations and tours, complementary goods (product and services available)
price etc so that they finally make their spiritual journey.

CONCLUSION
Spiritual tourism is a fast growing global phenomenon. The tourism market has been observed to be growing world wide and
its the fifth largest in case of Australia after iron-ore, coal, education and gold (ABS 2007); a slowdown in tourism requires
tourism operators to apply different marketing strategies for business success. Due to the lack of any literature on spiritual
tourism marketing, the literature from the parent marketing discipline was adapted to assist in the development of appropriate
spiritual tourism marketing theory. The spiritual tourism product, as a type of special interest tourism, has the potential for
growth since interest in spirituality related matters is on the rise. New pilgrimage routes are developed and old pilgrimage
routes upgraded, revived and marketed through PPP in South Asia to promote the sustainability of spiritual tourism (ADB
2008).
In agreement with the OECD (1997) conference on partnerships in tourism, it was concluded that the establishment of public
and private sector partnerships is instrumental as it is closely linked with the improvement of the effectiveness of national
tourism administrations (NTAs) and national tourism organisations (NTOs). PPP further is useful for implementing tourism
policies more effectively in the areas of employment, education and marketing and other areas of tourism policy. Governments
have to play an important role in new ways of organising this co-operation, notably by defining a clear national strategy for
tourism policy which will stimulate and guide innovative partnerships, develop new products and give incentives to all individual
partners to participate in the development. Partnerships should seek to establish a balance between competition and cooperation, focusing on the advantages of economies of scale and the creation of synergies between the partners in marketing
of spiritual tourism products. European Union Commission (2007) also concluded in its report that in the field of cultural
heritage management, Public-Private Partnerships (PPP) is a promising new governance mechanism to balance increasing
pressure of market forces on the one hand and governments responsibilities in protecting public cultural values on the other
hand.
Moreover, spiritual tourists tend to travel to satisfy their specific needs even when the economic, financial and political situation
is not favourable. This paper presents the view that considerable potential exists for spiritual tourism product if marketed
effectively. In this research, the PPP framework is presented as one approach to effectively apply the tourism marketing mix for
marketing spiritual tourism. Future research would involve an attempt to empirically test the application of the PPP and tourism
marketing mix for spiritual tourism by adopting a quantitative as well as qualitative methodology. In the next stage a research
survey instrument will be designed and distributed to selected public and private tourism operators in India, Pakistan, Italy and
Thailand to test the application of the PPP to tourism marketing mix for the product of spiritual tourism as suggested in this
paper.

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75

Organizational and Personality Effects on Job Stress: The Case of Iranian Managers

ORGANIZATIONAL AND PERSONALITY EFFECTS ON JOB STRESS


(THE CASE OF IRANIAN MANAGERS)

Reza Shafiezadehgarousi
Azad University Saveh Branch, Iran
ABSTRACT
The two main objectives of this study are: first, to determine the influence of organizational variables (conflict, blocked career,
alienation, work overload and unfavourable work environment) and second, to examine the effects of personality variables
(neuroticism, extraversion, openness, agreeableness and conscientiousness) on job stress among managers working in the
vehicle manufacturing sector of Iran. Analyses of 285 responses using hierarchical regression revealed that four of five
organizational variables (blocked career, alienation, work overload and conflict) had significant positive effects on job stress.
In terms of the personality traits, neuroticism and conscientiousness were found to be significantly and positively related to
stress. Extraversion and agreeableness, on the other hand, had significant negative effects on job stress. Theoretical and
managerial implications of the findings are discussed.
Keywords: Personality, Job Stress, Organizational Effects, Work Environment

1. INTRODUCTION
Job stress has long been an important concept in the study of employees responses to their work surroundings. The many
challenges in the work environment, characterized by heightened competition, lack of time, lack of space, continuous
technological development, conflicting demands from organizational stakeholders (Hall and Savery, 1986), increased use of
participatory management and computerization (Murray and Forbes, 1986), greater uncertainty and others have resulted in
higher job stress. In the era of globalization, survival of firms particularly manufacturing ones depends on their ability to
compete effectively. Managers in these organizations would be working under highly stressful circumstances. The findings by
Jestin and Gampel (2002) provide empirical support for this phenomenon.
In Iran, the same phenomenon may hold true. This is because the weakening of the global economy during the last several
years has resulted in substantial downsizing and retrenchments within the vehicle manufacturing sector which accounted for 60
per cent of the countrys total exports (Central Bank of Iran, 2001). Although there have been several studies on job stress
within the Iran context (Yahya, 1998; Nasehi and Ramayah, 2006), these studies have been somewhat fragmented.
Specifically, the objectives of this study are: (1) to gauge the influence of organizational variables (conflict, blocked career,
alienation, work overload and unfavourable work environment) and second, to examine the effects of an individuals personality
traits (neuroticism, extraversion, agreeableness, openness and conscientiousness) on job stress.

2. REVIEW OF LITERATURE
2.1. Organizational Sources of Stress
Job stress has been defined as the non-specific response of the body to any demands made upon it (Selye, 1976). It is
considered to be an internal state or reaction to anything a person consciously or unconsciously perceive as a threat, either
real or imagined (Clarke and Watson, 1991). Robbins (2001) defines stress as a dynamic condition in which the individual is
confronted with an opportunity, constraint or demand related to what he or she desires and for which the outcome is perceived
to be both uncertain and important. Stress can be caused by environmental, organizational and individual variables (Matteson
and Ivancevich, 1999; Cook and Hunsaker, 2001).
Organizational variables have been known to create stress for employees at the workplace (Greenhaus and Beutell, 1985).
Although there are numerous organizational sources of stress, this study focuses on only five, namely conflict, blocked career,
alienation, work overload and unfavourable work environment. Role conflict has been found to have a positive relationship with
job stress (Roberts, Lapidus and Chonko, 2004). When individuals are required to play two or more roles that work against
each other, they are likely to experience job stress. This is because role conflicts create expectations that may be hard to
76

R. Shafiezadehgarousi

Volume 8 Winter 2009

reconcile. Previous scholars (Foot and Venne, 1990; Rahim, 1996) discovered a positive relationship between barriers to
career advancement and job stress. When employees perceived a lack of career opportunity, they are likely to feel uncertain
about their future in the organization, which in turn, is likely to induce stress.
Working alone on ones job without social support from ones peers and supervisors would lead to job stress (Mirovisky and
Ross, 1986; Thoits, 1995; Eugene, 2007). According to Kanungo (1981), when workers believe there is a separation between
their own job and other work related context, a sense of frustration that finally manifested in a behavioural state of apathy is
likely to occur. This is particularly intense for employees with high social needs.
Work overload, both quantitatively and qualitatively, has been empirically linked to a variety of physiological, psychological and
behavioural strain symptoms (Beehr and Newman, 1978; Miller and Ellis, 1990; Roberts et al., 2004). According to Greenhaus,
Bedeian and Mossholder (1987), heavy workload lowers ones psychological wellbeing resulting in job stress.
Additionally, a work environment associated with unpleasant organizational climate, lack of privacy, a lot of hassle in
conducting work and physical distractions can result in higher stress (Miller and Ellis, 1990; Eugene, 2007). Therefore, the first
hypothesis posited for this study is:
H1: Organizational variables (conflict, blocked career, alienation, work overload and unfavourable work environment) will
be positively related to job stress.

2.2. Personality Traits as Sources of Stress


Past studies have indicated the potential impact of personality traits on job stress (Goldberg, 1993; Deary and Blenkin, 1996).
Over the years, five personality dimensions that have been identified as being able to explain a majority of the variance in
behavioural outcomes are neuroticism, extraversion, openness, agreeableness and conscientiousness (John and Srivastava,
1999).
Neuroticism involves a sense of emotional instability and negative affect (Costa and McCrae, 1985; John and Srivastava,
1999). People with neuroticism traits are those who experience more negative emotions, which would be reflected in poor job
attitudes and high levels of job stress. According to Tellegen (1985), neuroticism functions as a warning system, activated by
perceptions of environmental uncertainty and tends to interfere with ones ability to adapt. Thus, individuals with elevated levels
of neuroticism would be expected to be associated with higher stress since they are more likely to view stimuli as a threat to
them. Prior studies have provided empirical evidence on the positive relationship between neuroticism and job stress (Tellegen,
1985; Deary and Blenkin, 1996; Birch and Kamali, 2001).
Extraversion relates to social facility, ambition, energy, enthusiasm, dominance and positive affectivity (Watson and Clark,
1997). Individuals who are high in extraversion exert more leadership, being more physically and verbally active and are more
friendly and outgoing around others than most people tend to be (Costa and McCrae, 1992). According to Moberg (2006),
extraversion taps the individuals predispositions to view his/her actions as positive, emotionally satisfying and effectual. Such
information seems to suggest that individuals who are high on extraversion are more likely to experience lower stress since
they are more likely to perceive stimuli in a positive and favourable manner. Birch and Kamali (2001) discovered that
extraversion had a negative relationship with job stress.
Openness involves intellectual activity, cultural sophistication, thoughtfulness, originality, imagination, need for variety and
preference for cognitive complexity (McCrae, 1996). According to Costa and McCrae (1992), the openness factor includes
behaviours that convey a willingness to entertain and experience novelty, whether in interests, people, situations, values or
ideas and a sense of divergent and creative thinking. According to Moberg (2006), individuals who have high openness are
less likely to emphasize rules, order and conformity, are more flexible, and find it easier to understand others point of views.
Hence, one would expect individuals with elevated levels of openness to be associated with lower stress since they are able to
adapt to the different environmental stimuli. Agreeableness reflects the ability to be kind, considerate, likeable, cooperative and
helpful (Graziano and Eisenberg, 1997). People who are high in agreeableness are sympathetic, helpful and cooperative,
whilst those who are low in agreeableness are antagonistic, skeptical and competitive (Costa and McCrae, 1992). According to
Moberg (2006), individuals who have high agreeableness are more likely to emphasize cooperation and consideration for
others. Since highly agreeable individuals tend to be friendly to other people, they are more likely to experience lower stress.

77

Organizational and Personality Effects on Job Stress: The Case of Iranian Managers

Finally, conscientiousness has been defined as social conformity and impulse control, cautiousness, orderliness, persistence,
dependability, responsibility, carefulness and preference for predictability (Hogan and Ones, 1997). Those who are high in
conscientiousness are thought to exhibit high levels of perseverance, low impulsiveness, a strong disposition toward
achievement and a responsible orientation toward work (Moberg, 2006). Costa and McCrae (1992) viewed conscientiousness
as a group-based responsibility relating to activities of planning, organizing and task completion. Deary and Blenkin (1996)
found that conscientiousness contributed to positive feelings of personal achievement since highly conscientious individuals
have a greater inclination to apply themselves to solving the practical aspects of a stressor. Moberg (2006) added that
individuals with high conscientiousness are able to address conflict situations promptly and resolve disputes in an organized
fashion that benefits the group. Such information seems to suggest that conscientiousness would be negatively related to job
stress.Hence, the second hypothesis conjectured in this study is:
H2: Personality traits (extraversion, agreeableness, openness, conscientiousness except neuroticism) will be negatively
related to job stress.

3. METHODOLOGY
3.1. Subjects
Participants in the study consisted of managers attached to 20 randomly selected vehicle manufacturing firms (both local and
foreign) in Penang, Iran. A total of 400 questionnaires were distributed with the help of company officials in proportion to the
population of managers in these firms. Respondents were given three weeks to answer the questionnaires.

3.2. Measurements
The predictor variables in this study consist of organizational and personality variables. Organizational variables include
conflict, blocked career, alienation, work overload, and unfavourable work environment. Organizational variables were
measured using a 25-item questionnaire (Davis, Elizabeth and Matthew, 2000). Each organizational stressor was measured
using 5 items based on a 5-point Likert response format ranging from (1) Strongly Disagree to (5) Strongly Agree. The mean
scores were computed by averaging the scores for all the items associated with a particular stressor. Another set of
independent variables relates to personality. Personality variables include extraversion, neuroticism,agreeableness, openness
and conscientiousness. These five dimensions of personality were gauged using 60 items derived from the NEO Five Factor
Inventory (Costa and McCrae, 1992). Each personality trait was assessed using 12 items. A 5-point scale ranging from (1)
Strongly Disagree to (5) Strongly Agree was utilized. The mean score for each personality trait was obtained by averaging
the scores for each of the 12 items. On the other hand, the criterion variable in this study is job stress.
Job stress was measured using a 20-item screening inventory (Goldberg and Hillier, 1998) based on a 5-point scale ranging
from (0) Never to (4) Almost Always. The job stress level for each respondent was computed by summing the total score for
all the 20 items. Subsequently, the total scores obtained were averaged in order to gauge the overall job stress level for the
sample in accordance with Davis et al.s (2000) suggestion as follows: 025 (coping adequately with job stress), 2640
(suffering from job stress), 4155 (suffering from high job stress) and 5680 (experiencing very high job stress or burnout).
Job stress can be influenced by personal factors (Matteson and Ivancevich, 1999). Six personal variables (age, marital status,
number of children, working experience and job tenure) were controlled in the statistical analysis following previous
researchers (Cooper, Kirkaldy and Brown, 1994; Roberts et al., 2004; Smith, Stanley and Frank, 1998). The first and second
hypotheses were tested using a two-step hierarchical regression (Cohen and Cohen, 1995) where the control variables were
entered in the first step, followed by the main effects of the five organizational variables (conflict, blocked career, alienation,
work overload and unfavourable work environment) plus the five personality variables (neuroticism, extraversion,
agreeableness, openness and conscientiousness) in the second step.

4. RESULTS
4.1. Response and Profile of Respondents
At the end of the stated period, of the 400 questionnaires sent out, 285 useable responses were obtained representing a
response rate of 71.25 per cent. The sample profile is shown in Table 1.

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R. Shafiezadehgarousi

Table 1:

Volume 8 Winter 2009

Sample Profile

Demographic

Categories

Gender
Gender

Age Less Than

Frequency

Percentage

Male

162

56.8

Female

123

43.2

30 years

108

37.9

30 to 35 years

101

35.4

36 to 40 years

66

23.2

41 to 45 years

10

3.50

Marital

Single

136

47.7

Status

Married

149

52.3

None

144

50.5

One

42

14.7

Two

72

25.3

Three

27

9.50

Less than 1 year

48

16.8

1 to 5 years

83

29.1

6 to 10 years

91

31.9

11 to 15 years

53

18.6

More Than 15 years

10

3.50

110

38.6

1 to 5 years

83

29.1

6 to 10 years

87

30.5

11 to 15 years

1.80

Number of
Children
Work

Experience

Job

Less than 1 year

Tenure

As shown in Table 1, the majority of the sample (56.8 %) consisted of males. Almost all of the respondents (96.5 %) were 40
years and below. The majority (52.3 %) of them were married, of whom 50.5 per cent had no children. In terms of work
experience, 54 per cent had been working for more than six years. As for job tenure, 67.7 per cent of the respondents had
been in their current job for five years or less. Table 2 depicts the reliabilities of the survey instruments.
Table 2:

Reliability Coefficients of the Instruments


Variable

Cronbachs (Alpha Value)

Conflict

0.87

Blocked Career

0.86

Alienation

0.89

Work Overload

0.85

Unfavourable Work Environment

0.80

Neuroticism

0.96

Extraversion

0.95

Agreeableness

0.91

Openness

0.95

Conscientiousness

0.94

Job Stress

0.92

As observed from Table 2, the instruments used in this study were reliable, with coefficients ranging from 0.80 to 0.96, which
exceeded the minimum acceptance level of 0.7 (Nunnally, 1978). The mean scores and standard deviations for each study
variable are shown in Table 3.

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Organizational and Personality Effects on Job Stress: The Case of Iranian Managers

Table 3:

Mean Scores and Standard Deviations of the Study Variables


Variable Mean Std.

Deviation

Conflict

2.667

0.716

Blocked Career

2.806

0.647

Alienation

2.652

0.839

Work Overload

3.011

0.736

Unfavourable Work Environment

2.506

0.663

Neuroticism

3.146

0.910

Extraversion

2.989

0.720

Agreeableness

2.782

0.631

Openness

2.860

0.704

Conscientiousness

2.973

0.735

45.382

10.721

Job Stress

From Table 3, it can be seen that the mean value for each of the organizational variables ranges from 2.51 to 3.15, with a
standard deviation of 0.63 to 0.91. The mean score for job stress was 45.38 with a standard deviation score of 10.72. Based
on Davis et al.s (2000) interpretation, this score indicates that respondents in this study, on the average, experience high job
stress.
The results of the two-step hierarchical regression undertaken to test the first and second hypotheses of this study are
depicted in Table 4.
Table 4:

Results of Hierarchical Regression Analysis

Independent Std Beta


Std Beta Variable

(Step 1)

(Step 2)

Control Variables
Age

0.207 *

-0.172 **

Marital Status

-0.116

0.142 *

Number of Children

0.301**

-0.225

Work Experience

-0.011

-0.058 **

Job Tenure

-0.705**

0.181 **

Model Variables
Conflict

0.126 *

Blocked Career

0.395**

Alienation

0.298**

Work Overload

0.118**

Unfav. W. Environ.

-0.011

Neuroticism

0.579**

Extraversion

-0.131**

Openness

0.032

Agreeableness

-0.131**

Conscientiousness

0.133 *

R2

0.370

0.891

Adj R2

0.358

0.884

R2 Change

0.370

0.521

Sig. F Change

0.000

0.000

p < 0.05, p < 0.01

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R. Shafiezadehgarousi

Volume 8 Winter 2009

As shown in Table 4, when the five personal variables were entered into the regression equation in the first step, the coefficient
of determination (R2) was found to be 0.37 indicating that 37 per cent of the variance in job stress is explained by the
demographic variables. Specifically, age and number of children had significant positive relationships with job stress whereas
job tenure had a significant negative relationship with job stress. In step 2, by adding the ten independent variables, R2
increased to 89.1 per cent. This R2 change (0.521) is significant. This implies that the additional 52.1 per cent of variance in job
stress is explained by the organizational variables (conflict, blocked career, alienation, work overload and unfavourable work
environment) and personality variables (neuroticism, extraversion, openness, agreeableness and conscientiousness).
As for the independent variables, eight out of the 10 organizational and personality variables were found to have an impact on
job stress. Of the organizational variables, blocked career (b = 0.395), alienation (b = 0.298), conflict (b = 0.126) and work
overload (b = 0.118) were found to have significant and positive relationships with job stress. Unfavourable work environment,
however, had no effect on stress. These results provide partial support for the first hypothesis of the study. As for the
personality variables, four of five dimensions had significant relationships with j ob stress. Specifically, neuroticism (b = 0.579)
and conscientiousness (b = 0.133) were found to have significant and positive relationships with job stress. In contrast,
extraversion (b = 0.131) and agreeableness (b = 0.131) had significant and negative effects on stress. Openness, however,
had no impact on job stress. Thus, the second hypothesis is partially supported.

5. CONCLUSION, IMPLICATIONS AND LIMITATIONS


The purpose of the current study is two-fold: first, to determine the influence of organizational variables (conflict, blocked
career, alienation, work overload and unfavourable work environment) and second, to examine the effects of personality
variables (neuroticism, extraversion, openness, agreeableness and conscientiousness) on job stress among managers working
in the vehicle manufacturing sector of Iran. The regression results from this investigation indicated that four of five
organizational variables (conflict, blocked career, alienation and work overload) had positive relationships with job stress.
Hence, the first hypothesis of the study is partially supported.
The finding on the positive relationship between conflict and job stress is consistent with those obtained by Roberts et al.
2004). When employees are required to fulfil conflicting role requirements, they are likely to experience job stress. This is
because role conflicts create expectations that may be hard to satisfy. The finding pertaining to the positive relationship
between blocked career and job stress supports those by previous researchers (Foot and Venne, 1990; Rahim, 1996). Seeing
ones opportunities for career advancement being diminished is perceived as a threat, which in turn, leads to increased job
stress. The finding on the relationship between alienation and job stress is also consistent with those discovered by prior
scholars (Kanungo, 1981; Mirovsky and Ross, 1986; Thoits, 1995; Eugene, 2007). Alienation at the workplace suggests that
employees may not be able to fulfil their social needs. Thus, this sense of isolation is likely to be viewed as a threat to the
individual resulting in stress. The finding pertaining to the positive relationship between poor working conditions and job stress
supports those by previous researchers (Miller and Ellis, 1990; Eugene, 2007). The positive relationship between work
overload and job stress as discovered in this study is consistent with those of prior scholars (Beehr and Newman, 1978; Miller
and Ellis, 1990; Roberts et al., 2004). A heavy workload lowers ones psychological well being resulting in job stress.
Unfavourable work environment, on the other hand, was found to have no relationship with job stress. This finding may be
related to the sample itself. It is possible that managers in the vehicle manufacturing firms sampled may have perceived their
work climate as relatively conducive. Within such a context, this variable may not be viewed as an organizational stressor.
In terms of personality variables, neuroticism had a significant and positive relationship with job stress. The finding is consistent
with previous researchers (Deary and Blenkin, 1996; Tellegen, 1985; Birch and Kamali, 2001). Individuals with elevated levels
of neuroticism would be expected to be associated with higher stress since they are more likely to view stimuli as a threat.
Conscientiousness, too, was found to have a significant and positive relationship with job stress. One plausible explanation
may be due to the fact that conscientious individuals have a responsibility orientation towards work and are more likely to
perceive their job responsibilities seriously, which in turn, is likely to increase their stress.
In contrast, two other personality traits, namely extraversion and agreeableness, had significant and negative relationships with
stress. The finding on the negative impact of extraversion on job stress is consistent with previous researchers (Moberg, 2006;
Birch and Kamali, 2001). Individuals who are high in extraversion tend to view stimuli favourably, positively and emotionally
satisfying, thereby, they are more likely to experience lower stress. The finding on the negative influence of agreeableness on
job stress is consistent with previous researchers (Hogan and Ones, 1997; Birch and Kamali, 2001).

81

Organizational and Personality Effects on Job Stress: The Case of Iranian Managers

Individuals who are high in agreeableness are sympathetic, helpful, cooperative and friendly. As such, they are more likely to
feel positive towards others and more likely to experience lower stress. Openness, on the other hand, had no relationship with
job stress. This finding may be related to the sample itself. Openness implies the possibility that one has to be candid and
expressive in communicating ideas and feelings to others. Given that the act of preserving face has a lot of significance to Irans
regardless of ethnicity (Asmani, 2007), they tend to be less forthcoming in expressing views and opinions. As such, openness
may not be perceived as having an effect on ones stress level.
From the managerial point of view, the findings from this research suggest that employing organizations need to attend to
organizational factors as well as the individuals personality traits that are likely to act as job stressors. In order to reduce stress
among managers, organizations should provide sufficient opportunities for their managers to move to higher positions in the
organizational hierarchy, build cohesive cross-functional work teams, avoid burdening managers with heavy workloads and
communicate clearly its expectations. Additionally, employers should consider tapping the per sonality potentials of their
candidates during the interview process so that they would be able to select qualified candidates that exhibit extraversion and
agreeableness traits for managerial positions.
There are three major limitations in this research that need to be noted. Firstly, this study makes use of cross-sectional data,
which limits inferences with regard to causality between the independent variables and the dependent variable. The use of a
longitudinal approach would improve the ability to make causal statements. Secondly, this study is limited to managers within
the manufacturing industry of Iran. Thus, the validity of the findings cannot be generalized to other job incumbents in other
sectors. Future research may be conducted to compare the predictive validity of the model across different jobs and industries.
Thirdly, given that there may be other individual, occupational, organizational, and non-work factors that also affect and
moderate stress, researchers interested in this area should try to explore these factors in future.

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19. Greenhaus, J H, Bedeian, A G and Mossholder, K W (1987) Work Experiences, Job Performance and Feelings of
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83

Part II - The Four Factors of Quality: Achieving the Circle of Acceptance and Satisfaction

PART II - THE FOUR FACTORS OF QUALITY: ACHIEVING THE CIRCLE OF


ACCEPTANCE AND SATISFACTION

Avis J. Smith
New York City College of Technology, USA
ABSTRACT
Part II of The Four Factors of Quality: Achieving The Circle of Acceptance and Quality, is a continued discussion explaining
views of the author, and articles obtained from other sources. The information pertains to the business areas of manufacturing,
distribution, sales, and professional/social customer. Much focus is given to the areas of concern with respect to the internal
and external factors that can create greater efficiency or adversity in the efforts to achieve acceptance and satisfaction, as well
as profit and value; depending on ones approach. It explains the need for divisional analysis of the Four Factors of Quality and
the internal and external factors. It is suggested by the author, that to investigate these areas separately would be best as an
analytical tool because of the attention to detail it can provide. It is believed that when the areas suggested for analytical
investigations are properly performed, that the results will equal the achievement of the circle of acceptance and satisfaction.
The approach also serves as a logical approach to study customer satisfaction surveys.
Keywords: Divisional Analysis, Internal Factors, External Factors, Business Variation, Divisional Process.

INTRODUCTION
The social economic environment of business rules as the primary determinant for success and acceptance in all levels of the
Four Factors Of Quality. There must however, be diligent observance and assessment of the internal and external factors,
which are the avenues towards helping businesses to obtain success. These avenues towards success must be ventured into
separately (divisional process) in an effort to develop detailed strategies, which will coincide with the benefits of overall
performance for achieving success in the business process. The primary factors of internal and external implementation are
cross-sectional and include the various areas of business fields previously mentioned (manufacturing, distribution, sales,
professional/social customer), but are not always specific to each area of business variations covering the four factors. Further
studies into The Four Factors of Quality, reveals opinions of others who have written on related subjects. For example, in one
report it was noted that a significant change in the manufacturing phase of business had taken place. This change particularly
reflects the changes taking place from manufacturing to the service sector; it also reveals information about how technology
has affected manufacturing trends. It continues to explain how the service sector has increased in size, while the
manufacturing sector (the foundation of a strong economy), has decreased in size; a trend which affects the overall economy of
the United States. Because of the significant change in manufacturing, it is important to examine all of the factors which are
common to the Four Factors of Quality, manufacturing, distribution, sales, and the professional/social customer. It is also
necessary to assess those factors, which can adversely affect the achievement of goals at each level of the various phases in
the assessment of the Four Factors of Quality. There are major factors that can have an adverse or positive effect on the
success of strategic planning, solutions planning, inventory control and planning around economic conditions. The divisional
process for assessing these factors in efforts to work towards success, and development, are common for all areas from
manufacturing to the professional/social consumer.

FACTORS AND CONCERNS FOR MANUFACTURING


A recent assessment based on a poll taken to determine the major causes for declines in manufacturing turned up very
interesting results. The assessment was done by polling/surveys of executives, and was performed by the Fabtech
International & AWS Welding Show, and included a company by the name of Metalform.
(http://www.qualitymag.com/copyright/BNP-GUID-9-5-2006-A-10000000000000452788... viewed on 8/27/2009). As an
explanation for the increase in the service industry and decreases in the manufacturing industry, the results from executives
polled determined the following to be the cause:
1. Lack of employee skills
2. Oil prices

63%
20%
84

A. J. Smith

3.
4.
5.
6.

Volume 8 Winter 2009

Taxes
Weak dollar
Iraq (financial commitment)
Credit crisis
Total:

11%
10%
9%
7%1
100%

Chart 1 below, depicts a graphical picture of the responses from the executives who were polled/surveyed. These executives
expressed their opinions as to why there is a decrease in manufacturing. As a result of the polling/surveys suggestions, which
serve to give a greater focus of how to increase the interest of future generations in manufacturing was also determined. It was
suggested that an increase in parental involvement, might help to encourage young people to go into the field of
manufacturing. At the educational level, it was suggested that teachers get involved to encourage students to seek
employment, and careers in manufacturing. It was also felt that greater offerings of compatible math and science programs at
the level of high school and college would be used to serve, and support an increased interest in manufacturing. Technology
programs that help to facilitate greater knowledge in high-tech and computer skills could also serve as an investment, which in
turn would help to develop a greater interest in manufacturing as well. (http://www.qualitymag.com/copyright/BNP-GUID-9-52006-A-10000000000000452788..., viewed on 8/27/09. The final results from those polled, determined that 58% of the
respondents felt that competitive salaries would increase interest in manufacturing, while 27% felt that parental/teacher
involvement would increase interest. Also of those surveyed, 23% supported the idea of more relevant math and science
courses in high school and college, while 22% supported the need for increased computer and high-tech skills. The pie chart in
Chart 2, shows the percentage of those respondents who expressed possible solutions for increasing future generational
interest in manufacturing.
Chart 1:

Explanation for decreased manufacturing.

Chart 2:

Solutions to support future generational interest in manufacturing.

Taking another look into these concerns, it is also useful to assess the various planning processes which can help to support
manufacturing by investigating supportive internal and external possibilities. The author has found based on articles published
by others, which although not directly stated; supports the following as internal factors for supporting quality in manufacturing
and increasing the infrastructure of the companies and industry itself. Table 1, is a list of some of the internal factors, which
support improving manufacturing, and is followed by Table 2, which displays the external factors.
85

Part II - The Four Factors of Quality: Achieving the Circle of Acceptance and Satisfaction

Table 1: Internal Factors


1.
2.
3.
4.
5.

Invest in infrastructure
Resource allocation
Human resource system
Quality control system
Measurement analysis system

6.

Six Sigma Training

7.
8.
9.
10.
11.

Human resources system


Quality control system
Process development
Product development
Information processing

4.
5.

Product based strategy


Price based strategy

Table 2: External Factors1.


2.
3.

Market based strategy


Capability based strategy
Changing markets

FACTORS AFFECTING DISTRIBUTION


The major factors affecting distributors is the continuous increase and improvements in technologies such as those, which are
inspired by ecommerce. Generally it is believed that the larger the distribution company size, the greater the need exists for
investment into ecommerce. It is also believed that ecommerce is responsible for the increasing profits and value in
distribution. It is assumed that larger scale distribution companies are more financially stable allowing the affordability for more
advanced technology to support their operations. If true, this may create a competitive disadvantage for small scale
distributors, as indicated in the article How Much Are Small-to-Midsized Distributors Losing When They Ignore eCommerce?
authored by Cheyne Rood. It is also noted in this article, that the capacity of larger size distributors creates the need to develop
departments within their companies which are dedicated to handling ecommerce as a means to increase profits and value on a
consistent level in their functions; (www.distisuite.com/articles/distisuite-ecommerce-stats), viewed on November 1, 2009).
The Distisuite Company provides web-sites for distribution companies to facilitate the ecommerce process. They have found
that the benefits out way the cost, but can differ based on the difference between their non-installation and installation
processes. The following revenue costs/profits, were determined by the Distisuite Company: a. for the non-installation year
where clients are only paying their monthly rate, average revenue to cost ratio of 91:1 was achieved, which indicates an
average $91 dollars of revenue for every $1.00 spent on the DistiSuite system annually. The installation revenue cost ratio was
21:1, or $21 dollars of revenue for every $1.00 spent. The DistiSuite Company determined that the average lowest performing
clients of the Distisuite system investment, produced revenue to cost ratios of 20:1 for the non installation year, and 7:1 for an
installation year. They also determined that top performing clients average about 400 new customers each year;
(www.distisuite.com/articles/distisuite-ecommerce-stats,viewed on 1 November 2009). The findings indicate that ecommerce
can obviously put a distributor of large scale, at a greater advantage than that of a midsize or smaller size distributor; however
it is the balance sheet in any business that tells the final story. What is important however is that distributors assess the internal
and external factors, which help to facilitate progress in efforts to improve profits and value. The article Distributors Search For
Bright Spots, Industrial Distribution, March/April 2009, viewed on 11/01/2009, indicates the following internal factors that can
help to add profits and value to distributors; and external factors that should be assessed to develop strategic planning in
support of the internal factors for establishing profits and value as seen in Tables 3 and 4:
Table 3: Internal factors for adding profits and value for distributors.
1.
2.
3.
4.
5.

Develop new growth strategies


Facility closings
Enhance catalog offerings
Suspend salary increases
Reduce staff

6.
7.
8.
9.
10.

Consolidation
Create full service warehouses
Seek alternative energy sources
Reduce work hours
Layoffs

Table 4: External factors


1.
3.
5.

Mergers and acquisitions


Seek new external business opportunities
Find new customers

2.
4.
6.

Geographical territories
Find new markets
Nationwide highways

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A. J. Smith

Volume 8 Winter 2009

FACTORS AFFECTING SALES


As for any major factors having affects on sales activity, issues surrounding economy and employee training are paramount to
understand. As it has been previously stated in the article, Survey: Lack of Skilled Workers Hurts Economy Most, unskilled
workers create a trickle down affect which is a hindrance to sales potential. Employers must establish internal procedures to
perpetuate significant training of employees, however they must also make full use of their investment into employees by
determining the variety of skills those employees may poses, which can add to their value
(http://www.qualitymag.com/copyright/BNP-GUID-9-5-2006-A-10000000000000452788... viewed on 8/27/2009).
As sales represent the consistent purpose of the companys strategic goals and objectives (value and profit), it is
understandable that if workers (for example), in a dental company which sales complete dentures, and not partials dentures;
that company would be considered as a single aggregate company despite the fact that various workers may possess skills in
the partial denture process. A company in this situation could be in a position to explore and develop workers skills by
establishing methods for identifying such skills for the purpose of making full use of their investment in their employees. This
can help to increase the flexibility of sales output and add value to both the company and the economy. The ability of a
company to develop training as a creative marketing approach is necessary to increase sales. There are internal and external
strategies for general use by sales facilities that are needed to enhance specific employee related training skills, and methods
that help to increase sales goals (value/profit), as seen in Table 5.
Table 5: Internal factors which help to promote sales.
1.
3.
5.

Training and training up-dates


Brand focus
Developing methods to continuously address consumer needs.

2.
4.

Establishing of research of consumer markets


Analysis of social networks

Table 6: External factors that help to promote sales.


1.
3.
5.

Relationship building
Set focus on customer success
Maintain a professional relationship

2.
4.

Invest in customers
Open communication

FACTORS AFFECTING THE PROFESSIONAL


The greatest factor which can have a serious impact on the professional is the location of choice. As distributors and
manufactures generally depend on a variety of transportation means, the professional commonly establishes local
relationships. This is particularly true for individual professionals such as doctors, dentists, podiatrist, lawyers, accountants etc.
The geographical locations of such professionals are important due to the potential to select a location, which is overcrowded
or much of the time selected based on the popularity of a state or city; or selection just based on what they like. There must be
analysis made by these professionals to determine the population ratio which they intend to serve. There may be concerns for
age variations within a population, as particular professional services to be offered may better serve a particular age group
population or other qualitative population. In dentistry for example a prosthodontists who specializes in dentures, and seek an
area where there is an older population assuming the restorative needs of older patients. It has been assumed by many
dentists, that the state of Florida is a state where dentures may sale more, due to an elderly population that prefers warm
weather year round.
Using the field of dentistry again as an example, the New York State Dental Association, is a professional organization which
supports more than 13,000 dentists in New York State. Members have special access to clinical, education and business
resources. NYSDA is one of the largest state constituents of the American Dental Association, and is dedicated to ensuring the
highest standards of dental care for the State of New York. (newyork.citystar.com/mall/dentists01.html; viewed on 6 November
2009). This organization is a valuable resource for dental professionals, as it can assist in their decision of locations within the
state. Decisions both internal and external which are commonly used in the process of the professional, which work to develop
profits and value, are those which are stated in Tables 7 and 8, and are also listed as internal and external factors.
Table 7: Internal factors supporting value and profits for the professional.
1.
3.
5.
7.

Establish methods of consumer courtship


Limited social networking
Establishing methods of sales courtship
Quality assurance

2.
4.
6.

87

Web-based planning
Accounting and record keeping
Pricing

Part II - The Four Factors of Quality: Achieving the Circle of Acceptance and Satisfaction

Table 8: External factors which can affect the professional.


1.
3.

Geographic selection
Review and up-dates of professional organizational information

2.

Demographic selection

FACTORS AFFECTING THE SOCIAL CUSTOMER


The social customer has an array of choices, consumer information and redress in the business process. The orientation of
their satisfaction and choices primarily reflects the quality of the manufacturer, the ability of the distributor to manage
transportation of goods, the professionalism of sales personnel and consumer knowledge. The social customer is ruled by
economic conditions, which influence by the decision making of manufacturing, distributions, sales and the professional as a
result of the economy. It is this that sets the social customer apart from the rest. It is the ability of the social customer to
maneuver in the ever changing currents of the economy, which determines their economic survival. The ability to separate
needs from wants under specific economic conditions determine their longevity, and the longevity of their offspring. The
dynamics for the social consumer are quite different from those of the manufacturing, distribution and the professional
customer, but all are participants in the Four Factors of Quality, areas and are all social consumers in their daily lives; having
commonly shared concerns that back track from professional services to manufacturing. One would assume that the unified
experience at the social customer level would create a greater determination on the part of all to ensure quality and service
based on their empirical experience. This however leads into ethical issues, which must be continuously addressed. The social
customer must be aware of the following internal and external factors relevant to their survival in all economic conditions as
listed in Tables 9 and 10.
Internal: factors supporting the social customer.
1.
2.
3.

Education
Earning capacity
Life style

External: factors needed for the social customer to be aware of.


1.
2.

Economic awareness
Social awareness

ANALYSIS ASSESSMENTS COMMON TO ALL FACTORS


When assessing The Four Factors of Quality, there are specific methodologies used in each area for evaluating processes,
values and quality. Most of the methods are common to all areas however; the variation in the size of a business does
influence the need to use particular methods. This helps to distinguish between primary and secondary methodologies used.
For example, it seems more common for manufactures to spend a significant percentage of time focusing on process analysis
to maximize quality in the production process as a primary method. They are more likely to use methods such as the simulation
methods used in the Monte Carlo simulation for making decisions significant to production. Various production factors require
the need for evaluating time and time cycles, which directly relate to equipment used. There are also defects that may occur in
the production process as a result of machinery or equipment used, where established parameters for calculating making
assessments of the overall value of the production process can be made. With such information obtained, manufactures can
use a simulation process for the following reasons: a) variable relationships indicate a lack of linear relationship (outliers), or a
situation that involves too many variables, b) a simulation experiment where processes can be performed without interrupting
an actual process. This method is used as a cost control factor, and helps to perfect timing and quality in the manufacturing
process.

ETHICAL CONSIDERATIONS
Ethical considerations in todays business world include an increased concern about the environment, and ways to preserve life
on our planet. Aside from this increased concern, the business world has also been devastated by corruption which has
affected the economy; having an impact on every level of the Four Factors of Quality from manufacturing to the social
customer. Ethics is something that must be a part of every society, and must serve society for the better. How well it is
understood or institutionalized in society is still in question. There was once someone who said, Every man is a gentleman and
a saint, depending on the expediency of the moment, (Parrish, P. (2009, October 18). Napoleon Hill Review - The Law of
Success in Sixteen Lessons. Retrieved November 17, 2009, from http://ezinearticles.com/?Napoleon-Hill-Review---The-Law-ofSuccess-in-Sixteen-Lessons&id=3113317), viewed on November 17, 2009. The expediency of the moment can be seen clearly
in how we respect the need for adhering to the principles related to the achievement of acceptance and satisfaction.
88

A. J. Smith

Volume 8 Winter 2009

CONCLUSION
There are many ways to make greater strides towards the achievement of perfection in the areas of manufacturing, distribution,
sale and the professional/social consumer. The divisional process of breaking down these business functions can provide the
most detailed means for investigating each area, with correlations made to determine interdependent relationships. What is
very clear, is that the sum of all of the four factors, manufacturing, distribution, sales, professional/social customer and the
internal and external measures taken in support of progress to make improvements; all equal the efforts to achieve quality and
satisfaction.

SOURCES
Buxton, K.V.; Gatland, R., (1995), Simulating the Effects of Work-in-Process on Customer Satisfaction in a Manufacturing
Environment, Simulation Conference Proceedings, 1995. Winter Volume, Issue, 3-6 Dec 1995 Page(s):940 944 Digital
Object Identifier.
Festus O., and Hsu, M. (2007) An Investigation of Customer Experience with Professional Services; Service Marketing
Quarterly, Retrieved November 7, 2009 from http://web.ebscohost.com/ehost/detail?vid=3&hid=11&sid-50c742d2-b49e487e-80952e...
Gustafsson, Anders, Johnson, Michael D., Ross, Inger, (2005), The Effects of Customer Satisfaction, Relationship
Commitment Dimensions, and Triggers on Customer Retention, Journal of Marketing, Vol. 69, Issue 4, Business Source
Elite.
Homburg, Christian, Koschate, Nicole, Hoyer, Wayne D., (2005), Do Satisfied Customers Really Pay More? A Study of the
Relationship Between Customer Satisfaction and Willingness to Pay, Journal of Marketing, Vol. 69, Issue 2, Business
Source Elite.
Hutson, K., (2004) 10 Things every promotional products salesperson should know, Retrieved November 3, 2009 from
http://www.empirepromos.com/promote-huston1004.php
Kickham, V., (2009) Distributors search for business bright spots, Industrial Distribution, Retrieved www.inddist.com
Levine, David M., Stephan, David; Krehbiel, Timothy C.; Berenson, Mark L., Statistics for Managers Using Microsoft Excel, 4th
Edition, Prentice Hall, 2005.
McKenna, M. Distributors play a critical role in the supply chain, Retrieved November 2009 from www.adhesivesmag.com.
Mithas, Sunil, Krishnan, M. S., Fornell, Claes, (2005), Why Do Customer Relationship Management Applications Affect
Customer Satisfaction? Journal of Marketing, Vol. 69, Issue 4, Business Source Elite.
Morgan, Neil A., Anderson, Eugene W., Mittal, Vikas, (2005), Understanding Firms Customer Satisfaction information
Usage, Journal of Marketing, Vol. 69, Issue 3, Business Source Premier.
Reilly, T (2009).Strictly for sales, the power of business relationships. Industrial Distribution, Retrieved from
http://www.inddist.com.
Seiders, Kathleen, Voss, Glenn B., Grewal, Dhruv, Godfrey, Andrea L., (2005), Do Satisfied Customers Buy More? Examining
Moderating Influences in a Retailing Context, Journal of Marketing, Vol. 69, Issues 4, Business Source Elite.
Steiger, Darby., Keil, Linda and Gaertner, Greg; "Mode Effects in Customer Satisfaction Measurement" Paper presented at the
annual meeting of the American Association For Public Opinion Association, Fontainebleau Resort, Miami Beach, FL,
<Not Available>. 2009-08-13 http://www.allacademic.com/meta/p15954_index.html.
Economy: The rapid change in both manufacturing and service sectors, Retrieved November 27, 2009 from
http://ops.fhwa.dot.gov/freight/theme-papers/final-thm2-v3.htm.
http://www.ask.com/bar?q=how+should+historical+data+be+used_research&page=1&qsr...

CONTACT
Avis J. Smith, Associate Professor
New York City College of Technology
Restorative Dentistry (P409)
300 Jay Street
Brooklyn, New York 11201
Phone: 718-260-5141
Fax: 718-254-8557

89

The Hospital Leadership Dilemma: You cant Look at a Frog and Tell how High it will Hop

THE HOSPITAL LEADERSHIP DILEMMA: YOU CANT LOOK AT A FROG AND


TELL HOW HIGH IT WILL HOP

Joel E. Rodgers, Maria Toledo and Thomas E. Griffin


Nova Southeastern University, USA
ABSTRACT
In a previous study, Rodgers and Griffin (2009) found a strong positive relationship between a subordinates empowerment
level and the subordinates willingness to be empowered. The purpose of this study was to determine whether employers could
use tuition reimbursement to identify potential candidates for placement in jobs that require employees to act in an empowered
fashion. The results indicate that hospital workers that elect to pursue advanced education have a high level of willingness to
be empowered. Even though you cannot look at them and determine their willingness to be empowered, you can use tuition
reimbursement to find candidates for placement in jobs that require them to act in an empowered fashion.
Keywords: Empowerment, Willingness, Tuition Reimbursement

THE HOSPITAL LEADERSHIP DILEMMA


Hospitals and other service organizations are emulating the very successful corporations that employ Six Sigma and other
participative management platforms in which middle managers have become problem solvers. Hospitals are leading the way
with programs aimed at improving patient quality of care and reducing cost by having patients needs resolved by the first
person the patient comes in contact with. A Success Profiles study determined that hospitals with the highest patient
satisfaction are more financially successful than the average hospital (Makris, 2009). Achieving high levels of patient
satisfaction requires that key hospital employees must act in an empowered fashion. Rodgers and Griffin (2009) found that
employees that were not willing to be empowered could not be empowered by a supervisors actions. Many leaders falsely
think they are empowering subordinates when they merely involve them in decisions. Empowerment is the sharing of a leaders
power by a subordinate. Not all subordinates are willing to accept the risks involved with accepting additional power and the
resulting responsibility. A Kentucky colloquialism accurately describes the dilemma by stating the obvious, you cant look at a
frog and tell how high it will hop. Hospitals and other service providers need a mechanism that will help predict which
employees can be successfully trained for key positions, which require the employee to act in an empowered fashion. In a
previous study, Rodgers and Griffin (2009) found a strong positive relationship between an employees willingness and
resulting empowerment. The primary purpose of this study was to determine if hospitals could successfully use a tuition
reimbursement program to identify which employees are willing to be empowered.
In this study, the researchers examined the level of willingness of hospital employees that pursued a Masters of Business
Administration or a Masters of Science in Leadership at Nova Southeastern University. The study used the instrument used by
Rodgers and Griffin (2009) to determine willingness to be empowered. The instrument had 15 questions and demographic
information. Some employees avoid risk by resisting opportunities to perform tasks or make decisions, which are considered by
the employee to be beyond the scope of his or her job. The questions used for this study were:
A. In the normal course of business, I perform tasks that can and often are performed by my supervisor(s) _______ % of
the time
B. In the normal course of business, I resist performing tasks that are often performed by my supervisor.
(a) Almost Always (b) Usually (c) Frequently (d) Seldom (e) Almost never
C. In the normal course of business, I resist making decisions normally made by my supervisor.
(a) Almost Always (b) Usually (c) Frequently (d) seldom (e) Almost never

Literature Review
Empowerment has been a buzz word for the last quarter century. Hersey and Blanchard conceptual framework for the
examination of the construct empowerment was a first step. (Hersey & Blanchard, Life Cycle Theory of Leadership, 1969)
90

J. E. Rodgers, M. Toledo and T. E. Griffin

Volume 8 Winter 2009

(Dixon & Dogan, 2003). Empowerment is defined as the sharing of power which is manifested as the level of freedom a
subordinate has to make decisions. This freedom is given to the subordinate by his or her supervisor. However, unless an
employee has a willingness to be empowered and a sufficient level of maturity, he or she will not act in an empowered fashion.
Researchers continue to discuss the role of leadership behavior and subordinate behavior (Ozaralli, 2003). Recent research
state the need for novel approaches to leadership and followership to deal with organizational designs that handle
environmental complexities (Bligh, Pearche, & Kohles, 2006). Yate (1991) proposed that a subordinates level of empowerment
is dominated by the level of delegation of power offered by the leader. His research determined the level of freedom that a
subordinate has to act was significant (Walumbwa, Orwa, Wang, & Lawler, 2005). Rodgers and Griffin (2009) concluded that
empowerment is positively related to the subordinates willingness to be empowered. More importantly, their study concluded
that empowerment was not positively related to a supervisors perceived willingness to empower as viewed by the subordinate.
Their research concluded that employees that are expected to act in an empowered fashion must be selected based on the
trait, willingness to be empowered. In their study of one hundred thirteen middle managers, they determined that subordinates
with a willingness to be empowered scored of 1.34 to 2.88 on a Likert scale of one to five had an empowerment mean of 39.3
with a standard deviation of 5.84. The population was divided into five groups based on the variable willingness to be
empowered. Eighty seven of the one hundred thirteen studied fell into groups 1, 2 , and 3. Groups 1, and 2, and were not found
to be significantly different than group 3. Group 5 was not found to be significantly different than group 4.
POPULATION
Mean
Empowerment

36.26

39.3

43.10

Willingness

1.34

2.60

4.1

GROUP 2 and 3
Mean
Empowerment

36.26

38.45

40.01

Willingness

1.34

2.24

2.88

GROUP 4
Mean
Empowerment

40.2

41.65

43.10

Willingness

2.95

3.53

4.1

Conger and Kanugo (1988) concluded that empowerment of subordinates may prove to be an important path to organizational
change. They found that empowered individuals have higher expectations than they had prior to empowerment. Zimmerman
(1990) determined that participation is necessary to achieve empowerment but participation alone will not yield empowerment.
Hollander and Offerman (1990) described the delegation of decision making responsibility as situational. They found that
delegation, unlike participation, distributes power selectively rather than equally. Leaders that delegate consider the ability and
the responsibility of the follower for the task. Leana (1987) determined that managers do distinguish between delegation and
participation. Leana found that managers determine the level of delegation versus participation on a situational basis; based on
the specific decision rather than their overall trust in a subordinate. Vroom (1976) found that no manager used the same
decision process for all decisions. He found that the subordinate is the important element in the choice of leadership style and
technique. Leana (1987) and Yate (1991) focus on the importance of determining the willingness of a subordinate to be
empowered and the willingness of the leaders to empower the subordinate. Subordinates will make decisions and perform
tasks in accordance with their level of empowerment.
In this study, the researcher examined and measured the willingness levels of employees of South Florida hospitals. The study
focused on the employees willingness to be empowered. All of the employees studied have completed a Masters Degree at
Nova Southeastern University. The resulting level of willingness will be compared to Rodgers and Griffins (2009) study to
determine if students who self select to pursuing additional study while full time employees of hospitals are more willing to be
empowered than the population.

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The Hospital Leadership Dilemma: You cant Look at a Frog and Tell how High it will Hop

RESEARCH QUESTIONS AND HYPOTHESES


Research Question
Can hospital employees with the trait, willingness to be empowered , be positively identified by selecting employees whom
have pursued advanced education while employed by the hospital?

Hypothesis
Null: Across hospital employees, the level of willingness to be empowered will be unrelated to whether the employee has
pursued advanced education while employed by the hospital.
Alternative: Across hospital employees the level of willingness to be empowered will be positively related to the employees
pursuit of advanced education while employed by the hospital.
Thirty-two hospital employees that had completed their Masters in Business Education or Masters in Leadership were studied.
The groups mean level of willingness to be empowered was compared to the level of willingness to be empowered of the most
empowered subordinates in Rodgers and Griffins (2009) study.
The variables and their relationships are demonstrated in Table 1.
Table 1:

Variables and their relationships

Variables
Variable

Relationship

Type

X1 Employee Willingness

Dependent

Metric

Y1 Employee Education

Independent

Non metric

RESEARCH DESIGN
Sample
A study was conducted by sampling Nova Southeastern University Masters students that were full time employees of hospitals
in the South Florida Region. The sample consisted of 32 Nova Southeastern Masters students that were full time hospital
employees. The sample was obtained through Nova Southeasterns Masters in Business Program Office. Respondents were
assured of data confidentiality.

Research Instrument
The original concept of measuring empowerment by determining an employees method of performing tasks was developed in
1992 by Dr. Rodgers and used by Rodgers and Griffin (2009) for their study on empowerment. To establish reliability the
survey was given to 10 Nova Southeastern University DBA Students. Validity was confirmed by using Chi Square tests. The
survey instrument was the same instrument used by Rodgers and Griffin (2009) for their study on empowerment. It was not
modified for this study.
Table 4: Demographic Characteristics of Respondents
AGE

Male

Female

Less than 30

30 to 50

15

51 to 65

Greater than 65
Total

1
9

23

The primary purpose of this study was to determine if hospitals could use tuition reimbursement to select employees to be
trained for positions requiring employees to act in an empowered manner. The researcher examined the level of willingness of

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Volume 8 Winter 2009

full time hospital employees that have self-selected for advanced education. It was determined that tuition reimbursement could
be used by the hospitals to identify potential candidates for empowerment.
In this study, the researchers determined that the mean level of willingness of the hospital employees studied to be empowered
was 3.15. Sixty three percent of the employees studied had a willingness level higher than 2.88 .This is outside the range of
group two and three and well within the range of group four, which were the most empowered middle managers of the previous
study. Using tuition reimbursement hospitals can expect two thirds of employees selected to act as empowered employees
given training.

REFERENCES
1. Bligh, M. C., Pearche, C. L., & Kohles, J. C. (2006). The importance of self- and shared leadership in team based
knowlege work: A meso-level model of leadership dynamics. Journal of Managerial Psychology , Vol. 21, No. 4, pp. 296318.
2. Conger, J. & Kanungo, R. (1988). The Empowerment Process: Integrating Theory and Practice. Academy of Management
Review, V. 13. pp. 46-78.
3. Dixon, J., & Dogan, R. (2003). A philosophical analysis of managemnt: improving praxis. Journal of Management
Development , Vol. 22, No. 6, pp. 458-482.
4. Hersey, P., & Blanchard, K. H. (1969). Life Cycle Theory of Leadership. Training and Development Journal , pp. 25-37.
5. Hersey, P., & Blanchard, K. H. (1996). Management of Organizational Behavior. Englewood Cliffs: Prentice Hall.
6. Ozaralli, N. (2003). Effects of transformational leadership on empowerment and team effectiveness. Leadership and
Organizational Development Journal , Vol. 24, Nol. 6, pp. 335-344.
7. Hollander, E.P., & Offerman, L.R. (1990). Power and Leadership in Organizations. American Psychologist, Vol. 45, No. 2,
pp. 179-189.
8. Leana, C.R. (1987). Power Relinquishment Versus Power Sharing: Theoretical Clarification and Empirical Comparison of
Delegation and Participation. Journal of Applied Psychology. V. 72-2. pp. 228-233.
9. Rodgers, J & Griffin, T. (2009). Empowerment: Trait relatedness. Journal of Applied Business Research. V.25-5 pp
10. Spreitzer, G.M. (1995). Psychological Empowerment in the Workplace: Dimensions, Measurement, and Validation.
Academy of Management Journal. V. 38-5. pp. 1442-1465.
11. Vroom, V. (1976). Can Leaders Learn to Lead? Organizational Dynamics. Winter, pp. 17-28.
12. Walumbwa, F. O., Orwa, B., Wang, P., & Lawler, J. J. (2005). Transformational leadership, organizational commitment,
and job satisfaction: A comparative study of Kenyan and U.S. financial firms. Human Resource Development Quarterly ,
Vol. 16, No. 2, 235-256.
13. Yate, M. (1991). Delegation, The key to Empowerment. Training Development Journal. Apr. pp. 23-24.
14. Zimmerman, M.A. (1990). Toward a Theory of Learned Hopefulness: A Structural Model Analysis of Participation and
Empowerment. Journal of Research in Personality, Vol. 24. pp. 71-86.

BIOGRAPHY
Dr. Joel E. Rodgers is an Adjunct Professor at Nova Southeastern University School of Business and Entrepreneurship. He is a
retired Vice President of Allied Signal and former CEO of Baron Blakeslee Inc. He teaches master level courses in Leadership
and Strategy.
Maria Toledo is an Associate Director for the H. Wayne Huizenga School of Business and Entrepreneurship at Nova
Southeastern University. She teaches Human Resource Management.
Dr. Thomas Griffin is Professor of Management at the H. Wayne Huizenga School of Business and Entrepreneurship at Nova
Southeastern University. He teaches master lever and doctoral level courses including strategy, statistics, operation
management, and finance.

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I Dont Want to Read About You in the Paper

I DONT WANT TO READ ABOUT YOU IN THE PAPER

Ronald M. Mano
Weber State University, USA
ABSTRACT
This paper is based on a speech on ethics that was given by the author to two separate professional groups.
The objective is to encourage participants to always choose to do the right thing. The theme is that the author never wants his
students to be written up in the newspaper or other news media for doing improper activities. Especially, he does not want any
more of his students to go to jail for improper behavior.
The paper includes examples of people who did improper activities. They include both individuals with whom the author is not
acquainted and those with whom he is acquainted. The author is nearing the end of his academic career and refers to several
articles which he and colleagues have published over the years.
The Continental Vending/Valley Mortgage case of the late 1960s and early 1970s are a critical part of the paper. That is the
first case in which auditors were tried and convicted as criminals in a failed audit. A critical lesson should have been learned
from that case but it appears the profession has failed to do so.
An important part of the paper is a discussion of condition and criteria. These are related to Principles-based and Rulesbased accounting. These are related to the Enron and Global Crossing cases or recent years.
Keywords: Ethics, Continental Vending, Valley Mortgage, Condition, Criteria, Principles-Based, Rules-Based, Accounting,
Enron, Global Crossing.

INTRODUCTION
I have often seen articles published that were actually speeches given by the author that was then picked up and published as
an article. These were typically speeches made by rather famous people made to fairly high profile audiences. I am certainly
not a famous person but I recently gave a speech to two different audiences that were not particularly high profile at least on
the national scene. However, the speeches did seem to go over quite well so I decided to write it up as an article and see if a
journal would pick it up and publish it as an article.
Both organizations asked me to give a presentation on ethics and thus I chose as the title of my presentation a statement that I
often make to my students. I often tell them about ethical situations either from the past or sometimes from current news. The
recent Madoff and Rajartnam cases (Wall Street Journal October 17th and 20th, 2009) are two cases in point. I also tell them of
cases regarding former students and colleagues from the professional world of whom I have read about in the paper for doing
improper activities and in some cases actually went to jail.
I happen to be a golfer and one of the people who asked me to make the presentation was the person who introduced me to
golf so I began with a couple of golf stories. I have been a professor for over 35 years so I am nearing the end of my academic
career and these two golf stories relate to some elderly golfers so I can relate to both stories. The first story is about a 70 yearold golfer who was still quite good but his eyesight was beginning to fail so he had difficulty seeing where his ball was landing.
After telling his dilemma to a friend, the friend mentioned that he knew 90 year-old who did not like golf but loved to go walking
and had perfect eyesight. The friend suggested that the two of them get together the next time and thus made the
arrangement. When they got together, the 70 year-old teed it up and hit a wonderful drive right down the center of the fairway.
He immediately turned to the 90 year-old and said, did you see where it went? The 90 year-old immediately replied, yes.
The 70 year-old asked where it went and the 90 year-old replied, I cant remember. I am getting to the point where I can relate
to the frailties of both the 70 and 90 year-old.
The other golf story relates to an interesting clip that aired during the 2008 British Open. An old guy, like myself, and a young
buck were on the tee box and between them and the green was a large bushy tree. The old guy said to the young buck, When
I was your age, I used to hit the ball right over that tree and onto the green. Recognizing the challenge, the young buck teed
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up the ball and hit a terrific shot only to see it hit a branch at the top of the tree, trickle through the tree and land at the base of
the trunk. The old guy then said, When I was your age that tree was this tall (holding his hand about five feet above the
ground).

USING SLIDES IN MY PRESENTATION


Several days prior to my presentation I was asked to submit any powerpoint slides or handouts that I would be using. I told
them that I was not planning on using any of them. Then at the presentation I told them the following story. Several years ago
on the very first day of class I found an article in the Wall Street Journal that was perfect for the class. So I made copies of the
article which was less than a single page and took them to class. I handed out a copy to each student and we discussed it and
how it related to the class.
A few days later I was attending a CPA breakfast or lunch meeting and the speaker was discussing intellectual property. As he
was speaking, I was getting increasingly anxious. Finally I raised my hand and asked, If I were to find an excellent article in the
Wall Street Journal and made copies for my students and took them to class and discussed it, would I be in trouble? Instantly
the speaker said, Yes. Then someone else raised his hand and said, If Ron just made a transparency of it would that be
okay? Instantly the speaker said, That would be worse. He never explained why that would be worse and I never asked
because I had heard enough. Therefore whenever I speak, I seldom use powerpoints or slides and I never make copies of any
articles or jokes that I might see published and would like to use.

BERNIE MADOFF
I was asked if I knew enough about Bernie Madoff to speak about him. I told the requester that all I knew about Bernie was
what I had read in the papers just like everyone else. However, I replied that I did have some opinions that might shed some
light on why the Bernie Madoffs of the world are able to succeed in what they do.

DONT GO TO JAIL
I began my speech by reading parts of an article that I wrote and which appeared in the October 25-November 7, 1999 issue of
Accounting Today. The article is titled, Dont go to Jail and Other good advice for Accountants. I read the following parts from
the article:
When I was a youth, one of my heroes was Ray Edmonds. Ray had been my scoutmaster. As I was about to
graduate with my accounting degree, Ray was close to death. I went to visit him at his home. Although he was
bedridden, he was still very much alert.
He was pleased to see me and asked what I was doing at the time. I told him that I was about to graduate from
college with a degree in accounting. He looked at me and said, Dont go to jail. I just chuckled and completed our
visit, which was wonderful but was the last time I say Ray before his passing.
I had often thought, What a strange thing for Ray to say to me. Now I think, That was about the best advice I ever
received in my life.
I am now an accounting professor and I often tell my students that I dont want to read about them in the paper (at
least not because of improper behavior). I also tell them that if I did read about them in the paper, they would not,
unfortunately, be the first former student whose name had appeared in the paper for improper behavior. I have a
former colleague with whom I worked in public accounting who actually did go to jail. So let me give Rays advice to
accountants everywhere Dont go to jail.
We often hear of management fraud. For many years, I thought that it was a terrible thing that management could
be as dishonest as to intentionally falsify financial statements in order to deceive investors or auditors. As I think
about the issue of management fraud, it occurs to me that management fraud that results in falsified financial
statements could never happen if all accountants were so completely honest that they would not allow the quality of
their financial statements to be influenced by management pressures.

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I Dont Want to Read About You in the Paper

We accountants must be interested in figuring out how much was made and reporting it. Unfortunately, too often we
seem to be told how much management wants to report in income or earning per share and then we set out to
manipulate the financial statements to make it happen.
On Sept. 28, 1998, Arthur Levitt, chairman of the SEC (now former chair) gave a speech at New York University. In it,
he criticized what he called earnings management. Little discussion is necessary for readers of this article to
understand the meaning of earnings management. We accountants tend to lay blame for this type of behavior at the
feet of management. I believe that a major portion of the fault for such financial reporting lies right at our feet, as well
at the feet of management. There are probably few managements of companies who could report managed earnings
if their accountants absolutely refused to go along with the ruse.
I recently viewed for the umpteenth time, the video Billion-Dollar Bubble. That video is the story of the massive
Equity Funding fraud of the late 1960s and early 1970s. It is a classic case of where the accountant failed to insist
that the financial statements be presented fairly and went along with managements desire to manage income. In that
case, several company executives, including the accountant, actually went to jail.
A long-time friend of mine, Bob Sterling, talks of what he calls truth in accounting. Few phrases have a sweeter ring
to me than that. I happen to believe that there is some truth out there and it is our function as accountants to see that
what we report is the truth. Frankly, I dont believe that generally accepted accounting principles necessarily represent
the truth. In fact, when auditors say, Fairly presented in accordance with generally accepted accounting principles, I
have always believed that two statements were being made rather than only one statement.
As accountants, we must insure that our financial statements are fairly presented. In my opinion, it is even more
critical that they be fairly presented than it is that they be in accordance with GAAP.
Remember, it is better to sleep well than to eat well. So let me conclude by repeating the words of Ray Edmonds
Dont go to jail.

SAMPLE AUDITOR REPORTS


Kim Anderson, who invited me to speak gave me an audit report that someone had prepared as a joke stating that it was the
audit report of the audit of Bernie Madoffs company. It states:
We done the best we could on this audit and considering all things involved, we figure its pretty close. You know its
darn hard to hit it right on the button cause theres so many changes from year to year. Good help is hard to get and
in order to keep down the cost of the audit, we had to estimate some of the items like the cash receipts and cash
disbursements.
We were able to do this by projecting figures we had on other companies, we worked on a few years ago. However,
we verified the petty cash and come out pretty close to what they figured should be left. Some of the stuff we did
check was pretty far off but we figure if they aint worried about it, why get everybody upset.
Well, as we said above, we done the best we could and whatever figures aint exactly right, aint too far off. It itll
make you feel any better, remember this is the same way we done it last year.
Since Kim had given me the above auditors opinion to use in my presentation, I decided to go to my files and find a couple
other of my favorites. The following one appeared in the Wall Street Journal around 1980. I did not even copy the specific date
of the issue. I hope it is not a violation of intellectual property rights to use it without a specific reference.
We examined the Consolidated Balance Sheets of the Barrel-Proof Company as of December 31, 1880 and
December 31, 1980. Our examination was made in accordance with what we will maintain, under oath are generally
accepted auditing standards and included the record we considered necessary to cover ourselves under the
circumstances.
In our opinion, the Consolidated Balance Sheets of The Barrel-Proof Company display a uniquely creative exception
to generally accepted accounting procedures.

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Volume 8 Winter 2009

However, my favorite one appeared on the cover of the March 15, 1977 issue of Forbes magazine.
To the Directors and Stockholders:
We have examined the Consolidated Balance Sheet of the company and consolidated subsidiaries as of December
31, 1976 and 1975. In our opinion, these financial statements present fairly the financial position of the companies, in
conformity with generally accepted accounting principles consistently applied.
On the other hand, there is a growing body of opinion that holds that our opinion is not worth a damn.

CONTINENTAL VENDING CASE


Usually when I speak to groups of professional accountants, I work in the Continental Vending case. I believe that this is
perhaps the most important case to ever affect accountants but is perhaps one of the most forgotten cases.
To briefly introduce this case, I read from an article titled, Principles-Based Accounting that I wrote with two colleagues in the
February, 2006 issue of The CPA Journal.
Continental Vending was one of the first major criminal cases successfully brought against auditors.The auditors
were engaged to audit Continental Vending Machine Corporation. A Continental affiliate, Valley Commercial
Corporation, borrowed a large sum of money from Continental. Valley then loaned the funds to a dominant officer and
significant shareholder of both Valley and Continental. The auditors learned that the dominant officer would not be
able to repay Valley, and the auditors knew that as a consequence Valley would be unable to repay Continental.
Nevertheless, the Continental financial statements showed the receivable from Valley as an asset, with only a
relatively obscure footnote explaining the circumstances surrounding the receivable.
Continental never did collect payments from Valley on the receivable in question: in fact, Continental went bankrupt
shortly after the financial statements were issued. When the U.S. government brought criminal charges against the
auditors, the auditors maintained that they properly followed generally accepted auditing standards (GAAS) during the
audit and that the footnote also complied with applicable standards. Moreover, several experts testified that the
footnote disclosure explaining the receivable from Valley complied with generally accepted accounting principles
(GAAP) and that the auditors had followed GAAS.
the district court judge instructed the jury that mere compliance with professional accounting standards was not a
complete defense. Rather, the critical test was whether the financial statements fairly represented Continentals
financial status. The jury found the defendants guilty.
The appellate court judgetold the accounting profession that fairly presentedin accordance with generally
accepted accounting principles is two statements rather than one. Furthermore, the clear message was that if one is
to prevail over the other, it must be fairly presented. Fairly presented is principles based accounting and in
accordance with GAAP is rules based accounting.

WE SHOULD DO SMART THINGS


I then told a story about my daughter when she was about five years old. She is now in college. I was trying to get her to say
something nice to me so I was saying things like, youre cuter than cute or youre nicer than nice, After several of those, she
finally looked up at me with a twinkle in her eye and I thought that finally she was going to say something nice to me. She said,
youre dumber than dumb. I use that story to introduce the fact that I believe that in several ways, we accountants have been
dumber than dumb. Lets talk about a few examples.
On August 5, 2005 I read a Wall Street Journal article about the sentencing of Betty Vinson and Troy Normand of WorldCom,
the largest bankruptcy in the history of mankind. They were sentenced for their participation in the preparation of fraudulent
financial statements after being pressured by their superiors Scott Sullivan and David Meyers. Just five days later on August
10, 2005 I was at the American Accounting Association annual meeting in San Francisco, California. One of the keynote
speakers was Cynthia Cooper who was the internal auditor of WorldCom that found and exposed the fraud there. As Cynthia
Cooper was talking about Betty Vinson and Troy Normand she read letters of resignation which were written by them. Parts of
those letters are included in her book, Extraordinary Circumstances. According to her book, Troy Normand wrote:
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I Dont Want to Read About You in the Paper

Due to circumstances surrounding the third quarter 2000 close, I feel I have no choice but to resign. I have chosen
not to participate in the recommended course of action and have decided not to take any future risk.
Betty Vinson wrote:
Dear Buddy,
This letter is to serve as notice of my resignation from WorldCom effective today. The actions proposed regarding
quarter close entries has necessitated this action. If needed, I can assist with any transition issues that may arise. My
income situation is such that I request wework out an equitable arrangement regarding some sort of salary and
benefits continuation until I can obtain other employment, because I feel that upper management has forced my
decision surrounding my resignation. This is not the course of action I prefer, but feel I must take. It has truly been a
pleasure working for you.
As I was sitting in that meeting in San Francisco and listening to Cynthia Cooper read those letters of resignation I was asking
myself what was going on. You see, I actually had the Wall Street Journal article about the sentencing in my hand as I was
listening. Then Cynthia Cooper said, They never sent the letters. I suppose they had a house payment and a car payment
and decided to go along with the fraud rather than resign and now are convicted and sentenced criminals. They were probably
dumber than dumb.
I next told the attendees a good story. It is about Ryan Thomas a student of mine. Ryan was not a typical accountant. He had
long hair and maybe even an earring (I dont recall for sure). When Ryan was a student, he used to tell me that he would take
me fishing and would often show me pictures of huge trout he had caught. He never did take me fishing but for many reasons, I
took a particular liking to Ryan. I really did like him.
A few years after he graduated, I got a call from Ryan. He wanted to talk about a situation that he was facing at his
employment. He said that his employer was pressuring him to do some things that he felt were not right and perhaps even
fraudulent. He asked for my advice. I told him that I would definitely not participate and that he should get out of that situation
as soon as possible. After I hung up the phone, I had a totally sick feeling. I was sure that Ryan was going to go along with
management and bow to the pressure just as Betty Vinson and Troy Normand had done at WorldCom.
At that time I used to have one of the most outstanding accountants and a person of impeccable integrity come to speak to my
auditing class. His name is Joe Knudsen. That fall when Joe came to speak to my class, there was Ryan Thomas at his side.
After the presentation, I asked Ryan what had happened. He told me that he had a mortgage and car payment and family to
feed. But after our conversation he went in and resigned his position. He did not have another job lined up but was able to get
hooked up with Joe Knudsen and was pleased with his situation. I am convinced that he will never face those same pressures
with Joe Knudsen as he did with his prior employer. I have always been proud of Ryan Thomas and know that he was NOT
dumber than dumb. He did just the opposite of Betty Vinson and Troy Normand.

CONDITION AND CRITERIA


In the February, 2006 CPA Journal article mentioned above, we talked about condition and criteria. Here is what we wrote:
Internal auditors use what they call condition and criteria. Condition is the current situation: what actually exists.
Criteria is what the ideal situation would be. The internal auditor must determine what to use as criteria. This is done
by a careful analysis of the business situation based on the internal auditors experience and knowledge. There is no
rulebook for the internal auditor to use. Each situation is different and demands different analytical skills. The auditor
must decide on the best practice.
To determine criteria, the external auditor turns to GAAP. The external auditor applies those rules, and if the
companys practice can be squeezed into the confines of GAAP, the external auditor declares that the practice is
fairly presented in accordance with GAAP. The external auditor might not agree with the presentation yet support it
because it fits within the rules. There is no commitment to the rule for the external auditor as there must be a
commitment to criteria for the internal auditor.
Criteria in internal auditing would be principles-based accounting. Criteria in external auditing would be rule-based
accounting. It seems clear that the profession needs principles-based accounting today. It needs external auditors to
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take some ownership in the criteria that they apply when they profess that the financial statements are fairly
presented.
I believe that Andy Fastow of Enron was the worlds foremost expert on accounting for Special Purpose Entities. However, in
my opinion, he used that expertise not to provide full disclosure of Enrons financial condition but used that knowledge to hide
the truth. Quoting from an article that two colleagues and I wrote and was published in the May/June, 2003 issue of CPAFocus
titled, Present Day Lessons from Robert R. Stelings Lecture on Accounting Power, we wrote the following about this
disclosure.
In the Nov. 5, 2001 Wall Street Journal, an article titled, Andersen Faces Scrutiny on Clarity of Enron Disclosures
described how parts of the Enron annual report were indecipherable. The article quotes an Enron spokesperson,
Karen Denne, as stating, They comply with reporting requirements. She continues by saying, investors who didnt
understand the transactions didnt have to buy Enron stock.
Exactly one month after the first Enron article reference above, another Enron article appeared in the Dec. 5, 2001,
Wall Street Journal. That article stated, The company (Enron) hired legions of lawyers and accountants to help it
meet the letter of federal securities laws while trampling on the intent of those laws. It became adept at giving
technically correct answers rather than simply honest ones.
When accountants rely on GAAP rather than their own criteria which they believe in their heart-of-hearts, accounting such as
happened at Global Crossing occurs. We discussed that case in the same February, 2006, The CPA Journal article referenced
earlier.
On March 11, 2004, the Wall Street Journal reported that Global Crossing had just reported a quarterly profit of
$24.88 billion which dwarfed the prior record of $6.7 billion held by Exxon for its fourth quarter of 2003. Global
Crossing had been under Chapter 11 bankruptcy protection. It managed to turn things around quickly on revenue of
$719 million, or $34.60 of profit on every $1 of revenue a fantastic profit margin. And that is net profit margin, not
gross profit margin.
To understand how it was able to claim this, remember the equation:
Assets = Liabilities + Owners Equity
In bankruptcy, the liabilities are forgiven. Therefore, to keep the equation in balance, either assets must go down or
owners equity must go up. Without being privy to internal discussions, one might still reasonably assume that the
company accountants challenged the auditors to show them where in the rules it says they could not do that. In fact,
the rules do recommend that liabilities forgiven in bankruptcy be handled in exactly this manner.
The authors believe that both the in house accountants and the auditors of Global Crossing would have been well
served had they gone back and studied the statements made by the appellate court in Continental Vending. The
application of Rule 203, the definition of criteria as used in internal auditing, and the lessons of Continental Vending
would have clearly indicated that a better reporting approach would have been to take these gains directly to retained
earnings rather than through earnings, and avoid a situation where a bankrupt company reports the highest quarterly
profit (by fourfold) in the history of American business.

WHY DO WE HAVE SO MANY RULES?


I am a firm believer that we need principles-based accounting. We need accountants who take ownership of the financial
reporting of which they are partially responsible. A case that illustrates the need for this type of ownership is the situation that
occurred in 1999 when the SEC issued their rule on revenue recognition (SAB 101). I discussed that problem in an article
published in Accounting Today, April 17-30, 2000, titled The SEC Promulgates the Obvious.
On Dec. 6, 1999, I received The Wall Street Journal, which contained an article titled, SEC Lists Revenue-Booking
Guideline, Says It Aims to Curb Dot-Com Abuses. I read the article with some interest. It seems that the Securities
and Exchange Commission had issued an official rule on the criteria that must exist before a company is allowed to
book revenue.

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I Dont Want to Read About You in the Paper

That day, I took the article to class with me and asked my undergraduate class at Weber State University what they
thought should exist before a company recognized revenue. They came up with the following list:

An actual sale or goods or services


A specified price and
The ability to collect

It turned out to be a pretty simple exercise because it took them about three minutes to come up with the list.
Two days later, I spoke at an Institute of Internal Auditors meeting in Salt Lake City. Since the issue fit in well with my
topic, I did the same exercise with that group of professionals. They came up with the same list in about the same
amount of time.
Next, I went to a faculty colleague and did the same exercise. In about the same amount of time, he came up with the
same list. I have conducted the exercise a few additional times with other groups but always with the same result.
Here is the list of criteria that the SEC came up with as reported in The Wall Street Journal on Dec. 6, 1999:

An agreement to deliver products and services


They have actually delivered the product or services
They have a fixed price for the product or services
They can collect the specified price

Now I ask readers of this article: Why do we need a formal SEC rule to require what several different groups took
about three minutes each to develop? Could it be that there are some problems out there that relate to the recognition
of Revenue? It is regrettable when the SEC feels a need to promulgate as a formal rule, which should be totally
obvious to even marginally qualified accountants.
Exactly one month later (Jan. 6, 2000), while again reading The Wall Street Journal, I saw an article titled, Auditors
Miss a Fraud and SEC tries to Put Them Out of Business. The title caught my eye so I read the entire article which
mentioned a particularly bold fraud where the company, Cal Micro, was booking bogus sales to fake companies for
products that didnt exist. Now surely, Cal Micros accountants did not need the SEC rule to tell them that booking
bogus sales to fake companies for products that dont exit is really not proper accounting.

WHO GETS INTO TROUBLE WITH ETHICS?


Remember the title I choose for this article. I often tell my students that I dont want to read about them in the paper, at least
not for doing improper activities. I also tell them that I dont want them to go to jail. However, I tell them that if I did read about
them in the paper, they would not, unfortunately, be the first former student about whom I have read in the paper. I also tell
them that if they were to go to jail, they would not be the first former student who actually went to jail.
The next two people I am not going to name because I am pretty close to them personally. However, if you would like to google
their names, please contact me directly and I will give you the names. Also, just putting some key words into Google from the
information provided will pull up their names. Putting the names of two former students whom I knew had gotten in trouble into
Google yielded the following:
On February 5, 2007, in Salt Lake City..(name withheld) was sentenced on January 10, 2007, to five months in
prison, five months home detention, and one year of supervised release.(name withheld) was also ordered to pay
$11,378 in restitution to the United States. On March 22, 2007(former student and father) were indicted in separate
indictments charging them with multiple counts of aiding and assisting in the preparation and presentation of false tax
returns
In a case that is still pending google yielded the following:
A special agent of the Office of Inspector General at the Department of Housing and Urban Development was
arrested in Salt Lake City for making a false statement to federal authorities and bank fraud, according to the U.S.
attorneys office for the District of Arizona.
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The indictment alleges that (name withheld) of Layton, Utah failed to report on a 2005 financial disclosure form that
he held a position outside his duties as a federal agent in the company Funding Matrix LLC. He also failed to report
on that same form that he conducted real estate business dealings.
A conviction for bank fraud has a maximum penalty of 30 years in prison, a $1 million fine or both. A conviction for
making a false statement has a maximum penalty of five years in prison, a $250,000 fine or both.
There are some other rather ordinary people who have gotten into trouble and whom I will not name because they were my
neighbors. However, I will provide enough information that if you would like to look them up on the internet you could find them
using some of the key words that I will provide. I hope disclosing these people does not give the impression that all my
neighbors and students are crooks.
The first person is one whom my daughter worked for when he owned a video rental shop in our neighborhood when such
businesses were quite new.
The Idaho Department of Finance today issued a Cease and Desist Order against a Utah-based company and its
promoter ordering a halt to the offer and sale of a purported international, elite bank trading program in Idaho.
Nations International LLC and (name withheld) are named in the order. Nations International operates from Sandy,
Utah.
This person was a fugitive for several months and was ultimately apprehended in Las Vegas, Nevada.
The second person was an officer in my church.
Hansens co-defendant, (name withheld), of Salt Lake County, pleaded guilty to two second degree felony counts of
Securities Fraud and a single count of Sales by an Unlicensed Broker-Dealer or Agent. Both defendents will be
sentenced May 10, 2004 in Third District Court.
The next person is one whom I have spent many a night with at scout camps. At one of those camps, for a half-hour he
explained his business to me. At the end of that discussion, I said to myself, I have been a CPA for over 30 years and have a
Ph.D. in business and I dont have any idea what he was talking about. When I returned home the next day, I told my wife that
it sounds like money-laundering to me.
Attorney, (name withheld), of Sandy, Utah was convicted on tax and fraud charges after a two week jury trial, the
Justice Department and Internal Revenue Service (IRS) announced today.(name withheld), along with his coconspirators, were indicted in November for conspiring to defraud the United States and to commit mail fraud and
wire fraud. (name withheld) was also charged with tax evasion and assisting in the filing of false tax returns.
This person is currently serving a ten-year prison sentence in federal prison.

CONCLUSION
Accounting is a discipline that has had a wonderful reputation (at least prior to Enron). I believe that reputation is still strong but
it is up to the current generation of accountants to see that it remains strong. I have often said to my students, I am not proud
of what my generation has done with this profession. However, I tell them that I have great confidence that they will do better.
Truly, if I did not have confidence in the next generation, I would not be able to continue to do what I do.

101

Cirque du Soleil

CIRQUE DU SOLEIL

Derek Kenneth Dygos and Emin Civi


University of New Brunswick, Canada
ABSTRACT
This case is about Cirque du Soleil, a leading entertainment organization in Canada. The Montreal based company tours the
world with 8 shows and entertains audiences with 7 resident shows in Las Vegas, New York and Orlando, fascinating
spectators of all ages with a blend of traditional and non-traditional circus acts with new innovative ideas for costume, set
design and choreography. Cirque du Soleil already employs approximately 1000 artists from 50 nationalities and 2500 other
employees in the organization estimating that over 10 million people around the world have seen a Cirque du Soleil show in
2007. In 2006 Guy Laliberte was listed on the Forbes Worlds Richest People with an estimated net worth of $1.4 billion
grossing a stated $650 million in revenue, this after pouring 70% of profits back into new productions. The case discusses one
of the biggest Canadian service exporters internationalization experiences.

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Volume 8 Winter 2009

HOW DO CONSUMERS CATEGORIZE INNOVATIVE PRODUCTS?


INSIGHTS FROM MULTI DIMENSIONAL SCALING

Michael W. Kroff and Mike Reilly


Montana State University, USA
ABSTRACT
The academic literature is rich with theoretical and empirical research involving product innovativeness. Various definitions and
dimensions have been proposed and measured. These definitions and dimensions, however, come primarily from a firm-based
perspective. Little research exists regarding how consumers go about categorizing innovative products. Specifically, there is
little research dealing with the dimensions that consumers consider when encountering innovative products. This research
explores a variety of possible dimensions that consumers might consider important when assessing the innovativeness of a
variety of products. These dimensions include technological sophistication, ease of use, benefits, daily impact, change of
behavior, and innovativeness in form. An experiment is conducted in which pictures of a variety of new products pre-tested to
vary in innovative across these dimensions are presented to respondents. These respondents are asked to individually group
the products based on similarity in perceived innovativeness. Multi dimensional scaling (MDS) is subsequently used to tease
out the dimensions most commonly used by respondents. While technology expectedly appears as in important dimension, the
unexpected dimension of information innovativeness also appears. This dimension includes products that are perceived to be
innovative in the type of information offered and/or the method in which this information is presented. Examples include a
power surge protector that glows when it heats up and a portable meat bacteria indicator. This dimension of information
innovativeness and its impact on the area of overall product innovativeness are explored conceptually.
Keywords: Product Innovativeness, New Products, Product Categorization

103

Impacts of the Financial Crises on Stock Markets: Empirical Study on the US and Asia

IMPACTS OF THE FINANCIAL CRISES ON STOCK MARKETS: EMPIRICAL


STUDY ON THE US AND ASIA

Hong Rim and Robert Setaputra


Shippensburg University, USA
ABSTRACT
In consideration of the severity of the US financial crisis (2007), this study analyzed and compared the impacts of the two
crises --- the US financial crisis and the Asian economic crisis --- on the financial markets and economic activities around the
world. First, the Asian economic crisis (1997) had been relatively confined within the region without having any significant
impacts on other economies. Second, the US financial crisis (2007) had spread out fast to other economies with significant
negative impacts on various economic entities (e.g., governments, banks, tax payers, and investors). To prevent the crises of
this nature in the future, governments need forward-looking policies to establish systemic-risk measures at the national level for
fast reaction to high systematic risk and to minimize the amplification effects on economic activities. In the end, more
fundamental reform of financial infrastructure should be considered for greater transparency and accountability for
policymakers to follow. To be more effective, policymakers should stress the importance of capital adequacy at financial
institutions and remain vigilant in seeking the right balance between prudent and indiscriminate risk taking.
Keywords: Financial Crisis, Systematic Risk Measures, Transparency, Capital Adequacy, Risk Taking.

IMPACTS OF THE FINANCIAL CRISES ON STOCK MARKETS: EMPIRICAL STUDY ON THE


US AND ASIA
In recent years, global trading and cross-border investing significantly increased due to open economic and market policies.
Globalization (trade liberalization, foreign entries) enabled domestic firms to improve competitiveness but to become more
exposed to additional (e.g., financial, economic, business, and market) risks. The current US financial crisis (Sept. 2007)
rapidly escalated and spilled over to other financial markets around the world and raised serious questions on the costs of
financial integration and the benefits of financial innovations. Empirical results suggest that financial shocks had been
transmitted through equity prices in the short run but other variables (e.g., cost, amount of credits) became more important in
the long run. The stock price, among others, was the main channel of information transmission across financial markets during
the time of high volatility. Financial crises have been pervasive phenomena in history, but their frequency and severity have
been more on the rise in recent years, compared to the previous eras (e.g., Bretton Woods (1945-1971), Gold Standard (18801993)).
Most bubbles occurred in an era of fast financial innovation (e.g., tech bubble in 2000). For example, the tech bubble in the
1990s focused on the promising but unrealized profits of new technologies, reflecting investors optimism on high-tech
industries. Banking crises (2007) were the result of bubbles in real estate markets, preceded by credit booms and asset price
bubbles. Crises result in a 35% real drop in housing prices over a period of 6 years, equity prices fall around 60% over 4 years,
output falls by 9% over two years, unemployment rises 7% over 4 years, and central government debt rises 96% compared to
its pre-crisis level.
The US economy experienced chronic international imbalances in the current and capital accounts, mostly during the Bretton
Woods II period. During this time, both Japan and China accumulated unprecedented current account surplus and huge foreign
currency reserves (mainly in US dollars). They could maintain exchange rates low and earn the foreign currency necessary for
strong economic growth. Due to low-priced Chinese goods, the Fed could keep the US interest rates low for a long time without
generating inflation rate. In addition, the introduction of innovated financial assets enabled US consumers to finance
consumption by increasing their indebtedness.But the increase of sub-prime mortgage loans induced various forms of fraud
(e.g., inflated valuations, false incomes, ).The sheer complexity of the products in which these mortgages are bundled made
risk assessments more difficult (or almost impossible) for investors.

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The US financial crisis can be traced back to the low interest rates by the Federal Reserve Bank and other central banks after
the collapse of the dot-com bubble in 2000. The US financial crisis (Sept. 2007) was mainly due to 1) rapid innovation without
proper valuation models, 2) the speculation on housing (20~ 30% (even 30~40% in some places) annual increases in house
prices), 3) financial market inefficiencies, 4) inconsistency in monetary policies, 5) strong market interconnectedness, and 7)
the insufficient constraints. In considering the severity of the US financial crisis on capital markets and economies, this study is
to analyze and compare the effects of the two crises --- the Asian economic crisis (1997) and the US financial crisis (2007) --on stock markets and economic activities in the US and Asian countries. It is of great importance for investors and policy
makers to understand how economic/financial information and shocks are transmitted between financial markets and between
the real and financial sectors across borders. It is also important to know the dynamic linkages between financial markets for
investors and portfolio managers to better manage their foreign exposures especially during the period of high volatility.
This study uses daily return of the MSCI for the US and the Asian countries (ASEAN countries (Indonesia, Singapore,
Malaysia, the Philippines, and Thailand); non-ASEAN countries (Hong Kong, Japan, S. Korea)) for a period of 1992 to 2009.
Empirical results show that the Asian economic crisis (1997) was relatively confined within the region without having any
significant impacts on other economies whereas the US financial crisis (2007) had spread out fast to other economies with
significant negative impacts on various entities (e.g., governments, banks, tax payers, and investors).
To prevent the crises of this nature in the future, governments need forward-looking policies to establish systemic-risk
measures at the national level for fast reaction to high systematic risk and to minimize the amplification effects on economic
activities. In the end, more fundamental reform of financial infrastructure with greater transparency and accountability for
policymakers to follow should be considered. To be more effective, policymakers should stress the importance of capital
adequacy at financial institutions and remain vigilant in seeking the right balance between prudent and indiscriminate risk
taking.

105

Revealed Comparative Advantages of Emerging Economies: A Comparative Export Performance Analysis

REVEALED COMPARATIVE ADVANTAGES OF EMERGING ECONOMIES: A


COMPARATIVE EXPORT PERFORMANCE ANALYSIS

Birol Erkan1 and Emin Civi2


University of Kilis 7 Aralik1, Turkey and University of New Brunswick2, Canada
ABSTRACT
During the last two decades, these countries have started transforming their manufacturing from labor intensive to technology
intensive. This change has helped these countries to take larger portion of the global trade, start playing more dominant role in
international trade arena and engage in more value creating activities. The paper draws on a sample of twenty five emerging
economies to calculate their revealed comparative advantages (RCAs), indicate similarities and differences of each countrys
RCAs. The study has also shown each emerging economys comparative advantages and disadvantages towards other
emerging countries along with the whole world. The results would be helpful for the policy makers, industry leaders and
exporters to be able to make their long term strategies.

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SCIENCE & TECHNOLOGY

SECTION 2

Future Revenues and Cash Flow: Valuation of Wireless Technologies Adoption

FUTURE REVENUES AND CASH FLOW: VALUATION OF WIRELESS


TECHNOLOGIES ADOPTION

Lenford A. Smith, Thomas E. Griffin and Roscoe Dandy


Nova Southeastern University, USA
ABSTRACT
The wireless industry is one of the most capital intensive high-technology industries (Harmantzis & Tanguturi, 2007). The rapid
advancement of wireless technologies has seen the industry shift from voice-centered communication to a combination of high
speed data communication and multimedia (Zhanwei, 2005). This intensely competitive industry (Eshghi, Haughton, & Topi,
2007) requires information technology (IT) managers to justify large investments in wireless technologies. How will the stock
market react to the announcement to adopt new wireless technologies? Will this adoption decision be rewarded by investors?

FUTURE VALUE AND CASH FLOW IN WIRELESS INDUSTRY


BACKGROUND
The wireless industry is one of the most capital intensive high-technology industries (Harmantzis & Tanguturi, 2007). The rapid
advancement of wireless technologies has seen the industry shift from voice-centered communication to a combination of high
speed data communication and multimedia (Zhanwei, 2005). This intensely competitive industry (Eshghi, Haughton, & Topi,
2007) requires information technology (IT) managers to justify large investments in wireless technologies. How will the stock
market react to the announcement to adopt new wireless technologies? Will this adoption decision be rewarded by investors?
Three benefits are expected from investments in new wireless technologies: Revenue increases, cost reductions, and
competitive advantage developments.
This paper has a focus on a new generation of technology that will change the wireless industry. Fourth generation (4G)
wireless mobile technologies will give people more convenience and ease in lifestyle. With the anytime, anywhere, anything,
capability, 4G will benefit every individual regardless of time and place. Considering a global standpoint, this technology stands
to be the way to communicate and connect all the time with more ubiquitous means (Hwang, Consulta, & Yoon, 2007).
The wireless industry is still a very young industry and difficult market conditions persist; therefore, it is crucial to examine the
impact of an anticipated investment (Sabat, 2005). At present second generation (2G) wireless technology also called global
system for mobile communications (GSM) is an open, digital cellular technology used for transmitting mobile voice and data
services, is widely used worldwide. The problem with 2G is that the data rates are limited. This makes it inefficient for data
transfer applications like video conferencing, music or video downloads. To increase speed, various new technologies have
emerged. The first was 2.5G technology that allowed data transfer at a better rate than GSM; and recently 3G technologies
have emerged. The maximum theoretical data transfer rate with 3G technology is 2Mbps (practically it could be a max of
384Kbps or even less). 4G technology which is at its infancy supposedly, allows data transfer up to 100Mbps outdoor and
1Gbps indoor.
Managers use non-financial and financial disclosures in different ways as part of an impressions management strategy
(Walden & Schwartz, 1997). It is likely that disclosures of innovation, particularly those concerning the firms long-term
strategies or non-financial leading indicators, can provide investors with more value-relevant information (Amir & Lev, 1996).
Traditional financial statements are incapable of evaluating fully the significant differences that exist in the high-tech industry
between book values and underlying fair market values (Liang & Yao, 2005). This means that the accounting measurement
and reporting system is ill-equipped to provide value-relevant information in emerging high-tech industries, such as wireless
communications (Amir & Lev, 1996).
Few studies on technology investment (Zhanwei, 2005; Sabat, 2005; Harmantzis & Tanguturi, 2007; and Eshghi et al., 2007)
focus on the wireless industry. This paper contributes to the voluntary disclosure literature by examining the effect of
managements disclosure of long-term innovation strategies in the wireless industry on share price. According to Entner (2008),
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the United States has outpaced Japan and the European Union in labor productivity growth. The widespread and thorough
adoption of information technology, computers, and telecommunications to reengineer business practices and improve
productivity was the main reason for the improved productivity. Entner (2008) found that even though the Internet and
computers have helped to improve productivity, wireless telecommunications, has become an essential component in
generating productivity gains for American businesses. Mobile voice telecommunications devices are now in common use by
consumers and businesses alike (p. 4).
The announcement of 4G adoption by firms in the wireless industry will be the proxy for voluntary disclosure of non-financial
information by management. This papery contributes to the growing literature on business valuation of technology in general by
examining investor reaction to the adoption of new wireless technology.

THEORY BACKGROUND
Capital markets transfer funds efficiently between suppliers and users (Fama, 1970). Three different efficiencies exist:
operational, allocational, and informational. This paper will focus on informational efficiency. The efficient market hypothesis
(EMH) implies that in an informational efficient market, information is free and securities prices reflect perfectly all information
available to the market. Theoretical and empirical research indicate that inside managers with access to detailed information
about a firm will reduce information asymmetry among outside investors by voluntarily disclosing nonfinancial information
(Narayanan, Pinches, Kelm, & Lander, 2000). Voluntary disclosure provides investors with the necessary information to make
informed decisions. According to (Narayanan et al., 2000) voluntarily disclosing qualitative information is an attempt by
management to influence investor decisions about a firms value.
Diffusion of innovation theory is used to outline the meaning of adoption of new technology. Innovation diffusion theory has
been widely applied to the study of technology innovations for more than a decade, and has provided insight into the adoption,
implementation, infusion, and diffusion of technology innovations (Prescott, 1995).

RESEARCH QUESTION
Do economic rewards actually accrue to organizations which are the first to adopt innovative technologies (Dos Santos &
Peffers, 1995)? The effect of technology announcements on stock prices indicates that investors perceive innovative
technology investments to have positive net present values (NPV) (Dos Santos & Peffers, 1995). Unlike Dos Santos and
Peffers (1995) who examined investment in a new technology application, this study examines investment in a new technology
(4G). A new technology can spawn a multitude of new applications. This study examines managements voluntary disclosure of
the intent to invest in 4G technologies by announcing the adoption of 4G technologies. In the cellular industry, the valuerelevance of non-financial information overwhelms that of traditional financial indicators (Amir & Lev, 1996). Key financial
statement variables - earnings, book values, and cash flows - fail to provide value-relevant information to investors in cellular
companies (Amir & Lev, 1996). This paper extends the related literature by posing the following question: Is the value of a firm
in the wireless industry related to the announcement of the adoption of a new technology? The following hypotheses drive
analsis:
Hypothesis 1:

A firms market value is either not related or is negatively related to an announcement of the adoption of
a new technology.
Hypothesis 1A: A firms market value is positively related to an announcement of the adoption of a new technology.

KEY ASSUMPTIONS
Adoption occurs when a decision is reached to invest resources necessary to accommodate the implementation effort (Cooper
& Zmund, 1990).
According to Dardan, Dardan, and Stylianou (2005), Announcements that that impact stock prices include changes in dividend
policy, stock splits, layoff announcements, key personnel changes, and even celebrity endorsements. This new and
unpredicted information received by the financial market can be perceived as contributing positively or negatively to future cash
flows and has been associated with a stock price reaction (valuation) in the same direction (Dardan et al., 2005).
IT investments result in some direct benefits that contribute to future cash flows. In addition, the investments may have indirect
benefits in the form of new investment opportunities. For example, investment in a new technology project may improve a firm's

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Future Revenues and Cash Flow: Valuation of Wireless Technologies Adoption

ability to use this new technology in future projects, thus affecting its future investment opportunities (Dos Santos, Peffers, &
Mauer, 1993).
Non-financial information refers to qualitative information outside of the four financial statements and footnotes (Flostrand &
Strom, 2006).
Wireless segment is the most competitive of the telecommunications industry and is the key driver behind its current growth
(Zhanwei, 2005).
Wireless carriers compete in a fiercely competitive environment. Since the introduction of wireless number portability, the
wireless industry in the United States experienced a significant transformation: Cingular bought AT&T Wireless in 2004, and
Sprint merged with Nextel in 2005, reducing the number of national providers to four (Eshghi et al., 2007).

DESCRIPTION FOR A PROPOSED STUDY


This paper assumes a market model event study consistent with Dardan, Dardan, and Stylianou (2005). Market model event
studies assume a linear relationship between the return of any security to the return of the market portfolio:
(1) Ri,t = i + iRm,t + i,t ,
where Ri,t = the rate of return on the share price of firm i on day t, Rm,t = the rate of return on a market portfolio of stocks (S&P
500 index) on day t, i = the intercept term, i = the systematic risk of stock i, and i= the error term, with (i,t)=0. Using
equation (1) and following McWilliams and Siegel (1997), the abnormal returns (AR) for the ith firm follow are:
(2) ARit = Ri,t (i + i Rm,t),
where i and i are the ordinary least squares (OLS) parameter estimates obtained from the regression of Ri,t on Rm,t over an
estimation period (T) preceding the event. The abnormal returns (ARi,t) represent stock returns after the events effect on equity
prices has been adjusted for the normal return process. If the difference is statistically significant, there is an abnormal or
excess return. The standardized abnormal return (SAR), where the abnormal return is standardized by its standard deviation
(Dardan, et al., 2005), follows:
(3) SARit = ARi,t / SDi,t,
where
(4) SDi,t = {S2 [ 1 + 1/T (Rm,t Rm)2 / t=1 (Rm,t Rm)2]}1/2,
where Si is the residual variance from the market model as computed for firm i, Rm is the mean return on the market portfolio
calculated during the estimation period, and T is the number of days in the estimation period (Dardan, et al., 2005). The
standardized abnormal returns are cumulated over a number of days, or the event window, to derive a measure of the
cumulative abnormal return (CAR) for each firm. This equation is shown as:
(5) CARi = (1/k1/2) t=1 SARi,t,
The values of CARi are assumed to be independent, normal, and identically distributed (Dardan, et al., 2005). As a result,
these values are identically distributed variables when dividing CARi by its standard deviation, which is equal to [(T-2)/(T-4)]1/2.
It follows that the average standardized cumulative abnormal returns across n firms (ASCAR) over the event window can be
expressed as:
(6) ASCARi = 1/n 1/[(T-2)/(T-4)]1/2 i=1 CARit,
and the Z-value for the average standardized cumulative abnormal return is:
(7) Z = ASCARt n1/2
The event window will include the day prior to the announcement, the day of the announcement (day 0) and the day after the
announcement. There are three reasons to choose a three-day event window. First, by narrowing the event window the
likelihood of confounding events impacting the data set will be reduced (Dardan et al., 2005). Second, prior studies (Dehning,
Richardson, & Zmud, (2003); Dos Santos & Peffers, 1995; Dos Santos et al., 1993; and Pettit, 1972) have used this technique
to examine the impact of earnings, dividend, stock split, IT investments, ERP, and accounting practices announcements. Third,
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Volume 8 Winter 2009

this assumes that investors will respond quickly and positively to the announcements. According to McWilliams & Siegel
(1997), it takes 15 minutes for a stock to fully adjust to the release of firm-specific information.

DIFFUSION OF INNOVATION
Research examining innovation of diffusion often cites the work of Everett Rogers (Robertson, 1967, Fischer & Caroll, 1988,
and Katz, 1999). Rogers studied diffusion traditions in the spirit of logical empiricism and attempted to create a synthesis of
seemingly diverse outcomes (Kinnunen, 1996). Diffusion is not a single theory. It is several theoretical perspectives that relate
to the overall concept of diffusion; it is a meta-theory (Rogers, 2003). Diffusion is the process by which an innovation is adopted
by members of a certain community. Four factors influence adoption of an innovation: The innovation itself, the communication
channels used to spread information about the innovation, time, and the nature of the society to whom it is introduced (Rogers,
2003). Rogers (2003) advances four theories concerning the diffusion of innovations. These are the innovation-decision
process theory, the individual innovativeness theory, the rate of adoption theory, and the theory of perceived attributes.
This paper focuses on the innovation-decision process theory. The innovation-decision process occurs over time and involves
five distinct stages. The first stage is knowledge. Potential adopters must first learn about the innovation. Second, they must be
persuaded as to the merits of the innovation. Third, an individual or organization must decide to adopt or reject the innovation.
Fourth, subsequent to innovation, an adoption must be implemented. Fifth, adopters must confirm that their decision was
appropriate. Once these stages are achieved, diffusion results (Rogers, 2003).
Perhaps the founding father of innovation of diffusion theory is Gabriel Tarde (1843-1904). Kinnunen, (1996) argues vigorously
that Tarde made numerous insightful and practical observations that have benefited diffusion research. Nineteenth century
anthropologists embraced a meta-theory of cultural change for which diffusion would be the key. This diffusion concept was
borrowed from physics, where it means interpenetration of substances. Tarde was convinced that general laws similar to
natural sciences could be found for sociology, as well (Kinnunen 1996). Katz (1999) heralds Tarde as an elder statesman of
diffusion theory. He argues that based on Tardes contribution, the study of diffusion theory belongs in the custody of mass
communication. According to Katz (1999), Tarde posits that innovation spreads in concentric circles, flowing smoothly until it
encounters hostile barriers, whether environ- mental or cultural, including the onset of a competing invention. The process
occurs in stages, a slow advance in the beginning, followed by rapid and uniformly accelerated progress, followed again by
progress that continues to slacken until it finally stops.
The adoption of innovation is generalized through an S Curve on a cumulative basis along with more sophisticated models. A
normal S Curve frequency distribution is a bell curve that encompassing five categories of adopters: (1) innovators; (2) early
adopters; (3) early majority; (4) later majority; and (5) laggards (Rogers, 2003).
Diffusion of innovation in businesses is widely based on the work of economist Joseph A. Schumpeter (Robertson, 1967).
Schumpeter envisioned innovation as being characterized by: (1) construction of new plants and equipment, (2) introduction of
new firms, and (3) the rise of new individuals to leadership. Thus, Robertson (1967) views innovation as a discontinuous event.
A discontinuous event is part of Robertsons (1967, p. 16-17) framework for classifying diffusion of innovation:
1. A continuous innovation has the least disrupting influence on established patterns. Alteration of a product is involved,
rather than the establishment of a new product. Examples: Fluoride toothpaste; new-model automobile change-overs;
menthol cigarettes.
2. A dynamically continuous innovation has more disrupting effects than a continuous innovation, although it still does not
generally alter established patterns. It may involve the creation of a new product or the alteration of an existing product.
Examples: Electric toothbrushes; the Mustang automobile; Touch-Tone telephones.
3. A discontinuous innovation involves the establishment of a new product and the establishment of new behavior patterns.
Examples: Television; computers.
This paper supports 4G as a discontinuous innovation, given it will supersede the current 3G technology when fully adopted.
Karshenas and Stonemans (1993) diffusion theory states that when a firm adopts new technology, its profits will depend on:
The firms characteristics (rank effects), the number of other firms that adopt the technology (order effects), and the firms
position in the order of the adoption (order effects). Oliva, (1991) used McCardles (1985) stochastic model and extended it
using chaos theory to examine the interaction of information and profitability estimates on the firm's adoption of a new
technology or innovation. According to Oliva (1991), a firm evaluating an innovation or new technology begins with information
and a corresponding estimate of the innovation's profitability. One of three conditions exists: (1) the profit estimate is very high
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Future Revenues and Cash Flow: Valuation of Wireless Technologies Adoption

and the firm adopts because the potential gains greatly outweigh the risks; (2) the profit estimate is very low and the firm does
not adopt; or (3) the profit estimate is inconclusive causing the firm to gather more information before making a decision. As
familiarity with an innovation increases, and as its adaptability to variations in environment become more clear, the element of
risk declines for innovations of high utility to the point where the greater risk favors the non-adopter (Colman, 1968). Thus, it is
likely that companies faced with innovation (4G) will experience a process that ultimately results in a decision to adopt or not to
adopt 4G (Rogers, 2003, Karshenas & Stoneman 1993, Oliva, 1991, and Robertson 1967).

VOLUNTARY DISCLOSURE
Leftwich, Watts and Zimmerman examined interim reporting and determined that, in the absence of mandatory interim
requirements, some firms voluntarily publish interim reports (1981). Leftwich et al. (1981) also examined the incentives for
voluntary disclosures, and considered the cost-benefit trade-offs influencing managers reporting frequency. They sampled
firms listed in 1948, a time before interim reports were mandated. They analyzed capital structures, asset composition, and
monitoring devices employed by those firms using Jensen and Mecklings (1976) framework, and found a stock exchange
effect, inertia, and anomalies. The lack of a finance theory on capital structure limited their examination, and included
measurement problems in both dependent and independent variables (Leftwich et al., 1981).
Subsequent studies incorporated the capital market hypothesis (Verrechia 1983, Healy and Palepu, 1993 and 1995, Lang and
Lundholm, 1993) and examined voluntary disclosure to reduce information asymmetry between managers and investors, and
ultimately the cost of capital. Gibbens, Richardson, & Waterhouse, (1992) also determined that management may strategically
disclose information in a variety of settings. They identify eight categories of managed disclosures including data content, data
organization, medium, timing, and credibility. They concluded that incentives for more disclosures include improved managerial
reputations, resulted in more effective firm monitoring, and reduced both the cost of information collection by investors and the
cost of raising capital in equity markets.
Strict application of accounting regulations without any additional disclosures can certainly lead to an image that is by far not
comparable to the true economic state of the company (Vergauwen & Alam, 2005). This scenario occurs if large investments
are made in intangible assets such as information technology and professional services. When the presence of intangibles is
not disclosed symmetry among companies and the users of the financial statements may result. Users and other outsiders
have no knowledge of a companys decision to not disclose. This asymmetry may result in insider trading (Vergauwen & Alam,
2005).
Bontis (2002) examined intellectual capital (IC) disclosure in Canadian firms. Vergauwen and Alam (2005) used Bontis
methodology to examine IC disclosures in the Netherlands, France, and Germany. Their findings revealed that IC related
voluntary disclosures vary strongly among countries. They found significantly higher average disclosures in French annual
reports relative to their Dutch counterparts, while the German disclosures were between both countries but significantly
different. They also found much larger disclosure rates than those reported by Bontis (2002) in his study of Canadian firms.
Finally, Vergauwen and Alam (2005) conclude that disclosure practices lag globally, despite their perceived importance by
corporate managers.
Amir and Lev (1996) performed an empirical analysis of the value-relevance of disclosed financial and non-financial information
of wireless companies. They augmented their examination by regressing stock prices and returns on combinations of reported
financial variable. The resulting impression was that wireless industry capital market values are unrelated to reported financial
variables (Amir & Lev, 1996). Their findings revealed that financial analysts following cellular companies rarely mention
earnings in their industry analyses.
Analysts pay close attention to cash flows of wireless companies. Moreover, Amir & Lev (1996) determined the value-relevance
problem does not lie primarily with noncash depreciation and amortization charges, but rather with the large costs associated
with the investment in cellular franchise and in customer-base creation. Amir and Lev (1996) conclude that these specific
investments involved intangibles, such as R&D and franchise development, and substantial spending on the development of
customer-base and market share. Finally, their overall findings indicate that financial information (earnings, book values, and
cash flows) is largely irrelevant for the valuation of cellular companies, and that nonfinancial information (e.g., customer
penetration rate of cellular companies) has incremental value-relevance over financial information (Amir & Lev, 1996). Since
then, there is a paucity of research focusing on non-financial disclosure in the wireless industry. This study adds to the
valuation literature by examining how the stock market values the disclosure of nonfinancial information (4G adoption
announcements) in the wireless industry. There have been a few studies on value relevance of non-financial disclosure in high
technology industry following Amir and Lev (1996). The following section looks at some of those studies.
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Volume 8 Winter 2009

Dehning, Richardson, Urbaczewski, and Wells, (2004) reexamined the value relevance of e-commerce announcements using
an event study methodology. They found evidence that traditional event study methodology may not provide an accurate
measure of abnormal returns during periods of high market volatility, and propose an alternative methodology. Their research
takes into account extreme or unusual market movements in the period in which the e-commerce announcement was made.
Their findings revealed positive abnormal returns for e-commerce announcements.
Dehning, Richardson, and Zmud, (2003) studied transformational IT announcements by high technology firms using event
study methodology. They expected to find abnormal positive returns compared to firms that did not make announcements.
Their analysis was based on the samples used by (Dos Santos et al., 1993), (Im, Dow, & Grover, 2001), and (Chatterjee,
Pacini, & Sambamurthy, 2002). They found positive abnormal returns to firms investing in IT with a transform strategic role.

EMH AND EVENT STUDIES


EMH is an important concept that has become widely accepted since the late 1950s and early 1960s under the rubric of the
theory of random walks in the finance literature and rational expectations theory in the mainstream economics literature
(Dimson and Mussavian, 1998). EMH was taken seriously by only a few scientists in the economics and finance communities
but has now emerged as a dominant paradigm in finance and macroeconomics. In mainstream finance and accounting
research, the EMH is widely accepted (Dimson and Mussavian, 1998).
Fama (1970) classified market efficiency into three forms; weak form efficiency, semi-strong efficiency and strong efficiency.
The weak form market efficiency claims that all past prices of a stock are reflected in todays stock prices. Past stock prices
cannot be used to predict future stock prices, and the stock prices follow a random walk. Technical analysis cannot be used to
predict and defeat the market. The weak form market efficiency supports using companies financial statements, not historical
stock prices, to identify under- and overpriced stocks.
Semi-strong market efficiency asserts that all public information, as well as future expectations, is reflected in a stocks current
price. The semi-strong form implies neither fundamental nor technical analysis can be used to achieve above normal returns. A
passive, diversified buy-and hold strategy will generate the highest returns in a semi-strong form efficiency market since an
active strategy will not be more profitable due to the related transaction costs. All public information is embedded in the current
stock price; therefore, investors needs private information to achieve above normal return.
The strong form market efficiency implies that all information in a market, both public and private, is reflected in a stocks price.
Profits exceeding normal returns can not be obtained irrespective of the amount of research or information an investor has. The
strong form implies that above normal returns cannot be achieved by investors with insider information since the market
predicts future stock behavior and has taken all private information into account.
Studies of the semi-strong form of the EMH can be categorized as tests of the speed of adjustment of prices to new
information. The principal research tool in this area is the event study. An event study averages the cumulative performance of
stocks over time, from a specified number of time periods before an event to a specified number of periods after. Performance
for each stock is measured after adjusting for market-wide movements in security prices. Seminal event studies were
undertaken by Fama et al. (1969), and Ball & Brown (1968). Using the market model or capital asset pricing model as the
benchmark, these two event studies provide evidence on the reaction of share prices to stock splits and earnings
announcements respectively. In both cases, the market appears to anticipate the information, and most of the price adjustment
is complete before the event is revealed to the market. When news is released, the remaining price adjustment takes place
rapidly and accurately.
The strength of an event study is inherent in its capturing of the overall assessment of a large group of investors about the
discounted future and current value of the firm as reflected in the stock price and market value of the firm (Mcwillliams &
Siegel, 1997, Subramani & Walden, 2001). The future performance is attributable to individual events such as the
announcement of a new wireless technology. Subramani and Waldens (2001) research shows a list of prior studies that use
event studies to examine the effect of an individual event (announcement) (p 151): Jarrell and Poulsen (1989) examined the
effect of successful takeover bids announcements. MacKinlay (1997) examined the effect of earnings announcements. Menzar,
Nigh, and Kwok (1994) examined the effects of withdrawal from South Africa announcements. Wright, Ferris, Hiller, and Kroll
(1995) examined the effects of affirmative actions awards announcements. Das, Sen, and Sengupta (1998) examined the
effects of strategic alliances announcements. Horsky and Swyngedouw (1985) examined the effects of change in firm name
announcements. Lane and Jacobson (1995) examined the effects of announcements of brand leveraging announcements.
Wright, Ferris, Hiller, and Kroll (1995) examined the effects of being found guilty of discrimination announcements. Chaney,
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Future Revenues and Cash Flow: Valuation of Wireless Technologies Adoption

DeVinney, and Winer (1991) examined the effects of new product announcements. Agrawal and Kamakura (1995) examined
the effect of celebrity endorsement announcements. These prior studies examined CARs to determine effects of each
announcement (individual event) on firm value.

ISSUES WITH EVENT STUDIES


Event study methodology is increasingly being used by researchers to assess the effect of strategic decisions on firm
performance (McWilliams, Siegel, & Teoh, 1999). There appears to be little controversy about the statistical properties of event
study methods because the underlying conditions provide information; and permit well-understood inferences (Kothari &
Warner, 2004). Event studies provide estimates of the short run impact on shareholders and findings are sensitive to small
changes in the research design and lack of robustness should be minimized by additional methodologies (McWilliams et al.,
1999). Hayes, Hunton, and Rick (2000) design a two day event window to limit extraneous noise affecting their result. They
argue against expanding the event window beyond two days because doing so would not increase its explanatory power
significantly (Hayes et al., 2000).
Tsiotsou and Lalountas (2005) propose the application of multiple regression models and bootstrapping independently from the
sample size because they view a problem of non-normality on distribution of the abnormal returns. Event studies must address
several basic issues including risk adjustment, expected/abnormal return modeling, the aggregation of security-specific
abnormal returns, and the calibration of the statistical significance of abnormal returns (Kothari & Warner, 2004). These issues
become critically important with long horizons which are beyond the scope of this research.
Other event study research (Sankarshan, 1993) posits alternative methods that measure the impact of latent information not
completely available to the market. Latent information includes endogenous events related to management decisions leading
up to the announcements of technology adoption. Information privately acquired by the firm that is imputed in its decision to
adopt can only be partially extracted by the market. Therefore, Sankarshan (1993) argues that a latent variable model
accounts for market inference and computes the inferred value of information underlying an event announcement process. (p.
364) Additionally; this latent variable model provides a framework for testing the impact of firm specific variables on expected
abnormal return thus minimizing the inconsistency and selectivity bias in the standard event model. Sawyer and Gygax (2001)
issue with event studies involves the uniqueness of the event. They argue that focusing on the single variable of abnormal
return purges the uniqueness of the event and proposes a methodology involving recursive abnormal return. According to
Sawyer and Gygax (2001), a simultaneous equation system based on the abnormal returns across a small event window
provides more understanding of the learning of markets, and of the information effects of events.
This paper considers investor reaction to announcements of 4G adoption in the wireless communication industry. The
evaluation of historical information will form the basis of this research design. Event study methodology will be used to test the
semi-strong form of EMH using firms in the U.S. wireless communication industry. Consistent with MacKinlay (1997), and
Dardan et al., (2005), a narrow event window will reduce the likelihood of confounding events impacting the data set. These
confounding events may include other general market and/or firm specific events. Therefore, a three-day event will be used to
include the day prior to the announcement, the day of the announcement, and the day after the announcement. The selection
of this sampling timeframe will allow the inclusion of the first mover effects. This window is used to reduce the impact of other
firm related events on the adoption announcement to a minimum (MacKinlay, 1997). This methodology will also rely on the
recommendations of Brown and Warner (1985), and McWilliams and Siegel (1997) for performing an event study. Their
research indicate that a longer event window causes difficulty in controlling for confounding effects and reduces the power of
the test statistic (Dardan et al. 2005). Mcwillliams and Siegel (1997) outline the following ten steps for implementing an event
studies.
Step 1:
Step 2:
Step 3:
Step 4:
Step 5:
Step 6:
Step 7:
Step 8:
Step 9:
Step 10:

Define an event that provides new information to the market.


Outline a theory that justifies the financial response to the new information.
Identify a set of firms that experience this event and identify event dates.
Choose an appropriate event window and justify its length, if it exceeds two days.
Eliminate or adjust for firms that experience other relevant events during the event window.
Compute abnormal returns during the event window and test their significance.
Report the percentages of negative returns and abnormal Z or Wilcoxon test statistic.
For small samples, use bootstrap methods and discuss the impact of outliers.
Outline a theory that explains the cross-sectional variation in abnormal returns and test this theory econometrically.
Report firm names an event dates in data appendix. (p. 652)

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Volume 8 Winter 2009

An eventual study should utilize the market model. Dardan et al. (2005) examine the efficacy of the market model using
arguments from the research of MacKinley (1997) and McWilliams and Siegel, (1997); therefore rely on the market model
approach to measure the relationship between the security return and return of the market portfolio. Structural equation
modeling (SEM) normal return, abnormal return, and cumulative abnormal return could then be measured for each security
within the data set.
Firms that announce the adoption of 4G should be compared to firms with similar characteristics (e.g. firm size) in the industry
that did not announce 4G adoption. A SEM model is a useful tool for selected firm characteristics consistent throughout the
industry. Firms that announce will be labeled as 1, and firms that did not announce will be labeled as 0 as a control variable.
Figure 1 below represents the theoretical model that drives this research design.

Firm
Characteristics

Adoption Decision

EMH
EMH

VOLUNTARY
VOLUNTARY
DISCLOSURE
DISCLOSURE

DIFFUSIONOF
OF
DIFFUSION
INNOVATION
INNOVATION

THEORETICAL MODEL

Adoption
Announcement

Firm
Financial
Information

Value
Relevance

Stock Price

Figure 1: Theoretical Model


Firm characteristics in the model represent order and rank effects (Karshenas & Stoneman, 1993) should be tested using SEM.
Firm financial information represents R&D, sales, market capitalization, and cash flow.

STATISTICAL ANALYSIS PROPOSED7


The proposed research would use an event study methodology consistent with Dardan, et.al, (2005) where they used the
market model. This is the same standard used by Brown and Warner (1985), Mackinlay (1997), and McWilliams and Siegel
(1997). The market model assumes a linear relationship between the return of any security to the return of the market portfolio:
(1) Ri, t = i + iRm,t + i,t ,
where Ri,t = the rate of return on the share price of firm i on day t, Rm,t = the rate of return on a market portfolio of stocks (S&P
500 index) on day t, i = the intercept term, i = the systematic risk of stock i, and i= the error term, with (i,t)=0. Using
equation (1) and following Dardan et al., (2005), the abnormal returns (AR) for the ith firm are:
(2) ARi,t = Ri,t (i + i Rm,t),
where i and i are the ordinary least squares (OLS) parameter estimates obtained from the regression of Ri,t on Rm,t over an
estimation period (T) preceding the event. The abnormal returns (ARi, t) are assumed to reflect the stock markets reaction to
7

Eventus software can be used for event study using the CRSP stock database or other stock return data and provides fast event-oriented data retrieval from the CRSP
stock database. Eventus software is available for use through WRDS (Wharton Research Data Services).

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Future Revenues and Cash Flow: Valuation of Wireless Technologies Adoption

new information (McWilliams and Siegel, 1997) and represent stock returns after the events effect on equity prices has been
adjusted for the normal return process. If the difference is statistically significant, then there is an abnormal or excess return.
The standardized abnormal return (SAR), where the abnormal return is standardized by its standard deviation (Dardan, et al.,
2005), follows:
(3) SARi, t = ARi, t / SDi,t,
where;
(4) SDi, t = {S2 [1 + 1/T (Rm, t Rm)2/t=1 (Rm,t Rm)2]}1/2 ;
where Si is the residual variance from the market model as computed for firm i, Rm is the mean return on the market portfolio
calculated during the estimation period, and T is the number of days in the estimation period. This procedure controls for
multicollinearity (Dardan, et al., 2005). The standardized abnormal returns can then be cumulated over a number of days, or
the event window, to derive a measure of the cumulative abnormal return (CAR) for each firm. This equation is shown as:
(5) CARi = (1/k1/2) t=1 SARi, t,
The values of CARi are assumed to be independent, normal, and identically distributed (Dardan, et al., 2005). As a result,
these values are identically distributed variables when dividing CARi by its standard deviation, which is equal to [(T-2)/ (T-4)] 1/2.
It follows that the average standardized cumulative abnormal returns across n firms (ASCAR) over the event window can be
shown as:
(6) ASCARi = 1/n 1/ [(T-2)/ (T-4)] 1/2 i=1 CARi, t,
and the Z-value for the average standardized cumulative abnormal return is:
(7) Z = ASCARt n1/2
The Z-value test statistic, if significant, will represent the cumulative abnormal return of the potential investment in 4G.
A testable model depicting the research variables and the hypotheses tested using the SEM approach can be formulated from
the theoretical model (see Figure 1above) as follows:
4G
Announcemen
t

Change in
stock price

Sales

Cash flow

Market Cap.

R&D

Figure 2: SEM Approach


The model shows 4G announcement as the independent variable, change in stock price as the dependent variable, and sales,
market capitalization, cash flow and R&D as moderating or interaction variables. The 4G announcement variable is
operationalized as a 0 1 dummy variable. The moderating variables are drawn as sending arrows into the relationship
between the independent and dependent variables. These moderating variables are operationalized as products of the
individual moderator variable and the independent variable 4G announcement. It is expected that here will be mutli co-linearity
between the moderator variables themselves and the moderator variable and the independent variable 4G announcement.
SEM was chosen as the analysis method for a number of reasons: Multiple regression cannot model co-linearity between
independent and moderator variables unless a number of regressions are performed. However, multi co-linearity will occur if
product variables are used to test moderating effects as stated above. SEM can test the complete research model
simultaneously which is a more valid approach than a series of piecemeal regressions simply because the research variables
have their actual effect simultaneously in the real market. Thus, the co-efficient obtained in analyzing the data will be closer to
the true parameters.
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Volume 8 Winter 2009

SUMMARY
This paper contributes to the voluntary disclosure literature by examining the effect of managements disclosure of long-term
innovation strategies in the wireless industry on share price and proposing a research design to investigate. According to
Entner (2008), the United States has outpaced Japan and the European Union in labor productivity growth. The widespread
and thorough adoption of information technology, computers, and telecommunications to reengineer business practices and
improve productivity was the main reason for the improved productivity.
The announcement of 4G adoption by firms in the wireless industry is proposed to serve as a proxy for voluntary disclosure of
non-financial information by management. This paper contributes to the growing literature on business valuation of technology
in general by examining investor reaction to the adoption of new wireless technology.

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Network Security: An Undergraduate Course in Network Security for Computer Information Technology Curriculum

NETWORK SECURITY: AN UNDERGRADUATE COURSE IN NETWORK


SECURITY FOR COMPUTER INFORMATION TECHNOLOGY CURRICULUM

Hetal Jasani
Northern Kentucky University, USA
ABSTRACT
An undergraduate computer information technology course in network security is presented which is developed based on many
hands-on lab activities. In learning the concepts of network security via hands-on labs, students have ample opportunities to
understand the underlying network security. These hands-on labs are chosen to provide sufficient challenges to the students
that prepare the engineers and technologists for the next generation solutions. The level of difficulty for this course requires the
prerequisites of networking course. For each hands-on lab, the student must carry out the lab activities in order to successfully
implement the particular network security technology. The course requires the students to collaborate among them and
participate in active learning based modules.
Network security courses become increasingly popular in colleges (including community colleges) and universities. This paper
elaborates innovative projects that are suitable for laboratory work in computer information technology curriculum. It explores
both hardware and software components that are now being used for practical exercises in network security courses. This
paper discusses the hands-on labs for network security technologies, especially configuring the firewall (Access Control List ACL), VPNs (Virtual Private Networks), IPS (Intrusion Prevention Systems) on various devices such as Cisco routers and
Adaptive Security Appliances (ASA). In addition, this paper also discusses the wireless network security labs which discuss
how to set up WPA/WPA2 on wireless access points. Wireless security is very important topic due the growth of wireless LAN
in recent mobile and wireless evolutions.
Keywords: Firewalls, Virtual Private Networks (VPN), Intrusion Detection Systems (IDS), Intrusion Prevention Systems (IPS),
Wi-Fi Protected Access (WPA)

INTRODUCTION
The field of network security is dynamically changing due to the advances in the technologies. It becomes more and more vital
as people spend more and more time connected to the Internet from anywhere anytime. Intruding into networked resources is
often much easier than compromising physical security. Many areas of network security demand highly trained personnel to
solve the new challenges such as firewall, VPN, IDS (intrusion detection system), IPS, wireless LAN security, etc. There is a
great demand of technicians and engineers who can maintain and secure the networked environment.
While theory oriented electrical and computer engineering and computer science curricula offer students few network security
courses, this may not be enough to train network engineers with the proper background on the newer security technologies.
Although many courses on computer and network security have been developed in these programs, they are primarily focused
on in-depth mathematics, algorithms, and theory. Most of these courses dont use hands-on labs that are the preferred learning
style of information technology students (Helps & Ekstrom, 2008). Since computer information technology (CIT) program
emphasizes the hands-on based active learning, the previous approaches taken by other programs (computer
science/engineering programs) are not suitable for CIT program.
The goal of the network security course is to teach students with several different network security technologies through a
series of laboratory experiments using small-scale test beds. Hands-on experiments are the best way to enhance the students
learning which facilitates collaborative based active learning (Rosenberg & Koo, 2002). Additionally, the evolution of network
security equipments has made it possible for students to perform many levels of experiments to design and implement the
secure networked systems.

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CURRENT NETWORK SECURITY COURSES


Network security course training is often integrated into existing courses or as separate courses using various tools in projects.
Many universities have used different network security protocols and devices for hands-on labs in network security courses.
Hands-on based training in these network security technologies is not common at the college level for undergrad curriculums
due to the cost and complexity devices/configurations.
Oh, et al. (2009) discusses the use of OPNET modeler to model the HAIPE (High-Assurance Internet Protocol Encryption)
technology. The problem of using OPNET is that students may not be engaged as much as they do in doing hands-on labs.
They have used OPNET because HAIPE is a fairly new encryption technology similar to Internet Protocol Security (IPSec), and
it is not easy to teach different components of it with hands-on labs. They also mentioned in their conclusion that some
students learn faster and have a better understanding of the concept when using a hands-on approach. Hartpence (2009)
emphasizes QoS and less security in his paper with various hands-on experiments. Meiselwitz (2008) developed a general
education course covering information security for all majors. However, it didnt involve many hands-on labs but involved
presentation and discussion components to improve the skill set. His course didnt involve the advanced level of network
security exercises such as intrusion prevention systems, WPA2 for wireless networks, etc. Abbott-McCune et al. (2008)
presented the reconfigurable networking labs for their networking courses. However, they havent discussed the network
security component at all. Cao et al. (2009) discusses the development of networking lab for teaching and research. They have
used various tools such as OPNET, Network Simulator (NS-2), Virtual PC, and CPLEX, which enable students to conduct
various network modeling, and simulation. However, this is not the best way to enhance the students learning as they
mentioned that building a hands-on experimental lab environment is a challenging for many institutions due to space
constraints, budget limitations, maintenance difficulty.
There is a need to create such more comprehensive, dedicated course to teach network security technologies that could give
students a practical experience. This course is proposed to satisfy this demand and provide college graduates a practical
hands-on training. In newly designed network security course with enhanced laboratory experiments have demonstrated
effectiveness in teaching the concepts of different network security technologies (Northcutt, et al., 2005). This course has been
proposed to provide a practical view of network security using real equipment configurations. The course assumes that
students have the knowledge of networking (i.e., students had taken the first course of network administration/troubleshooting).
It includes lectures covering the relevant concepts needed to understand the different security technologies including VPN,
IDS, IPS, etc. and their applications. Some Cisco networking equipments are used to enhance these laboratories experiments.

COURSE DEVELOPMENT
The objectives of network security course are that students should be able to:

Use the security appliances to configure firewalls, intrusion prevention, VPNs


Harden Cisco routers
Understand and implement wireless network security
Configure and debug network security appliances using the IOS (Internetwork Operating System) command line
Design network security architecture

For the hands-on network security labs, students configure several networking devices such as Cisco routers, Cisco switches,
Cisco adaptive security appliances (ASA) (Frahim & Santos, 2005), wirelesses access points, etc. to provide various security
features of the networks. To accomplish the above mentioned objective, the following topics are included:

Network security fundamentals


Firewalls
Access control lists
Network address translations
Wireless network security
Hardening the routers
Security protocols and virtual private networks
Intrusion detection systems
Intrusion protection systems

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Lab PCs

Cisco
Switch253

Cisco
Switch251

PCs used for lab activities


Network Security course lab setting connected via
stacks of Cisco routers, ASAs and switches

Figure 1: General Lab/Classroom Network Diagram


Figure 1 shows the network setup that students use for various courses. This network is set up in the regular classroom, in
which many classes are being taught. On left side, regular lab network setting is shown and connectivity to Internet can be
identified via Dell switch, Cisco switch and Internet router. However, on the right side, network connections for networking and
security labs are shown using additional Cisco switches, routers, and ASAs that could be configured in various
networking/security lab exercises. Students perform hands-on labs using command line interface to configure the access
control lists (ACL) on the Cisco routers. Students configure standard and extended control list to filter the various networking
traffic. Students also configure the Cisco Access Point (AP) to enhance the wireless security (Cisco, 2002). Students configure
Cisco ASA (adaptive security appliances) to create site-to-site VPN, and remote-access VPN. Moreover, IPS lab activities are
also carried out to solidify the knowledge of intrusion detection and prevention systems.

FIREWALL TECHNOLOGIES
The perimeter security is very important in today's networking world. It could be provided by the network-based firewalls.
Detailed understanding of how firewalls and their related technologies work is extremely important for all network security
professionals. The knowledge of firewall helps them to configure and manage the security of their networks precisely and
efficiently. Students are taught two types of firewall: network firewall and personal firewall. The network firewall could be
systems or devices that are placed between an outside and an inside network. Numerous network firewall solutions that
students learn in this course offer user and application policy enforcement that provide attack protection for different types of
security threats. Students also learn the logging capabilities of these firewall devices that allow them to identify, investigate,
validate, and mitigate such threats that could be carried out in the real world. The personal firewall could be software
applications that can run on a system to protect only that host. In this network security course, the focus is the network firewall.
The primary duty of a network firewall is to deny or permit traffic that tries to enter the network based on explicit preconfigured
policies and rules. The filtering techniques that are used to allow or block traffic may include the following (Frahim & Santos,
2005):
Simple packet-filtering techniques
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Multifaceted application proxies


Stateful inspection systems
Figure 2 shows the network setup for setting up the filters (firewalls). This experiment aims to create and apply the standard
and extended ACL (Odom, 2008) to filter specific network traffic that pass through the router.
Lab361
Router

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10.255.1.2/16
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Switch

Dell Switch
Blue Console Cable

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Router
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Cisco Switch VLAN1
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Blocked
PC

Unblocked
PC

10.25X.0.100/16
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(connected via Dell switch)

Subnet25X PCs
(connected via Cisco
Switch)

10.25X.0.101/16

Figure 2: Network Setup for ACL


Students connect PCs to Cisco switch that has already been configured for normal connectivity as shown in Figure 2. Students
configure a standard IP access list on the Cisco router using console/rollover cable, which filters traffic based on source IP
addresses. This process is carried out in two steps. First, the list is created using a console terminal connection and configured
in global configuration mode. Second, the list is applied to the appropriate interface as either an inbound or an outbound
direction in interface configuration mode. Students create standard access list and apply in order to deny traffic from particular
host IP. Finally, students monitor and test the list. In the second part of the lab, students create an extended list. The process
of creating extended list is the same as creating the standard access list. An extended list will allow students to filter traffic
based on source address, destination address, source port and destination port. In this case, students block the ICMP (Internet
Control Message Protocol) traffic to specific destination host from the specific source host using ping utilities. After creating
standard and extended list, students are asked to create more advanced ACLs such as named list, reflexive list, use of object
grouping, etc. Students are also asked to submit a lab report discussing their learning experience (i.e., student reflections)
based on this lab.

VPN
The virtual private networks (VPNs) are useful to provide the low-cost, widespread medium to transport data while providing
data integrity and confidentiality to protect the information within the data packets. Students are introduced to two types of
VPNs (site-to-site & remote access VPNs) using the various protocols (Frahim & Santos, 2005): Point-to-Point Tunneling
Protocol (PPTP) (Hamzeh, et al., 1999), Layer 2 Forwarding (L2F) (Cisco Systems, 1998) Protocol, Layer 2 Tunneling Protocol
(L2TP) (Townsley et al., 1999), Generic Routing Encapsulation (GRE) (Farinacci et al. 2000) protocol, Multiprotocol Label
Switching (MPLS) (Rosen, et al., 2001) VPN, and Internet Protocol Security (IPSec) (Kent & Atkinson, 1999).

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Site-to-Site VPN
Cisco Lab
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Router

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Dhcp enabled IP

ASA

ASA

Cisco Switch
Dhcp enabled IP

Cisco Switch
Dhcp enabled IP

Team1

Team2

Dhcp enabled IP

Dhcp enabled IP

Figure 3: Site-to-Site VPN


Two or more offices of a corporation can establish a VPN connection using the site-to-site protocols so that they can send
traffic back and forth using a shared medium such as the Internet. This is cost effective solution since it eliminates the need to
have dedicated leased lines to connect the remote offices to the corporate network. The high maintenance cost of point-topoint WAN links can be reduced by using the IPSec VPN tunnel in site-to-site mode. The network administrators can use
broadband connections, including DSL (digital subscriber line) or cable modem, to achieve Internet connectivity at a
considerably cheaper rate, and they can deploy IPSec VPN on top of that to connect the remote locations to the central site in
a secure way.
Students configure a site-to-site IPSec tunnel between two ASAs, as shown in Figure 3, using Cisco IOS commands. Here are
some steps involved in order to create site-to-site VPN (Jasani & Hao, 2009):
1.
2.
3.
4.
5.
6.
7.
8.
9.

Enable ISAKMP.
Create ISAKMP policy.
Set the tunnel type.
Configure preshared keys.
Define the IPSec policy.
Specify interesting traffic.
Configure the crypto map.
Apply the crypto map to the interface.
Configure traffic filtering.

This lab provides a challenging real world experience to the students since students have a unique opportunity to create siteto-site VPN using Cisco ASA.

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Remote Access VPN


Cisco Lab
Switch
10.255.1.2/16

DHCP
Address
Dell Switch

Remote Access
IPSec Tunnel

ASA

10.255.4.XX/16

Cisco client on
Windows PC
Figure 4: Remote-Access VPN with local authentication
The remote-access VPN is another kind of VPN connection. It could be beneficial to an organization by allowing mobile users
to work from remote locations such as home, hotels, and Internet cafes. Previously, the only way to provide this kind of
connection was through dialup connections using analog modems. To accommodate remote users, corporations had to
maintain a huge pool of modems and access servers. Moreover, it was quite expensive due to the use of toll-free and longdistance phone service charges. More and more dialup mobile users are migrating to broadband DSL and cable-modem
connections due to the rapid growth of the Internet technologies. Consequently, corporations are in the process of moving
these dialup users to remote-access VPNs for faster and secure communication. Therefore, it is very important for students to
know this technology and how to configure it.
Students are taught that there are many remote-access VPN protocols as in the case of site-to-site VPN such as Point-to-Point
Tunneling Protocol (PPTP) (Hamzeh, et al., 1999), Layer 2 Forwarding (L2F) (Cisco Systems, 1998) Protocol, Layer 2
Tunneling Protocol (L2TP) (Townsley et al., 1999), Generic Routing Encapsulation (GRE) (Farinacci et al. 2000) protocol,
Multiprotocol Label Switching (MPLS) (Rosen, et al., 2001) VPN, and Internet Protocol Security (IPSec) (Kent & Atkinson,
1999). Those protocols could be used to provide the secure network access. Figure 4 shows the network set up which students
create in order to perform this lab. In this part, students use the local authentication on Cisco ASA to create a tunnel for provide
privacy and confidentiality.
Students follow the following steps in order to configure the remote-access VPN on Cisco ASA using Cisco IOS commands:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

Enable ISAKMP.
Create the ISAKMP policy.
Configure remote-access attributes.
Define the tunnel type.
Configure preshared keys.
Configure user authentication.
Assign an IP address.
Define the IPSec policy.
Set up a dynamic crypto map.
Configure the crypto map.
Apply the crypto map on the interface.

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10.255.1.1/16
10.255.1.2/16
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Switch
Dell Switch

Remote Access
IPSec Tunnel

Ethernet0/0
Outside
DHCP address

ASA 5510

10.255.4.XX/16

Ethernet0/1
Inside

Cisco client on
Windows PC

Authentication Server

Figure 5: Remote-Access VPN with Remote/External Authentication


Students are made aware of two types of modes that could be used for creating IPSec. It is recommended to use main mode
for IKE authentication using RSA signatures because of the known vulnerabilities in aggressive mode (Frahim & Santos, 2005).
There are two different types of authentications (step 6 above) that could set up for this lab. Figure 4 shows the local
authentication while Figure 5 shows the remote authentication using external authentication server (i.e., RADIUS (Remote
Authentication Dial-in User Service). IAS (Internet Authentication Service) has been configured on Windows server 2003 in
order to provide remote authentication. User account database has been created in Active Directory and Certificate has been
created and installed.
This lab is very important due to the importance of technology for providing secure connection for employees to the corporate
data networks. Creating remote access VPN with external authentication server using 802.1x framework is a significant
challenge to the CIT student. However it is a skill of significant importance to the IT (information technology) industry. In this
course, the students are facilitated to master these skills and tools.

IDS & IPS


Intrusion detection system is used to identify attacks and security incidents. Network intrusion detection systems are designed
to sniff network traffic and analyze it to identify threats in the forms of reconnaissance activities and attacks. By detecting
malicious activity, network intrusion detection enables the network professionals to identify and react to threats against their
environment (Northcutt, et al. 2005). An IDS can detect reconnaissance activity that may indicate future targets of particular
interest. It generates alerts for the subsequent attempts to breach host security. Alerts are usually generated through one of
two methods: 1) anomaly detection and 2) signature detection. The anomaly detection relies on statistical analysis to identify
traffic that falls outside the range normally seen in this environment, or it relies on protocol analysis to identify traffic that
violates protocol standards or typical behavior. The signature detection identifies known attack signatures observed in traffic.
While intrusion detection technology generally only reports attacks against monitored systems, intrusion prevention technology
adds an active layer of defensive technology by attempting to stop the attacks before they are successful. Students can
effectively detect and react to security threats using the Cisco Intrusion Prevention Software that is integral part of Cisco ASA.
This device could detect attempts from malicious users to steal information or to gain unauthorized access to a network or a
host to create performance degradation such DDoS (Distributed Denial of Service). In this lab, students learn about the Cisco
IPS software architecture. In addition, they also learn how to configure and monitor the AIP-SSM (Adaptive Inspection and
Prevention Security Services Module), and several troubleshooting techniques. By performing this lab, students achieve the
efficient network intrusion protection skill which is vital to maintaining a high level of protection. Students learn that the cautious
protection ensures business continuity and minimizes the effects of costly interruption of services.
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The CIPS 5.x CLI on Cisco ASA provides a user interface for all direct connections to the AIP-SSM (e.g., Telnet, SSH, and
session from the ASA). By performing this lab, students learn: how to log in to the AIP-SSM via the CLI, CLI command modes,
and initial AIP-SSM configuration. In addition, students also configure the different types of users in the AIP-SSM with different
roles associated to them. Each AIP-SSM user account has a role associated to it. There are a total of four roles that can be
assigned to a specific account: administrator account, operator account, viewer account, and service account. Students also
learn about the advanced features and configuration of the AIP-SSM CIPS software, such as IPS tuning, custom signatures, IP
logging, and shunning.

WIRELESS LAN SECURITY


Wireless networks are becoming more and more popular due to mobile and wireless network evolutions and demand. Wireless
networks are open by nature, so network designers have to take extra steps to protect wireless networks. Without entering into
company building, attacker may have access to company network resources. Because a wireless access point (AP) typically
connects wireless and wired networks, nodes that are located on networks on both sides of an AP participate in the same
broadcast domain. Therefore, an attacker can use techniques that apply to wire-based networks, including attacks such as
ARP cache poisoning (Northcutt, et al., 2005).
Without including the wireless network security, course objectives could not be fully fulfilled as wireless network security is very
important topic. Students perform the following learning activities to setup the security on wireless access point:

Set a MAC address filter on Cisco AP


Configure open authentication with WEP on Cisco AP
Set dynamic WEP keys on Cisco AP
Setting up WPA (Pre-shared Key) on the Cisco AP
Setting up WPA2 on the Cisco AP
Discussion of IEEE 802.11i
Discussion of wireless DoS (Denial of Service) attack (Jamming, etc.)
Discussion of wireless Man in the Middle (MITM) attack (Rogue access point, etc.)

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Dell Switch
DHCP
enabled

Cisco Lab
Switch

Lab PC

Console Cable

10.255.4.x/16
Use Nearest PC for CLI
configuration
Laptop

Figure 6: Wireless Network Setup


Figure 6 shows the general setup of WLAN that students use for performing the lab activities for securing the wireless
networks. In addition to the above activities, students are exposed to the weakness of WEP, and dynamic WEP. Students also
understand the WEP could be cracked easily with tools available for free. Students also configure the WPA and WPA2 which
are more secure ways of providing the wireless access to the users. Students learn that the enterprise should use WPA2 in
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Network Security: An Undergraduate Course in Network Security for Computer Information Technology Curriculum

order to provide confidentiality and privacy of data communication over the wireless link. In addition, 802.1x framework should
be used in enterprise wireless network for external authentication.

CONCLUSIONS
A course in network security has been developed for undergraduate computer information technology students. Due to the
shortage of similar courses, this is the first of its kind providing the students solid practical skills at the undergraduate level.
Students perform advanced labs including network security technologies such as Firewalls, VPN, IDS, IPS, etc. for wired
networks. In addition, WPA2 and 802.1x based wireless security labs also carried out by the students. These labs help
graduating students to improve their skills that enhance the job hunting skills and marketability of them. Moreover, this course
will also benefit industry by offering skills which are practical and valuable. Students carry out experiments using Cisco
networking devices such as switches, routers and ASAs, submit lab reports. Students found this course along with lab
assignments useful in understanding the theory of network security, and gaining practical experience. Consequently, students
have shown great enthusiasm in this course, and student interest is expected to grow as we offer this course.

REFERENCES
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Cisco Systems Inc., (2002). A Comprehensive Review of 802.11 Wireless LAN Security and the Cisco Wireless Security Suite,
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October
30,
2009,
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Cisco
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ACM SIGITE conference on Information technology education, pp37-42.

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THE IMPACT OF INTERACTIVITY OF ONLINE NEWSPAPERS

Sue-Jen Lin
I-Shou University, Taiwan (R. O. C.)
ABSTRACT
Many unanswered questions on interactivity concern the relationship between interactive features and perceived interactivity
and their respective impact on the users attitudes and behavioral intentions. This study attempts to answer these questions by
documenting how readers browsed online newspapers that varied in number and types of interactive features. 169 participants
were randomly assigned to a 2 x 2 between-subject experimental design to browse one of four online newspapers, and their
interactive behaviors were recorded. Participants were asked to evaluate the interactivity levels of the online newspapers and
provide their attitudes and behavioral intentions after the experiment.
The results suggest that the more interactive features a Web site had, the more interactive an individual would perceive the site
to be. This study also found strong support for the impact of both feature-based and perception-based models of interactivity on
an individuals attitude and behavioral intentions toward a Web site.

THE IMPACT OF INTERACTIVITY OF ONLINE NEWSPAPERS


As the number of daily newspapers offering online products continues to grow rapidly and more and more people read online
newspapers on a regular basis, it has become increasingly important for online newspaper publishers to determine the
effectiveness of their Web sites. Although there is no consensus yet as to how to measure the effectiveness of an online
newspaper, it is reasonable to argue that, for an online newspaper to be effective, its readers should at least have favorable
attitudes toward the site and have the intention to revisit the site in the future.
Therefore, it would be important to examine what factors might influence attitudes toward online newspapers and the intention
to revisit online newspapers. Interactivity is often cited as a central characteristic that separates online newspapers from their
traditional counterparts (Massey & Levy, 1999; Kenny, Gorelik, & Mwangi, 2000), and many believe that online news services
can transform journalism (Pavlik, 1997; Regan, 1997; Brooks, McKean, & Morris, 1997). Regan (1997) went even further by
stating that interactivity is the magic bullet that papers have been searching for since circulation began to drop in the 60s (p.
62). Hume (1995) suggested that interactive online newspapers may change the function of those who earn a living in the news
industry. Instead of gathering facts, they may wind up gathering sources of related information, and establishing these sources
as hot links within a Web site. The fact that interactivity may change the roles of readers, the traditional practices of journalism,
and the function of news workers strongly suggests that online newspapers constitute an important site for the study of
interactivity. Therefore, this study aims at examining the impact of interactivity on readers attitudes toward online newspapers
and on readers behavioral intentions.

LITERATURE REVIEW ON INTERACTIVITY


Interestingly, although surrounded by a staggering degree of hype, interactivity is rarely defined or measured. When it is, a
different range of conceptualizations and operationalizations emerges. One of the most quoted definitions of interactivity,
introduced by Rafaeli (1988) from an interpersonal communication perspective, is as follows: an expression of the extent that,
in a given series of communication exchanges, any third (or later) transmission (or message) is related to the degree to which
previous exchanges referred to even earlier transmissions (p. 111). Rafaeli and his colleagues (Rafaeli, 1990; Rafaeli &
Sudweeks, 1997) conducted a number of studies operationalizing interactivity as one-dimensional, process-related variables
based on relatedness of communication messages.
But not all communication researchers use relatedness of communication messages as a standard to evaluate the interactivity
of mediated communication. Acting from a functionalists perspective, some define interactivity as the ability of communication
technologies to facilitate communication among users. Jensen (1998) defined interactivity as A measure of a medias potential
ability to let the user exert an influence on the content and/or form of the mediated communication (p. 201). Heeter (1989)
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The Impact of Interactivity of Online Newspapers

further suggested interactivity as a multi-dimensional concept where interactivity levels fluctuate depending on the technical
capacity of the medium to: 1) provide complexity of choices to users; 2) require effort from users to access information; 3) be
responsive to users; 4) monitor information use; 5) allow users to add information; and 6) facilitate interpersonal communication
among users. Heeters multi-dimensional concept provided a standard for measuring what makes one medium more interactive
than another. Applying Heeters conceptual definition, several researchers (Massey & Levy, 1999; Kenney, Gorelik, & Mwangi,
2000; McMillan, 1999) operationalized interactivity by counting the amount of functional features such as e-mail links, search
engines, feedback forms, chat rooms, and online polls/forums to determine interactivity levels of a medium.
While some communication researchers see interactivity as more technologically determined, others believe interactivity
resides in the perspective or perceptions of those who use interactive media. Newhagen, Cordes, and Levy (1995) suggested
that varying levels of interactivity are dependent upon users perceptions. In their study, e-mail messages intended to be read
by large audiences was considered low level of perceived interactivity, while those addressed to individual audiences were
deemed to possess a high level of perceived interactivity. Wu (1999) measured perceived interactivity by asking Web site
visitors questions that, falling into two groups, sought to determine (1) how responsive a Web site was and (2) how easy it was
for users to navigate a Web site. Downes & McMillan (2000) designed an interactivity scale to measure perceived interactivity8.
In the empirical literature, functional- and/or perception-based definitions of interactivity were employed as independent
variables to predict three possible user-responses: users attitudes toward the Web site (McMillan, 2000a, McMillan, 2000b,
McMillan, 2000c; Wu, 1999); users perceived relevance of the topic of a Web site (McMillan, 2000c); and their behavioral
intentions (Bezjian-Avery, Calder, & Iacobucci, 1998; McMillan, 2000a; McMillan, 2000b). The results of these studies serve
more as confusion than as clarification. In studies that directly compared the impact of interactive features and perceived
interactivity, some studies (McMillan, 2000a; McMillan 2000c) suggested that there was no significant relationship between
functional- and perceived interactivity. That is, users did not perceive Web sites possessing more interactive features as more
interactive than Web sites possessing less interactive features. But one study (McMillan, 2000b) found a strong correlation
between the total numbers of features and perceived interactivity among trained coders.
Not surprisingly, there is no consensus as to how interactivity affects users attitudes and behaviors. Some studies (Wu, 1999;
McMillan, 2000a; McMillan, 2000b) suggested that perceived interactivity, while influencing users attitudes toward both a given
Web site and relevance of site topic, did not affect behavioral intentions. Moreover, the sheer number of interactive features
presented on the sites did not have any impact on any of the users attitudes or behaviors. On the contrary, another study
(McMillan, 2000b) found that perceived interactivity only had impact on one of many behavioral intentions measured, but not on
users attitudes toward the Web site. The study also suggested that relationships between attitudes toward the site and
interactivity tended to be strongest among trained coders, particularly when interactivity was measured as interactive features
rather than as perceptions.
Why do these inconsistencies exist? The answer lies on different user traits and levels of user activities among the studies. For
those studies that did not find a correlation between interactive features and perceived interactivity, only those who were
unfamiliar with the Web sites were used as respondents. Given that the respondents were allowed to spend approximately 510 minutes on each site, they had to make their judgment of interactivity based on their idiosyncratic definitions of interactivity.
Thus, there was no correlation between the number of interactive features and perceived interactivity. Also, given the short
time-frame, the interactive features of the sites were not fully explored, and perceived interactivity was obtained
idiosyncratically. Thus, it can be of little surprise that interactive features had no impact on users attitudes and behaviors, and
that the effects of perceived interactivity were inconsistent. On the other hand, in the study where the responses of trained
coders, who spent averagely 20-30 minutes on each site and sometimes more than one hour, were examined, the number of
interactive features correlated with perceived interactivity, and both interactive features and perceived interactivity had an
impact on viewers attitudes toward the Web sites.
These results indicated that, for experienced users, the more they experienced interactive features (that is, the more they
initiated interactive behavior with the medium) the better they made a judgment of the interactivity-level of the medium, and
thus the more positive their attitudes were toward the medium, and the more likely they were to recommend the medium to
others. This leads to a reasonable assumption that a users perceptions of the interactivity level of a Web site should be
influenced by the amount of interactive behavior employed by the user. Perceived interactivity, in turn, should have impact on
the users attitudes and behavioral intentions toward the medium.
8

The scale asks respondents to indicate their agreement with the following statements so as to gauge perceived interactivity levels: This site facilitates two-way
communication, When I visit this site I get the sense that I am in a place in cyberspace, This site seems to allow site visitors to communicate at times that are most
convenient for them, I feel that I have a great deal of control over my visiting experience at this site, Visitors to this site need to take an active role in order to fully
experience the site, This site seems to be designed primarily to inform rather than persuade, and This site is interactive (Downes & McMillan, 2000, p. 6).

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LITERATURE REVIEW ON THE STRUCTURAL CHARACTERISTICS OF ONLINE NEWSPAPERS


To know what characteristics of online newspapers allow interactivity, two questions have to be addressed first: What
interactions can be made possible by online newspapers, and what features allow those interactions?
As Massey & Levy (1999) pointed out, online newspapers can make two types of interactions possible by: content interactivity
and interpersonal interactivity. Content interactivity refers to the degree to which consumers of online newspapers can have
control over content, while interpersonal interactivity refers to the extent to which a reader can have computer-mediated
conversations with other readers/reporters/editors.

Features that Facilitate Content Interactivity


Hume (1995) described how Internet technologies are able to create a bottomless news hole for online newspapers and to
increase the opportunity for interactivity by providing online readers with a wide range of content choices. The degree of
content interactivity could be measured by the diversity of the content that an online newspaper serves to its reader.
But the topical range of content of online newspapers alone cannot determine the interactivity of an online newspaper. After all,
readers of traditional newspapers can also leaf through a sectionalized, ink-and-newsprint newspaper to find content that
matches their own interests. Although the capability of an online newspaper to provide diversified content is an important
indicator of content interactivity, what makes an online newspaper differ from its traditional counterpart is that readers of online
newspapers have not only many choices but also control over the messages. Readers of online newspapers can search,
select, edit, and modify the form and content of mediated messages; they can also choose to forward the messages to their
friends or print out the messages for later uses. Features that allow readers to manipulate and customize the messages, such
as hyperlinks, hypertext links, search engines, and multimedia elements should be another sub-dimension of interactivity.

Features that Facilitate Interpersonal Interactivity


Another type of interaction made possible by online newspapers is the interaction between readers and news content creators.
Traditional newspapers rely heavily on letters to the editor or on readers phone calls for feedback, but only editors read this
type of feedback. Even if it is printed on the papers, the audience for these messages still amounts to other newspaper
readers, not news writers. Journalists of traditional newspapers have no way of connecting or relating to their readers unless
readers have the ability to call them or write to them personally. The interaction between readers and content creators of
traditional newspapers is often infrequent, indirect, and delayed. Online newspapers become interactive when the provision of
e-mail links to the newsroom creates opportunities for online readers to interact with content creators.
Interpersonal interactivity made possible by online newspapers also involves readers on both ends of the interactive processes.
It refers to the extent to which a news Web site presents itself as a conduit for a reader to engage in communication with
another reader (Massey & Levy, 1999, p. 141). Online newspaper features such as chat rooms and opinion forums enable
communication between two people or among a small group of people in which each participant can send and receive
messages to and from all others.
But how these interactive features are actually used by online newspapers? Several studies (Gubman & Greer, 1997; Tankard
& Ban, 1998; Kamerer & Bressers, 1998; Preston, 1998; Schultz, 1999; Massey & Levy, 1999; Kenny, Gorelik, & Mwangi,
2000; Li, 2000) that examined the structure of online newspapers provide information as to how interactive features of online
newspapers have been used by online newspaper publishers. Table 1 presents a detailed summary of the results of six studies
on the uses of interactive features by online newspapers.

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The Impact of Interactivity of Online Newspapers

Table 1: Summary of the results of six studies on uses of interactive features by online newspapers
AUTHOR

Gubman, &
Greer (1997)

Tankard & Ban,


(1998)
Kamerer, &
Bressers,(1998)

CONTENT INTERACTIVITY
Content diversity

Links and search engine

Multimedia

INTERPERSONAL
INTERACTIVITY

89% provided local news


54% provided national news
53% had news stories on the
first screen
70% had news headlines on
the first screen

69.9% had archives


15.7% used any type of
linked boxes or nontraditional storytelling
10% linked to searchable
news wires.

Only 14.5% of sites used


audio, video, or animation
in news section.

95% had e-mail addresses


55% had e-mail links to newsrooms
40% had forums
57.8% were responsive to readers
comments

The average % of material


written by online staff was
13%

94% contained no links


64% had search engine and
news archives

77% used photographs,


but less than 10% used
animated graphics, audio
clips, video clips, tables,
or graphs.

96% had e-mail addresses


26%had discussion
forums/electronic bulletin boards
12% chat rooms

91-91% provide local news


45-53% provide national news

37-39% had search engine


34-52% had archives

33-42% had animation,


6% audio, 2% audio

73-94% had e-mails to papers


47-57% had e-mails to individuals
94% had e-mail addresses to
newsrooms
29% provided directories that listed
their editors and reporters with
personal e-mail links.
92% offered no synchronous chat
rooms
3% provided links to other chat
providers
Only 5% has their own chat rooms.
33% had discussion forums

Schultz, (1999)

High on news but low on


entertainment and
commercials

10% had hypertext links


75% had search engines;
only 3 (out of 44) had news
customization features

83% had news on homepage

33% had hypertext links


52% had hyperlinks
23% had search engines

Massey, & Levy


(1999)

Kenny, Gorelik,
& Mwangi,
(2000)

Multimedia features found


at 2(out of 44) sites.

42 (out of 44) had e-mail links to


papers
50% had links to webmasters
Only 2(44) had links to
papers/online editors and reporters.
4 had moderated chat rooms; 4 had
unmoderated chat rooms; only one
had both
51% had at least one e-mail address
on the home page,
64% had email addresses to
reporter; 69% did not respond,
51% had email addresses to
webmaster, 70% did not respond
12% had chat rooms
17% had discussion groups
49% had feedback mechanisms

Based on the results of the above studies, what are the similarities and differences between sites with high interactive options
and sites with low interactive options? As we can see from Table 1, almost all the sites are pretty good at providing headlines
on the home page and local news sections. What distinguishes sites with high interactive options from sites with low interactive
options is that high interactivity sites tend to have more news stories on the first screen, more national news, and more
entertainment coverage. Low interactivity sites typically do not provide hypertext links and search engines, but, as with high
interactivity sites, they provide hyperlinks9. Almost all the sites provide e-mail links, but the difference is that high interactivity
sites provide links not only to webmasters and subscription/service departments, but also to individual reporters/editors within
news stories, while low interactivity sites tend to provide links only to webmasters and subscription departments. In some cases
where low interactive sites provide links to reporters, readers have to click on the link to news department to find an individual
reporters email address (Schultz, 1999) so that they can email reporters. In terms of providing features that allow interactions
among online readers, very few sites have synchronous chat rooms, while asynchronous chat rooms and opinion forums are
found at high interactivity Web sites, but are less common at low interactivity sites. Based on these findings, Table 2
summarizes what key characteristics distinguish a high interactive site from a low interactive site.
9

Hypertext links refer to those that connect one document (news story) to another within the same site while hyperlinks refer to those that connect to a location on the
Internet outside the site where the current page is located.

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Table 2: Key characteristics that distinguish a high interactive site from a low interactive site
Type of Interactivity

Concept of Interest

Interactive Features

Diversity of content

Number of stories within the


site

Content interactivity

Hypertext links

Control over content


Interpersonal interactivity

Search engine

Communication with content creators

E-mail links to reporters/editors

Communication with other readers

Bulletin boards

Therefore, the structural characteristics of an online newspaper that enable content interactivity is operationalized in this
study as both the number of stories that an online newspaper serves to its reader and the presence of features that enable
users control over content, features such as hypertext links, and search engines. The capability of an online newspaper to
provide interpersonal interactivity between readers and content creators and among readers is operationalized as the
presence/absence of e-mail links to reporters/editors and bulletin boards.

HYPOTHESES
Although the structural characteristics of online newspapers alone can not determine the interactivity level of online
newspapers, the structural characteristics do it place limits on interactions that can be made possible within the medium.
Therefore, this study proposes the following hypothesis:
H1:

An online newspaper with more interactive features will lead to more time spent on the site and more page-viewed
by readers than one with fewer interactive features.

A key question that stems from the existing literature, but still rests on inconsistent findings, concerns the relationship between,
on the one hand, interactive features of a Web site and, on the other, perceptions of interactivity and their respective impact on
users. Conclusions from previous studies on interactivity seem to imply that the number of interactive features presented at
Web sites affects neither users attitudes nor their behavioral intentions, while the effects of perceived interactivity on users
attitudes and behavioral intentions are inconsistent. This study argues that, by counting interactive features without tracking the
use of interactive features, a method employed by previous studies, researchers only obtained measurements of the
interactivity potential of a medium. Researchers who asked users to make judgments regarding the interactivity levels of a
medium when these same users were not familiar with the medium (another methodological problem found in previous studies)
eventually amassed nothing more than users idiosyncratic definitions of interactivity.
This is especially true when one looks at the statements used to tap perceived interactivity. When a researcher asks the
respondents to indicate their agreement with statements like This site is interactive and This site facilitates two-way
communication, there is an unanalyzed assumption that people are capable of evaluating not only what interactivity and twoway communication are, but whether these two concepts share the same meaning, as well. To the extent that people can and
do make such evaluations, there exists the possibility that interactivity may have an impact on favorable attitudes/behavioral
intentions toward the site. To the extent that people cannot make such evaluations, there exists the possibility that favorable
attitudes/behavioral intentions may come from somewhere else.
This study argued that the reason for the inconsistent findings is due to the fact that participants in those studies were not
given enough time to use the interactive features at the sites so that they did not perceive Web sites with more interactive
features as more interactive than Web sites with less interactive features. Asking participants to spend at least 20 minutes at
the online newspapers created for this study should allow participants to have enough time to use those interactive features,
and then to make experientialnot idiosyncraticjudgments regarding their perceptions of interactivity. Therefore, one can
expect to find
H2:

An online newspaper with more interactive features will lead to a higher perception of interactivity of that Web site.

While the literature has begun to explore the relationship between interactive features of a Web site and users perceptions of
interactivity, no study has attempted to examine the reasons as to why users can/cannot make a connection between
interactive features presented at the site and the perceived interactivity level of that site. If allowing participants to spend more
time to use interactive features will lead to a higher perception of interactivity of a Web sitethat is, if hypothesis 2 is
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The Impact of Interactivity of Online Newspapers

supportedit should be reasonable to argue that it is the use of those interactive features, that is, interactive behavior, that
leads to a higher perception of interactivity. Therefore,
H3:

The greater the interactive behavior, the higher degree of perceived interactivity.

As for the respective impacts of feature-based and perception-based interactivity on users, results of previous studies suggest
that the impact may lie with changes in users attitudes and behaviors. The impact of perceived interactivity in the effectiveness
of online newspapers can also be explained through the concept of information processing. More interactivity among readers,
between online news readers and messages, or between readers and reporters/editors should yield more intensive and active
information processing. And this active information processing through interactivity may result in more favorable and desirable
reader attitudes and actions (e.g., a favorable attitude toward the newspaper Web site; the likelihood of returning to the site).
The following hypotheses explore relationships between feature-based and perception-based interactivity, as well as attitudes
toward newspaper Web sites and users future actions.
H4a: An online newspaper with more interactive features will lead to more favorable attitudes toward the newspaper Web
site.
H4b: An online newspaper with more interactive features will lead to more favorable behavioral intentions toward the
newspaper Web site.
H5a: The higher the perceived interactivity of a Web site, the more positive the attitudes toward the newspaper Web site
will be.
H5b: The higher the perceived interactivity of a Web site, the more positive the behavioral intentions toward the
newspaper Web site will be.

METHOD
Stimuli
To test the hypotheses, a 2 (presence or absence of features that facilitate content interactivity) x2 (presence or absence of
features that facilitate interpersonal interactivity) between-subject factorial design was used to create four treatment conditions.
Table 3 showed how the interactive features were manipulated in the four experimental conditions.
Table 3: Interactive features presented in a 2x2 experiment conditions
Content Interactivity
Low
Low

Interpersonal Interactivity
High

High

--50 news stories

--100 news stories


--200 hypertext links
--search engine on each page

--50 news stories


--email links to reporters within
news stories
--8 bulletin boards

--100 news stories


--200 hypertext links
--search engine on each page
--email links to reporters within news
stories
--8 bulletin boards

Participants and Procedures


A total of 263 students signed up for this research. Students who were enrolled in a large sociology class at a large Midwest
university in the United States were asked to participate in this research. The students were told that the study was to examine
how college students browsed online newspapers and their media use habits. Those who agreed to participate filled out a signup sheet that asked their e-mail addresses and basic information. The students were randomly assigned to one of the four
experimental conditions. An e-mail confirmation for participation was sent to the signed-up students, which included the URL of
the site to be examined. The instructions as to how to complete the study were also included in the e-mail. The e-mail asked
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Volume 8 Winter 2009

sign-ups to browse an online newspaper for at least 20 minutes10, and then to click on the survey link to fill out a questionnaire
(10-15 minutes). After the students submitted the questionnaire online, a Web page that contained debriefing information
appeared on the screen, debriefing the students and thanking them for their participation. Participants were compensated for
their time with five dollars.
Net Tracker, a software program designed to view the individual click stream path of each visitor to Web sites, to analyze the
use of Web site content, and to measure site response times and page delivery, was used to gather information on participants
interactive behaviors. Because the participants names and e-mail addresses were recorded on log files, Net Tracker was then
able to match each participants name and e-mail address with his/her own browsing activities, and thus to provide information
necessary for data analysis.

Dependent Measures
The dependent variables are interactive behavior, perceived interactivity, attitude toward Web sites, and behavioral intentions.
Interactive behavior was measured in two ways: by recording the time a participant spent on the site and by recording the
number of pages that a participant visited while he/she was browsing the site. As previously argued, allowing participants
enough time to use interactive features is the key to understanding the relationship between interactive features and perceived
interactivity and how interactive features and perceived interactivity respectively affect users attitudes and behavioral
intentions. Therefore, time spent on the site is used as one way to measure interactive behavior.
As for how to operationalize the use of interactive features, that is, interactive behavior, the way Tremayne & Dunwoody (2001)
measured the use of interactive features was adopted in this study. By recording how many pages have been requested and
received by users, Tremayne and Dunwoody successfully obtained an interactivity measure that takes not only the availability
of interactive features but also the use of interactive features into account. Therefore, in this study, a participants use of
interactive features was obtained by recording the number of news pages that had been successfully requested and received.
Perceived interactivity was measured by asking respondents to use a seven-point Likert type scale to indicate their agreement
with 13 statements that were used in McMillan (2000a, 2000b, 2000c)s studies and Wu (1999)s study. According to these
studies, these 13 statements corresponded to four dimensions, which, themselves, related to how individuals perceive
interactivity. These four dimensions are responsiveness, navigation, control, and direction of communication.
Attitudes toward the online newspaper Web site was measured by five, seven-point, semantic, differential items. These items
are commonly used in advertising, marketing, consumer behavior, and communication research (e.g. Gardner, 1985;
MacKenzie, Lutz & Belch, 1986; Mitchell & Olson, 1986; McMillan, 2000a; 2000b) to reflect a broad range of attitudinal
information about the Web site. These five items are bad/good, unpleasant/pleasant, irritating/not irritating, boring/interesting,
dislike/like.
As the readers responded to seven carefully formulated statements, a 7-point scale ranging from very unlikely (=1) to very
likely (=7) was used to measure the readers behavioral intentions toward their respective online newspaper Web sites.
Specifically, the seven questions asked respondents to indicate their intentions to return to the site/to tell someone about this
site/to bookmark the site/to send e-mails to the site/to forward what they found interesting at the site to friends/to print out what
they found interesting at the site/to purchase the online newspapers print version. These statements were adapted from
McMillan (2000b; 2000c)s studies, Wu (1999)s study, and Cho & Leckenby (1999)s study.

Measurement Results
Among the 263 recruits, 209 visited the sites and 169 completed the study. The instructions for the experiment asked the
participants to spend at least 20 minutes on the online newspaper and then to fill out the survey. The mean of the time that the
participants spent on browsing the newspaper was 24 minutes and 49 seconds, ranging from 2 minutes and 2 seconds to 1
hour, 17 minutes, and 3 seconds. The mean of pages viewed was 11.18 pages, ranging from 2 pages to 45 pages. There were
5 participants who spent fewer than 5 minutes browsing the online newspaper to which they had been assigned. The decision
was made to drop these 5 participants from the study. As mentioned in the previous chapters, not spending enough time on the
site could be the reason for the inconsistent and/or null findings of past research. As for the number of pages-viewed, the home
page was the only page that was exactly the same across experimental conditions. So, as long as the participant ventured out
10

A clock was placed on the top of each Web page to remind the participants of how much time that they had spent on the site. Under the clock was a reminder that the
participants could click the survey link to fill out the survey after the passage of 20 to 30 minutes.

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to view at least 2 pages of the site, they should have been able to experience the difference in the design. Since the minimum
pages-viewed was 2, no case was dropped for this reason.
After dropping these 5 participants, among 164 participants whose information was used for the following analyses, 97 (59.1%)
were female and 67 (40.9%) were males. The mean age of participants was 20.93.
Interactive behavior was operationalized as the time spent on the online newspaper and the number of Web pages viewed.
After dropping the five participants who spent fewer than five minutes on browsing the online newspaper that they were
assigned, the mean of the time that the remaining participants spent on browsing the online newspaper was 25 minutes and 28
seconds, ranging from 5 minutes and 37 seconds to 1 hour, 17 minutes, and 3 seconds with 11 minutes and 25 seconds as the
standard deviation. The mean of pages-viewed was 11.40 pages, ranging from 2 pages to 45 pages, with a standard deviation
of 8.47 pages.
A factor analysis was conducted using the principal component analysis with the varimax rotation. Applying eigenvalues
greater than one or equal to one criterion, a three-factor model was adopted. The first factor consisted of five items, the second
consisted of three items, and the third factor consisted of two items11. The first factor accounted for 35.71% of the total
variance, the second factor accounted for 12.76%, and the third factor accounted for 8.50%. These three factors account for
56.98% of the total variance. Clearly, the first factor can be denoted as the navigability dimension of perceived interactivity,
the second one can be denoted as the communication interactivity dimension of perceived interactivity, and the third one as
the activity dimension of perceived interactivity. Alpha for the 5 items in the navigability component was .80, alpha for the
three items in the communication interactivity component was .64, and alpha for the two items in the activity component was
.55. Table 4 shows the factor loadings for the 11 statements.
Table 4: Factor loadings on 11 scale items that measured perceived interactivity of online newspapers.
Rotated Component Matrix a
Component
Scale Items

While I was on the site, I always knew where I was going.

.831

.137

-.045

While I was on the site, I was always able to go where I thought I was going.

.822

.117

-.085

I was delighted to be able to choose which link and when to click.

.510

.355

.347

While I was on the site, I could quickly jump from one page to another.

.705

-.024

.356

I was pleased to express my feelings and opinions on the spot through


email or feedback form.

.033

.727

-.092

This site facilitates two-way communication.

.031

.581

.516

When I visit this site, I get the sense that I am in place in cyberspace.

.151

.736

.289

This site seems to allow site visitors to communicate at times that are most
convenient for them.

.229

.489

.470

I feel that I have a great deal of control over my visiting experience at this
site.

.622

.228

.305

Visitors to this site need to take an active role in order to fully experience
the site.

.066

-.065

.768

This site is interactive.

.104

.298

.712

Extraction Method: Principle Component Analysis.


Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 5 iterations

Attitudes toward the online newspaper Web site were measured by five seven-point, semantic, differential items. The grand
mean for these five items was 4.48, a score that was higher than the mid-point on a seven-point scale. A factor analysis was
conducted on these five items using the principal component analysis with the varimax rotation. All these five indicator
variables had high communalities (all over .70) and loaded on a single factor, which accounted for 75.49% of the total variance.

11

Three items were dropped because of low communality or violation of items-on-factor criterion.

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Volume 8 Winter 2009

An individuals attitudes toward the site score was therefore calculated by averaging the scores of these five items that were
non-missing to avoid losing too many cases with missing values on the items. Alpha for the scale was .92.
Behavioral intentions toward the online newspaper Web site was measured by asking respondents to use a seven-point Likert
scale to indicate their level of agreement with the seven statements. The grand mean for these seven items was 2.77, a score
that was lower than the mid-point on a seven-point scale.
A factor analysis was conducted on these seven items using the principal component analysis with the varimax rotation. All
these seven indicator variables loaded on a single factor, but the factor only accounted for 58.43% of the total variance.
Therefore, instead of using the Kaiser Criterion, which dropped all components with eigenvalues under 1.0, variance-explainedcriterion was used to determine the number of factors. As a result, a two-factor model was selected because it accounted for
71.21% of the total variance (when the first factor had an eigenvalue of 4.09 and the second factor had an eigenvalue of .90).
Two factors emerged: The first consisted of five items and the second consisted of two. The first factor accounted for 58.43%
of the total variance and the second factor accounted for 12.78%. These two factors accounted for 71.21% of the total
variance. Clearly, the first factor can be denoted as behavioral intentions toward the Site dimension, while the second one
can be denoted as behavioral intentions toward the Content of the Web site dimension. Alpha for the five items in the Site
component was .87, and Alpha for the two items in the Content component was .77. This scale proved to be reliable overall.
Table 5 shows the factor loadings on seven items that measured behavioral intentions toward the online newspaper.
Table 5: Factor loadings of seven items that measured behavioral intentions toward the online newspapers
Rotated Component Matrix a
Component
Scale Items

How likely would you be to tell someone else about this site?

.77

.33

How likely would you be to send e-mail to this site?

.63

.40

How likely would you be to bookmark this site?

.85

.19

How likely would you be to forward a message you found interesting at this site to your
friends?

.30

.84

How likely would you be to subscribe to this online newspapers print version?

.76

.15

How likely would you be to return to this online newspaper website?

.80

.32

How likely would you be to print out a message you found interesting when you browsed the
site?

.22

.88

Extraction Method: Principle Component Analysis.


Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 3 iterations

RESULTS
Hypothesis 112 predicts that an online newspaper with more interactive features will lead to greater interactive behavior. The
results of the GLM multivariate analysis of variance showed that participants who were assigned to high content interactivity
experimental conditions spent more time (M=00:26:57) on the site than those who were assigned to low content interactivity
conditions (M=00:23:52) and the difference approached significant levels, F(1, 163)=3.04, p=.08, but participants in high
content interactivity experimental conditions viewed fewer pages (M=10.66) than did participants in low content interactivity
conditions (M=12.11); however, this difference was not statistically significant, F (1, 163)=1.21, p=.273.
The results of the GLM multivariate analysis of variance also showed that participants who were assigned to high interpersonal
interactivity experimental conditions spent more time (M=00:28:46) on the site than those who were assigned to low
interpersonal interactivity conditions (M=00:22:04), and the difference was statistically significant, F(1, 163)=15.32, p=.00. The
former group of participants also viewed more pages (M=13.67) than did participants in low interpersonal interactivity

12

Several GLM (General Linear Model) were conducted and checked first to see if there were interactions between types of interactions on all the dependent variables. The
results indicated none of the interactions were significant. Thus, only the interpretations of the statistical results on main effects were discussed.

137

The Impact of Interactivity of Online Newspapers

conditions (M=8.99), and the difference was also statistically significant, F (1, 163) =13.51, p=.00. Hypothesis 1 was mostly
supported. Table 6 shows the results of the effects of interactive features on interactive behaviors.
Table 6: Means and F-ratios of time spent on the site and number of pages-viewed for participants in different
experimental conditions
Type of Interaction allowed

Experimental condition

Content Interactivity

Time spent on the site

Number of pages-viewed

Mean

Mean

High

0:26:57

10.66

Low

0:23:52

12.11

3.03

1.21

High

0:28:46

13.67

Low

0:22:04

8.99

F-ratio
Interpersonal Interactivity

F-ratio

15.32**

13.51**

**Significant at the 0.01 level


*Significant at the 0.05 level

Hypothesis 2 predicts that an online newspaper with more interactive features will be associated with a higher perception of
interactivity belonging to that Web site. The results of a GLM multivariate analysis of variance show that participants in high
content interactivity conditions reported higher means scores on all three dimensions of perceived interactivity (M=5.49 on
Navigability; M=3.53 on Communication Interactivity; and M=4.57 on Activity dimension) than participants in low content
interactivity conditions (M=5.29 on Navigability; M=3.13 on Communication Interactivity; and M=4.09 on Activity dimension).
The difference on Communication Interactivity dimension of perceived interactivity and the difference on Activity dimension
were statistically significant (F=3.83, df=1, p=.05 on Communication Interactivity, and F=5.42, df=1, p=.02 on Activity
dimension), although the difference on Navigability dimension was not (F=1.62, df=1, p=.21). Table 7 shows how participants
in high versus low content interactivity conditions differed in scores of each component (dimension) of perceived interactivity.
Table 7: Mean scores, F-ratios, and p-values on the three dimensions of perceived interactivity for participants in high/low
content interactivity conditions
Interactivity scores

Dimension
(Component)

Assigned to high content


interactivity condition?

Navigability

no

5.29

yes

5.49

Communication
Interactivity

no

3.13

yes

3.53

Activity

no

4.09

yes

4.57

Mean

p-value

1.62

.21

3.83

0.05 *

5.42

0.02 *

**Significant at the 0.01 level


*Significant at the 0.05 level

Participants in high interpersonal interactivity conditions reported higher means scores on all three dimensions of perceived
interactivity (M=5.53 on Navigability; M=3.83 on Communication Interactivity; and M=4.55 on Activity dimension) than did
participants in low interpersonal interactivity conditions (M=5.27 on Navigability; M=3.46 on Communication Interactivity; and
M=4.12 on Activity dimension). The difference on Communication Interactivity dimension of perceived interactivity and the
difference on Activity dimension were statistically significant (F=3.89, df=1, p=.05 on Communication Interactivity, and
F=4.56, df=1, p=.03 on Activity dimension), although the difference on Navigability dimension was not (F=2.62, df=1, p=.11).
Table 8 shows how participants in high versus low interpersonal interactivity conditions differed in scores of each component
(dimension) of perceived interactivity.

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Table 8: Mean scores, F-ratios, and p-values on the three dimensions of perceived interactivity for participants in high/low
interpersonal interactivity conditions
Interactivity scores

Dimension
(Component)

High interpersonal
interactivity condition?

Navigability

no

5.27

yes

5.53

Communication
Interactivity

no

3.46

yes

3.83

Activity

no

4.12

yes

4.55

Mean

p-value

2.62

.11

3.89

0.05 *

4.56

0.03 *

**Significant at the 0.01 level


*Significant at the 0.05 level

Hypothesis 3 predicts that the greater the interactive behavior is, the higher degree of perceived interactivity there will be. No
significant relationship was found. The correlations between time spent on the site and the three dimensions of perceived and
the correlations between number of pages-viewed and the three dimensions of perceived interactivity were also small and not
statistically significant. Therefore, hypothesis 3 was not supported.
Hypothesis 4a predicts that an online newspaper with more interactive features will lead to more favorable attitudes toward the
newspaper Web site. The results of the GLM univariate analysis of variance showed that those who were assigned to high
content interactivity experimental conditions had more positive attitudes toward the site (M=4.70) than low content interactivity
groups (M=4.24), and the difference was statistically significant, F(1, 158)=4.54, p=.04. In addition, participants assigned to
sites that had more features that allowed interpersonal interactivity also displayed more positive attitudes toward the site
(M=4.85) than low interpersonal interactivity groups (M=4.09), and the difference was statistically significant, F(1, 158)=13.11,
p=.00. Hypothesis 4a was supported.
Hypothesis 4b predicts that an online newspaper with more interactive features will lead to more favorable behavioral intentions
toward the newspaper Web site. The results of the GLM multivariate analysis of variance showed that those who were
assigned to high content interactivity experimental conditions had a more positive behavioral intentions toward Site dimension
score (M=2.68), and had a more positive behavioral intentions toward Content dimension score (M=3.65) than low content
interactivity groups (M=2.27 for Site dimension, and M=3.28 for Content dimension), and significant relationship was found
only for behavioral intentions toward Site dimension (F=4.08, df=1, p<.05).
The results of the GLM multivariate analysis of variance also showed that those who were assigned to high interpersonal
interactivity experimental conditions had a more positive behavioral intentions toward Site dimension score (M=2.73), and had
a more positive behavioral intentions toward Content dimension score (M=3.67) than low interpersonal interactivity groups
(M=2.22 for Site dimension, and M=3.26 for Content dimension), and significant relationship was found for the behavioral
intentions toward Site dimension (F=6.29, df=1, p<.05). Hypothesis 4b was mostly supported. Table 9 summarizes the results
of statistical tests on hypothesis 4a and 4b.
Table 9: Means and F-rations of attitude toward the online newspaper measure and behavioral intentions toward the online
newspapers measures for participants in different experimental conditions
Type of Interaction
allowed

Content Interactivity

Experimental
condition

Attitudes toward the


online newspaper

Behavioral intentions
toward Site Dimension

Behavioral intentions toward


Content Dimension

Mean

Mean

Mean

High

4.70

2.68

3.65

Low

4.24

2.27

3.28

4.54*

4.08*

1.64

High

4.85

2.73

3.67

Low

4.09

2.22

3.26

F-ratio

3.11**

6.29*

2.11

F-ratio
Interpersonal
Interactivity

**Significant at the 0.01 level


*Significant at the 0.05 level

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The Impact of Interactivity of Online Newspapers

Hypothesis 5a predicts that the higher the perceived interactivity of a Web site is, the more positive the attitude toward the
newspaper Web site will be. Bi-variate correlations were used for examining this hypothesis. Strong positive correlations were
found for the relationships between the three dimensions of perceived interactivity scores and attitudes toward the online
newspaper (r=.59, p<.01 for Navigation and attitudes, r=.41, p<.01 for Communication Interactivity and attitudes, and r=.37,
p<.01 for Activity and attitudes). Support for hypothesis 5a was found.
Hypothesis 5b predicts that the higher the perceived interactivity of a Web site is, the more positive the behavioral intentions
toward the newspaper Web site will be. Strong positive correlations were found for the relationships between the three
dimensions of perceived interactivity and all behavioral intentions measures. Thus, strong support for hypothesis 5b was found.
Table 10 summarizes the results of hypothesis 5a and 5b.
Table 10: Correlations between perceived interactivity measures and attitudes/behavioral intentions measures
Attitudes toward the
online newspaper

Behavioral intentions toward


Site dimension

Behavioral intentions toward


Content dimension

Navigation Dimension

R=.59**

r=.33**

r=.30**

Communication
Interactivity Dimension

R=.41**

r=.49**

r=.38**

Activity Dimension

R=.37**

r=.21**

r=.23**

**Correlation is significant at the 0.01 level (2-tailed).


*Correlation is significant at the 0.05 level (2-tailed).

DISCUSSION
The present investigation sought to understand the relationship between interactive features and perceived interactivity and
their respective impact both on users attitudes and behavioral intentions toward a Web site. The data presented in this study
give clear answers to the above questions. Participants assigned to high interactive experimental conditions reported higher
perceived interactivity scores, which suggests that the more interactive features a Web site has, the more interactive an
individual will perceive the site to be. That is, the number of interactive features at a Web site is a predictor of perceived
interactivity.
This study also found strong support for the impact of both feature-based and perception-based models of interactivity on an
individuals attitude and behavioral intentions toward a Web site. Participants in high interactive experimental conditions had
more favorable attitudes and behavioral intentions toward the online newspaper Web site. Also, the higher an individuals
perceived interactivity score was, the more favorable his/her attitudes and behavioral intentions were toward the online
newspaper Web site.
As the literature contains contradictory evidence when it comes to the relationships between feature-based and perceptionbased models of interactivity and their respective impact, the finding that differences in the availability of interactive features
that were presented at Web sites resulted in significant differences in readers perceived interactivity, attitudes, and behavioral
intentions toward the online newspaper has profound practical and theoretical implications.
Despite the trials and tribulations of creating a digital publication, most analysts are convinced that creating interactive news
sites is the only way that newspapers can continue to provide information and survive as institutions. But, if adding more
interactive features to a newspaper Web site does not increase perceived interactivity in the mind of online readers and does
not result in favorable attitudes and behavioral intentions toward the online newspaper as previous research has found, then
what is the point of building up a computer version of the printed newspaper? Intuition suggests that creating an interactive
online newspaper for online news readers would have positive consequences for online news publishers. The results of this
study confirm this hypothesis by finding evidence that adding more interactive features to a Web site does increase online
readers perceptions of interactivity, producing favorable attitudes and behavioral intentions toward online newspapers. If online
newspaper Web site developers want their online readers to have not only favorable attitudes toward their sites, but also the
intention of revisiting their sites, then these developers should devote more effort to designing features that are capable of
facilitating interactivity, because, as evidence found in this study and Newhagen and Rafaeli (1996) suggested, good choices
and crafty implementation of interactivity are often the difference between successful and failing Web sites (p. 6).
Theoretically, this finding suggests that both counting the number of interactive features available in a medium and measuring
users perceptions of interactivity of a medium are useful ways to define interactivity. But findings of a positive relationship
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between the availability of interactive features and perceived interactivity and the fact that interactive features and perceived
interactivity have affected an individuals attitudes and behavioral intentions toward a Web site would seem meaningless if we
do not know why this occur.
This study is pioneering in the sense that it is the first formal research that tried to examine the underlying mechanism through
which users of online newspapers make their judgments of perceived interactivity of an online newspaper based on the
interactive features that they encounter while browsing an online newspaper Web site. It was hypothesized that the underlying
mechanism through which users of online newspapers made their judgment of perceived interactivity centered on the number
of interactive behaviors that they initiated when they browsed an online newspaper. Although participants who were assigned
to sites that had more interactive features spent more time and viewed more pages and this effect was more pronounced for
those who were assigned to high interpersonal interactivity conditions, the complete lack of significant relationships between
measures of interactive behaviors and measures of perceived interactivity is somewhat unexpected.

LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH


There are some limitations to the present study. Although the use of four versions of a fictitious online newspaper as the stimuli
for this experiment created tight control over the variables of research interest, problems inevitably arise when one attempts to
reproduce real world behaviors and processes using a not-so real world object. It could very well be that the participants in
this study evinced different news reading behaviors than they otherwise would have when using real-world, online newspapers.
However, one can reasonably argue that the experimental groups differ from their ordinary online news reading behaviors in a
similar way. Thus, it is quite probable that a good portion of the observed effects was due to the differences in the number and
types of interactive features manipulated in each experimental condition.
Another weakness of this study is that, based on previous studies that content-analyzed the most prevalent interactive features
available at newspaper Web sites, this preliminary study only examined the impact that a limited number of interactive features,
news stories, hypertext links, search engines, e-mail links to reporters/editors, and bulletin boards had on users attitudes and
behaviors. As Internet technologies become more advanced and users Internet experiences become more sophisticated,
future research might need to identify other interactive features that make using the Web a more interactive experience. For
example, research might need to focus on how the addition of other interactive features, such as hyperlinks, synchronous chat
rooms, audio and video, or breaking news stories change both the nature of the online news service and users perceived
interactivity of that online newspaper.
Also, this study involves the scales used therein to measure perceived interactivity. Items that were used in measuring
perceived interactivity had been used in previous research, but the factor analysis of these 13 items performed in this study
produced different results than those found in previous research. In addition, the result of the factor analysis suggested there
were three dimensions of perceived interactivity: Navigability dimension, Communication Interactivity dimension, and Activity
dimension. These dimensions are more useful when are used to gauge the degree of interpersonal interactivity of online
newspapers, but are less helpful when are used to assess the degree of content interactivity of online newspapers. Also,
McMillans perceived interactivity items were derived from in-depth interviews with 10 individuals who work and teach in the
field of interactive communication (Downes & McMillan, 2000); none of the items was based on users perceptions of
interactivity. Although the resulting three scales of perceived interactivity from factor analysis all had high inter-item reliability, a
more rigorous scale development for perceived interactivity is desirable, especially in relation to scale items that take users
definitions of interactivity into consideration.
In addition, items that measured behavior intentions were mental measures (i.e., intention of future behavior). They may not
represent actual behavioral measures (i.e., real future behavior). By adding features that allowed participants to e-mail this
message to a friend, print out this news, or bookmark this site on each page of the online newspapers used in this study, it
sought to determine whether the measure of intentions of future behavior would match real behavior. However, no participant
actually used these features probably because of the artificiality inherent in any experiment. Also, behavioral intention scores,
both in previous research and in this study, were all found to be lower than the mid-point on a seven-point scale. But the result
of factor analysis in this study suggests that the mean for items that measured behavioral intentions toward the Site (i.e., How
likely would you be to tell someone else about this site?) may be low (M=2.48 in this study), but the means for items that
measured behavioral intentions toward content (i.e., How likely would you be to forward/print out a message that you found
interesting while browsing the site?) were close to the mid-point on a seven-point scale (M=3.47). Therefore, especially when
examining behavioral intentions toward an online newspaper, future research should consider using items that would
differentiate distinct types of behavioral intentions: one toward a Web site itself, one toward a Web sites content.

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The Impact of Interactivity of Online Newspapers

Most importantly, future studies should address the most perplexing finding of this exploratory study. Why is there so scant a
relationship between interactive behavior and perceived interactivity, especially when the increased number of interactive
features at an online newspaper has led to greater interactive behavior and higher perceived interactivity?
One possibility is that there could be a better way to measure interactive behavior than the focus on both time spent on the
site and number of pagesviewed has thus far indicated. Using a qualitative research method, Smalik, Hawkins, Pingree,
Gustafson, Boberg, and Bricker (1998) examined how HIV-infected individuals used an interactive health software package
called CHESS (Comprehensive Health Enhancement Support System) and found that particular patterns of CHESS useand
not time spent on CHESS or the number of times a user turned CHESS onaccounted for significant improvements in quality
of life.
Problems associated with using time spent on the site and number of pages-viewed as indicators of interactive behavior may
be due to the fact that, for example, the number of pages-viewed, as Smaglik et al. (1998) would argue, cannot show depth of
use. Likewise, any overemphasis of time spent on the site runs the risk of ignoring differences among users in terms of
reading, as well as differences among types of interaction allowed in each experimental condition. Although total number of
pages-viewed could not show depth of use, if we break total number of pages-viewed into conceptually meaningful categories
(i.e., pages for e-mailing reporters; pages for using search engines; and pages for using bulletin boards) and correlate these
pages-viewed categories with related dependent measures, we should be able to get a more detailed information about the
relationships among the availability and uses of interactive features, perceived interactivity, attitudes and behavioral intentions.
Therefore, future research should investigate alternative ways to measure interactive behaviors. Navigation patterns of online
newspaper Web sites that pursue, for example, a particular theme indicate that these sequences of clicking behaviors are far
more involving than the same number of clicks based on a random selection of news stories.
Another possibility is that the sample used in this study is non-representative, and, as compared to the general population of
Web users, the sample may be more representative of long-term, sophisticated Web users. Analyzing Web users navigational
behavior, Novak, Hoffman, and Yung (2000) found that recent Web users displayed a greater heterogeneity in skill levels than
did long-term Web users. By applying this finding to this study, one can see that long-term, sophisticated Web users, such as
the participants in this study, may not need to use many interactive features or venture out to so many pages in order to make
an acute judgment regarding the interactivity level of the site. That is why participants in high interactivity conditions reported
high perceived interactivity scores, even though there was no correlation between interactive behaviors and perceived
interactivity scores. Nonetheless, future research is needed to augment our understanding of how people use the Internet and
of how the combined use of quantitative and qualitative research methods can help researchers to perform better evaluations
of users navigation behavior and its impact.
Mark Porat, the president of General Magic Incorporated, a US technology company that designs software for computer
communications, once said that, before people can actually drive on the information highway, three pre-conditions must be
met: Firstly, there has to be a great vehicle, which is to say, easy-to-use computers, intelligent TVs, etc; secondly, there has
to be a real, electronic highway, one that has enough bandwidth so that users do not need to spend hours on on-ramps,
downloading information; and finally and most importantly, there must be an interesting place to go (Burstein & Kline, 1995).
This study suggests that adding interactive features is one of the factors that make online newspapers an interesting place to
visit. More studies are needed to see what other factors play a role in the ultimate goal of attracting as many people as possible
onto interesting places once the information highway is technologically realized and financially affordable.

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Tankard, J. W., & Ban, H. (1998, August). Online newspapers: Living up to their potential? Paper presented at the 81st annual
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Aademy of Avertising, 254-262.

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COMBINATORY PRACTICES IN SOFTWARE COST ESTIMATION

Hisham M. Haddad and Olayemi Olagbegi


Kennesaw State University, USA
ABSTRACT
The frequency of software projects being over budget continues to be a concern in the business and software engineering
industry. Software cost estimation practices significantly contribute to this phenomenon. Cost estimation is software project
planning process for forecasting the cost (effort) required to develop the application. Various cost estimation models have been
proposed since the late 1960s. None of these techniques give a hundred percent accuracy. To address this concern, some
work has been done to investigate the reasons that lead to inaccurate estimates obtained from various cost estimation models.
This research investigates current practices in software cost estimation. It draws from actual cases and industrial experiences
to address various approaches to cost estimation. One approach of interest is the combination of different estimation methods
and models to predict the required effort to develop an application. This work highlights combinations of estimation methods
that have been used in actual projects. This work contributes to the understanding of cost estimation models and best practices
for accurate estimates.
Keywords: Software Cost Estimation, Software Cost Models, Effort Estimation, Cost Estimation Practices.

1. INTRODUCTION
The success of a software project is part of a cost-driven business process in todays business environment. If the project cost
is not analyzed and controlled properly, the project is likely to be doomed as a failure regardless of its technical achievements.
Software development costs are constantly on the rise. Decision makers of software projects estimation need a thorough
understanding of effort estimation analysis and the intricate details necessary for software estimation accuracy. Hence it
becomes necessary to have experienced individuals work on the process and ensure its validity in order to realize a successful
project. Faced with the difficulty to decide what estimation model to use and what size metrics to utilize, project managers
sometimes rely on expert judgment to predict effort estimates. This approach has been widely criticized as it does not have a
defined approach to deriving estimates and is its not repeatable.
Quantitative cost models have leveled over the years and they range from empirical models (models that use data from past
projects to predict cost estimates for current project) to analytical models (models that use mathematical formulas based on
assumptions such as problem size and experience to develop cost estimates for current project). Some models utilize project
size metrics to develop cost estimates, such as lines of code [1], function points [2], feature points [3], object points [4] , or
code length and volume metrics [5]. Its clear that cost estimation is not a perfect science because of the large number of
variables that result from the human, technical, environmental and political factors [4]. By modeling cost estimation through a
series of systematic steps, the estimates approach figures with acceptable risks. Though it is mainly used to make estimates of
software development cost; the results can be referenced in order to support important decision making such as resource
allocation, component reuse, and others. In addition, the lack of qualified estimation experts, lack of historical cost
measurements, and lack of accountability for poor estimates have contributed to the difficulty of practicing precise software
cost estimation.
A broad range of methods have been used to develop cost models. The classification of cost estimation models based on the
methods they employ includes Experiential Models, Static Models (linear estimation and non-linear estimation), and Dynamic
Models. With Experiential models, results are derived from earlier projects similar to the current project. Under these models,
experts come up with three different cost predictions: a pessimistic estimate, a most likely estimate, and an optimistic estimate.
The final estimate is realized as the mean of the beta probability distribution (i.e., Estimated effort = (Sum of three cost
predictions) / 6). Static models on the other hand make use of regression analysis to relate cost factors to effort with a linear or
nonlinear equation. However, most static models require that the size of the project be estimated in lines of code. This is not
always feasible and hence, dynamic estimation models are utilized. One of the advantages of dynamic models is that they can
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be used to estimate the effort required for a particular development activity. Hence, dynamic models are useful to answer the
questions when effort will be required and how much effort is required?
The goal of this work is to study software estimation models and current practices in outlining best cost estimations. The work
is motivated by case studies and industrial experiences that address specific approaches to cost estimation for software
projects. One particular approach is the combination of different estimation methods for a single project, which is the focus of
this research. This work highlights investigated method combinations that have been used in software projects. This is an effort
to increase the awareness and understanding of cost estimation methods and best practices for effective cost estimation.
Knowledge of such approaches helps project managers and technical leads adopt effective estimation practices. The paper is
organized as follows: section 2 highlights the research methodology; section 3 provides brief overview of commonly used
estimation models; section 4 describes selected case studies results analysis; and section 5 presents a discussion of the
findings, concluding remarks, and future work.

2. RESEARCH METHODOLOGY
This work is a study of software estimation models and current practices in cost estimation. The research method adopted for
this work is based on qualitative study and analysis of case studies and reports relevant to this work. It also involved a study of
published cost estimations models and their analysis reported in the literature. The case studies and reports are considered a
valuable research methodology as they involve factors that planned experiments do not exhibit, such as unpredictability,
scalability, complexity and dynamism [6]. The first step in this direction was to research the various cost estimation models that
evolved over the years. These models were developed using different methods. To narrow the discussion of these models,
they are grouped into two categories: Algorithmic models and Non-algorithmic methods.
The next step was to study, analyze, and document selected case studies for their findings on cost estimation practices and
how project costs were determined for different project types. Additional case studies are being collected and analyzed as this
work continues to progress. The last step was to compare the various approaches to cost estimation and understand the
reasoning for combinatory approaches. The outcomes of these steps led to the derived conclusion of this work. Two
researchers were involved in this process. A limitation in this study is the accessibility to document practical experiences in cost
estimation for real projects. Such information is not readily available and organizations are reluctant to share. In addition, the
researchers limited the literature search to referred literature mostly published in the ACM and IEEE digital libraries. As the
work continues, more cases studies and reports on combinatory practices will be collected and studies in an effort to explore
better ways to combat cost and effort inaccuracy.

3. COST ESTIMATION MODELS


Software cost estimation models have been around as early as software projects themselves. Every software project is
appraised in terms of cost in dollars, man power, size and resources, and therefore there needs to be accurate ways to resolve
software project cost estimates. Research has revealed that several methods used for this purpose. Some of the most
common approaches include the Wideband Delphi technique and Parametric models. The Delphi method [7] has been in use
since 1940 and was developed by the RAND Corporation as a forecasting tool. It was used across many companies for
estimation. A variant of the Delphi method was later developed in the 1970s by Boehm and Farquhar and they called it
Wideband because compared to the existing Delphi method, it involved more interaction and communication [8]. The
Wideband Delphi involves a few steps which require a coordinator and a group of estimation experts. The experts fill out forms
anonymously; results are collected; summarized and compared. Next, experts discuss widely varying result areas, and finally
the team reviews the results to determine if the estimation results are sufficient to continue with further planning. Another
variant of the Delphi was also developed later.
Parametric models such as COCOMO [9] and Putnam [10] were evolved in the 1980s. They weigh factors or cost drivers
related to the domain, environment, and constraints of the project to transform an estimate of size into an estimate of personmonths, or team size and duration, hence leading to cost. These models are calibrated using data collected across ranges of
projects. Software cost estimation practices has been categorized in differed way in the literature, including methodologies,
techniques, heuristic approaches [11]. Here we categorize them into two main broad categories: Algorithmic models and Nonalgorithmic methodologies. Both categories are briefly outlined below.

3.1 Algorithmic Models


Algorithmic models are based on mathematical formulas and differ extensively in mathematical sophistication. A few are based
on easy arithmetic formulas which use means and standard deviations. The rest are based on regression models and
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differential equations. To improve the accuracy of algorithmic models, there is a need to adjust or calibrate the model to local
circumstances. As a result, estimation methods are designed based on these models. Algorithmic methods are designed to
provide some mathematical equations to perform software estimation. These mathematical equations are based on research
and historical data and use inputs such as lines of source code, number of functions to perform, and other cost drivers such as
language, design, methodology, skill-levels, risk assessment, and others [16]. Commonly used models are the following:
1. Constructive Cost (COCOMO) Model: It was developed by Barry Boehm in 1981. Initially it was only used in building
new applications in the traditional software development. COCOMO II was later developed in order to be applicable to
newer software development practices [9].
2. Lawrence Putnam (Putnam) Model: Also known as Putnam SLIM, it was developed by Lawrence Putnam to determine
the time and effort required to finish a project of a specified size. The model is based on Norden/Rayleigh manpower
distribution and historic data. The major part of the model is what is known today as the Software Equation [10].
3. Function Point Analysis (FPA) Model: It was developed by Allan Albrecht (IBM) in 1979. Another method of quantifying
the size and complexity of a software system in terms of the functions that the systems deliver to the user. A number of
proprietary models for cost estimation have adopted a function point type of approach such as ESTIMACS and
SPQR/20 [13].

3.2 Non-Algorithmic Methodologies


Non-algorithmic estimation methodologies are solely based on reasoning and differ greatly in judgment from algorithmic
models. These methods do not utilize mathematical calculations; they are developed based on analogy and expert judgment.
Just like algorithmic models, methods have been developed based on non-algorithmic models. Commonly used methods are
the following:
1. Expert Judgment Method: This method uses one or more experts who provide estimates using their own methods and
experience. Expert-consensus mechanisms such as PERT and the Delphi technique are used to resolve any
inconsistencies that may exist in the estimates [15].
2. Analogy Costing Method: This method is based on actual project experience and it depends on one or more completed
projects that are similar to the new project. Through analogy, it uses the actual costs of previous projects to reason for
the current project estimates. However, the risk is with the previous projects representation of the current projects
functions, environment, and constraints [14].
3. Bottom-up Method: Under this method, each component of the software is estimated separately. The total cost estimate
for the overall application is the aggregate of all component-level estimates. This method assumes that the application
design is in place and it indicates how the application was decomposed into components. Reported advantages include
allowing the team to develop an estimate in an almost traditional fashion, allowing the team to estimate components for
which the team has a better feel, and it is relatively stable as it allows for estimation errors to balance out. On the other
hand, this method my not account for costs associated with integration, configuration management, quality assurance,
and other costs. Also, it tends to be more time-consuming and not feasible when time and personnel are limited [11].
With these documented advantages and disadvantages, some researchers have reported success and failures in using
this method.
4. Top-down Method: This method (also called Macro Model) is the opposite of the bottom-up method. An overall cost
estimate for the system is derived from global properties, using either algorithmic or non-algorithmic methods. It is more
applicable to early cost estimation when only global properties are known. In the early phase of the software
development, it is very useful because there is no detailed information available. Unlike the bottom-up method, this
method focuses on system-level activities such as integration, documentation, configuration management, and others.
On the other hand, this method often does not identify low-level problems that are likely to escalate costs and sometime
tends to overlook low-level components [12].

4. PRACTICES IN COST ESTIMATION


Several cost estimation methods like COCOMO model, Putnam model, and expert judgment method are still in use. In many
cases, researchers have reported low to medium level success rates and only very few have reported satisfactory success rate
levels using both algorithmic and non-algorithmic cost estimation models. At the present time, it has become common for
researchers to utilize a combination of methods for cost estimation.
In order to increase the effectiveness of cost estimation analysis, combination practices are utilized in diverse settings. It is not
unclear whether a combination of methods has improved or changed the outcome of cost estimation results. However, the
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COCOMO model variations have been used in conjunction with function point and use-case points methods. Non-algorithmic
methods have also been combined like the expert judgment method has been combined with the analogy costing method. All
these practices seem to be experiments which are carried out in an attempt to continue the search for effective and accurate
cost estimation means.

4.1 Analysis of Selected Case Studies


For the purpose of this work, a number of case studies were selected for analysis. The case studies were examined and
analyzed to better understand some of the problems behind inaccurate cost/effort estimates in software projects. Below is a
description of the analysis results for each case study, its focus, and results.
Case Study #1: An approach of a technique for effort estimations of iterations in software projects: This case study discussed
a cost estimation technique (combination of COCOMO II and function points) to estimate the effort needed for each
development phase in software developments that use iterative development lifecycles. The technique is divided into 2 phases;
determination of use-cases for software iteration and completion of cost estimation for software iteration. Activities in the first
phase utilize a precedence diagram (preconditions of every use-case is represented) which matches use-case functionalities or
information that is managed and or used by others. Activities in the second phase are centered on effort estimation in
iterations; function point and COCOMO II model are proposed to determine the effort in iterations. This technique was
demonstrated in a university setting where juniors enrolled in an Informatics program were required to utilize the technique in a
Software Engineering course from spring 2004 to spring 2005.
The students were put in teams of 11 or 12 where every team had to develop a software system which was different for each
team but had similar input/output processes. A teacher assistant (TA) was assigned to every team and was in charge of the
team and helped them throughout the project supporting the students to obtain an adequate SRS for business processes of a
real company. It is necessary to mention that TAs were constantly working in real software projects at Peruvian companies of
software development with an average of 7 years of experience in the field. The results of these projects revealed that the
magnitude of relative error (MRE) was less than 12% in second iteration in all three semesters which indicates the technique is
accurate, estimated adjusted factors (EAF) used to calculate estimated effort were the same for all teams. The analysis
confirmed that though the results show that the technique was well suited under these circumstances, it may not fit well in
another context [16].
Case Study #2: Effort estimation of use-cases for incremental large scale software development: This study discussed the
results of an empirical study on effort estimation of use-cases in a large industrial system that was developed incrementally.
The Use-case Point (UCP) method is used for the complex use-cases in this study with some modification and also elements
of the COCOMO model. The system used for the study is a large distributed telecom system built by Ericsson. The system is
characterized multi-site development, development for reuse (almost 60% of software components are shared with another
product) and several programming languages (C, Erlang, Perl and Java). The software process uses RUP; each release had
typically 5 to 7 iterations with iterations lasting 2 to 3 months. The definition of several factors were modified, a few include
actors, use-case weights, technical complexity factor, environmental factor and others.
The first software release (release 1) used in this study was made up of 288 use-cases (15 were modified based on a previous
release 0) and the second release (release 2) was made up of 21 use-cases (18 of them were modified). The estimation results
reveal that the UCP estimates were 21% lower for release 1 and 17% lower for release 2 than the actual effort which is fairly
accurate for large projects according to the authors. When compared, the effort to develop release 1 was 2 to 3 times the
estimated effort; while the effort to develop release 2 was 35% lower than the actual effort. This indicates that the adapted UCP
method for this study seems to have lower relative error than expert estimates. The contribution of this study include the
discussion of how to adapt the UCP method for a large industrial project and to a specific context, how to adapt the UCP
method for incremental development, and how to identify the impact of effort distribution profile on estimation results [17].
Case Study #3: Enhancing the COCOMO Estimation Models: This study is based upon improving both the COCOMO I and II
models by assigning individuals to a single task. The process is referred to as Task Assignment Metrics (TAMs) and the
manner in which tasks are shared among the members as Task Assignment Patterns. The TAMs are categorized into three;
intensity which measures the degree of focus on a particular task, concurrency refers to the degree to which team members
are working together cooperatively on given tasks, and fragmentation measures the degree to which a teams time is
fragmented across multiple tasks. Each TAM category is computed using a mathematical formula and defined with respect to
tasks instead of individuals. The authors studied a client-server application for a state government agency supporting about
400 users distributed through a statewide network and encompassing agency accounting, procurement, inventory control, and
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personnel. The project was supervised by an external contractor with sixteen developers. The external contractor used the
COCOMO model, constructed 160 modules, and successfully completed user testing and acceptance. The TAM was used on
the modules developed by the contractor. It was concluded that the development decreased as intensity increased,
development effort increased with concurrency (degree of team collaboration), and development effort increased with
fragmentation. As a result, the three TAMs significantly impacted the development effort and applied the TAMs to improving the
COCOMO model.
Four models were examined; an intermediate COCOMO I model tuned to the specific development environment, the
COCOMO II post architecture model using the 1997 calibrated parameters, and two additional models augmenting COCOMO I
and II with the three TAMs. Two forms of metrics were utilized to compare these four models namely the average square root
error (ASRE) which measures the ability of the model to fit the data which it was derived and the percentage of estimates
having a MRE of 30% or less. The TAM models showed a significant improvement compared to the regular COCOMO models.
The analysis concludes that the three TAMs have the potential to significantly enhance the predictive power of the COCOMO
effort estimation method. The study lists the basic steps for augmenting cost and effort estimation models. Lastly, it was found
that the prediction accuracy increased to 35% from 29% on the COCOMO I model and to 43% from 37% on the COCOMO II
model [18].
Case Study #4: Estimating Software Based on Use-case Points: This is a case study of how a large multi-team software
engineering organization (over 450 engineers) estimates project cost accurately and early in the software development lifecycle
using Use-case Points, and the process of evaluating metrics to ensure the accuracy of the model. The goal of the team was to
provide their customers with accurate costs early on in the software development lifecycle. The estimation process was used
over a period of five years on over 200 hundred projects with teams of 6 to 12 members. A process known as the Use-case
Point estimating model is utilized; the process starts with an actor who is categorized as simple, average, or complex. A simple
actor represents a system with a defined API, an average actor is a system which interacts through a protocol such as TCP/IP
or a person interacting through a text based interface, and a complex actor is a person interacting through a GUI. The next
step is to compute the total number of actors by multiplying each actor by a weighted factor in order to determine the total
number of actor points. Then each use-case is grouped as either simple (3 or fewer transactions), average (4 to 7
transactions), or complex (more than 7) based on the number of transaction including scenarios. The number of simple,
average, or complex use-cases are determined and multiplied by another weighting factor and are summed up.
Other factors like weighting technical factor and experience factor are also computed and identified. In order to estimate effort,
man-hours are calculated from use-case points (UCP). The effort rate (ER) is obtained by calculating an effort rate (based on
historical data) and multiplying that value by the number of UCPs. Finally, a performance analysis is conducted to include
performance analyses, deliverable analyses, schedule analyses, effort analyses, defect analyses and casual analyses. The
quantitative management analyses easily identifies anomalies: outside of predetermined limitations (9% for upper and lower
control limits), one standard deviation (5.2% below), and showing clear deviation trends. High and low points crossing out of
limitation indicate anomalies that require further explanation. It was concluded that the UCP model continues to accurately
predict the cost of a project early in the lifecycle of the software product [19].
Case Study #5: Do adaptation rules improve web cost estimation? This case study is a comparative study of several analogy
based estimation methods. The study focuses on evaluating the use of adaptation rules as a way to better estimation accuracy.
A few analogy based effort estimation methods are compared in this study. This study uses two datasets; the first dataset
presents a continuous cost function, translated as a strong linear relationship between size and effort. The second dataset
presents a discontinuous cost function where there is no linear or log-linear relationship between size and effort. Analogy
based methods are also referred to as Case Based Reasoning (CBR). The CBR parameters used in this study are as follows:
feature subset selection, similarity measure, scaling, number cases, case adaptation, and adaptation rules. All the results for
this study were obtained by using a CBR tool known as CBR-Works. The results were obtained by using four similarity
measures (unweighted Euclidean (UE), weighted Euclidean using Subjective Weights (WESub), Weighted Euclidean using
Correlation-based Weights (WECorr) and Maximum (MX)). The analysis of this study is based on two datasets that contain
information about Web hypermedia applications developed by Computer Science Honors and postgraduate students, attending
a Hypermedia and Multimedia Systems course at the University of Auckland.
The jack knife method was used to compare the CBR techniques used for this study. For each dataset, comparison steps were
conducted 34 times for the first dataset and 25 times for the second data. All together, there were 34 projects in the first
dataset and 25 projects in the second dataset respectively. The authors conclude that the best predictions were obtained from
the first dataset which utilized a continuous cost function reflected as a strong linear relationship between size and effort. In
addition, for datasets that have a discontinuous cost function, there is a strong relationship between the nature of the cost
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Combinatory Practices in Software Cost Estimation

function and prediction accuracy. The authors also concluded that, except for Weighted Euclidean, the best predictions were
obtained without the use of adaptation rules and by applying adaptation rules without weights [20].
Case Study #6: Comparing Effort Estimates Based on Use-case Points with Expert Estimates: This case study is part of three
courses in a large international IT company. All course schedules were the same and the participants were experienced
professionals; developers, business analysts, and project managers. All study participants had requirements engineering
experience and effort estimation experience respectively. The course duration was two days and for the coursework, students
made presentations on different aspects of use-case modeling and two assignments. On the first day, study participants were
provided with a problem statement and a context diagram for the system to be built. The participants were encouraged to
understand the problem statement in order to be prepared for the second day. The participants were randomly selected and
split up into groups. All the groups worked on building a use-case model for most of the day and at the end, they were given a
complete solution consisting of 5 actors and 22 use-cases. Participants were also given a 30 minute lecture on estimation on
estimation and on how attributes of a use-case model can be used as a measure of the size of the functionality. However, the
use-case points method was not presented during the lecture. Based on the use-case model, each group took 15 minutes to
estimate team size, elapsed project time in months, and total effort in person months. The company did not permit the author to
present the complete problem statement and use-case model in the paper. The problem statement provided in the paper states
The system will be the IT part of a service for shopping through the Internet and the delivery of products to the customers
homes. The service should be available through a call-centre or the Internet. The system will consist of an order taking facility
for both the server and the clients.
The results of the study reflect that both the experts and the use-case points method produced reasonably accurate estimates
based on the available information. On average the groups of experts estimated a total effort of 19.8 person months, and the
Mean Magnitude of Relative Error (MMRE) is 0.37. The Magnitude of Relative Error for the use-case points estimate is 0.21 or
0.29 depending on how the values for the environmental factors were assigned. The use-case points method produced
estimates that were closer to the actual effort than the estimates produced by 8 of the 11 groups of professional software
developers. The groups of experts, on the other hand, did not know exactly how to use the information in the use-case model.
They chose different estimation strategies leading to estimates of various precision. The results therefore support earlier results
which indicate that the use-case points method may support expert knowledge in producing accurate estimates. The analysis
concludes that the use-case points method produced estimates that were quite close to the actual effort spent on a
development project. They were closer to the actual effort than most of the estimates produced by the groups of professional
software developers. The results also show that the combination of expert estimates and method based estimates may be
particularly beneficial when the estimators lack specific experience with the application domain and the technology to be used
[21].
Case Study #7: Combining Regression and Estimation by Analogy with in a Semi-parametric model for Software Cost
Estimation: In this study, a parametric model used in conjunction with a non-parametric model. Regression analysis is
combined with estimation by analogy, which are two of the most common techniques in literature, to form a semi parametric
study. The study demonstrates the procedure of building two datasets from regression analysis and estimation by analogy and
compares the results based on the predictive accuracy of the new combined technique. Equations were derived in order to
compute the datasets. For the parametric model, the dataset is a popular one from the literature dataset that contains 21
projects from a major Canadian financial organization. The dependent continuous variable is effort (actual effort days), whereas
there are also 10 independent ratio-scaled predictors.
The non-parametric model utilizes the jackknife procedure, from one up to twenty analogies were adopted but only four
analogies were used for the study. The general results of the study show that the semi-parametric model had a higher
accuracy than both the parametric model and the non-parametric model, the semi-parametric and parametric model out
performed the non-parametric model, and the parametric model tends to overestimate while the non-parametric model tends to
underestimate. The improvement was evaluated through various accuracy measures and graphical inspection. Statistical tests
were used to check for error in order to assess the superiority of the method. The results confirmed that the semi-parametric
model derived in this study needs to be tested on various data sets before the conclusion that regression analysis combined
with estimation by analogy is better than parametric or non-parametric models [22].

5. FINDINGS AND CONCLUSION


The analysis of selected case studies affirmed that using combination of estimation models and methods may lead to better
estimates. Table-1 shows combinatory practices and the MMRE and MRE values reported in the selected case studies.

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The first and second case studies, which are a combination of two algorithmic methods, show an MRE of < 12% and MMRE of
19% respectively. Thus, the combination of algorithmic models may lead to more accurate estimates compared to applying
individual models.
The third case study, which sought after improvements to the COCOMO I and II models, illustrates improvement in the
prediction accuracy from 29% to 35% and from 37% to 43% respectively. This implies that as a result of augmenting both
models, the prediction accuracy increased based on having an MRE of 30% or less. The fourth case studys aim was to
educate the public on how to achieve 9% deviation from actual estimation costs using the UCP method. The results indicate
that for most projects estimated costs deviated less than 9% from the actual costs.
Table-1: Combinatory practices and their MMRE and MRE values.
Case
Study

Practices

Findings
(The lower MMRE/MRE, the more accurate the estimation).

COCOMOII + FPA

MRE < 12%. The technique was well suited under the circumstances of the study

COCOMO + UCP

21% lower for release 1 and 17% lower for release 2 than the actual effort. The
adapted UCP (UCP + elements of COCOMO) worked better.

COCOMO

MRE <= 30%.The prediction accuracy of COCOMO I & II models rose to 35%
from 29% and 43% from 37% respectively.

UCP

< 9% deviation from actual to estimated cost on 95% of projects.

Algorithmic methods + Analogy

No adaptation rules, MMRE: 12% to 25%. Adaptation rules without weights,


MMRE: 14% to 33%.

UCP + Analogy

MMRE= 37%, MRE is 21% or 29% depending on environmental factor values.

Regression Analysis + Analogy

MMRE = 9%, MRE = 19%

The fifth case study combined analogy based estimation with algorithmic methods. It shows an MMRE of 12% to 25% when no
adaptation rules were applied; while an MMRE of 14% to 33% when adaptation rules were applied without weights. The sixth
case study demonstrates that estimation by analogy and use-case points yield an MMRE of 37% and an MRE of 21% to 29%
depending on environmental factor values. In the seventh case study, the combination of regression analysis and estimation by
analogy resulted in an MMRE of 9% and an MRE of 19%. The findings derived from combining analogy and algorithmic based
methods force the question: Do analogy based estimation methods improve estimation accuracy when combined with
algorithmic methods?
From these findings, MRE values seem to be highest when algorithmic methods are used in isolation even after augmentation.
A combination of algorithmic methods produced lower MRE and MMRE values. In addition, the best combination seems to be
combining algorithmic methods with non-algorithmic methods. The case studies that combined analogy based methods with
algorithmic method appear to have the best prediction accuracies and consistent findings judging from the case study analysis.
From the analysis of these case studies, it has been established that the lower the MRE or MMRE of a software cost/effort
project calculation, the less likely for errors to abound in the projection. This finding was also confirmed by other researchers
who participated in those case studies. As shown in Table-1, all case studies used modified versions of original methods to
erase or reduce errors in calculation. Despite the variety of combinations and manipulations of methods in all case studies,
interestingly the analysis confirmed (and the researches warn) that these practices need to be further verified as they are not
conclusive due to limitation to certain environmental limiting factors.
Automation of estimation techniques is a continuous effort. Many project management tools support estimation. Thus,
organizations must adapt and customize estimation methodologies to their requirements to improve accuracy. For better
estimation, M. Nasr [11] outlined the following recommendations:
- For better accuracy, any estimation technique should be applied through both the top-down and bottom-up approach.
- Estimate the software size using different techniques and then average these results to produce a combined estimate.
- Estimation should be based on several methods. If these do not return approximately the same result, then one has
insufficient information available to make an estimate.
- With a mature metrics program, use the data collected from past projects to develop specific estimation procedures and
formulas.
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Combinatory Practices in Software Cost Estimation

- Re-estimate as the project progresses and adjust cost and effort estimates accordingly.
- Estimate the size of each program component independently.
This research provided an initial theoretical and conceptual study of cost estimation practices in software projects.
Furthermore, the results of combinatory practices can be affected by other factors such as the project size, available
resources, facilities, culture, and market value. To address such variations in the context of the combinatory approach, this
work continues to identify and analyze more case studies to isolate trends that could further support the current findings combinatory practices may improve the accuracy of cost estimation. The limitations to this work include a restriction in literature
search as being limited to refereed literature published in the ACM and IEEE digital libraries, a modest experimentation of
combinatory practices especially of algorithmic and non-algorithmic methods, and limited access to the real projects and their
cost estimation information.

6. REFERENCES
[1] N.E. Fenton and S.L. Pfleeger, Software Metrics: A Rigorous and Practical Approach, PSW Publishing Company, 1997.
[2] A.J. Albercht and J.E. Gaffney, Software Function, Source Lines of Code, and Development Effort Prediction: A Software
Science Validation, IEEE Transactions on Software Engineering. SE-9, 1983, pp. 639-648.
[3] C. Jones, Applied Software Measurement, Assuring Productivity and Quality, McGraw-Hill, 1997.
[4] R.S. Pressman, Software Engineering: A Practitioners Approach, McGraw-Hill, 2005.
[5] P.G. Hamer and G.D. Ferwin, H.M. Halsteads Software Science A Critical Examination, Proceedings of the 6th
International Conference on Software Engineering, September 13-16, 1982, pp. 197-206.
[6] L. Layman, L. Williams and L. Cunningham, Motivations and Measurements in an Agile Case Study, Proceedings of the
2004 Workshop on Quantitative Techniques for Software Agile Processes, ACM, November 2004, pp. 14-24.
[7] B. Boehm, C. Abts, and S. Chulani, Software development cost estimation approaches - A survey, Annals of Software
Engineering, Vol. 10, No. 1-4, Springer Netherlands, November 2000.
[8] K. Molkken-stvold and M. Jrgensen, "A Review of Surveys on Software Effort Estimation," in 2003 ACM-IEEE
International Symposium on Empirical Software Engineering (ISESE 2003), Frascati, Monte Porzio Catone (RM), ITALY,
2003, pp. 220-230.
[9] B.W. Bohem, Software Engineering Economics, Englewood Cliffs, NJ: Prentice-Hall, 1981.
[10] L.H. Putnam and W. Myers, Measures for Excellence: Reliable Software On Time, Within Budget. Yourdon Press, 1991.
[11] M. Nasir, A Survey of Software Estimation Techniques and Project Planning Practices, Proceedings of the ACIS
International Conference on Software Engineering, Artificial Intelligence, Networking, and Parallel/Distributed Computing
(SNPD06), Las Vegas, Nevada, June 2006.
[12] http://www.compapp.dcu.ie/~renaat/ca421/LWu1.html
[13] A.J. Albrecht, Measuring application development productivity. Proceedings of the IBM Applications Development Joint
SHARE/GUIDE/IBM Symposium, CA, USA, pp. 83-92, 1979.
[14] M. Shepperd and C. Schofield, Estimating Software Project Effort Using Analogy, IEEE Transactions on Software
Engineering, SE-23:12, 1997, pp. 736-743.
[15] R.T. Hughes, Expert Judgement as an Estimating Method, Information and Software Technology, Vol. 38, No. 2, pp. 6775, 1996.
[16] J.A. Pow-Sang and E. Jolay-Vasquez, An approach of a technique for effort estimations of iterations in software projects,
Proceedings the 13th Asia Pacific Software Engineering Conference 06 (ASPEC), IEEE, December 2006, pp 367-376.
[17] P. Mohagheghi and et al., Effort estimation of use-cases for incremental large scale software development, Proceedings
of the 27th International Conference on Software Engineering 05 (ICSE), May 2005, pp 303-311.
[18] J. Hale and et al., Enhancing the COCOMO Estimation Models, IEEE Software, November/December 2000, pp 45-49.
[19] Kusumoto, Shinji and et al., Estimating effort by use-case points: method, tool and case study, Proceedings of the 10th
IEEE International Symposium on Software Metrics (Metrics 04), September 2004, pp 292-299.
[20] E. Mendes and et al., Do adaptation rules improve web cost estimation, Proceedings of the 14th ACM Conference on
Hypertext and Hypermedia, August 2003, pp 173-183.
[21] Bente, Comparing Effort Estimates Based On Use-case Points with Expert Estimates, Empirical Assessment in Software
Engineering, 2002, pp 1-13.
[22] N. Mittas and L.Angelis, Combining Regression and Estimation by Analogy with in a Semi-parametric model for Software
Cost Estimation, Proceedings of the Second ACM-IEEE International Symposium on Empirical Software Engineering and
measurement (ESEM 08), Kaiserslautern, Germany, 2008, pp 70-79.

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THE USE OF COMPUTER SUPPORTED ANALYSIS FOR INTERVIEW DATA: A


CROSS-CULTURAL EXAMPLE FROM THE ELECTRONIC GAMING INDUSTRY

June Buchanan1 and Michael Jones2


Macquarie University1, Australia and University of Wollongong2, Australia
ABSTRACT
Computer assisted analysis has long been a major factor of quantitative analysis. This paper illustrates the use of computer
assisted analysis for qualitative research, looking specifically at research in the Electronic Gaming Industry, across two country
sectors New South Wales, Australia and Nevada, USA, where empirical data are collected and analysed. The paper
highlights the important place that computer assisted analysis holds in social and societal marketing. A detailed discussion
explains how analysis was undertaken in the Electronic Gaming Industry, and how concepts and theory emerged. This paper
discusses the qualitative approach used in this research. In particular, it highlights the benefits of using computer mediated
tools for analysis, showing that qualitative research and analysis packages, such as NVivo, can both add value to, and reduce
the complexity of, research, especially in cases where data are sensitive, limited or confidential. A combination of grounded
theory and case study methodology was also utilised to guide the research, with the former highlighting the importance of
continuing to explore the extant literature during and after analysis of the primary data. The paper also presents some of the
findings of the research, developing a conceptual model for legitimacy.
Keywords: Qualitative Analysis; Computer Assisted Analysis; NVivo; Societal Marketing & CSR; Gambling and
Stakeholders, Legitimacy

INTRODUCTION
The controversial nature of gambling generally and electronic gaming machines (EGMs) more specifically came to the
researchers attention some four to five years ago. After conducting an extensive literature review, it was discovered that, whilst
there is a plethora of academic literature on research related to aspects of problematic gambling, a dearth existed in the nonproblem gambling literature. In fact, a gaping chasm appears to exist in regard to any published material on the marketing of
EGMs. As a consequence, it was necessary to generate primary data due to the total absence of available empirical data in
this area (in addition to the aim of generating insights into the gaming industry in terms of marketing).
While there is a need for research in the area, data collection is difficult due to the widespread negative perception of the EGM
industry by many stakeholders, particularly the media, along with non-governmental organisations (NGOs) and many in the
community. As a result, information generated from within the gaming industry is considered to be highly sensitive.
Respondents were cautious and required assurances of total confidentiality.
A qualitative methodology was considered most appropriate for the purposes of this study as it is known for its ability to
generate in-depth knowledge in an area that has no existing research. Patton (2002) refers to the power of qualitative data (p.
17) in its ability to go beyond mere numbers and yield rich insights. A hallmark of qualitative analysis is its thick description,
which in turn is balanced by analysis and interpretation (Patton 2002, p. 503). A qualitative approach also ensures that high
quality data are acquired from a relatively small sample, thus managing the issues of sensitivity and participant confidence.
This paper discusses the qualitative approach used in this research. In particular it highlights the benefits of using computer
mediated tools for analysis especially NVivo showing that qualitative research and analysis packages, such as NVivo, can
be used for social and societal marketing, especially when data are sensitive, limited or confidential.

LITERATURE REVIEW
Analysis of qualitative data can be described as a task which is demanding, repetitive and arduous. Although predominately a
mechanical exercise, it requires an ability of the researcher to be dynamic, intuitive and creative, to be able to think, reason and
theorise. The object of qualitative analysis is to deconstruct blocks of data through fragmentation and then have them coalesce
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The Use of Computer Supported Analysis for Interview Data: A Cross-Cultural Example from the Electronic Gaming Industry

into collections of categories which relate conceptually and theoretically, and which make assumptions about the phenomenon
being studied (Jones 2005). Richards calls this process decontextualizing and recontextualizing (2002, 200). He regards this
process as a fundamental component in the analysis of qualitative data. Typically, qualitative research is a one researcher
domain. Data are acquired through firsthand experience as a result of subjective interpretation. Understandings of phenomena
are tempered through experience, bias and knowledge (Ely, Anzul et al. 1991).
It is argued that qualitative analysis is among the most demanding and least examined areas of social research (Miles 1979;
Basit 2003). This could be due to the larger investments of time and effort that qualitative inquiry requires. This is especially
relevant since the researcher needs to spend time becoming familiar with the data and the subjects of the research this
process being far more peculiar to qualitative research rather than quantitative. Qualitative research does not permit short-cuts
(Delamont 1992). It is a continuous process which dominates the research activity, beginning with data collection through to
conceptualisation and beyond (Ely, Anzul et al. 1991). The analytical approach requires a process of reduction and
accumulation to manage and classify data. This process requires context specific textual segments to be removed from their
source and accumulated into context independent repositories. A textual segment is defined by Tesch as a segment of text
that is comprehensible by itself and contains one idea, episode, or piece of information (1990, 116). This activity constitutes
the decontextualizing and recontextualizing that Richards (2002, 200) discusses.
The researchers ability to code is an essential part of analysis (DeNardo and Levers 2002; Basit 2003). Coding requires the
researcher to firstly identify the meaningful segments of text among the less valued data, and secondly, to tag or label these
data so that they can be located along-side equally salient data. In doing so, tags must be descriptive and sufficiently abstract
to encompass other similar, yet unique, datum (Glaser 1978). Miles and Huberman (1994) discuss two methods of code
creation. The first method, which is preferred by inductive researchers, involves coding the data without a priori knowledge and
labelling the data, at least initially, using the data itself as the tag (Glaser and Strauss 1967). This is often called in vivo coding.
The second method uses an established list of codes (or tags). These usually come from the data collection instrument.
Up until recently, qualitative analysis has been kept mainly in the domain of manual, hand wrought techniques. Applications
range from pen and paper methods through to computer assistance with programs like Microsoft Word and Excel. In recent
years however, dedicated software have been designed to assist researchers with the processes of qualitative analysis. One of
the first computer programs to provide real assistance to qualitative researchers was NUD*IST 1.013 (Richards 2002).
NUD*IST standing for: Non-Numerical Unstructured Data by Indexing Searching, and Theorising was developed to provide
to qualitative researchers a program like SPSS but as a non-Statistical Package for Social Scientists. The fundamental
purpose of NUD*IST was to provide functions which would assist researchers in the retrieval of text from data, allow users to
code that data, and to develop a system of relating codes to each other using a tree structure (Jones 2007).
Computerised packages for qualitative analysis have become far more sophisticated than these early systems. Software, like
QSR-NVivo, provide many tools for analysis, reliability, management and reporting. However, the uptake of these products has
not been without controversy. The research community is divided in regard to the deficits and benefits of digital intervention in
what is fundamentally a human endeavour (Crowley, Harr et al. 2002; Basit 2003). Opponents argue that methodological
impurities may result as data are transferred into a digital ones and zeros environment. The abstraction that results from
this transfer may misrepresent or simplify the multi-dimensional qualities of the original data. This can certainly be the case with
simple, plain text programs, where expression and emphasis can be lost, but the latest generation of augmented, rich text
programs tend to mitigate this deficiency (Bourdon 2002; Crowley, Harr et al. 2002). Another argument emphasises the utility
of computers for counting and producing numbers. It is seen by some, that this may force researchers into the trap of turning
qualitative accounts into semi-quantitative arrays of analysis by enumerating the facts rather than interpreting them. While
qualitative analysis software will often provide these facilities, it is not their strength and it detracts from their purpose (Crowley,
Harr et al. 2002; Welsh 2002). Software can also be seen to distance the researcher from their research by providing a buffer
between the person and their data (Bourdon 2002; Welsh 2002).
Proponents see qualitative analysis software as the genesis of the new age in qualitative research. Software can assist
researchers by providing better data management, reducing time consuming repetition and offering greater flexibility. Computer
supported analysis can provide higher accuracy and greater transparency (Welsh 2002). In addition, software can provide
faster and more comprehensive methods of inquiring into the data, and much more versatile and efficient systems of collecting,
storing and reporting (DeNardo and Levers 2002; Basit 2003). It is often misconstrued by critics that software does the analysis
for the researcher this is not the case. The researcher must still collect the data, decide what to code and how to
conceptualise. However, the software does increase the ease at which analysis is undertaken, by minimising repetitive,
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mechanical tasks (Bourdon 2002). Computer assistance is merely a tool which facilitates more effective and efficient analysis
(Coffey and Atkinson 1996). Researchers who use the packages are often amazed that this kind of work, with its thousands of
pages of data, could ever have been conducted by hand (Basit 2003, 145).
Despite these debates, the use of computer assisted analysis is on the increase (DeNardo and Levers 2002; Basit 2003, 145;
Bringer, Johnston et al. 2006; Bazeley 2007; Wong 2008). A number of notable qualitative theorists have encouraged the use
of qualitative data analysis software within their research: (Miles and Huberman 1994; Denzin and Lincoln 1998; Krueger 1998;
Berg 2001; Merriam 2001; Silverman 2001; Morse and Richards 2002; Patton 2002).
In this research using NVivo 8.0 (QSR International Pty Ltd, 2008) the software approach has been an invaluable tool.
Large amounts of data were managed relatively easily. Data were coded more generously than would have been achieved with
paper and pen methods, and while this most probably led to over-coding (this is a problem reported by Blismas and Dainty
(2003, 460), it allowed ideas and issues to emerge more freely without the compulsion to force data into already established
categories. The software also permitted easier reporting and reflection
Initially, a literature review was conducted on gambling (particularly relating to harm minimisation), a list of nine topics was
developed and arrangements made for interviewing respondents in the gaming industry. During the process of analysing the
interviews using NVivo, distinct patterns began to emerge, largely driven by the nine topic areas developed for the interviews.
Following this analysis a further review of the extant research ensued covering three substantive areas societal marketing,
stakeholder theory and corporate social responsibility (CSR). This led to theoretical development. The next section will review
the literature associated with gambling.

Societal Marketing, CSR, Gambling and Stakeholders


Kotler et al.s (2001) societal marketing concept recognises that marketers need to consider the long-run interests of society in
addition to economic and other considerations such as customers and employees. This concept however does not elaborate
on the social aspect in terms of who the various stakeholders are and how companies can become more socially responsible.
Accordingly, the societal marketing concept needs to be elaborated on, and strengthened by, a robust explanation and
inclusion of stakeholder and CSR theories. Many authors stress the imperative of including stakeholders in an organisations
social responsibility (see for example Aguilera et al. 2007; Black and Hartel 2004; Breen 2005; Carroll 1991; Maignan et al.
2005; Miles et al. 2006; Mitchell et al. 1997; Polonsky et al. 2003). Branco and Rodriques (2007) state that any useful notion of
CSR should be based on a stakeholder view (p. 5). Accordingly, any societal marketing and CSR concept needs to include
identification and inclusion of key stakeholders. The most prominent in the gaming industry in New South Wales, Australia
being the Government and the media, in addition to the gaming industrys target market. The influence of key stakeholders
cannot be under-emphasised. For example, the media and NGOs in Australia appear to have exerted a certain amount of
pressure resulting in increased regulation of EGMs.
In practice, organisations have a long way to go in terms of being socially responsible. For instance Rundle-Thiele et al.s
(2007) study into consumers knowledge of safe consumption levels of alcohol showed that, whilst alcohol marketers
communicate the drink responsibly message throughout their policies and programs and can therefore arguably be
considered socially responsible, the majority of respondents (adults aged 18 years and over) were not aware of safe levels of
alcohol consumption. Accordingly, the authors call for a focus on corporate social performance (CSP) in order to address the
gap between stakeholder knowledge, and company policies and practices. Hing (2000) also found significant gaps between
NSW Registered Clubs views, policies and practices in terms of dealing with problem gambling, against an array of
expectations from their key stakeholders. This highlights the importance of organisations identifying and responding to key
stakeholder expectations in a manner that is also beneficial to the organisation (i.e. in a strategic manner).
Other authors focus on different aspects of CSR. For example, Polonsky et al. (2003) build on Porters value chain to develop a
harm chain whereby the creation of harm occurring within marketing exchange networks can be examined and dealt with by
policy makers and firms. The Reno model developed by Blaszczynski et al. (2004) also incorporates policy makers in the
provision of responsible gaming, further emphasising the importance of including key stakeholders in any socially responsible
program.
The importance of ethical programs throughout all levels of the organisation is endorsed by Moore (1999), who emphasises the
salience of having a code of ethics by which business people can make ethical decisions, as governments cant legislate
moral behavior (p. 305). Hemingway and Maclagan (2004) recognise the importance of personal values on corporate values
and hence CSR. They endorse the role of individual managers as champions of social responsibility, as opposed to simply
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The Use of Computer Supported Analysis for Interview Data: A Cross-Cultural Example from the Electronic Gaming Industry

acting as agents of corporate policy, [who] may inspire or remind employees that they can make the difference in an
organization without a formally adopted CSR culture (p. 41). This should not be seen as negating the need for an on-going
code of ethics training program throughout all levels of an organisation, however. Given that the vast majority of EGM
operators in NSW are SMEs, their role in developing a socially responsible culture throughout their business is paramount.
Accordingly, all staff throughout the organisation need to adhere to ethical and CSR practices, for example by having staff who
seriously look out for, and, where appropriate, are willing and empowered to intervene to protect problem gamblers from
themselves.

Legitimacy
Institutional theory postulates that organisations influence, and are influenced by, society and that a social contract between
the two entities exists. Organisations therefore, in order to develop or protect their legitimacy, try to ensure they have policies,
processes and practices that meet societal expectations (Hoque 2005). As a result of the centrality of this concept, legitimacy
theory has emerged as an important area of scholarly research. According to Brinkerhoff (2005), three types of organisational
legitimacy exist: normative; pragmatic; and cognitive, with Patten (1991) stating that the concept of economic legitimacy was,
until recent years, largely the only constraint placed on business by society: (p. 298). Dowling and Pfeffer (1975) state that
when the social values of an organisation are congruent with the the norms of acceptable behaviour in the larger social system
of which they are a part, organisations achieve legitimacy (p. 122). Suchman (1995) found that many researchers refer to the
term legitimacy but very few define it. Accordingly, he develops a definition of organisational legitimacy: Legitimacy is a
generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially
constructed system of norms, values, beliefs, and definitions (p. 574).

THE STUDY
This study entails a multi-case, multi-site, case study to understand the motives (or lack thereof) of electronic gaming providers
to act in a socially responsible manner. Our research question was: To what extent do operators in the gaming industry
consider that they are socially responsible in terms of their marketing of EGMs?
Staff of electronic gaming facilities, gaming consultants and government regulators, were interviewed in two jurisdictions,
namely Nevada (USA) and New South Wales (Australia). A nine-item, open-ended questionnaire was developed to focus
discussion on the salient issues during the interviews, whilst at the same time encouraging the respondents to talk freely and
include other aspects they felt were important.
Table 1 indicates the location, category and number of respondents interviewed at each jurisdiction.
Table 1: Respondent Classification
Number of
Respondents

Size

Gaming consultant and gaming conference organiser

SME

Las Vegas (Nevada)

Gaming consultant

Individual

Las Vegas (Nevada)

Gaming Machine Manufacturers

Large

Las Vegas (Nevada)

International Casinos

Large

Las Vegas (Nevada)

Locals Casinos

Large

Lake Tahoe (Nevada)

Gaming Machine Manufacturer

Large

Lake Tahoe (Nevada)

Problem-Gambling Consultant

Individual

New South Wales

Gaming Legislators

Large - government

New South Wales

Gaming consultants

Individual

New South Wales

Gaming Machine Manufacturers

Large

New South Wales

Casino

Large

New South Wales

Hotels (Pubs)

SME

New South Wales

Registered Clubs

SME

Location

Category

Reno (Nevada)

Source: Adapted from Buchanan et al. (2009), p.86

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METHOD
The research method adopted in this paper synthesises two accepted methods of analysis: Grounded Theory (Glaser and
Strauss 1967) and Case Study (Yin 2009).
Grounded theory is an inductive, theory discovery methodology that allows the researcher to develop a theoretical account of
the general features of a topic while simultaneously grounding the account in empirical observations or data (Martin and
Turner 1986, 141). Grounded theory provides a detailed, rigorous and systematic method of analysis, which has the advantage
of reserving the need for the researcher to conceive preliminary hypotheses, thus providing greater freedom to explore the
research area and allow issues to emerge (Glaser 1978; Glaser 1992; Glaser 1998; Glaser 2001; Bryant 2002). As a
consequence, grounded theory is useful in providing rigorous insight into areas which are relatively unknown by the researcher.
The benefits offered by grounded theory include the methods capacity to interpret complex phenomena, its accommodation of
social issues, its appropriateness for socially constructed experiences, its imperative for emergence, its absence from the
constraints of a priori knowledge, and finally, the methods ability to fit with different types of researchers.
Although grounded theorists emphasise the importance of an inductive approach (see for example the seminal work of Glaser
and Strauss 1967), it is generally accepted that no researcher goes into the field totally devoid of a priori experiences (Goulding
2005). This paper does not purport to adopt grounded theory as it is proposed by Glaser and Strauss, rather, for reasons of
necessity, purposive sampling has been adopted, in place of the grounded theory approach to select participants progressively
through theoretical sampling (Glaser 1978; Suddaby 2006).
The middle ground approach taken by Glaser and Strauss (1967) between the extremes of rigid positivism and the postmodern approach of constructivism, best describes the ontological and epistemological philosophies of this study.
Postpositivism is a term that also appears to amalgamate the belief that an external reality exists which can be discovered
(valid belief) and the belief that knowledge is inherently embedded in historically specific paradigms and is therefore relative
rather than absolute (Patton 2002, pp. 92-93, italics in original). The inescapable influence of hermeneutics is also
acknowledged, in that all analysis and meaning generated from, for example, interviews, is interpretive in the sense that
different people from different backgrounds, and/or using different methods but using the same texts, would arrive at different
meanings. This influence occurs even when following the more positivistic stance of case study researchers such as Yin
(2009).
A case study is an empirical enquiry that investigates a contemporary phenomenon within its real-life context; when the
boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used (Yin
1989, 23). Case studies allow the researcher an opportunity of explaining the causal links in real-life interventions that would be
too complex for surveys or experimental strategies (Yin 1989, 25). The method is most appropriate when there is a desire to
find broad definition, rather than narrow discovery (Yin 1993). Case study research is primarily about particularisation. When
responses or issues link across multiple cases, as opposed to a single case, generalisations can be drawn: valid modification
of generalization can occur in case study (Stake 1995, 8). In terms of interpretation of data, Stake (1995) asks whether it is the
researchers or the respondents interpretation that is being reported, although it is accepted that it is the qualitative
researchers interpretation that takes precedence, with the importance of maintaining multiple realities being emphasised.
Continual and progressive focusing is recognised in that initial research questions may be modified or even replaced in midstudy by the case researcher, as initial observations lead to renewed inquiry and further explanation (Stake 1995, p. 9).
Researchers draw their own conclusions from observations and other data. These in turn lead to assertions, which lead to
speculation or theory.
The process of case study research can be intrinsic (we need to learn about a particular case), and/or instrumental (when we
have a research question and we need to gain a general understanding). When several cases are studied, each case might be
instrumental in terms of learning about, for example, the effects of regulations on the gaming industry and therefore the
coordination between the different cases. This research might therefore be referred to as a collective case study.
Data were collected through these combined methods, and while analysis was undertaken using NVivo, the analysis was
guided by these methods. Thirty-eight in-depth interviews were undertaken with gaming operators and gaming machine
manufacturers in both the Nevada (USA) and NSW (Australian) jurisdictions during 2005-2006. Interview data were augmented
through observation, resulting in a rich collection of data. The data were coded and initially entered into nodes within the
NVivo program. A pre-defined set of themes was derived from topic areas of the interviews. Each theme then became a node.
As each interview was read, additional themes were identified and nodes created for each theme. The nodes were fleshed out
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The Use of Computer Supported Analysis for Interview Data: A Cross-Cultural Example from the Electronic Gaming Industry

as data were extracted from each interview referring to the same theme. Thus a range of themes was created as a result of
going through the data and coding according to themes within each transcript. Once all data had been placed into various
nodes, themes were checked through the matrix function within NVivo to ensure that the various themes were distinct from
each other and that there was no redundancy.
Further analysis of emerging themes resulted in a conceptual model. This is discussed in the next section.

ANALYSIS AND FINDINGS


A conceptual model which integrates analysed data from the interviews and observations with related literature is exhibited in
Figure 1. This model postulates the theoretical finding that in order to be viewed as legitimate, EGM operators need to ensure
that: a) socially responsible programs are implemented throughout their businesses, (b) they adhere to the law, and (c) they
satisfy a range of stakeholder expectations (or at least come to some mutually acceptable compromises). Further, in order to
be considered socially responsible, firms are expected to act beyond economic imperatives and legal requirements, by
adopting ethical programs and voluntarily donating a percentage of their profits to charitable causes (refer to Carrolls 1991
CSR Pyramid).
As can be seen in Figure 1 below, a number of stakeholders have been identified, with media influence on government policies
being one example of their importance. Gambling issues in turn influence community, media and government perceptions of
social responsibility, such as whether technological advances of EGMs with their flashing lights and seductive sounds leads to
increased enticement/inducement for the player. A number of respondents stated that their patrons preferred EGMs with higher
volatility and many stated that a higher return to player (RTP) certainly adds to the appeal. Controversy exists as to whether
EGM expenditure should be viewed as part of the larger social issue of problem gambling, or whether it can be legitimately
viewed as entertainment for the majority of people who enjoy EGM play without any associated addiction or resultant problems.
Certainly the vast majority of academic literature and media stories (the latter at least in NSW) focus on issues of problem
gambling. Observation in Las Vegas however highlighted to one of the researchers that a number of EGM players appeared to
be enjoying the process as a form of entertainment, with one patron in a wheel chair who otherwise might be socially isolated
or at least perhaps have less opportunities to go out and be involved in a wider socially constructed environment. Although
evidence points to the majority of EGM profits being derived from at risk and/or problem gamblers (Livingstone and Woolley
2007, Symond 2007), as an overall indication showing perhaps the predominance of adults who enjoy EGM play without any
reported problems is the Productivity Commission report (1999), stating that approximately 2% of the adult population in
Australia exhibit symptoms of at risk or problem gambling. One could argue therefore, based on these statistics, that the
majority of adults (98%) can enjoy EGM play as a form of entertainment, similar to other forms of entertainment expenditure
such as going to a concert, show, nightclubbing etc. Because of a higher risk of addiction to EGM play than to many other
forms of entertainment, however, EGM operators need to ensure socially responsible policies, processes and practices are an
integral part of their organisation.
A number of factors were also conceptualised which highlighted the importance of legitimacy in the gaming industry. One such
concept is the influence of historical roots:
New South Wales, like Nevada, owes its gambling origins to criminal involvement (for example, Mafia chiefs such as Meyer
Lansky and Bugsy Siegel were major investors in Las Vegas casinos and hotels). The 1973 Moffitt Royal Commission of
Inquiry into Organised Crime in Licensed Clubs in New South Wales found a significant risk from criminal elements (Kirby
2007). Part of the evidence put forward during this Royal Commission stated that Bally Australia was alleged to have used
intimidation and bribery to convince registered clubs in NSW to buy Bally poker machines (Kretschmar 2004). In 1966 Nevada
gained its respectability largely due to Howard Hughes, with his buying of casinos and large tracts of land in Nevada (Kilby et
al. 2005) and also to the corporatisation of casinos. Unlike their counterparts in NSW, the press in Nevada rarely focuses on
the negative aspects of gaming activities, with one respondent attributing this to the fact that there are many more murders to
report on than there are in NSW! The NSW gaming industry is considered to operate in the most heavily regulated jurisdiction
in the world. Certainly, the introduction of the Registered Clubs Act in 1976, the Casino Control Act in 1992, the Responsible
Gambling Act of 1999 and the Gaming Machines Act of 2001 has meant that NSW EGM operators have far less opportunity to
practice voluntary socially responsible activities than their largely self-regulated counterparts in Nevada. That being said,
however, our analysis of the interviews, along with official published government documents and the media, found that, overall,
gaming operators in Nevada appear to be much more aware of, and to implement, socially responsible activities than do many
operators in NSW. Regardless of the current situation, it could be argued that organisations that have their genesis in criminal
associations, such as the gambling industry, have a substantially more difficult time in terms of gaining legitimacy in the eyes of
its stakeholders, than do organisations without such illegal connections.
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Volume 8 Winter 2009

Figure 1: Conceptual Model


In spite of identified differences between the Nevada and New South Wales jurisdictions, the conceptual model (Figure 1) can
be applied to both. The main issues, which were then developed into the nodes that collectively form the conceptual model,
were gleaned from interviews, observations and the literature from both jurisdictions. Although the nodes/issues apply to both
markets and possibly to other jurisdictions, it is postulated that the degree to which they are an important influence varies from
market to market.

DISCUSSION
Using NVivo to facilitate organisation of the data has been extremely beneficial in this study. Patterns and themes were more
easily identified and different categories and nodes were developed as part of the process of analysing the data. Memo links
proved a valuable aid in recording insights gained from the data. To illustrate, the following excerpt from the CSR ethical
node (based on Carrolls (1991) four components of the CSR Pyramid, namely economic, legal, ethical and
discretionary/philanthropic see Figure 1) notes under the Memo Links feature is provided:
1) Hotels focus a lot on being popular with the NSW Government. They throw lots of money at the Government (political
donations).
This statement indicates what could be considered an unethical approach. Political donations are very much driven by
'self-interest'. This perhaps satisfies the 'economic' component of CSR (see Figure 1) in the sense that pubs (and
clubs), through political donations and lobbying, are seeking to 'protect their turf' - i.e. profits. Given that political
donations and political lobbying are not illegal, the 'legal' component of CSR (see Figure 1) is also met. But it would
appear that, in spite of both components being met, these actions (political donations and lobbying) are a long way
from being ethical.

159

The Use of Computer Supported Analysis for Interview Data: A Cross-Cultural Example from the Electronic Gaming Industry

Another memo excerpt that describes the researchers impression of one of the luxury casinos on the Las Vegas Strip:
Wynn had just been opened a few weeks prior to this interview. Its decor is sumptuous - top label retail shops, a
number of 5 star restaurants, fine art throughout the casino, impressive gardens and a small lake, and extravagant yet
tasteful decor. The gaming and other staff wore 'tasteful' uniforms, with none of the short dresses, low necklines and
high heels associated with many of the other casinos. Wynn also has a helipad and separate entrances for its
exclusive bedroom suites in order to offer discretion and anonymity for those guests so requiring it. It is the latest
casino developed by Steve Wynn. His other casino, Bellagio, is also opulent.
This memo extract illustrates the Inducement component of our conceptual model. Patrons may be enticed to stay
and gamble longer in premises that: (i) have alluring staff, (ii) offer complimentary beverages and/or (iii) have
luxurious surroundings
Electronic storage of the interview transcripts allows ready access to anecdotal statements which provide empirical support for
theoretical emergence and conceptualisation. For example, a number of respondents, in relating to the NSW context,
expressed their strong opinion that EGMs should only be allowed in registered clubs, not pubs or bars. A probable explanation
for this is that, ostensibly at least, NSW Registered Clubs operate on a community, not-for-profit mandate, whereas many bars
in NSW are privately owned, with much media reporting of publicans being made overnight millionaires as a result of the legal
introduction of EGMs into pubs in 1997.

POSSIBLE LIMITATIONS AND BIASES


Many quantitative methods in marketing adopt convenience sampling. Authors such as Patton (2002) argue that, unlike
qualitative methods such as case study research which are purposeful, strategic and can yield crucial information about critical
cases., [c]onvenience sampling is neither purposeful nor strategic (p. 242). It is recognised however that [q]ualitative inquiry
is rife with ambiguities (ibid, p. 242) and one of the challenges for qualitative researchers to is to have a high degree of
tolerance with this aspect. Whilst it is acknowledged that triangulation ideally uses a combination of qualitative and quantitative
data, the interview data for our study was supplemented by observational data, thus satisfying one form of triangulation. It is
considered highly unlikely that one of the limitations of observational data, being that of the observer affecting the observed
persons behaviour, occurred due to the fact that the researcher did not intrude into peoples space. A further limitation cannot
be overlooked however, in that the selective perception of the observer may distort the data (ibid, p. 306). In order to minimise
this limitation, interview data were also examined by the other researcher. Patton (2002) lists a number of [i]nterview data
limitations [which] include possibly distorted responses due to personal bias, anger, anxiety, politics, and simple lack of
awareness since interviews can be greatly affected by the emotional state of the interviewee at the time of the interview.
Interview data are also subject to recall error, reactivity of the interviewee to the interviewer, and self-serving responses (p.
306). Two important factors serve to minimise these limitations, in that the interviewer used the same list of nine topics for each
interviewee and, as an outsider, was not aware of any organisational politics at play. Furthermore, the researcher can
emphatically emphasise that no anger or anxiety was present before, during or after the interviews. Recall error was
minimised through the use of detailed and rigorous note-taking. Further, the researcher does not consider any biases existed
prior to, or during the interviews, in relation to a preference for a pro or anti gambling stance.

CONCLUSION
This paper has developed an empirical exploration of the ethical issues of EGMs in two ways. Firstly, we have developed a
grounded theoretical model which addresses the concerns of gambling operators and other stakeholders such as the
government, media, NGOs and community groups with regard to the ethical and societal issues surrounding electronic
gambling. Legitimacy theory relates to the fact that organisations affect and are in turn affected by, the societies within which
they operate, whereby a social contract is developed. This social contract is largely non-controversial when the values of the
organisation are aligned with the values of society. This would appear not to be the case with gaming operators and the
societies within they operate, perhaps particularly so in NSW. Further, we have postulated that industries which have their
genesis in organised crime have a substantially more difficult time gaining legitimacy in the eyes of their stakeholders.
Secondly, and most importantly, we provide insight into the use of NVivo for analysing social and societal marketing. It is hoped
that this paper may lead researchers who are involved in this field of research to adopt similar practices with computer assisted
analysis.

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Volume 8 Winter 2009

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Volume 8 Winter 2009

INTRODUCING EULERS CONSTANT INTO THE CALCULUS CLASSROOM

Thomas P. Dence
Ashland University, USA
ABSTRACT
By the time students have finished a year of the calculus, they are well familiar with the famous constants of and e, but
knowledge of Eulers constant is practically at a bare minimum. This is a shame since occurs in so many interesting
places in mathematics. This article will demonstrate about half a dozen such examples, requiring nothing more than an
introductory calculus background.

Keywords: Eulers
Constant, Riemann Zeta Function, Logarithmic Integral, Tau
Function, Primes

INTRODUCING EULERS CONSTANT INTO THE CALCULUS CLASSROOM


It is not at all uncommon for students in the first year of calculus to encounter the infamous mathematical constant named after
the great Swiss mathematician Leonhard Euler, denoted by the Greek letter gamma, , and defined by the limit

n 1

lim ln(n).
n
k 1 k

This constant, approximately equal to 0.5772156, though not nearly as popular as its big brothers and e, or even the golden
ratio = (1 5 ) / 2 , nevertheless deserves special recognition because it does play a prominent role in much of

mathematics.

Its interesting to note that high school students of a generation ago, say in the 1950s and 60s, carried slide rules to

mathematics
class (this was the period just before pocket calculators hit the scene), and on many of the top-ranked slide rules
(made by the Post Company) special markings were etched in the slide rules to indicate the presence of a special
mathematical constant. In fact, only two markings were usually present, one for and one for .
One of the areas, and there are many, of mathematics where Eulers constant makes its appearance is in the distribution of
primes. The primes, 2, 3, 5, 7, 11, 13, .., of which there are infinitely many, are distributed so irregularly among the sequence of

natural numbers that their study has fascinated man for over a thousand
years.
Let me just briefly mention three situations
where Eulers constant makes an appearance, followed then by several other interesting applications appropriate for the
calculus classroom.
1) Several hundred years ago a major problem was to try and find a formula that would yield the count of how many primes
were less than any specific given number x, denoted by ( x) . One such formula, denoted by Li(x), was the
logarithmic integral Li(x) =

x
2

1
du . This expression, produced by the great German Karl Gauss, was quite
ln( u)

accurate but was still not perfect in counting the correct


number of primes. We note, for example, that Li(10,000,000)
= 664,918 while (10,000,000) 664,579 . As it turns out, Eulers constant is related to Li(x) by the
complicated expression:

Li(x) = ln(ln( x))

(ln x) n
n n! .
n1

163

Introducing Eulers Constant into the Calculus Classroom

2) The most famous problem in the mathematics world today (2009) is to determine the zeros of the function known as the
zeta function (s), where this complex-valued function is defined by the series (s)

. To date, millions of the

n1

zeros have already been found, but more may still exist. Solving this problem will give one instant fame of the highest
caliber! Eulers constant is related to the zeta function by the equation:

(n) 1
.
n
n 2

3) One of the standard functions in elementary number theory is the tau function, denoted (n) , which counts how
many positive divisors a given natural number n has. For instance, (20) = 6 because 20 has 6 divisors, namely 1, 2,

4, 5, 10, 20. If we then examine all the natural numbers k from 1 to n, and compute (k ) for each one, and then sum
n

them up,

Imation improves as n increases) by


(k ) , we get a value that is closely approximated (and the approx-

k 1

the expression n[ln(n) 2 1] . Equivalently, dividing both sides by n,


to give an average, yields:

1 n
(k ) ln(n) 2 1.
n k 1

In particular, if n = 2500, then

1 2500
(k ) 7.9840 and ln(2500) 2 1 7.9783. Therefore we can say that
2500 k 1

from 1 to 2500 has about 8 positive divisors. Its important for calculus students to really understand the concept
each integer
of limit, since this is essentially the foundation upon which calculus is founded. In first semester calculus, students are always

sin( x)

1 inasmuch as this is crucial in establishing the derivative of the sine function. The
x
f ( x h) f ( x)
derivative itself is a limiting value of a difference quotient, lim
f ( x) . The definite integral likewise is
h0
h
exposed to the limit
lim
x 0

defined via a limit, namely the limiting value of a Riemann sum. So it should not require too much of a step on the students
part to get
a good grasp on the limiting value as defined by Eulers constant.

books, I suspect it is in reference to either of the following:


When Eulers constant is mentioned in the calculus
1) it serves as a way to approximate partial sums of the harmonic series, and
2) it demonstrates that the difference of two divergent sequences can converge.
To demonstrate (1), if we wanted to sum 11/ 2 1/ 3
2.92896824, or by the rearrangement:
10

k
k 1

1/10, we could simply sum the ten terms and get

ln(10)

we could get the approximate ln(10)+0.5772156 = 2.879800693. Clearly the former is more accurate, and it didnt
require too much time. But with a larger value of n, say n = 500, to sum the 500 terms by hand is too tedious, and a
calculator
SUM feature would be more suited, yielding the value sum(seq(1/N, N, 1, 500)) = 6.79282343, while the
rearrangement involving Eulers constant gives a good close value of:
500

ln(500) 6.791823698 .

k 1

Even larger values of n, say n = 5,000,000 would prove too distasteful for the calculator, but the rearrangement would give
ln(5,000,000) + = 16.00216407.

164

T. P. Dence

Volume 8 Winter 2009

Typically not much else having to do with follows in calculus texts because most applications using gamma involve higher
mathematics, though many references are available [4]. There are, however, some cute applications involving the harmonic
series, and hence gamma, that would pique students interests, namely the stacking of dominoes for infinite overhang [1] and
the worm on a rubber rope problem [3]. Let me first show you about the rubber rope problem, then Ill give you a second

example that involves integral calculus,


and a third example that involves infinite series.
We place Willy the Worm on the left end of a rubber rope that is initially 1 yard long. The left end of the rope is attached to a
wall, while the right end hangs freely. Now Willy can crawl at the rate of 1 inch per second, and after each second he pauses
momentarily (an infinitesimal amount of time) to catch his breath, but while so doing the rope is stretched an additional yard in
length. The question is, does Willy ever reach the other end of the rope, and if so, when? The vast majority of the time Ive
given this problem to students they have reacted the same way, saying No way can Willy reach the other end cause the rope
keeps getting longer than Willy can crawl. Casting intuition aside, lets look at the mathematics of the movements of Willy.
Let L(t) denote the distance in inches Willy is from the left end of the rope after t seconds, when he just starts his rest break,
and before the rope is stretched an additional yard, and let LEN(t) denote the length of the rope in inches after t seconds
when Willy just starts his rest break. The initial values of these functions are L(1)=1, LEN(1)=36. After the rope is
stretched, its important to note that Willy is in the same relative position on the rope (e.g., a third of the way, or 1/36th of the
way) as before the stretch. This means, that at time t, and after his rest break when the rope is stretched an additional yard, he
is now x inches from the left end, where we have the proportion:

L(t )
x

LEN(t ) LEN(t ) 36
and consequently:

L(t + 1)= x + 1 =

L(t )[LEN(t ) 36]


1.
LEN(t )

Some subsequent values of L(t) are L(2) = 3, L(3) = 5.5 = 3 11/ 2 1/ 3 , and in general:

L(t) = t
11/ 2 1/ 3

1/ t .

Thus, Willy will reach the other end of the rope if


L(t) equals the length of the rope, 36t, for some t. But this implies
t

, which indeed happens when ln(t) +


1/ k 36

is approximately 36, or t = e 360.5772156. The surprising conclusion is

k 1

that Willy does make it to the other end of the rope, but he is awfully old when he gets there. Hopefully one can see that the
length of the rope, and its rate of increase (as long as they are constant) do not affect the outcome of whether Willy reaches

the other end, just how long it will take.


As for the application involving integral calculus, we note that the graphing calculator has become a favorite aid, and an
important educational tool, in the teaching of calculus. The calculator comes equipped with many standard built in functions,
such as sin(x), ln(x), 1/x, and even fpart(x). This latter function, known as the fractional part of x, returns the fractional
part of any decimal. Hence, fpart(2.73) = 0.73, and fpart(2) = 0. Its graph, for positive x, is pictured in Figure 1(a). It
has become fairly standard to denote this function by using braces, so now the notation would become fpart(x) = {x}. We
quickly note that {x} can be alternately defined for x 0 by {x} = x x, where this latter expression is the floor function,
or also known as the greatest integer function, of x, and this formulation will prove significant in what soon follows.
The interesting calculus problem that now presents itself [4] is to evaluate the area between {1/x} and the x-axis (see Fig.

1
1(b)); that is, to compute dx .
0
x
1

165

Introducing Eulers Constant into the Calculus Classroom

(a) Graph of y = {x}, x 0


Figure 1

(b) Graph of y = {1/x}, 0 < x 1

We note that the graph in (b) is highly oscillatory and possesses many points of non-differentiability. But we can call on the
calculator to numerically estimate the desired area. With the TI-83 calculator, using command (7) under the CALC menu, and
integrating from 0 to 1, we obtain the decimal value 0.42810655. On the other hand, using fnInt from the MATH menu returns
the value 0.4229680952. This latter computation took considerably longer than the former, clearly implying the use of a
different algorithm. To compute the exact value of the integral, we proceed as follows.
The substitution u = 1/x yields the following:

dx

x
1

u
du

u2
u
du
=
1
u2

k 1 u u
du
=
k
u2
k 1

k 11
k
= 2 du
k
u u
k 1
=

= ln u
k 1

= lim

Consequently

dx

x
1

k 1

u k

ln(k 1) k 1 ln k 1
k 1

n 1

= lim ln(n 1)
n

k2
= 1 - .

is approximately 1 0.5772156 = 0.4227844. Gamma thus occurs in the solution to an

integral that is not beyond


the comprehension of second year calculus students, or to high school Advanced Placement
students quite a nice treat!

October, 2008, I had occasion to direct a workshop for high school Advanced Placement Calculus teachers, and I
During
presented this discussion and derivation of the area under y = {x}, resulting in the appearance of Eulers constant. The
teachers were asked to express their opinions of how they thought this would go over in their class. The general consensus
was that it would probably not be suitable for the AB Calculus classes, but much more appropriate for the BC classes since
they spend more time with series. They thought that it would be something to challenge the brighter, more motivated students,
and that it could serve as an excellent choice for a team project. One of the teachers also commented on the benefit of talking
about the greatest integer function, which is something they rarely do. Others mentioned the benefit of introducing some
166

T. P. Dence

Volume 8 Winter 2009

mathematics history into class discussion, and anything having to do with Euler certainly does that. As Pierre Simon de
Laplace once said, Read Euler he is our master in everything.
The third calculus application where gamma appears is with infinite series, and hence also appropriate for Advanced

Placement Calculus students. Practically every calculus text in existence uses the example

divergence by means of the Integral Test, followed shortly thereafter by the series

(1)
k 1

k 1

ln k
to illustrate series
k
k 1

ln k
to illustrate convergence
k

by means of the Alternating Series Test. But what the series converges to is never mentioned!

To this end, for each m N, let S2 m be the 2m-th partial sum, which we immediately rewrite as a difference of two

suggestive finite series:

2m
ln k
S2 m = (1) k 1

k
k 1
2m

k 1

m
ln k
ln(2k )
2
.
k
2k
k 1

The strategy next is to rewrite ln(2k) as the binomial ln 2 + ln k (and similarly for ln(2m)), and to add and subtract some
judiciously chosen terms. We obtain:

m
2m ln k [ln 2m]2 [ln 2 ln m]2
1 m ln k [ln m]2 [ln m]2

S2 m =
- (ln 2) -

k k 1 k
2
2
2
2
k 1 k

k 1
m 1

(ln 2) 2 2m ln k [ln 2m]2 m ln k (ln m) 2


=
(1)

-
- (ln 2) ln m.
2
k
2
k
2
k

k
1
k
1
k
1

ln
k
k 1
Although (1)
converges only conditionally, each partial sum S2 m , as given by the formula in eq. (1), is a
k
k 1

member of the sequence


of partial sums of the series
with no rearrangements
of any of the terms. Accordingly, the sum of the
series is equal to the limit of S2 m as m . The final result is:

2
(ln
2)
ln
k
(1)k 1 k = 2 1 1 0 (ln 2)
k 1

(ln 2) 2
0 (ln 2)
=
2
0.159869 ,

where 0 , 1 are the first two members of a sequence n

N
[ln k]n [ln N ]n 1
n lim

N
k 1 k n 1

n 0

of constants defined by:

and these constants are referred to as generalized Euler constants. We note that 0 , so we now have the result [2]

(1)

k 1

k 1

(ln 2) 2
ln k
(ln 2) .
=
k
2

It is hoped that these few examples should spark students interest in this truly fascinating mathematical constant, which has
many other colorful appearances to make.

167

Introducing Eulers Constant into the Calculus Classroom

REFERENCES
[1]
[2]
[3]
[4]

Dan Bonar and Michael Khoury, Real Infinite Series, MAA (Classroom Resource Materials), (2006).
O. Furdui, J. Sumner and A. Kadic-Galeb, Problem No. 873: Stieltjes constants, Coll. Math. J., 40 (2009) 136-137.
Martin Gardner, Time Travels and other Mathematical Bewilderments, W. H. Freeman & Co., (1988), p. 111.
Julian Havil, Gamma: Exploring Eulers Constant, Princeton University Press (2003), p. 109.

168

R. Geertsen and J. Thompson

Volume 8 Winter 2009

HEALTH BEHAVIOR, MEDICAL EXPERIENCE AND USE OF


ALTERNATIVE MEDICINE

Reed Geertsen and Jobecka Thompson


Utah State University, USA
ABSTRACT
Alternative medicine is now used by more than one-third of Americans on a yearly basis. This has prompted many medical
schools and nursing programs to include courses on complementary and alternative medicine (CAM) in their curriculum. The
present research was undertaken to first determine if residents of Northern Utah were high or low users of different types of
alternative medicine. Second, we wanted to find out if selected types of health behavior and medical experience promoted
alternative medicine use. Third, we were interested in determining whether Andersens predisposing and/or enabling factors
inhibit or propel individuals toward this type of use. Finally, we wanted to know if adults were using alternative treatments
instead of, or in addition to conventional medicine. Some 466 adults representing 70% of the randomly selected residents who
received multiple mailing of a questionnaire participated in the study. We found that 31.3% of the adults between the ages of
21-75 had used alternative medicine during the year. Health behaviors and medical experience were found to have significant
effects on alternative medicine use; however, most of Andersons predisposing and enabling factors had no effect on its use.
No significant differences were detected between Mormons and non-Mormons in alternative medicine use. Of the 146 adults
who had used alternative medicine during the year, 132 or 90.4 % had also seen a medical doctor (M.D.) one or more times
during the same period of time.
Keywords: CAM, Utilization, Holistic, Organic, Dissatisfaction

INTRODUCTION
Health behavior refers to activities and practices that individuals undertake to maintain or enhance their health or to prevent or
reduce future health problems. It includes a wide variety of behaviors, such as those that help a person avoid obesity, expand
ones knowledge about health, and select foods to promote good nutrition (Cockerham, 2010). In contrast, medical experiences
are derived from actual health problems and past use of medical services. They include chronic health problems, past visits to
doctors, and satisfactions or dissatisfactions with these visits. Alternative medicine refers to treatments that are not generally
practiced by medical doctors. It is a broad field made up of many different types of practitioners and remedies whose use by
patients varies in different populations and cultural groups (Kiefer, Pitluk, and Klunk, 2009). Despite a lack of scientific
verification, these treatments and remedies are gaining wider acceptance by the general public. In 2007, over 38 million
American adults made more than 354 million visits to complementary and alternative medicine (CAM) practitioners. The
majority of these visits were for manipulative and body-based therapies. During this same year, about 12 billion dollars were
spent on practitioners and another 22 billion were spent on CAM products (Nahin, at al., 2009). This paper reports on research
designed to more clearly identify the health behaviors, medical experiences, and other characteristics of persons who are using
these types of treatments in a unique, semi-rural health district in Utah.

PAST RESEARCH
Sirois and Purc-Stephenson (2009) emphasize the importance of identifying the factors that predispose individuals to become
frequent consumers of complementary and alternative medicine (CAM). They found that openness and agreeableness were
correlated with proactive health motivations and all three were correlated with CAM use. Astin (1998) identifies three possible
reasons for why someone might choose alternative medicine: (1) a holistic outlook wherein alternative medicine is viewed as
being more compatible with personal and/or religious beliefs; (2) patient dissatisfaction with conventional medicine; and (3)
patient interest in exercising more control over health care decisions. These explanations describe separate pathways that an
individual might follow in making healthcare decisions. One pathway would be motivated by an ideological shift in how one
thinks about health and illness. Here the individual has become increasingly concerned about their health, wants to preserve it,
and is looking for broader-based treatments. A second pathway would reflect dissatisfaction with, and abandonment of
allopathic health care services. Because of bad experiences, the individual may abandon conventional medical treatments and
169

Health Behavior, Medical Experience and Use of Alternative Medicine

only use alternative medicine. The final pathway would view alternative medicine as complementary medicine. Taking
advantage of several choices as a consumer, the individual may want to use a variety of treatments. In this instance the
individual uses both allopathic medicine and alternative medicine. Although intriguing and insightful, these possibilities have not
been fully examined using empirical data.
According to Deierlein (1994) gaining control of ones body and understanding the power of ones self gives individuals a desire
for a more comprehensive health care system. Traditionally, when the sick sought medical care, they wanted the doctor to heal
them. But an increasing number of people want to take charge of their own health, and alternative healers typically expect their
patient to do a lot for themselves. As a result, health conscious individuals might engage in a wider variety of health behaviors
that are not reinforced by physicians and other health professionals, and therefore may find alternative medicine to be more
compatible with their interests. Three possible health behaviors were singled out for investigation that might propel individuals
toward alternative medicine. These include reading calorie labels, watching health programs, and buying organic foods. We
were unable to find any research that had examined the effects of these health behaviors on use of alternative medicine.
Use of organic foods has exploded in recent years. The market for these products has been increasing by roughly 20 percent a
year since 1990 (Jinghan, Zepeda, & Gould, 2007). Even though studies show few nutritional differences between organic and
conventional foods, many people perceive that they are superior for human health due to pesticides use on non-organic foods
(Dangour et al., 2009; Magnusson, et al., 2003). Watching television has been linked to obesity and inactivity, but no research
has focused on the effects of health programs on people who frequently watch them (Meyer et al., 2008). The explosion of fast
foods has made calorie counting increasingly important in the preservation of health, and the key problem appears to be
convenience rather than cost (Winterfeld, 2005). We were curious about the possible impact of these three health behaviors on
alternative medicine use?
One of the best known models of help-seeking behavior is Andersons model of health care utilization. According to Andersen,
health care utilization is shaped by three sets of factors. First are what he calls predisposing factors. These include gender,
education, age, and religion. Second are enabling factors such as residence (urban or rural), income, and satisfaction with
medical services. Need is the final factor and is indicated by the presence of chronic conditions. We wanted to determine if the
variables that influence the use of traditional health services have the same effect, if any, on the use of alternative medicine
(Aday & Awe, 1997).
Consistent with some of Andersens findings on utilization of conventional health services, Factor-Litvak (2001) and Upchurch
(2005) report that women are more likely to use alternative medicine than men. Astin (1998) and Stein (2004) both claim that
users of alternative medicine tend to be better educated. Astin believes that education may increase the exposure one has to
various forms of non-traditional health care. The highly educated are probably more likely to research their illness, find more
alternatives, and be more inclined to question the authority of a conventional practitioner. Tindle (2005) reports that individuals
with a family income above $60,000 are more likely to use alternative medicine.
Several investigators report a connection between age and medical use. Tindle (2005), Mugge (1984), Hartvigsen (2002), and
Barnes (2004) all found that individuals over forty are more likely to use alternative medicine. Miller (1997) was one of the first
to report a connection between multiple chronic conditions and use of alternative medicine. Other research shows that
individuals with three or more chronic illnesses are much more likely use alternative medicine (Al-Windi, 2004; Hartvigsen,
2002). In addition, Wells and colleagues (2007) found that women with more symptoms report higher use.

TYPES OF USE IN DIFFERENT POPULATIONS


National polls of alternative medicine use reveal significant variations over time. A 1997 CBS national poll revealed that only
33% of the United States population had ever used alternative medicine . A 1999 Los Angeles Times national poll revealed
similar results on the proportion of the population (36%) who had ever used these treatments; however, this poll distinguished
between chiropractic, herbal medicine, acupuncture/acupressure, and other types. The percentages were 27%, 25%, 5%, and
10% respectively. This shows that several respondents had used more than one type of alternative medicine. A national poll
conducted in 2002 began to show a new pattern of use. In this poll 35% of the population reported using some form of
alternative medicine during the past year. About 7% had used chiropractic and 18% had used herbal medicine. More recent
polls show similar patterns of yearly use (Roper, online polls)
One important gap in the literature is the lack of representative samples showing consumption patterns in different regions and
subcultures of the country (Adams, et al., 2009). Wells and colleagues (2007) have found significant regional variations in CAM
use. In their research women who lived on the West Coast were found to have the highest levels of CAM use. Bormann and
170

R. Geertsen and J. Thompson

Volume 8 Winter 2009

colleagues (2009) report extremely high alternative medicine use among HIV-infected men in California and Florida. Some 69%
of HIV-infected men in Southern California and Northern Florida were CAM users, and the frequent users were more likely to
exhibit health-promoting behaviors.
Northern Utah is a unique region both culturally and geographically. We thought this population might shed additional light on
variations in alternative medicine use. This part of the state is predominately Mormon, a unique religious group that requires its
members to abstain from coffee, tea, tobacco and alcohol. Since the Mormon Church once owned many of the allopathic
hospitals in the state, conventional medical practice is firmly entrenched in the Mormon culture (Geertsen, 1997). Furthermore,
this area is semi-rural with more than 60% of the population residing in communities of less than 20,000 population. Roughly
one-third of the permanent adult residents are college graduates and approximately 60% are over 40 year of age. We wanted
to see if the Mormon religions emphasis on good health practices might override its traditional emphasis on using conventional
medicine.
Based on the foregoing review of the literature, answers to four questions were sought in the present research. First, we
wanted to know if the residents of Northern Utah were high or low users of different types of alternative medicine. Second, we
wanted to find out if selected types of health behavior and medical experience promoted alternative medicine use. Third, we
were interested in determining whether Andersens predisposing and/or enabling factors inhibit or propel individuals toward this
type of use. Finally, we wanted to know if adults were using alternative treatments instead of, or in addition to conventional
medicine. We felt that answers to the last question might have special relevance for both current and future health
professionals, particularly those in this region of the country.

METHODS
Data Collection and Sample
A questionnaire was mailed to a random sample of adults living in Northern Utah (Cache and Box Elder counties). The sample
was generated from a list of names and addresses of persons between the ages of 21 and 75 with driver licenses. This
information was obtained from the Utah Division of Motor Vehicles. The first mailing was followed up with subsequent mailings
of reminder cards and additional copies of the survey. A final mailing was sent by certified mail. We followed the procedures
established by Dillman (2000) to insure a high completion rate. The survey achieved a 70.3 percent response from the
randomly selected subjects which yielded 466 completed questionnaires. The personal identifying information that was used for
sending subsequent mailings to non-respondents (i.e. numbers on questionnaires corresponding with names and addresses)
was destroyed after data collection to protect the privacy rights of respondents.

Measurement of Variables
We used standard questionnaire items to measure gender, religion, residence, age, education, and income. To measure use of
alternative medicine, respondents were asked if they had used chiropractic, herbal medicine, acupuncture or acupressure and
any other type of alternative medicine in the past year. These were defined in the survey as treatments used in addition to, or
instead of conventional medical remedies offered by a medical doctor (MD). To enable odds ratio calculations, responses were
categorized as having used and not having used alternative medicine in the past year.
Concern for health was measured
by the three separate questions using three response categories (frequently, sometimes, and never) for each question. First,
respondents were asked how often, if ever, they (1) looked for calories on food labels, (2) watched or listened to programs on
health, and (3) bought certified organic foods.
Respondents were asked During the last 12 months, about how many times did you see a medical doctor (M.D.) about your
health. Responses were collapsed into none, one to three, and four or more. To assess satisfaction, they were asked How
satisfied are you with the overall quality of the health care services in your area? Possible responses were very satisfied,
somewhat satisfied, or somewhat /very dissatisfied.
Health conditions were assessed from yes or no responses to the following conditions: high blood pressure, heart trouble,
stroke, asthma or chronic bronchitis, arthritis or rheumatism, diabetes, cancer other than skin, stomach or gallbladder or liver
trouble, depression, and other conditions that they specified. Responses were collapsed into none, one or two, and three or
more chronic conditions.

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Health Behavior, Medical Experience and Use of Alternative Medicine

Statistical Procedures
To assess the effects of social characteristics, health behaviors, and health experiences on the use of alternative medicine, we
divided the dependent variable into two categories. The resulting dichotomous variable distinguished those who had used any
type of alternative medicine in the past year from those who had not used this type of remedy (0-1). We used this dependent
variable for calculating odds ratios and adjusted odds ratios for categories on each of the other variables.
As is commonly done with logistic regression, odds ratios were calculated by comparing responses to a reference category for
each variable. Reference categories were selected to reflect expected outcomes based on the research of others cited in the
literature review as well as our own expectations on health behaviors. In other words, we used the lowest expected use of
alternative medicine as the reference category for each independent variable. For example, very satisfied with health services
was used as the reference category since those dissatisfied with the services in their area were expected to be the most
prevalent users of alternative medicine. Based on this coding strategy, all odds ratios exceeding a value of one would indicate
how many times more likely those falling in the other categories were to report using alternative medicine during the past year.

FINDINGS
Some 31.3 percent of the 466 respondents in this study reported using alternative medicine during the past year. Chiropractic
was the most common type of alternative medicine used with 19.5 percent of respondents indicating they have used this during
the year. Herbal medicines were used by 18.7 percent, while only 4.3 percent reported using acupuncture or acupressure
treatments. Some 6.9 percent reported using some other type of alternative medicine.
Of the twelve independent variables examined in this study, five were found to have no statistical effect on use of alternative
medicine. Three out of four of Andersens predisposing variables had no effect on the target variable. There was virtually no
difference between persons over 40 (31.5%) and persons 40 and under (31.1%) in alternative medicine use. Fewer college
graduates (26.8%) reported this type of use than did persons with some college (34.7%) or high school and/or less education
(32.1%). Alternative medicine use was somewhat more common among non-Mormons (36.1%) than Mormons (30.5%), but the
differences were not significant and may have been due to chance.
Two out of three of Andersens enabling factors had no significant effect on the dependent variable. People residing in larger
communities defined as 50,000 and above were no more likely to use alternative medicine (30.5%) than those residing in
smaller rural communities (31.8%). There were no meaningful differences between persons with incomes above $60,000 a
year (30.3%) and those with incomes below $20,000 a year (28.0%).
The seven variables that had significant statistical effects on use of alternative medicine are presented in Table 1. Gender was
the only demographic enabling factor to have a statistical effect on the dependent variable. As indicated by the percentages
and odds ratios in the table, women were much more likely than men to have used alternative medicine during the previous
year. All three health concern variables were found to predispose respondents to use alternative medicine. Persons who
frequently buy organic foods were more than six times more likely to use these services than those who never buy this type of
food. These differences remained strong when the effects of the other six variables in the table were adjusted using logistic
regression. Persons who frequently watched health programs were almost three times more likely to use alternative remedies
and persons who read calorie labels on foods were nearly two times more likely to do so than persons who never engaged in
these health concern practices.
Of the three medically-related factors, chronic conditions had the weakest though significant statistical effect on alternative
medicine use; and frequent doctor visits during the year had the greatest effect. Persons with four or more doctor visits during
the year were more than two and half times more likely to use alternative medicine than persons with no doctor visits during the
year. Persons who were dissatisfied with health services in their area were two times more likely than the very satisfied to use
alternative medicine.
The adjusted odds ratios in Table 1 show that buying organic foods has the strongest independent effect on alternative
medicine use, followed by dissatisfaction with health services, frequent doctor visits, and gender when the effects of other
variables are eliminated through logistic regression.
To determine if users of alternative medicine were using these treatments instead of, or in addition to health care received from
a medical doctor, the 146 respondents who used this type of medicine were examined with respect to their doctor visits during

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Volume 8 Winter 2009

the year. Some 132 or 90.4% of the 146 adults who had used alternative medicine during the year had also seen a medical
doctor (M.D.) one or more times during the same period of time.

DISCUSSION
Uses of alternative medicine in Northern Utah were found to be fairly similar to national figures. According to national
estimates, alternative medicine is used by one-third of the United States population (Kendall, 2005; Nahin, 2009). Some 31.3
percent of Northern Utahans are engaged in similar practices. Likewise, chiropractic and herbal medicine are the most
prevalent types of use in both Utah and the nation. The lack of statistical difference between Mormons and non-Mormons in the
present study suggests that our study findings may be applicable to a wider population than was originally anticipated.
The significant effect of all three health behaviors on alternative medicine suggests that users of this type of medicine tend to
be more proactive in protecting and promoting their health. This lends some credence to the supposition of Deierlein (1994)
and Astin (1998) that alternative medicine appeals to persons who have a more holistic view of health promotion and who want
to play a more active role in their health. Reading labels for calories and buying organic foods indicates a concern for nutrition.
Organic foods typically mean consumption of more fruits and vegetables which also tend to be much lower in calories. Persons
who are concerned about eating right are likely to experience frustration when visiting physicians who receive little training and
have limited knowledge of nutrition. Only 14% of resident doctors in a recent U.S. survey reported confidence in providing
counseling to patients about nutrition. General practitioners also report a lack of knowledge about proper diet to insure good
nutrition (Leslie & Thomas, 2009). This has been a deficiency in medical training for over three decades. A National Committee
on Nutrition in Medical Education (Cousins, 1989) issued a report in the 1980s calling for substantial increases in nutritional
education, and yet most doctors today still feel inadequate to give this type of advice to patients. In sharp contrast, many
alternative practitioners emphasize nutrition in their approach to healing.
The medical experience variables underscore the importance of medical needs as indicated by multiple chronic conditions and
frequent doctor visits during the year. The significant effect of gender on AM use may also be a reflection of medical need
rather than gender per se. Even though women live longer than men, they do experience far more acute illness and disabilities
than men. Infectious, digestive, and respiratory conditions are much more frequently reported by women than men. There is
growing evidence than women are more sensitive to their bodies and thereby notice more disturbances and symptoms of
possible illness (National Center for Health Statistics, 2007; Cockerham, 2010). These in turn may account for the higher
tendency of women to use alternative medicine.
Dissatisfaction with health services may also reflect different expectations between doctors and their patients who also use
alternative medicine. Marcuccio and associates (2003) studied 204 women with cardiovascular disease. More than half were
dissatisfied with their care, and most attributed this to poor communication with doctors. Williams (1998) observed a similar
disconnect between nurses and patients. While nurses viewed competent nursing as technically competent care, patients
defined quality care as good interpersonal communications. Alternative practitioners place much more emphasis on
communication and good interpersonal relations with patients. Most of the physicians in one study felt that patients turn to
alternative treatments when they become dissatisfied with allopathic care (Giveon et al., 2003). This may be true, but according
to our study, over 90% of the patients who use alternative medicine are still making visits to medical doctors during the same
year they are using these treatments.
Andersens predisposing and enabling factors, while influential in the seeking of conventional medical care, have little effect on
the seeking of alternative medical care. In this population, age, education, and religion reveal no differences in alternative
medicine use. Likewise, rural-urban residence and income reveal no differences. Lower cost and easier access may account
for the inability of income and residence to predict AM use. A lack of difference between age groups and education levels
suggests that a general diffusion and acceptance of these treatments may be taking place in Northern Utah, but without
comparative measures from earlier points in time it is difficult to determine. Although Mormons were found to be somewhat less
likely to use alternative medicine than non-Mormons, the differences were too small to achieve statistical significance. It
appears that historical Mormon commitments to scientific medicine may be slightly biased in favor of conventional medicine
given the fact that the Mormon emphasis on certain health practices (no smoking, no drinking, no coffee) has not resulted in a
higher proportion of members using alternative medicine than elsewhere in the country.
The finding of complementary uses of conventional and alternative medicine has the most important implications for the field of
medicine. One of the four questions we wanted to answer in this study was Are adults using alternative treatments instead of,
or in addition to allopathic medicine? Alternative medicine, in its extreme, refers to the use of unconventional medical
treatments instead of other more conventional means. In sharp contrast, complementary medicine refers to the use of
173

Health Behavior, Medical Experience and Use of Alternative Medicine

unconventional types of medicine in addition to, or along with other more conventional, allopathic medical treatments. Our data
show that the vast majority of the adult residents in Northern Utah, who use this type of medical treatment, use it as a
complementary form of medical care. Physicians must become more aware of what their patients are doing in addition to their
recommended treatments. And yet, Giveon and associates (2003) research on physician perceptions of patient=s use of CAM
reveals gross underestimates of its use. Most of the physicians estimated that only 15% of their patients used CAM and said
only 10% of their patients reported doing so. Other research shows that over 60% of the individuals who use alternative
medicine do not disclose this to their physician (Kendall, 2005). The main reason patients give for not discussing this with their
general practitioner is fear that their doctors will disapprove. According to Moss (2004) seven out of ten patients would discuss
CAM use with their primary care physicians if they felt more comfortable doing so. Based on research at the University of
Kentucky, most medical students and residents have favorable attitudes toward CAM, but most don=t feel qualified to counsel
patients about these matters (Hoellein Lineberry, and Kifer, 2008).
Given the reluctance of patients and doctors to discuss these types of treatment, a number of medical and nursing schools are
beginning to teach courses on CAM so future health professionals can discuss these topics with patients (Lee, et al., 2007).
However, this has not been easy. Programs that have tried incorporating CAM into their curriculum have met with resistance
from faculty who are committed to evidence-based instruction (Sierpina et al., 2007). Physician who have tried to be more
holistic in their practices have also faced challenges because these services are not covered by insurance plans (Golddman,
2008). Nevertheless, an increasing number of medical and nursing schools have come to recognize the importance of
familiarizing both undergraduate and graduate students with complementary and alternative medicine (Smith, 2009; Sierpina et
al., 2007).
Educating medical students and nurses about CAM is important because there are risks associated with some combinations of
alternative medicine and allopathic medicine. In a poll of 1,000 people, four out of ten were unaware of risks associated with
mixing CAM and physician prescribed drugs (Moss, 2004). Using ginkgo with blood thinners tends to counteract the thinners
effect and this can cause clotting problems. Likewise, antidepressants prescriptions can mix badly with St. Johns Wort (Lalley,
2004). The Food and Drug Administration currently regulates herbal supplements as foods, not drugs. As a result, the FDA
maintains a lower standard for safety and effectiveness for herbal medicines. With the dangers of mixing some alternative
medicine with allopathic medicine, patients and practitioners should be more proactive in understanding each others
perceptions of health care. Since CAM may interact negatively with some treatments; patients need to feel comfortable
discussing this with their physicians.
More research is needed to address some important limitations in our research. We recognize that quantitative, cross-sectional
data does not allow adequate testing of causal inferences. A mail survey collected at one point in time makes it difficult to
determine if the health behaviors examined existed prior to visiting an alternative practitioner or developed after having done
so. This would require a focused follow-up interview with study participants to reconstruct time sequences, but limited funds
made this impossible. However, even if health behaviors for some study subjects were the effects rather than the causes of
alternative medicine, the statistical associations would still point to the probable existence of a holistic orientation toward health
among those types of help-seekers. In addition, dissatisfaction with health services might also be a consequence rather than a
cause of visiting an alternative practitioner. For example, a person may have decided to try an alternative medicine practitioner
because a friend recommended this option and subsequently found that the encounter was more pleasant than previous visits
to a medical doctor. In this instance, the dissatisfaction could be the result of comparisons made after the fact. Additional
research is needed to sort out these possibilities. A final limitation in any self-reported survey is the possibility of a social
desirability bias. For example, there is always the possibility that some individuals might report higher frequencies on health
behaviors they feel are socially desirable. We do not believe that social desirability was a problem in our study because the
types of health behaviors examined do not have strong social approval connotations. There is also a chance that respondents
might have underreported alternative medicine use given the Mormon bias toward scientific medicine; however, our study
results showing similar levels of use in Utah and the Nation suggests that this too is not a serious problem.
Much more research is needed on CAM use in different populations and cultural groups both at home and abroad. Recent
research in Australia (OConnor & White, 2009) and Malaysia (Hasan et al., 2009) reflect a global interest in this topic. Growing
interest and awareness in alternative and complementary medicine in the United States is sure to put increasing pressure on
health professionals and the schools that train them to become more holistic and nutritionally competent in their approach to
medical practice.

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Volume 8 Winter 2009

Table 1: Odds ratios and logistic regression showing effects of variables on use of alternative medicine
Has Used Alternative Medicine in Past Year
Variables

Number

Odds Ratios

Female

(N = 263)

38.1

Male

(N = 203)

22.7

Frequently

(N = 131)

Sometimes

(N = 186)

Never

(N = 149)

25.5

Frequently

(N = 53)

Sometimes
Never

Adjusted Odds Ratios

Gender
2.094 ***

1.693 *

40.5

1.985 **

1.464

29.6

1.226

1.007

47.2

2.818 ***

1.424

(N = 280)

31.8

1.471

1.004

(N = 133)

24.1

Frequently

(N = 16)

68.8

5.693 ***

4.905 **

Sometimes

(N = 102)

37.3

1.536 *

1.363

Never

(N = 348)

27.9

(N = 57)

40.4

1.587 *

0.974

One or Two

(N = 225)

30.2

1.016

0.906

None

(N = 184)

29.9

(N = 58)

41.4

2.032 *

2.399 **

Somewhat Sat.

(N = 249)

32.5

1.388

1.584 *

Very Satisfied

(N = 159)

25.8

Four or More

(N = 132)

37.9

2.744 **

2.233 *

One to Three

(N = 257)

31.9

2.109 *

1.748 *

(N = 77)

18.2

HEALTH BEHAVIORS
Read Calorie Labels

Watch Health Programs

Buy Organic Foods

MEDICAL EXPERIENCES

Chronic Conditions
Three or More

Satisfaction With Services


Dissatisfied

Doctor Visits

None
Logistic Regression Summaries

-2 Log = 538.8 ***

Nagel R = .117

*p < .05 ** p < .01 ** * p < .001

REFERENCES
Adams, J., Lui, C. W., Sibbritt, D., Broom, A., Wardie, J., Homer, C., & Beck, S. (2009). Womens use of complementary and
alternative medicine during pregnancy: A critical review of the literature. Birth, 36(3), 237-245.
Aday, L. A., & Awe, W. C. (1997). Health service utilization models. In D. S. Gochman (Ed.), Handbook of Health Behavior
Research