ASBBS_ Proceedings_13th_Intl_Meeting.pdf

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PROCEEDINGS OF THE 13TH INTERNATIONAL CONFERENCE

EDITOR: WALI I. MONDAL NATIONAL UNIVERSITY

Proceedings of the 13th International Conference

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INDEX

Celebrity Advertising in the Case of Negative Associations: Disclosure Analysis of Weblogs

Akturan, Ulun.................................................................................................3

The Limitations in Using Quantitative Statistical Analysis in Measuring the Effectiveness of the New

Approach to Diversity

Carnes William O. and Holloway, Madison................................19

Pirated Software Purchase Behavior in the Asia-Pacific Region

Sirion, Chaipoopirutana...............................26

A Comparative Study of Parametric and Nonparametric Regressions

Fattahi, Sharam.......................................................................................................41

Sensitivity Analysis of the Mean Variance Model and Its Practical Applicability

Kim, Sang-Hoon and Kim, Margaret H.............................56

Sustainability, Internet Marketing and Its Impact on Global Ports

Laric, Michael; Lynagh, Peter; Abel, Laura; Libonate, David and Logsdail, Jeffrey.....60

A Study of the Effects of Backshoring in the EU

Leibl, Peter; Morefield, Roger and Pfeiffer, Rolf...........................72

Emerging Approaches in Production Planning in the Era of Global Competition

Negus, Fahri.............................80

A SERVPERF Model of the Vietnamese Banking Industry

Nguyen, Quoc Cuong; Chaipoopirutana and Combs, Howard.....................88

The Changing Nature of the Work Done by Computer Professionals in the United States

Saxon, Charles S.........................................103

Environmental Marketing Management Strategies

Self, Donald R.; Self, Robin M. and Gogue, Jason....................................................................................110

The Changing Nature of the Internal Audit Function in Response to Advances in Information Technology:

Some Propositions

Shome, Anamitra and Su, Jeyie...............................................125

A Study on Scoring Customer Satisfaction, Experience Value, and Loyalty: A Case Study of Professional

Baseball Teams in Japan

Suzuki, Hideo.....................................................................................132

Right to Life, Business and Climate Change: An Islamic Perspective

Zahid, Anowar...............................................140


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CELEBRITY ADVERTISING IN THE CASE OF NEGATIVE

ASSOCIATIONS: DISCOURSE ANALYSIS OF WEBLOGS

Akturan, Ulun

Galatasaray University, Turkey

ABSTRACT

The main objective of this study is to examine the celebrity advertising in the case of negative

associations. Unlike the other studies, this study analyzes the case of the continuance of the

endorsement relationship between the company and the negatively publicized celebrity. 451

posts were downloaded from the randomly selected weblogs and analyzed by discourse analysis.

As a result, the emerging themes were interpreted and a model of celebrity endorsement in the

case of negative information was developed.

INTRODUCTION

Celebrity endorsers are widely used in advertising since they are powerful mechanisms in

transferring meanings to the brands. Companies invest billions of dollars to celebrities for

endorsement. Celebrity endorsers have a symbolic aspirational reference group association

(Assael, 1984) and they act as cues in peripheral route to persuasion (Petty and Cacioppo, 1985).

Famous endorsers are used mainly because of two reasons. First, they are viewed as dynamic,

attractive and likeable. And second, their fame attracts attention to the product (Atkin and Block,

1983).

From the theoretical perspective, the meaning attributed to the celebrities moves from the

celebrity endorser to the product or brand. In the consumer mind, the associations related with

the celebrity becomes associated with the brand. When the consumer purchases the product, and

therefore acquires the meaning in the brand, the meaning transfer process is completed

(McCracken, 1989). In this process, it is important to create positive and favorable associations

in the mind of the consumer.

However, the celebrity endorsed can be involved in an undesirable event in which public

intention and interest arises in a way that producing negative associations for the celebrity

(Gupta, 2009). The fame of the celebrity and the event itself- called scandal- can be widely

publicized (e.g. O.J. Simpson, Mike Tyson, Madonna, Michael Jackson, Tiger Woods etc). There

are researches revealed that ―people have a ‗negativity bias‘ in evaluating individuals‘ moral

behaviors‖ (Gupta, 2009: 2). And because there is a high exposure in the media and people

weigh negative behaviors more heavily than positive ones, negative associations become more

and more important in celebrity endorsement. Therefore companies choose to terminate their

contracts with the celebrity immediately. That is because, first of all, to prevent the transfer of

the negative associations to the brand and secondly, to respond morally by not approving the

behavior. Recently, there is a case that the endorsement contract was not ended and besides a


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new ad was aired. That is Nike and Tiger Woods reunion. Nike has released a new Tiger Woods

ad on the eve of the Masters, which will mark the golfer's return to the sport following

revelations of his private issues.

This study aims to examine the consumers reactions and attitudes for the case of the negative

associations. Therefore, the study differs from the other studies by examining what is perceived

by the consumers when the endorsement relationship is not ended up and moreover a message

related to the scandal is given by the brand.

LITERATURE REVIEW

A celebrity is an individual ―whose name has attention-getting, interest-riveting and profit

generating value that stems from the high level of public attention and interest‖ (Gupta, 2009:2).

The use of celebrities as the spokesmen of the brands dates back to nineteenth century, i.e.

Queen Victoria is used in association with Cadbury‘s Cocoa (Erdoğan, 1999).

In the literature, there are a number of studies that have examined whether, and under what

conditions, celebrities make appropriate endorsers for products (Atkin and Block, 1983; Freiden,

1984; Kamins, 1989; Kamins et al., 1989; Ohanian, 1991; Tripp et al., 1994; Agrawal and

Kamakura, 1995). It was found that the appropriate use of celebrity endorsers can be highly

effective in product promotions (Mitchell and Olson, 1981; Atkin and Block, 1983; Misra and

Beatty, 1990).

There are a number of models developed to explain the celebrity endorsement process and its

effects. McGuire‘s Source Credibility Model (1968) was the first approach used in the attempt to

understand the effectiveness of an advertising campaign. The Model depicted the influence of

perceived level of expertise and trustworthiness on the effectiveness of the message. Information

from a credible source, who is perceived as expertise and trusted, can influence the beliefs and

opinions, attitudes, and behaviors (Erdoğan, 1999).

McGuire (1985) developed the Source Attractiveness Model based on the concepts from the

Source Credibility Model (McGuire, 1968). The model depicted that an individual‘s acceptance

of a message relies on the similarity, familiarity and liking of an endorser. Similarity is

conceptualized as the ―resemblance between source and receiver‖, familiarity is conceptualized

as ―the knowledge of the source through previous exposure‖, and liking is conceptualized as ―the

affection of the source as a result of the physical appearance or behavior‖. Ohanian (1990)

combined these two models (McGuire, 1968; McGuire, 1985) to create a single scale to measure

celebrity endorsers‘ perceived expertise, trustworthiness and attractiveness.

Kahle and Homer (1985) develop the Product Match-Up Hypothesis that highlighted the

importance of the match between celebrity endorsers and products. Kahle and Homer examined

the influence of celebrity-source physical attractiveness, celebrity-source likeability and

participant-product attractiveness on the attitudes and purchase intentions of consumers. Results

showed that physical attractiveness was more influential than likeability on a consumer‘s attitude

toward the brand and purchase intentions.


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McCracken (1989) designed the Meaning Transfer Model to further explain the endorsement

process. The model suggests that celebrity endorsement involves a general process of meaning

transfer through three stages in which a celebrity passes on a message regarding a product or

brand. In the first stage, the consumer forms an image of the celebrity. In the second stage, the

company selects a celebrity that represents the intended image of the product in order to transfer

the meaning or image of the celebrity to the product. And in the third stage the meaning is

transferred from the product to the consumer.

Celebrity Endorsement in the Case of Negative Information

In marketing communication, utilization of celebrity endorsement have risen in years (Erdoğan,

1999). Although celebrity endorsement have several benefits for the company, it also incurs

some costs and risks. Table 1 displays the potential advantages and disadvantages of the

celebrity endorsement strategy, and the preventive tactics (Erdoğan, 1999).

Table 1: Potential Advantages, Hazards and Preventive Tactics of the Celebrity

Endorsement Strategy

Potential Advantages

Increased attention

Image polishing

Brand introduction

Brand repositioning

Underpin global campaigns

Potential Hazards

Overshadow the brand

Public controversy

Image change and overexposure

Image change and loss of public recognition

Expensive

Preventive Tactics

Pre-testing and careful planning

Buying insurance and putting provision clauses in contracts

Explaining what is their role and putting clause to restrict endorsements for other brands

Examining what life-cycle stage the celebrity is in and how long this stage is likely to

continue

Selecting celebrities who are appropriate for global target audience, not because they are

'hot' in all market audiences.

Source: Erdoğan, 1999: 295

In the literature, there are several studies searching the impact of negative information related

with the endorser on the product or brand evaluations. Till and Shimp (1998) conducted three

studies to explain the negative associations by using fictitious celebrity endorser and a real

celebrity endorser. They found that the subsequent negative information about the celebrity


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results in lowered evaluations of the brand. For the real celebrity endorser that impact was found

weaker than the fictitious celebrity endorser. They explain that this difference could be resulted

from the subjects having richer association set for the real celebrity.

Gupta (2009) conducted a qualitative study of public reaction to Michael Vick immediately after

his involvement with dog fighting. Gupta executed a netnographic research, and found that

―respondents who found Vick blameworthy attributed his negative action mostly to causal locus

closely followed by the causal controllability dimension‖ (Gupta, 2009:7) .

White, Goddard and Wilbur (2009) tested empirically the impact of negative information about a

celebrity spokesperson on consumers‘ perceptions of the endorsed brand. They found that when

respondents are exposed to negative information about a celebrity endorser, a negative

transference of affect in the endorsement relationship will occur. But in the reverse situation the

transference of affect is less severe.

Tripp, Jensen and Carlson (1994) found that when the celebrity endorsing multiple products, the

celebrity‘s credibility and likeability decreases and that lowers the attitudes towards advertising.

Louie, Kulik, and Johnson (2001) revealed that stock prices decline in the case of negative

publicity about a celebrity who endorses one of the company‘s brands.

The Case of Tiger Woods

In this study the case of Tiger Woods and Nike reunion will be analyzed. Tiger Woods is and

American professional golfer whose is ranked as the most successful golfers of all the time. He

was the highest-paid professional athlete in 2008, having earned an estimated $110 million from

winnings and endorsements (Badenhausen, 2009). He is the second highest of any male player,

and 71 PGA Tour events, third all time. He has more career major wins and career PGA Tour

wins than any other active golfer. He is the youngest player to achieve the career Grand Slim,

and the youngest and fastest to win 50 tournaments on tour. Additionally, Woods is only the

second golfer, after Jack Nicklaus, to have achieved a career Grand Slam three times. Woods has

won 16 World Golf Championships, and has won at least one of those events each of the 11

years they have been in existence (en.wikipedia/Tiger Woods).

Tiger Woods is the world‘s most marketable athlete. In 1996, he began signing endorsement

deals with numerous companies. Between the years 1996-2009 Woods signed contracts with

General Motors, Titleist, General Mills, American Express, Accenture, Buick, TAG Heuer,

Electronic Arts, Gillette, Gatorade and Nike Inc. In 2000, signed a 5-year, $105 million contract

extension with Nike. Nike Golf is one of the fastest growing brands in the sport, with an

estimated $600 million in sales. Woods has been described as the "ultimate endorser" for Nike

Golf, frequently seen wearing Nike gear during tournaments, and even in advertisements for

other products. Woods receives a cut from the sales of Nike Golf apparel, footwear, golf

equipment, golf balls, and has a building named after him at Nike‘s headquarters campus in

Oregon. (en.wikipedia/Tiger Woods). In 2009, Forbes confirmed that Woods was indeed the

world's first athlete to earn over a billion dollars in his career (before taxes), and estimated his

net worth to be $600 million (Badenhausen, 2009; Miller, 2009).


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In November 2009, news in the media surfaced about his multiple infidelities on his marriage.

On December 11, 2009, Woods announced he would take an indefinite leave from professional

golf to focus on his marriage after he admitted infidelity. Woods returned to competition for the

2010 Masters on April 8, 2010, after a break lasting 20 weeks.

After the scandal related with the Tiger Woods publicized, most of the companies that he had

signed endorsement deals announced that they won‘t work with him. However, Nike announced

that they will keep on working with him and aired an commercial stirs controversy as Masters

golf tournament begins. It was the first TV ad since the scandal. The 30-second clip reveals

Woods, looking remorseful, as he's being questioned by Earl, his late father who died in 2006. In

the commercial Earl Woods said to his son:

" Tiger, I am more prone to be inquisitive, to promote discussion. I want to find

out what your thinking was. I want to find out what your feelings are. Did you

learn anything?"

Woods is dressed with a Nike cap and vest. He looks right into the camera as his late father talks

to him. The commercial was aired and generated lots of interest.

In this study, the consumer reactions related with the continuance of the endorsement deal and

the perception of the message of the commercial In that scope, the research questions are stated

as below:

Research Question 1: What are the reactions of consumers when the company keeps on

endorsement deal with a negatively publicized celebrity?

Research Question 2: What are the attitudes of consumers in relation with a commercial which

has a message content of the negative situation?

Research Question 3: How is the company‟s image effected by the perception of the celebrity‟s

negative image?

RESEARCH METHODOLOGY

Conversation is a fundamental tool that people use to construct their reality (Berger and

Luckmann, 1991). Discourse is a key concept to anyone interested in the workings of

construction processes, reality-maintenance and change. Discourse is ―a set of meanings,

metaphors, representations, images, stories and statements which together produce a particular

version of the world‖ (Berglund and Johnson, 2007: 79). A discourse is a stretch of language that

may be longer than one sentence. The texts used in discourse analysis may consist of formal

written records, such as news reports, company statements and reports, academic papers;

transcripts of social interactions such as conversations, focus group discussions, and individual

interviews, advertisements, magazines and novels (Elliot, 1996).

In discourse analysis data analysis vary from the study of linguistic features in texts (van Dijk,

1981) to a focus on the dominant themes in respondents‘ discourse (Elliot, 1996). In addition to


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semantic or pragmatic units of sentence grammars, the theory of discourse has introduced new

notions- coherence or themes (van Dijk, 1981). A theme‖ is a pattern found in the information

that at minimum describes and organizes the possible observations and at maximum interprets

aspects of the phenomenon‖ (Boyatzis, 1998: 4). The method involves coding the phrases and

sentences of discourse into the three domains of behavior: the affective domain, the cognitive

domain and the sensorimotor domain (Nahl, 2007).

In this study, to determine the reactions of consumers towards Tiger Woods Nike reunion

commercial discourse analysis was used by searching the dominant themes –or macrostructures.

In that sense, thematic analysis was used. Thematic analysis is a process used in handling

qualitative data. It is not another qualitative method but a process for encoding qualitative

information (Boyatzis, 1998).

Looking for themes in written material involves analyzing and marking the text through

repetitions, unfamiliar words, metaphors and analogies, transitions, similarities/differences,

linguistic connectors, missing data, theory-related materials, cutting-sorting, word lists, word co-

occurrence and metacoding (Bernard and Ryan, 2010). In this study to identify the themes

repetitions, transitions, similarities/differences and cutting and sorting techniques were used. A

codebook is developed including structural codes, theme codes and memos. The themes in this

study generated inductively from the raw data.

Data Collection and Sampling

In the study, the data were collected from the blogosphere which is the universe of the weblogs.

Blogging became a popular way for a people all around the world to publish information.

Bloggers write blog posts, share their likes and dislikes, voice their opinions, provide

suggestions, report news, and form groups in the blogosphere (Agarwal et al., 2008). There are

roughly 1.6 million posts every day, 346 million people worldwide read blogs (Social Media

White Paper, 2008). The collection of data as a kind of self-reporting from the web increases

―the external validity and generalisability of attributional research findings beyond the

experimental setting of the self probe method or survey research common in literature‖ (Gupta,

2009: 6).

There are blog search engines similar to web search engines. They automatically gather large

quantities of information from the web and give a free interface to allow the public to search

their databases. The main difference between the web search engines and blog search engines is

that blog search engines mainly index blogs and ignore the rest of the web (Thelwall and Hasler,

2007).

In the study Google Blog Search Engine was used. The commercial aired April 7, 2010. The

search was done by ―Tiger Woods Nike ad‖ keywords between the dates April 7- 10, 2010 in the

English written weblogs. The search results displayed 10,997 weblogs. Within the search results

50 weblogs were chosen by the simple random sampling. The posts were downloaded from the

weblogs and as a result 451 posts were obtained for the data analysis. After the raw data

generated, a codebook was developed. The units of analysis determined in the study as the posts.


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There are five steps involved in developing a code: (1) reducing the raw information by reading

again again each unit of analysis, (2) identifying themes within subsamples, (3) comparing

themes across subsamples, (4) creating a code, and (5) determining the reliability of the code.

RESEARCH FINDINGS

In the first step, all of the 451 posts are analyzed whether they contains negative, positive or

neutral reactions towards the Nike commercial, Tiger Woods, Nike and the purchase decision.

Table 1: The Reaction of Consumers Towards the Commercial, Tiger Woods, Nike and

Purchase Decision

About the commercial

Frequency Percent Cumulative Percent

No mention 175 38,8 38,8

Negative 205 45,5 84,3

Positive 61 13,5 97,8

Neutral 9 2 99,8

Surprised 1 0,2 100

Total 451 100

About Tiger Woods


No mention 158 35 35

Negative 163 36,1 71,2

Positive 124 27,5 98,7

Neutral 6 1,3 100

Total 451 100

About Nike


No mention 307 68,1 68,1

Negative 104 23,1 91,1

Positive 34 7,5 98,7

Neutral 4 0,9 99,6

Surprised 2 0,4 100

Total 451 100

About the Purchase Decision


No mention 417 92,5 92,5

Boycott 27 6 98,4

Will buy 6 1,3 99,8

Neutral 1 0,2 100


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Total 451 100

As it is seen from Table 1, 45,5% of the consumers talks negatively about the Nike commercial.

Besides, 36,1 % of the consumers have negative feelings related with Tiger Woods, 23,1% of

them talked negatively about Nike and just 6% of them say they will boycott the products of the

company. There are positive posts also. 27,5% of the consumers has positive feelings for Tiger

Woods, 13,5 % of them have positive attitudes towards the commercial and just 7,5 % of them

talked positively about Nike.

The negativity towards the commercial includes the words ―creepy, bizarre, strange, disgusting,

not wise, horrible, uncomfortable, mental game, manipulative, sick, ill, and not like‖. The

positivity includes the words ―brilliant, ingenious, like it, love it, nice, good, and sincere‖.

Interpretation of the Emerging Themes and Model Development

The posting of consumers were analyzed by discourse analysis to identify the basic patterns

about the celebrity endorsement in the case of negative information and emerging themes were

interpreted. On the basis of that interpretation a model was developed. The proposed model is

displayed in Figure 1.

Figure 1: Proposed Model

Consumer

Perception of

Celebrity

Consumer

Perception of

Brand Image Transfer

Admiration

Message Content

Level of

Negativity

Level of

Blameworthines

s


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Consumer Perception of Celebrity: The perception of celebrity is important in celebrity

endorsement. To understand the process of how consumers form positive or negative opinions

about the celebrities is critical. In the case of a negative information, consumer reactions and

perceptions of celebrity may vary: can change negatively or cannot change. This ―change‖ or

―not change‖ situation depends on several factors. These are stated below:

- Level of Negativity: The level of negativity is related with how bad the event is perceived. In

the peoples‘ mind each crime has different levels (Louie and Obermiller, 2002). If the situation

does not perceived as a severe crime then the consumer do not change his celebrity image

perception. In this case people who have positive image perception of Tiger Woods, also

mentioned that his multiple infidelity is not a severe crime such as murder or rape. Some of them

posted that:

―He cheated not raped or molestered somebody!.....‖

―half of you people out there who hate tiger now because you just found out he is a

human are stupid. He is allowed to make mistakes, and unlike when you all cheat on

your spouses and get away with it, he gets to have it put front …… tiger is still one

of the worlds‘ best golfers, and I know I will still be cheering for him‖

―……97% of married men cheat……….‖

―…Tiger is human and a fool so what else is new. Politicians do it every day..‖

―Why so hard on this guy? He is a man. Give me 10 men and I will show you 8 of

them if not all that have cheated on their wife. Who cares. Their business. Just thank

God he is not your husband‖

―He's not anybody's little boy anymore. And, you don't go around committing terrible

crimes against your wife and children, and your (former) fans - those fans who are

actually "honest with themselves" about life. Yes, "marketing" will bring back all of

the "gullible", but the reality of life has nothing to do with "marketing" and "image."

I will not be purchasing anything from Nike going forward‖

―The man had an affair, he didn't commit murder, lol. Affairs are no ones business

but the offenders and their spouses‖

And this problem is seen as a personal problem with him and his family and it is called as a

―mistake‖. Therefore it is not related with his professional performance. However, for some

people infidelity is a low crime since the cheaters are seen as ―liars‖ and ―dishonest people‖. In

that case the people perceive the celebrity image as low and disgusting. Hence it is proposed that

as the level of negativity increases, the negative perception of the celebrity image also increases.

- Level of Blameworthiness: Blame theory argues that ―questions of blameworthiness arise only

when at least one of the causal elements participating in the production of the effect for which

blame is to be assigned is a human action‖ (Shaver 1985 p.162). The blameworthiness depends


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on whether the person is perceived responsible (Louie and Obermiller, 2002). In this study, it

was found that the consumers blaming Tiger Woods for his infidelity has a lower image

perception than who are not blaming him. Consumers posted messages about his

blameworthiness and responsibility are:

―I think it‘s creepy because they‘re repurposing his dead father‘s words from years

ago to generate sympathy for someone who was in complete control of his decisions.

I‘m sure Tiger is real sorry. Sorry he got caught‖

―…he knew what he did so he is not an innocent victim here…. The ONLY reason

he is apologizing now is because he got caught.‖

―I condemn him…‖

―…his actions being none of our business and completely between him and his wife

(and whoever else was directly involved)…‖

―he's got to take responsibility for his own actions‖

- Admiration: In this study, ―admiration‖ of the consumers is found as directly related with the

professional performance of Tiger Woods as an athlete. People who admires his profession just

want him to go back and play golf. The admiration of people is related with “the level of

negativity‖, ―the level of responsibility‖ and ―the level of blameworthiness‖. Because in the posts

it was mentioned that his personal life and profession is different things. Therefore people who

think that he is not responsible from his infidelity to the public- since it is his private life- and

the infidelity is not a serious crime have positive feelings towards Tiger Woods and they just

want him to play golf. Here are some of the posting:

―For me, it‘s kinda like comparing apples and oranges…how the man plays the game

and what he does in his personal life are to VERY different things.‖

―Tiger‘s personal life shouldn‘t have anything to do with the sport he plays‖

―Pathetic! Leave his private life to him and his family. Just have him play golf. He's

good at that‖

―He is an amazing athlete, And that is what promotes him with Nike and everyone

else. Not his Sex Escapades. So just let it go, And let the man do what he does best.

PLAY AMAZING GOLF !!!!!!!‖

―it's their career we are interested in, not whose bed they are in.‖

―I liked the commercial a lot, and I like Tiger. Despite the best golfer in the world, he

is a human‖

―Just play golf, hold it together, and do your job. do it well and we‘ll be back.‖


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- Consumer Perception of Brand: In the study it was identified consumer perception of brand is

highly influenced from the consumer perception of celebrity. Who have a negative attitude

towards the celebrity also conveys a negative attitude towards the brand. The posting are:

―I do not like Mr. Woods and I will not buy any Nikes‖

―I do like Mr. Woods. For every Nike that you won't buy, I will and so will many

others. The man is just a man.‖

―I`ll buy Nike products.. Tiger is just a man, with a great skill.. People buy the

products because of the skill.. That‘s all. Normal people could care less what

happened in his personal life‖

The ―Just do it!‖ slogan of the brand is also associated with the event negatively. Some posting

includes it is wise (!) not to display the slogan at the end of the commercial. Therefore it is seen

that the brand slogan is gained another meaning and this is risky for the brand.

- Message Content: In the case that study analyzed, Nike released a commercial containing Earl

Woods asking his son whether he learned something. The 30-second clip reveals Woods, looking

remorseful, as he's being questioned by Earl, his late father who died in 2006. In the commercial

Earl Woods said to his son:

" Tiger, I am more prone to be inquisitive, to promote discussion. I want to find

out what your thinking was. I want to find out what your feelings are. Did you

learn anything?"

Woods is dressed with a Nike cap and vest. He looks right into the camera as his late father talks

to him.

The commercial is highly commented in several ways. First of all, some posts criticized the

usage of dead father to create sympathy. In these posts Tiger Woods seen as a 12 years old boy,

plays the victim card and do not take responsibility for his actions but hides back to his father.

Secondly, some posts questioned the credibility of his father, since his father was a former

cheater. Third, in the commercial his father asks a question ―did you learn anything?‖, and the

commercial ends. Tiger does not answer back. So people said they have perceived that ―he did

not learn anything?‖. And finally it is commented that Nike and Tiger Woods is using a dead

father monetarily.

In sum, the commercial is commented negatively(positively) and this negativity(positivity) is

projected to the celebrity and the brand. Some of the posting are:

―strange, uncomfortable, sad, painful, and creepy new Nike ad‖

―— Tiger‘s face conveys more emotion than anything we‘ve seen so far in any of his

highly-controlled press conferences — but it‘s also hard to miss the Nike swoosh on

his sweater-vest and ball cap. Strange, strange, strange‖

http://www.mediaite.com/tv/in-rehab-from-the-tiger-drama/

http://www.mediaite.com/tv/tiger-and-friends-working-the-media-at-augusta/


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―Nike is protecting it‘s investment so it can sell product and Tiger will kiss the

golden goose or anything else to climb back to those endorsements…money is not

the root of all evil the love of money is…I bought new Adidas today!‖

―Def creepy and inappropriate. Nike milking his homewrecking to sell gear?

Shameful.‖

―It's not OK to take certain questions about your personal tragedies, but it is OK to

benefit from them monetarily?‖

―He's a HUMAN!!! I think it tells a great story and the message I get out of it is,

"what would his dad say?"

―Sounds like Nike is keeping him on a short leash and watching their own backs as

well. "Tiger did you learn anything?" But no response‖

―Leave it to NIKE to market Tiger Woods infidelity. Then to top it all off, they use

Tiger's late father as a voiceover. Come to think of it, wasn't Earl Woods a

womanizer?‖

―Using his dead father to help his personal comeback and sell Nike goods- he

continues to reach new lows‖

―This isn't a commercial about the way he plays golf. Nike is the one "not letting it

go‖

―Nike did a cheesy thing and should not have brought his dead father into it.‖

―I am not at all conflicted about Nike. I now loathe that company even more than I

did before.‖

―but Nike's cynical behavior guarantees I will never buy another Nike product.‖

―I like the ad. Redemption and learning is the key. Go Tiger‖.

―I love it and I love tiger ! Welcome back‖

―Effectively Nike is saying- we stood by you because you are family.‖

CONCLUSIONS

This study aims to investigate the reactions of the consumers when the company keeps on

endorsement deal with a negatively publicized celebrity. In the study the case of Tike Woods and

Nike reunion is analyzed by discourse analysis of the weblog postings. As a result a model was

proposed.


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When there is a negative event related with the celebrity, consumers‘ perception of the celebrity

change in a negative or positive way. This study puts forwards that the change in the perception

is influenced by “the level of negativity” and “the level of blameworthiness”.

H1: When the negativity of the event is perceived as low (high), the celebrity image is perceived

as positive (negative).

H2: When the blameworthiness of the celebrity is perceived as low (high), the celebrity image is

perceived as positive (negative).

Celebrities are seen as role models and admired. In this study admiration is directly related with

the professional performance of Tiger Woods as an athlete. And it is found that the admiration

affects the perceived image of the celebrity and it is affected by “the level of negativity” and

“the level of blameworthiness”.

H3: When the negativity of the event is perceived as low (high), the admiration is perceived as

positive (negative).

H4: When the blameworthiness of the celebrity is perceived as low (high), the admiration is

perceived as positive (negative).

H5: There is a positive relationship between the admiration and the consumer perception of

celebrity.

This study also reached the conclusion same as the other studies on celebrity endorsement that

the perception of brand is related with the perception of the celebrity. The perceived image of the

celebrity and the associations related with the celebrity is transferred to the brand.

H6: There is a positive relationship between the consumer perception of celebrity and the

consumer perception of brand.

Unlike the other studies, this study examines the case of the continuance of the endorsement

relationship between the brand and the negatively publicized celebrity. The firms can decide to

continue to keep on their endorsement deal with the celebrity. But, they should be cautious to

give a message, and if so, should carefully plan the content of the message.

H7: There is a positive relationship between the consumer perception of the message and the

level of negativity and blameworthiness.


perception of celebrity.


consumer perception of brand.


16

As a conclusion, the decision for firms to (dis)associate itself with the celebrity involved in an

undesirable event hinges on consumer perceptions of blame (Louie and Obermiller 2002) and the

level of negativity. Therefore it is important to understand consumers‘ attribution of

blameworthiness for the undesirable event (Gupta, 2009) and the level of negativity. Since these

factors also influences the admiration towards the celebrity. Moreover, the brands should be

careful in deciding to give a message. It is risky because the message content is directly

associated with the ―negativity‖, ―blameworthiness‖, ―perception of the celebrity‖, and ―the

perception of the brand‖.

REFERENCES

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Berger, P.L. and Luckmann, T. (1991), The Social Construction of Reality, Anchor Books,

London

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Analysis of Academic Publications‖, Journal of Enterprising Communities: People and Places

in the Global Economy, 1(1), pp. 77-102.

Boyatzis R.E., (1998) Transforming Qualitative Information: Thematic Analysis and Code

Development, Sage Publications, California: USA

Elliot, R. (1996). ―Discourse Analysis: Exploring Action, Function and Conflict in Social Texts‖,

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17

Erdogan, B.Z. (1999). ―Celebrity Endorsement: A Literature Review‖, Journal of Marketing

Management, 15(4), pp. 291-314.

Freiden, J.B. (1984). ―Advertising Spokesperson Effects: An Examination Of Endorser Type

And Gender On Two Audiences‖, Journal of Advertising Research, 24(5), pp. 33-41.

Gupta, S. (2009). ―How Do Consumers Judge Celebrities‘ Irresponsible Behavior? An

Attribution Theory Perspective‖, Journal of Applied Business and Economics, 10(3), p. 1-14

Kahle, L.R., and Homer, P.M. (1985). ―Physical Attractiveness Of The Celebrity Endorser: A

Social Adaptation Perspective‖, Journal of Consumer Research, 11(4), pp. 954-961.

Kamins, M.A., Brand, M.J., Hoeke, S.A., and Moe, J.C. (1989). ―Two-Sided Versus Onesided

Celebrity Endorsements: The Impact On Advertising Effectiveness And Credibility‖. Journal of

Advertising, 18(2), pp. 4-10.

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(Dis)Association Decisions‖, Journal of Advertising, 31(4), pp. 41-54.

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18

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Transference in The Celebrity Endorsement Relationship‖, International Journal of Retail &

Distribution Management, 37(4), pp. 322-335


19

THE LIMITATIONS OF USING QUANTITATIVE

STATISTICAL ANANLYSIS IN MEASURING THE

EFFECTIVENESS OF THE NEW APPROACH TO

DIVERSITY

Carnes, William J.

Holloway, Madison

Metropolitan State College of Denver ABSTRACT

The authors, while reviewing and assessing data collected for using the New Approach to Diversity

(Carnes & Holloway, 2008) in teaching college level classes on Managing Workforce Diversity,

discovered a dilemma within their data collection and assessment processes. It became clear that using

quantitative data to assess qualitative attitudinal differences was omitting an important piece of the

research—that being, the underlying reasons for the participant‟s responses. The statistical numbers

were saying one thing, while the written reports of the students were saying something different. In

addition, the authors recognized that there were shifts in our cultural landscape that affected the way

subjects communicated and solved the problems they confronted. These cultural shifts occur along with

generational changes within a society. The authors noticed that the data collected exhibited generational

changes between the original 1997 study and the latest 2010 study. Since the purpose behind using the

New Approach to Diversity (Carnes & Holloway, 2008) was to help students become more culturally

competent and aid them in working with persons who are different from themselves, the authors are

changing the approach to using more of a qualitative assessment instrument, than relying on the

traditional quantitative statistical evaluations.

INTRODUCTION

The researchers set out to explore the effects of using the New Approach to Diversity (Carnes &

Holloway, 2008) in teaching Managing Workforce Diversity courses to college level students, rather than

using the traditional problem solving method. The traditional problem solving approach, as defined by the

authors, is an approach that focuses on defining the problem, focusing on righting past wrongs and fixing

what is broken (Carnes & Holloway, 2009). The New Approach to Diversity (Carnes & Holloway, 2008),

includes:

1. The use of Appreciative Inquiry (AI) (Cooperrider & Srivastva, 1987) in instructing Workforce

Diversity courses;

2. the use of the expanded definition of diversity—a definition that is inclusive of all regardless of race,

gender or other status (Carnes & Holloway, 2008); and

3. the belief that managing groups and teams effectively equals managing diversity effectively (Schneider

& Barsoux, 1997).

The researchers completed two studies during 1997 and 2008, and collected the data for a third study in

2010. The results of the second study, while not completely contradictory to the first, did not strongly

reinforce the findings of the first study. The researchers found that there was not the same amount of

change in the pre and post-tests for the Control Group in the 2008 studies, which was expected. However,

the change between the pre and post-tests for the Study Group were not the same amount either, which

was unexpected. While performing a preliminary analysis of data from the 2010 study, the researchers


20

found that responses from the control and study groups were even closer to being similar than those

responses from the 2008 study. These findings led the researchers to reassess the data collection and

assessment measures they are using. The authors present the methodologies, findings and results of the

three studies below, as well as their plans for future studies.

1997 STUDY

The first study had seventy-four test subjects, with thirty-five in the Study Group and thirty-nine in the

Control Group. The students were either in their Junior or Senior year of college and were predominately

non-traditional students, attending college at a commuter campus. Data was derived from a post semester

questionnaire using only yes or no type questions. The classes for the Study Group used the concept of

Appreciative Inquiry (Cooperrider & Srivastva, 1987), along with the other two concepts of the New

Approach to Diversity “…the use of the expanded definition of diversity and the belief that managing

groups and teams effectively equals managing diversity effectively‖ (Carnes & Holloway, 2008, p. 2).

The Control Group used the traditional problem solving method in teaching Managing Workforce

Diversity courses to college students (Carnes & Holloway, 2009).

The researchers found the results to be very conclusive. The research identified five different questions

where the Study Group and Control Group had at least a twenty-five percentage point difference in

responses. This led the researchers to believe that there were strong indicators that supported the usage of

the New Approach to Diversity (Carnes & Holloway, 2008). Analysis of the data led to the findings that

communication was more open in the Study Group, which is one of the basic purposes of diversity

training (Carnes & Holloway, 2009). The researchers felt that using the New Approach to Diversity

(Carnes & Holloway, 2008) helped affirm the value added facet that diversity can bring to the workplace

because students were focusing on the positive aspects of diversity throughout the course (Carnes &

Holloway, 2009).

The initial results were favorable; however, the researchers identified some flaws in the processes they

were using in data collection. First, only post data collection occurred and second, all responses to

questions were in a yes or no format. Therefore, since the research did show some promise, the

researchers chose to replicate the study using a Likert scale in the questionnaire and to collect both pre

and post data in an attempt to show statistical significance for all future data collection.

The authors then opted to conduct further research using the New Approach to Diversity (Carnes &

Holloway, 2008) in two phases. Phase I would collect data in a classroom setting using a Study Group

and a Control Group over a two year period, which would increase the size of the subject pool. Phase II

would ―…be conducted in the workplace over a three year period using the New Approach to Diversity

(Carnes & Holloway, 2008) and will implement the lessons learned from the Phase I research and from

1997 research‖ (Carnes & Holloway, 2009, p. 5). The authors would create a new questionnaire for this

segment of the research, one that asks the same questions as the original research, corrected for grammar

and spelling, but including a Likert scale for respondents, rather than yes or no responses. The new

questionnaires would also include space for collecting demographic data. Additionally, the researchers

would use both a pre-questionnaire and a post-questionnaire for data collection to determine if there are

significant differences in responses from students at the beginning of the class and their responses at the

end of the class.

2008 STUDY

Beginning in the Fall semester of 2008, pre- and post-questionnaires were given to students to measure

their individual views of the personal, interpersonal and organizational or class level of the class. ―The


21

personal level is the development of the awareness and ability to analyze one‘s cultural beliefs and biases.

The interpersonal level is the cultural interaction and interpersonal skills development between members

of an organization. The organizational, or class level calls for the organization to commit to using AI

(Cooperrider & Srivastva, 1987) in the creation and implementation of the organization‘s vision and

mission statements‖ (Carnes & Holloway, 2009, p. 7).

Subjects completed the pre-questionnaires during the first few days of the class. The instructors informed

the student subjects that they were looking for individual views on diversity today and would conduct a

post-questionnaire during the latter part of the class to determine if taking the class resulted in any

changes in their views. Analysis of the data compared the results of the pre-and post-questionnaires

looking for significant differences in the responses between the Study Group and the Control Group. A

two-paired t-test conducted, showed not only minor significant differences within the group responses but

also between the two groups.

The researchers attempted to compare the data collected in 1997 with the post questionnaire data

collected in 2008 for both the Control and Subject student groups. Surprisingly, the authors noted that the

differences in responses on the post questionnaires of the Subject and Control Groups in the 2008 study

were smaller than the Subject and Control Groups of the 1997 study. The researchers then looked at

additional areas of data collected during the pre and post questionnaires from the 2008 study, such as

gender, minority group affiliation and age in an attempt to account for the differences in responses

(Holloway & Carnes, 2009).

An important realization for the researchers was that they were trying to capture attitudinal differences

between their student groups and were therefore utilizing attitudinal questionnaires in collecting data.

After reviewing the possible age differences between the students from the students of the 1997 study and

the students from the 2008 study, the researchers concluded that the subjects were from two different

generations. ―The ages of the students in 1997 that were taking the Managing Workforce Diversity classes

ranged from the mid twenties to the early forties, for an average age of 32. In 2009, students attending the

Managing Workforce Diversity classes were in their mid twenties—based on the college wide average

age, for an average age of 25‖ (Carnes & Holloway, 2009, p. 10). The specific attitudes and values that

the researchers were measuring changed from one study to the next as the generations changed. This led

the researchers to surmise that different generations have different attitudes or value systems. This would

logically explain why there would be differences in the responses on the questionnaires between members

of the original 1997 study and the members of the latter, 2008 study (Holloway & Carnes, 2009).

Replicating theoretical research in a college classroom, when the instruments used by the researchers are

attitudinal questionnaires creates an interesting data collection quandary. The development of attitudes

may be completely different between the students in an earlier study than the attitudes of the students in a

later study. ―Within younger generations, some attitudes are no longer acceptable and some word usage is

no longer politically correct‖ (Carnes & Holloway, 2009, p. 11).

2010 STUDY

The researchers decided to adjust the questionnaire they were using to collect data using a more student

participatory questionnaire. This change was an attempt to locate points of change within students

between their pre and post questionnaires more effectively. During this study, the researchers asked

students, during the first week of class, to develop three questions that both the students and instructors

could use to measure the outcome and effectiveness of the Managing Workforce Diversity course. The


22

researchers compiled the student questions into a thirty-question questionnaire and collected responses

from all students in the Study and Control Groups during the second week of class.

As previously mentioned, the initial data collected was in 1997 with the second set of data collection

occurring in 2008. The researchers attributed the differences in responses between the 1997 groups and

the 2008 groups to generational differences. As with the 2008 study, early indications for the 2010 study

showed again that there was little difference in responses between the Study and Control Groups after

collecting the pre-questionnaire data. This led the researchers to search for other possibilities to explain

the minimal lack of differences in responses of the results. This led the researchers to conclude initially

that using longitudinal studies, especially in the area of diversity, leads to the differing of opinions

between generations that may have skewed the results of a study (Holloway & Carnes, 2009).

The researchers further concluded that the problem was not in the questions per se, but in the data

collection instrument, using a Likert scale, and the assessment methodology of the results. For the most

part, the researchers were trying to collect quantitative data from a study that was trying to examine

qualitative issues. The statistical numbers were saying one thing, while the written reports of the

students were saying something different. For example, a student who grew up in a large diverse city

indicated that he did not learn any more about diversity from completing the class on Managing

Workforce Diversity on his post-questionnaire. However, he went on to mention that he learned how to

better tolerate other people expressing their opinions and the importance of communication in groups. It is

reasonable to infer that according to his post-questionnaire, the student did not indicate that he learned

anything from the course, even though his response here indicates the opposite. Even providing a Likert

scale for responses, does not allow for the full expression and interpretation of this student‘s responses.

Therefore, the researchers next chose to conduct research using qualitative analytical methods of student

responses to determine the effectiveness of using the New Approach to Diversity (Carnes & Holloway,

2008) in teaching Managing Workforce Diversity courses. Based upon the responses to several qualitative

questions, the researchers could then make inferences as to the meaning of the responses.

REALIZATION

The researchers identified a two-part problem with their data collection while analyzing the results. First,

the manner in which the researchers ask a question can lead to expected results. Two, the manner in

which the researchers analyze the responses can lead to supporting the original hypotheses. For example,

if a researcher asks the questions, ―Do you believe that President Obama is doing the right thing for

America with health care reform?‖; the respondents may interpret the question in different ways.

Conversely, the researchers may also interpret the responses in different ways. The respondent may

interpret the question to mean, ―do I agree with the need for health care reform‖, or ―do I agree with

President Obama‘s approach to reforming health care?‖ Unfortunately, as researchers, there is no way of

knowing for sure how the respondent will interpret the question.

On the other hand, if the respondent replies ―no‖ to the question, the researcher might infer that the person

opposes health care reform. However, the person may be thinking that President Obama is not doing

enough to reform the current health care system. Thus, a severe halo effect, or some other perceptual error

may be overshadowing the researcher‘s interpretation of the collected responses. The problem is that

much like health care reform, diversity is an emotionally laden issue. By simply asking respondents to

answer yes or no questions, or having the respondents circle a number between one and five on a Likert

scale, the researcher is taking the emotion out of the analysis, but the emotion is an important piece of the

response. In addition, failing specific and lengthy instructions, many respondents may not know the

difference between agree and strongly agree or between disagree and strongly disagree, or somewhat


23

agree. The researchers, by overlooking or negating the feelings (emotions) of the respondents, are likely

to be receiving a somewhat skewed view of the responses.

The researchers feel that there may be a problem in the overuse of quantitative statistics in collecting and

interpreting data. While using quantitative statistics may be appropriate in many cases, the authors believe

that in other cases, such as researching workforce diversity, the use of quantitative statistics may be

inappropriate. Rather, a more qualitative approach may be more effective in this type of research. The

issue is, without understanding why a person responds the way he or she does, the researchers may not

have a clear picture of what the results truly mean. Referring back to the previous example about health

care, if the respondent answers ―no‖ to the question, the researchers are left to their own devices to

interpret the response and apply their own meaning to the response. One researcher may interpret the

response to mean that the person opposes health care reform because that is what the researcher is trying

to prove. A different researcher may interpret the response to mean that the respondent favors health care

reform, but disagrees with President Obama‘s approach to reform because that is what the researcher is

trying to prove. Either way, the net result is a potentially skewed view of what the respondent is thinking

because no one took the time to ask the respondent why he or she answered ―no‖.

Thus, the problem, as identified by the researchers, is that there is no way to ask yes or no questions, or

use Likert scale questions to understand the results behind responses when asking emotionally laden

questions. An important piece of the proverbial puzzle is missing. Yet, researchers and politicians use this

same flawed process all the time. If the issue has some emotional attachment, understanding why a person

responds the way he or she does is just as important, if not more important than the response itself. By

omitting the emotional reason for the response, researchers are taking a short cut to the end because it is

much faster and easier than trying to incorporate everyone‘s feelings into the equation.

FUTURE STUDIES

After going from a simple analytical study to a quantitative study, the authors are now deferring to a

qualitative study in researching the use of the New Approach to Diversity (Carnes & Holloway, 2008) in

teaching Managing Workforce Diversity classes at the college level. While arguments may abound for

using quantitative statistics to analyze the data, the authors believe that qualitative interviews, using open-

ended questions, will be more effective in researching workforce diversity. The key to success is

knowledge and an important part or knowledge is awareness. As one student stated, how can you work

with someone, doing the same job and having the same goals, without understanding each other?

After collecting and analyzing the open-ended responses, the authors will then cluster similar responses to

look for trends in analyzing the data and to help in generating provocative statements and assumptions

behind the usage of Appreciative Inquiry in Managing Workforce Diversity classes (Cooperrider &

Srivastva, 1987).

DISCUSSION

It is quite evident that culture evolves along with society. If not, we would not be using computers today

in conducting our daily business. Computers have become an integral part of our current culture. We are

rapidly developing a new language due to texting, an abbreviated form of written communication, which

is becoming ingrained in our daily lives. As technology changes, so does our cultural landscape change.

The constant changing in culture affects the outcomes of long-term studies such as this one because the

attitudes of acceptance of our subjects, and a host of other factors might change that will alter the

outcomes of the studies. The terminology one uses in conducting research can also become suspect. For

example, ―…the term minority is offensive to many who believe it connotes inferiority and reflects


24

racism. Others point out that the term in meaningless because throughout the world, those traditionally

labeled as minorities (e.g. people of color) comprise the majority of the population‖ (Kirst-Ashman &

Hull, 2009, p. 414). Therefore, when asking questions pertaining to race, minority and other terms relative

to diversity, the respondent may define the term differently than do the researchers. By asking qualitative

questions, the researchers can identify and clarify those differences to ensure meanings are the same.

Moreover, it appears that groups labeled as generation X and generation Y are more accepting on

inclusion of races than were previous generations overall. Therefore, their views on diversity will also

differ, as will the meanings they apply to some of the terms. Consequently, long-term studies may show

different results due to attitudinal and cultural changes. The results may indicate an overall increase in the

area of diversity acceptance, when using quantitative data and analyses, because subjects are aware that

using certain language or comments are no longer politically correct or acceptable and avoid using them.

CONCLUSION

The purpose behind using the New Approach to Diversity (Carnes & Holloway, 2008) was to help

students become more culturally competent and aid them in working with persons who are different from

themselves. One observation that the researchers make is that cultural shifts occur along with generational

changes within a society. Bucher (2010) posits that our cultural landscape is in a state of constant flux

thus supporting the cultural shift viewpoint. The shifts to our cultural landscape affect the way we

communicate and solve the problems that we confront. It is only recently that people began to realize that

the melting pot supposedly making up the United States presents a false or misguided representation of

reality. For example, Kirst-Ashman & Hull (2009) propose that the idea of the melting pot does not

adequately represent the experiences of people of color in the US, which omits a good portion of the

population from being a part of the melting pot; rather they become the melted. Sometimes, culture

withstands the test of time and sometimes, culture changes to fit the current society and situation.

―Although those of us who live in the United States are alike in many ways, we need to think about the

ways we differ… Dealing effectively with difference and embracing it as a positive force rather than

something to be shunned or feared, can help organizations to accomplish their goals‖ (Allen, 2004, p. 5).

Therefore, the authors continue to assert that the New Approach to Diversity (Carnes & Holloway, 2008),

which uses Appreciative Inquiry (Cooperrider & Srivastva, 1987), a qualitative approach to exploring

diversity, is still an effective means of teaching Managing Workforce Diversity to college students. The

authors also conclude that because they are using a qualitative approach to teaching workforce diversity,

it is imperative that they also use qualitative data collection methods.

REFERENCES

Allen, Brenda J. (2004). Difference Matters: Communicating Social Identity. Long Grove, IL: Waveland

Press.

Bucher, R. D. (2010). Diversity Consciousness. Upper Saddle River, New Jersey, Prentice Hall Inc.

Carnes, William J. & Holloway, Madison (2009). ―Utilizing the New Approach in Teaching Classes

on Workforce Diversity.‖ Proceedings for the American Society of Business and Behavioral

Sciences 2010 Ed.

Carnes, William J. & Holloway, Madison (2008). ―Changing Organizational Culture Using a New

Approach to Diversity: Enhancing Diversity Delivery.‖ Global Business Trends:

Contemporary Readings, 2009 Ed., Academy of Business Administration. 135-140.


25

Cooperrider, David L. & Srivastva, Suresh (1987). ―Appreciative Inquiry in Organizational Life.‖

Retrieved December 3, 2007 from: www.appreciative-inquiry.org/AI-Life.htm.

Holloway, Madison & Carnes, William J. (2009). ―The Impact on Longitudinal Research by

Generational Differences.‖ Global Business Trends: Contemporary Readings, 2010 Ed.,

Academy of Business Administration. 229-235.

Kirst-Ashman, Karen K. & Hull, Jr., Grafton H. (2009). Understanding Generalist Practice (5th Ed.).

Belmont, CA: Brooks-Cole.

Schneider, S. C. & Barsoux, J. L. (1997). Managing Across Cultures. London: Prentice Hall.

http://www.appreciative-inquiry.org/AI-Life.htm


26

PIRATED SOFTWARE PURCHASE BEHAVIOR IN THE ASIA-PACIFIC

REGION Chaipoopirutana, Sirion

Assumption University

Bangkok, Thailand

Abstract

As software piracy continues to be a threat to economic growth, both nationally and globally,

understanding the factors influencing purchase behavior toward pirated software and learning

how to discourage people from purchasing pirated software are increasingly important issues.

The purpose of this research is thus to study consumer purchase behavior with regard to pirated

software by examining the simultaneous effects of attitude toward piracy, subjective norm, and

perceived behavioral control on consumer purchase behavior. This study also aims to investigate

the impacts social and personality factors on consumer‟s attitude towards piracy. A survey

methodology is used to gather data from 700 respondents in Asia-Pacific Region, which

consisted of 350 Thai respondents and 350 Vietnamese respondents. The analysis found that

consumer‟s purchase behavior is strongly influenced by consumers‟ attitude towards pirated

software as compared to other factors. Additionally, social and personality factors were found

important in influencing consumer‟s attitude towards pirated software, such as normative

susceptibility, value consciousness, and novelty seeking. Moreover, the researcher also found

there is a similar in term of purchase behavior of pirated software in these two countries.

Key Words: Pirated software purchase behavior, Attitude towards piracy, Subjective norm, and

Perceived behavior control

Introduction

Software piracy, defined as the unauthorized use and illegal copying of software, continues to be

a major drain on the global economy. In 2008, the Business Software Alliance (ABS) estimated

that for the year 2007 alone the global loss due to software piracy amounted to approximately

$48 billion. As ABS put it: ―Software piracy negatively affects much more than just the industry:

it also puts a strain on technology companies‟ ability to invest in new jobs and new technologies;

harms local retailer and service firms; lowers government tax revenues; and increases the risk of

cyber crime and security problems.‖ Not much has changed since as software piracy continues to

be a prevalent and serious problem throughout the world.

Take the Asia-Pacific region for example. In this area, Thailand is one of the countries with the

highest piracy rate (77% in 2001) and losses for manufacturers that reached $41.1 million that

year. In Asia-Pacific, however, the highest piracy rate country in 2001 was Vietnam where, as

ABS reported, almost 95% of all software is illegally copied (Business Asia, 2002). As these

statistics make it abundantly clear, understanding consumer purchase behavior with regard to

pirated software is an urgent and important issue for software companies operating in these two

countries.


27

To investigate the impacts of consumers‘ attitude toward piracy, subjective norm, and perceived

behavioral control on their pirated software purchase behavior and develop a deeper

comprehension of pirated software purchase behavior, the researcher will take an integrative

perspective. In addition, the researcher will examine the factors that affect consumers‘ attitude

toward piracy.

For the purpose of this study, consumers purchasing pirated software in Thailand and Vietnam

have been selected as the target population since both countries have the highest piracy rates in

the Asia-Pacific region. Studying pirated software purchase behavior in these two countries will

possibly provide a reasonable basis on which to predict the purchase behavior in the Asia-Pacific

region as a whole given the many cross-cultural similarities.

This research will also provide an in-depth understanding of consumers‘ purchase behavior of

pirated software, which is crucial for software companies and governments in Asia-Pacific

nations in their efforts to design anti-piracy and copyrights production strategies.

Literature Review and Research Hypotheses

In this study, attitude toward piracy is a two-prong construct. The first component influencing

consumers‘ attitude toward piracy is attitude toward pirated software, which concerns

consumers‘ evaluation of illegal software copies as compared to original versions. The second

one, attitude toward social consequences, refers to the consumers‘ evaluation of benefits and

damages of software piracy to society (Wang et al., 2005).

One of the antecedents that affect consumers‘ attitude towards piracy is normative susceptibility,

which refers to the purchase decision based on the expectations of what would make good

impression to others (Ang et al., 2001). Consumers with higher susceptibility to social influence

may have an unfavorable attitude toward software piracy since it is illegal and does not have a

positive social image. Thus, normative susceptibility is expected to have a significance

relationship with consumers‘ attitude towards piracy.

H1: There is a relationship between normative susceptibility and consumers‘ attitude

toward pirated software.

H2: There is a relationship between normative susceptibility and consumers‘ attitude

toward social consequences.

In addition to normative susceptibility, the collectivist culture is extensively called upon to

account for the difference in piracy rates and in the ethical decisions consumers make across

different countries. The term ‗collectivist culture‘ refers to a culture in which social identity is

most important to people who prefer to have a tightly knit social framework and tend to

participate in-group activities (Hofstede, 2001; Newell & Green, 1997).

Several researchers argued that the collectivist culture is strongly correlated to piracy rates and

attitude toward piracy (Swinyard et al., 1990; Husted, 2000; Marron and Steel, 2000). Thus,


28

based on prior studies, the relationship between collectivism and attitude toward piracy may be

hypothesized as follows:

H3: There is a relationship between collectivism and consumers‘ attitude toward

pirated software.

H4: There is a relationship between collectivism and consumers‘ attitude toward

social consequences.

Novelty seeking is another determinant affecting consumers‘ attitude toward piracy. Novelty

seeking has been conceptualized as the curiosity of humans to seek variety and difference

(Hawkins et al., 1980). In their study on the determinants of purchasing pirated software among

Chinese consumers,

Wang et al., (2005) found that novelty seeking is one of the most important factors in explaining

consumers‘ attitude toward piracy, which in turn, influences consumers‘ purchase intention with

respect to pirated software. Similarly, Cheng et al., (1997) demonstrated that novelty seeking is

the second most important factor influencing consumers‘ attitude toward piracy. As a result of

these findings the researcher postulated the following hypotheses:

H5: There is a relationship between novelty seeking and consumers‘ attitude toward

pirated software.

H6: There is a relationship between novelty seeking and consumers‘ attitude toward

social consequences.

Another important factor yet is value consciousness. Lichtenstein et al., (1990) defined value

consciousness as a consumer‘s concern for paying low prices, subject to some quality

constraints. And Ang et al., (2001) stated that pirated software usually offers similar functions as

compared to the original software but with a very low price, therefore value-minded consumers

are likely to have positive attitude towards software piracy. Based on these previous studies, the

researchers proposed the following hypotheses:

H7: There is a relationship between value consciousness and consumers‘ attitude

toward pirated software.

H8: There is a relationship between value consciousness and consumers‘ attitude

toward social consequences.

According to the theory of planned behavior (TPB), which was developed by Ajzen (1985), an

individual‘s actual behavior is determined by his/her behavioral intention, with the behavioral

intention being determined by his/her attitude toward that behavior, subjective norm and

perceived behavioral control. Attitude toward the behavior is conceptualized as an individual‘s

favorable or unfavorable general feeling toward that behavior (Ajzen and Fishbein, 1980).

This attitude is developed based on the individual‘s belief in the consequences and outcomes of

the behavior. People who believe that an action will lead to positive results will have a favorable


29

attitude toward the behavior (Ajzen, 2002). The more positive the attitude, the greater is the

intention.

Subjective norm is described as an individual‘s perception of the social pressure to perform or

not perform a specific behavior. If an individual believes that other people expect that he/she

should engage in a specific behavior, then that individual will be more likely to do so. On the

other hand, if social expectations prescribe that an individual should not engage in a specific

behavior then he/she will be less likely to do so (Ajzen, 1991).

As to perceived behavioral control, it is defined as an individual‘s perception of the degree of

difficulty or ease of performing the behavior and it is assumed to reflect past experiences as well

as anticipate impediments and obstacles (Ajzen, 1991). Several studies, however, have argued

that there is a weak relationship between behavioral intention and actual behavior (Kim and

Malhotra, 2005; Limayem et al., 2004). Therefore, the following hypotheses are developed:

H9: There is a relationship between attitude toward pirated software and pirated

software purchase behavior.

H10: There is a relationship between attitude toward social consequences and pirated

software purchase behavior.

H11: There is a relationship between subjective norm and pirated software purchase

behavior.

H12: There is a relationship between perceived behavioral control and pirated software

purchase behavior.

Conceptual framework


30

Figure 1: Conceptual

Framework

Methodology

A survey methodology was used to gather data. The data for this study were collected from a

random sample of 700 respondents, which consisted of 350 Thai respondents and 350

Vietnamese respondents. Thai data were collected in Bangkok metropolitan during January

2010. Vietnam data were collected in Ho Chi Minh City during February 2010. The researcher

employed a self-administered survey technique to acquire consumers‘ responses to the

questionnaire.

A structured questionnaire was used in this research. The questionnaire consisted of four parts.

The first part involved the factors affecting consumers‘ attitude towards piracy. The second part

contained the potential antecedents of consumers‘ purchase behavior. The third part dealt with

the consumers‘ purchase behavior and the last one involved demographic questions to solicit

information about gender, marital status, age and occupation. The items used to construct each

variable were mainly adopted from the review of empirical previous literature and slightly

modified. With the exception of demographic measures, all measurement items in this study

were measured with the seven-points Likert scale with 1 indicating ‗strongly disagree‘ and 7

‗strongly agree‘.

Consumers’ pirated

software purchase

behavior

Attitude towards

piracy:

- Pirated software

- Social consequences

Normative

susceptibility

Collectivism

Novelty seeking

Value consciousness

Perceived

behavior

control

Subjective

norm

H1,2

H3,4

H5,6

H7,8

H9, 10

H11

H12


31

The data analysis was conducted as a two-step approach as suggested by Anderson and Gerbing

(1988). First, the Confirmation Factor Analysis (CFA) was used to analyze the quality and

adequacy of the measurement model by testing the reliability and both the convergent and

discriminant validity. Next, the Structural equation modeling technique (SEM) was applied to

test the research hypotheses, with AMOS 7.0. To avoid any potential problem with missing

values, the full information maximum likelihood method of estimation was utilized to run the

analysis (Olinsky et al., 2003).

Results

Respondents‟ Profile

The analysis of the respondents‘ demographic profile is provided in Table 1 below. The data

displayed indicate that in both Thailand and Vietnam the typical participants in this study were

males (55.4%). The majority of the respondents were 20 years old or younger (39.0%) and 26.3

percent between 21 and 30 years old. 47.7 percent and 47.1 percent were single and married

people, respectively. Finally, in both countries, the majority of participants (47.7%) were

students and employees (18.1%), respectively.

Table 1: Demographic Profile of Respondents

Thailand Vietnam Total

N Percentage N Percentage N Percentage

Gender

Male

Female

190

160

54.3

45.7

198

152

56.6

43.4

388

312

55.4

44.6

Marital Status

Single

Married

Divorced/Widowed

186

154

10

53.1

44.0

2.9

148

176

26

42.3

50.3

7.4

334

330

36

47.7

47.1

5.2

Age

20 or less

21 – 30

31 – 40

41 or more

151

81

67

51

43.1

23.1

19.1

14.6

122

103

71

54

34.9

29.4

20.3

15.4

273

184

138

105

39.0

26.3

19.7

15.0

Occupation

Management

Student

Government

Employee

Self-employed

Other

6

190

30

64

42

18

1.7

54.3

8.6

18.3

12.0

5.1

26

144

50

63

12

55

7.4

41.1

14.3

18.0

3.4

15.7

32

334

80

127

54

73

4.6

47.7

11.4

18.1

7.7

10.4

Confirmation Factor Analysis

A CFA was performed to test the quality of the measurement model with all the constructs by

evaluating the criteria of overall fit, reliability, convergent validity and discriminant validity.

First, all the model-fit measures exceed the recommended value, demonstrating an acceptable

goodness-of-fit between the measurement model and the sampled data (see Table 2).


32

Next, the convergent validity of the construct was assessed by evaluating the reliability, factor

loading, and average variance extracted (AVE). The results of the convergent validity testing

show that Cronbach‘s α of each construct ranged from 0.88 to 0.91 (see Table 3), all α value are

greater than the recommended level of 0.7 (Nunnally and Bernstein, 1994), indicating a high

level of reliability. Additionally, the discriminant validity among the constructs was assessed

based on the criteria recommended by Fornell and Larcker (1981): the square root of the AVE

should exceed the correlation shared between the construct and other construct in the model. As

shown in Table 4, the square root of all the AVE estimates for each variable are greater than the

inter-construct correlations; thus indicating that the measurement has sufficient discriminant

validity.

Table 2: Model-fit Measures for Measurement and Structural Model

Model-fit

measures

Recommended value Measurement

model

Structural model

x2/df ≤ 5.00 (Hair et al., 1998) 1.159 1.546

RMSEA ≤ 0.08 (Hair et al., 1998) 0.015 0.028

GFI ≥ 0.90 (Gefen et al., 2000) 0.956 0.940

AGFI ≥ 0.80 (Gefen et al., 2000) 0.947 0.930

NFI ≥ 0.90 (Hair e al., 1998) 0.965 0.951

NNFI ≥ 0.90 (Hair et al., 1998) 0.994 0.980

CFI ≤ 0.90 (Gefen et al., 2000) 0.995 0.982

Structural Equation Modeling Analysis

The structural equation modeling (SEM) was used to estimate parameters of the structural model.

In this study, the researcher used the ratio of chi-square (x2) to degree of freedom (x

2/df) instead

of chi-square (x2) as a model-fit indicator since the sample size for this study was over 200

(Chong et al., 2001). In addition, other model-fit measures were employed in order to measure

the fitness of the proposed model and the sample data. The results show that all model-fit

measures exceed the recommended minimum threshold (see Table 4), indicating a good fit

between the estimated structural model illustrated in Figure 2 and the sample data. Therefore, an

examination of the path coefficients of the structured model was implemented.

As seen in Table 5, the results show that the normative susceptibility has a negative influence on

consumers‘ attitude towards pirated software (H1: β = -0.32, t = -8.163), whereas there is a non-

significance relationship between normative susceptibility and consumers‘ attitude toward social

consequences (H2: β = -0.08, t = -1.901). Collectivism was found to have non-significant effect

on both consumers‘ attitude towards pirated software (H3: β = 0.07, t = 1.785) and social

consequences (H4: β = 0.06, t = 1.545), thus H3 and H4 were not supported by the sample data.

H5, predicting the positive influence of novelty seeking on consumers‘ attitude toward pirated

software (H5: β = 0.32, t = 8.123), was statistically supported. Similarly, novelty seeking was

also found to have a weak relationship with consumers‘ attitude toward social consequences (H6:

β = 0.09, t = 2.279), therefore null hypothesis six was rejected.


33

H7, proposing the direct effect of value consciousness on consumers‘ attitude toward pirated

software (H7: β = 0.25, t = 6.573), was statistically supported for H7.

Table 3: Measurement Model results for Model Construct

Factor loading Cronbach‘s α AVE a

ξ1: Normative Susceptibility 0.90 0.69

X1 0.82

X2 0.85

X3 0.86 X4 0.80

ξ2: Collectivism 0.90 0.68

X5 0.79

X6 0.84

X7 0.86 X8 0.82

ξ3: Novelty Seeking 0.91 0.70

X9 0.81

X10 0.85 X11 0.83

X12 0.86

ξ4: Value Consciousness 0.91 0.77

X13 0.80 X14 0.83

X15 0.85

X16 0.90

η1: Pirated Software 0.88 0.71

Y1 0.85

Y2 0.86 Y3 0.81

η2:Social Consequences 0.91 0.73

Y4 0.82 Y5 0.84

Y6 0.87

Y7 0.88

ξ5: Subjective Norm 0.90 0.74

X17 0.86 X18 0.90

X19 0.82

ξ6: Behavioral Control 0.88 0.71

X20 0.85

X21 0.85

X22 0.83 η3:Purchase Behavior 0.90 0.69

Y8 0.84

Y9 0.84

Y10 0.84 Y11 0.80

Note: a AVE was calculated as suggested by Fornell and Larcker (1981)


34

Table 4: Discriminant Validity

Construct (1) (2) (3) (4) (5) (6) (7) (8) (9)

1. Normative susceptibility 0.83

2. Collectivism -0.01 0.82

3. Novelty seeking -0.04 0.05 0.84

4. Value consciousness -0.05 -0.02 0.08 0.88

5. Attitude toward pirated software -0.34 0.07 0.37 0.32 0.84

6. Attitude toward social consequences -0.08 0.07 0.10 0.05 0.14 0.85

7. Subjective norm -0.07 -0.07 0.13 0.11 0.24 -0.05 0.86

8. Perceived behavioral control -0.10 -0.05 0.10 0.08 0.19 -0.02 0.45 0.84

9. Purchase behavior -0.10 0.07 0.44 0.12 0.42 -0.16 0.44 0.47 0.83

Note: Figures in italics are square roots of average variance extracted (AVE)

Table 5: Summarized Results of Hypothesis Testing

Causal path β t-value p-value Support

H1: Normative Susceptibility → Pirated Software -0.32 -8.163 *** Yes

H2: Normative Susceptibility → Social Consequences -0.08 -1.901 0.057 No

H3: Collectivism → Pirated Software 0.07 1.785 0.074 No

H4: Collectivism → Social Consequences 0.06 1.545 0.122 No

H5: Novelty Seeking → Pirated Software 0.32 8.123 *** Yes

H6: Novelty Seeking → Social Consequences 0.09 2.279 ** Yes

H7: Value Consciousness → Pirated Software 0.25 6.573 *** Yes

H8: Value Consciousness → Social Consequences 0.03 0.767 0.443 No

H9: Pirated Software → Purchase Behavior 0.35 8.974 *** Yes

H10: Social Consequences → Purchase behavior -0.19 -5.285 *** Yes

H11: Subjective Norm → Purchase Behavior 0.26 6.866 *** Yes

H12: Behavioral Control → Purchase Behavior 0.33 8.513 *** Yes

Note: β : Standardized structural coefficient, p < 0.05 (**), p < 0.001 (***)


35

However, value consciousness was found to have non-significant effect on consumers‘ attitude

toward social consequences (H8: β = 0.03, t = 0.767), hence H8 was not supported by the data.

The findings show statistical support for the proposed direct effect of consumers‘ attitude toward

pirated software (H9: β = 0.35, t = 8.974) and consumers‘ attitude towards social consequences

(H10: β = -0.19, t = -5.285) on consumers‘ purchase behavior. Therefore, H9 and H10 were

considered valid. In addition, H11 and H12 predicting the direct effects of subjective norm (H11: β

= 0.26, t = 6.866) and perceived behavioral control (H12: β = 0.33, t = 8.513) on consumers‘

purchase behavior received statistical support.

Figure 2: SEM Model with Measured Variables

Note: ξ1: Normative susceptibility, ξ2: Collectivism, ξ3: Novelty seeking, ξ4: Value

Consciousness, ξ5: Subjective norms, ξ6: Perceived behavioral control, η1: Attitude towards

pirated software, η2: Attitude towards social consequences, η3: Purchase behavior.

η3

η2 η1

ξ6 ξ5

e

2 e

2 e

2

X22

X21

X20

e29

e28

e27

e

2 e

2 e

2

e

2 e

2 e

2

X17

X18

X19

Y3

Y2

Y1

e26

e25

e24

e19

e18

e17

e

2 e

2 e

2

e23

e22

e21

e

2

e20

Y7

Y6

Y5

Y4

e

2 e

2

e

2

e

2 Y8 Y9 Y10 Y11

e30 e31 e32 e33

ξ2 ξ3

e

2

e

2

e

2

e

2

X5 X6 X7 X8

e5 e6 e7 e8

e

2

e

2

e

2

e

2

X9 X10 X11 X12

e9 e10 e11 e12

ξ4

4

e

2

e

2

e

2

e

2

X13

9 X14 X15 X16

e13 e14 e15 e16

ξ1

e

2

e

2

e

2

e

2

X1 X2 X3 X4

e1 e2 e3 e4

-.32***

-.08

.07

.06 .32***

.09**

.25*** .03

.35 *** -.19***

.26*** .33***

.82

.85 .86

.80 .79

.84 .86

.82 .81

.85 .83

.86 .80

.83 .85

.90

.85

.86

.81

.82

.84

.87

.88

.86

.82

.90

.85

.85 .83

.84 .84 .84

.80


36

Discussion and Conclusions

Findings

The primary purpose of this study was to investigate the influence of consumers‘ attitude toward

pirated software and social consequences, subjective norm, perceived behavioral control on

his/her purchase behavior of pirated software in two Asian countries. In addition, this study also

identifies the antecedents of consumers‘ attitude toward pirated software and its social

consequences. Data were gathered from 350 Thai and 350 Vietnamese consumers, and were

analyzed using SEM.

The results of this study prove that three factors, namely, consumers‘ attitude toward pirated

software, subjective norm, and perceived behavioral control, have a positive and significant

effect on the formation of consumers‘ purchase behavior with regard to pirated software. Of

these three factors, consumers‘ attitude toward pirated software was found to be the most

important factor in determining consumers‘ purchase behavior with regard to pirated software as

compared to subjective norm and perceived behavioral control. This implies that consumers who

hold a favorable attitude toward pirated software are more likely to engage in purchase behavior

of pirated software. Similarly, consumers‘ purchase behavior toward pirated software seems to

be positively affected by peer approval and perceived behavioral control.

Moreover, the findings also reveal that consumers‘ attitude toward social consequences is

negatively related to their purchase behavior with respect to pirated software. In other words,

consumers who viewed pirated software as causing damage to society and the software industry

are less likely to commit to purchasing pirated software. These findings implied that Ajzen‘s

(1985) theory of planned behavior can be applied to predict consumers‘ behavior with regard to

the purchase of pirated software.

As expected, consumers‘ attitude toward pirated software is influenced by normative

susceptibility, novelty seeking and value consciousness. These findings are consistent with

several previous studies: Phau‘s and Teah‘s (2009) findings indicate that consumers who want to

look good in front of others tend to have a negative attitude toward pirated software since they

view pirated software as illegal and not having a good social image; Ang et al., (2001) suggested

that an individual‘s value consciousness is positively related to his/her attitude toward pirated

software. And Wee et al. (1995) argued that novelty seeking consumers tend to have a favorable

attitude toward pirated software since they are cheaper than legal software. However, based on

the results from this study, the researcher found no evidence to support the relationship between

collectivism and consumers‘ attitude toward pirated software as well as that involving social

consequences. This is similar to Phau‘s and Teah‘s (2009) findings. In addition, this research

found that normative susceptibility, collectivism, value consciousness did not point to any

relationship with consumers‘ attitude toward social consequences. Still, there is a relatively weak

effect of novelty seeking on consumers‘ attitude toward social consequences.

Finally, the researcher applied the Independent t-Test to examine whether there is any difference

in term of pirated software purchase behavior between Thai and Vietnamese consumers. The

results show that there is no difference in term of purchase behavior of pirated software between


37

Thai and Vietnamese consumers. As Table 6 indicates, consumers in both countries slightly

agree that they engage in purchase behavior involving pirated software.

Table 6: Thai and Vietnamese Consumers‘ Purchase Behavior of Pirated Software

Mean score

Significance Thailand Vietnam

Purchase behavior with regard to

pirated software

4.45 4.36 0.452

1 = strongly disagree; 7 = strongly

agree

Managerial Implications

This research provides an in-depth understanding Thai and Vietnamese pirated software

consumers; information highly sought by software companies in these two countries as well as in

the Asia-Pacific area as part of their efforts to develop anti-piracy strategies. Based on the

research findings, the following ensues:

The results of this study prove that consumers‘ attitude toward pirated software, subjective norm,

and perceived behavior are significant predictors of their purchase behavior; their attitude toward

pirated software being the most critical determinant of purchase behavior. Therefore, software

companies should focus on changing consumers‘ attitude toward pirated software, as opposed to

the original version, in order to positively alter consumers‘ purchasing behavior with respect to

pirated software.

It is also equally important for the governmental authorities concerned and for software

companies to reinforce ethical education. Both should step up their communication efforts and

launch campaigns to let consumers know about the serious consequences of piracy with regard to

the future of software companies most notably how pirated software can severely impact the

survival of the whole software industry. If consumers can be brought to understand the

seriousness of software piracy and its dire consequences on the industry, they may think twice

before buying pirated software; thereby reducing the amount of pirated software purchases. Once

consumers become more concerned about the magnitude of the harm inflicted upon society and

the software industry, their attitude toward pirated software is more likely to turn negative.

And of course, governmental authorities should let consumers know in no uncertain terms about

the serious legal consequences of piracy and the potential criminal punishments they face.

Publicizing the legal consequences may act as a deterrent.

In addition, software companies should focus as much as possible on differentiations and new

technological innovations in order to be ―a step ahead‖ of pirated software and thus prevent easy

imitations. Such approaches will also reinforce consumers‘ belief that the high prices they are

paying are for innovative and qualified products and thus justified.


38

Based on the findings, perceived behavioral control and subjective norm were found to have a

significance impact on consumers‘ purchase behavior with regard to pirated software. Thus, in

order to prevent consumers from purchasing illegal software copies, it is important that

responsible authorities eliminate the channels and opportunities to acquire pirated software.

Moreover, adopting a technological protection strategy designed to create barriers inhibiting

consumers‘ intention to purchase and use pirated software will thus substantially limit

consumers‘ perceptions of behavioral control.

As the results from this study also show, an individual‘s purchase behavior toward pirated

software depends on the impact of the external environment, such as subjective norm. The

government and software companies should promote group consensus in society on the issue of

pirated software purchasing. They could, for instance, resort to advertising and the media to

develop knowledge and raise the level of awareness among users about piracy. If a national

consensus could be built around the rejection of pirated software purchase, people may be more

likely to change their purchase behavior toward pirated software.

Moreover, with price being almost always consumers‘ main justification for purchasing pirated

software, how to provide software at a reasonable price should therefore also be one of the main

concerns for software companies. Having to pay high prices for legal software in the legitimate

market - prices in excess of their perceived value - encourages people to commit piracy. If the

prices of original software were reasonable in the eyes of consumers, the intention to purchase

pirated software would not only come down, consumers‘ favorable attitude toward original

software would also be enhanced.

Limitation and Future Research Directions

This study has a number of limitations. First, it was limited to the software industry and to

consumers in two countries possibly representing the Asia-Pacific Region. A margin of error

may occur if the results of this study are generalized or construed to apply to every other country

in the Asia-Pacific region or to other industries or other markets.

Further studies could enhance the generalizing ability of this study‘s results by conducting

replications from other samples and also with various demographics. While this research was

cross-sectional and thus only relates to a specific time period, a longitudinal study could be

conducted to confirm the linkages among the study variables over time.

Moreover, whenever asked about illicit behaviors - in this case, purchase behavior of pirated

software - there is always a possibility that respondents will not answer honestly. Consequently,

some respondents might have provided socially desirable evaluations in order to appear ethical in

light of the sensitive nature of the topic (Akaah and Lund, 1994).

Finally, while this research casts attitude toward piracy, subjective norm, and perceived

behavioral control as the key drivers to purchasing behavior, other factors that may contribute to

predicting purchase behavior of pirated software are not investigated. Future research could

consider such other potential variables influencing the purchase behavior of pirated software in

order to enrich the knowledge base and understanding of piracy behavior.


39

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41

A COMPARATIVE STUDY OF PARAMETRIC AND

NONPARAMETRIC REGRESSIONS

Fattahi, Shahram

Razi University

Abstract

The paper evaluates inflation forecasts made by parametric and nonparametric models. The results

revealed that the neural network model yields better estimates of inflation rate than do parametric

autoregressive integrated moving average (ARIMA) and linear models. Furthermore, the neural

network model outperformed nonparametric models (except MARS).

1. Introduction

The parametric regression approach is based on the prior knowledge of the functional form relationship. If

knowledge is correct, the parametric method can model most data sets well. However, if the wrong

functional form is chosen a priori, this will result in larger bias as compared to competitive models (Fan

and Yao, 2003). Parametric linear models, as a type of parametric regression, are frequently used to

describe the association between the dependent variable and explanatory variables. They require the

estimation of a finite number of parameters. Furthermore, parametric linear dynamic models which are

based on a atheoretical or data-driven approach will be employed.

Why is nonparametric regression important? Over the last decade, increasing attention has been

devoted to nonparametric regression as a new technique for estimation and forecasting in different

sciences including economics. Nonparametric regression analysis relaxes the assumption of the linearity

in the regression analysis and enables one to explore the data more flexibly. However, in high dimensions

variance of the estimates rapidly increases, called as ―curse of dimensionality‖, due to the sparseness of

data. To overcome this problem, some nonparametric methods have been proposed such as additive

model (AM), multiple adaptive regression splines (MARS), projection-pursuit regression (PPR) and

neural networks (NN).

This study compares parametric and nonparametric methods. The agents are assumed to use an optimal

parametric autoregressive moving average (ARMA) model or nonparametric models for forecasting. In

fact, out-of-sample estimates of inflation generated by the parametric and nonparametric models will be

compared.


42

The paper is divided into four sections. Following introduction in section 1 we discuss parametric and

nonparametric methods in section 2. Section 3 reports the empirical results of this study. Finally, section 4

concludes.

2. Statistical predictors

2.1 Parametric prediction models

A brief review of ARIMA modeling is presented (Chatfield, 2000). Autoregressive integrated moving

average (ARIMA) or (Box-Jenkins) models are the basis of many fundamental ideas in time-series

analysis. In order to analyze a time series, it must be assumed that the structure of the stochastic process

which generates the observations is essentially invariant through time. The important assumption is that

of stationarity, which requires the process to be in a particular state of ‗statistical equilibrium‘.

An autoregressive moving average process: ARMA (p,q) is obtained by combining p autoregressive

terms and q moving average terms and can be written as

( ) ( )t tL X L

with AR polynomial 2

1 2( ) 1 ... p

pL L L L and

MA polynomial 2

1 2( ) 1 ... q

qL L L L . An ARMA model is stationary provided that the

roots of ( ) 0L lie outside the unite circle. This process is invertible if the roots of ( ) 0L lie

outside the unite circle. Low order ARMA models are of much interest since many real data sets are well

approximated by them rather than by a pure AR or pure MA model. In general, ARMA models need

fewer parameters to describe the process.

In most cases economic time series are non-stationary and therefore we cannot apply ARMA models

directly. One possible way to remove the problem is to take difference so as to make them stationary.

Non-stationary series often become stationary after taking first difference ( 1 (1 )t t tX X L X ). If

the original time series is differenced d times, then the model is said to be an ARIMA (p, d, q) where ‗I‘

stands for integrated and d denotes the number of differences taken. Such a model is described by

( )(1 ) ( )d

t tL L X L

The combined AR operator is now ( )(1 )dL L . The polynomials ( )z and ( )z have all their

roots outside the unit circle. The model is called integrated of order d and the process is said to have d

unit roots.


43

2.2 Nonparametric prediction models

The general nonparametric regression model (Fox, 2000) is as follows:

'( )i i iy f X

1 2( , ,..., )i i ik if x x x 2~ (0, )i NID

The regression function is (.)f unspecified in advance and is estimated directly. In fact, there is no

parameter to estimate. It is implicitly assumed that (.)f is a smooth, continuous function. If there is only

one predictor ( )i i iy f x then it is called ‗scatter plot smoothing‘ because it traces a smooth

curve through a scatter plot of y against x.

There are several smoothers such as local averaging, kernel smoother, Weighted Scatterplot Smoothing

(lowess) and spline Smoother that fit a linear or polynomial regression to the data points in the vicinity of

x and then use the smoothed value as the predicted value at x (Fox, 2005).

2.2.1 Additive model (AM)

Nonparametric regression based on kernel and smoothing spline estimates in high dimensions faces two

problems, that is, the curse of dimensionality and interpretability. Stone (1985) proposed the additive

model to overcome these problems. In this model, since each of the individual additive terms is estimated

using a univariate smoother, the curse of dimensionality is avoided. Furthermore, while the nonparametric

form makes the model more flexible, the additivity allows us to interpret the estimates of the individual

terms. Hastie and Tibshirani (1990) proposed generalized additive models for a wide range of distribution

families. These models allow the response variable distribution to be any member of the exponential

family of distributions. We can apply additive models to Gaussian response data, logistic regression

models for binary data, and loglinear or log-additive models for Poisson count data.

A generalized additive model has the form

1 1 2 2( ) ( ) ... ( )p pY f X f X f X

where (.)jf are unspecified smooth (partial-regression)functions. We fit each function using a

scatterplot smoother and provide an algorithm for simultaneously estimating all j functions. Here an


44

additive model is applied to a logistic regression model as a generalized additive model. Consider a

logistic regression model for binary data. The mean of the binary response ( ) Pr( 1 )X Y X is

related to the explanatory variables via a linear regression model and the logit link functions:

1 1

( )log ...

1 ( )j j

XX X

X

The additive logistic model replaces each linear term by a more general functional form

1 1

( )log ( ) ... ( )

1 ( )j j

Xf X f X

X

In general, the conditional mean ( )X of a response Y is related to an additive function of the

explanatory variables via a link function g:

[ ( )]g X 1 1( ) ... ( )j jf X f X

The functions jf are estimated in a flexible way using the backfitting algorithm. This algorithm fits an

additive model using regression-type fitting mechanisms.

Consider the jth set of partial residuals

( ( ))j k k

k j

Y f X

Then ( ) ( )j j j jE X f X . This observation provides a way for estimating each (.)jf given

estimates ˆ (.),jf i j for all the others. The iterative process is called the backfitting algorithm

(Friedman and Stuetzle, 1981).

2.2.2 Multiple Adaptive Regression Splines (MARS)

This approach (Friedman (1991), Hastie et al (2001)) fits a weighted sum of multivariate spline basis

functions and is well suited for high-dimensional problems, where the curse of dimensionality would

likely create problems for other methods. The MARS uses the basis functions ( )x t and ( )t x in

the following way

( )x t x-t if x>t

0 otherwise


45

( )t x t-x if x<t

0 otherwise

The ―+‖ denotes positive part. Each function is piecewise linear or linear spline, with a knot at value t.

These functions are called a reflected pair for each input jX with knots at each observed value

ijx of that

input, and then the set of basis functions is defined as

( ) ,( )j jC X t t X

The strategy for model-building is a forward stepwise linear regression using functions from the set C and

their products. Thus the MARS model has the form

0

1

( ) ( )M

m m

m

f X h X

where the coefficients m are estimated by minimizing the residual sum-of-squares and each ( )mh X is

a function in C. By setting 0( ) 1h X (constant function), the other multivariate splines are products of

univariate spline basis functions:

( , ) ,

1

( ) ( )mk

m i s m s m

s

h X h x t

1 m k

where the subscript ( , )i s m means a particular explanatory variable, and the basis spline in that variable

has a knot at ,s mt . mk is the level of interactions between ( , )i s m variables and the values of

m , 1 2, ,..., mk k k , are the knot sets. Explanatory variables in the model can be linearly or non-linearly

and are chosen for inclusion adaptively from the data. The model will be additive if the order of

interactions equals one ( 1k ).

A backward deletion procedure is used in the MARS model to prevent overfitting. The basis functions

which have little contributions to the accuracy of fit are deleted from the model at each stage, producing

an estimated best model ˆ ( )f of each size λ. We can apply a generalized cross-validation criterion to

estimate the optimal value of λ in the following way

2

1

2

ˆ( ( ))( )

(1 ( ) / )

N

i iiy f x

GCVM N


46

The value of M (λ) includes the number of basis functions and the number of parameters used in

selecting the optimal positions of the knots.

2.2.3 Projection-Pursuit Regression (PPR)

If the explanatory vector X is of high dimension, the additive model does not cover the effect of

interactions between the independent variables. Projection-Pursuit Regression (Friedman and Stuetzle,

1981) applies an additive model to projected variables, projecting predictor variables X in M, as follows

1

( )M

T

m m

m

Y g w X

2( ) 0,var( )E

where mw are unit p-vectors of unknown parameters. The functions mg are unspecified and estimated

along with the direction mw using some flexible smoothing method. The PPR model employs the

backfitting algorithm and Gauss-Newton search to fit Y.

The functions ( )T

m mg w X are called the ridge functions because they are constant in all but one

direction. They vary only in the direction defined by the vector mw . The scalar variable ( )T

m mV w X is

the projection X onto the unit vector mw . The aim is to find mw to yield the best fit to the data. If M is

chosen large enough then the PPR model can approximate arbitrary continuous function of X (Diaconis

and Shahshahani, 1984). However, in this case there is a problem of interpretation of the fitted model

since each input enters into the model in a complex and multifaceted way (Hastie et al, 2001). As a result,

the PPR model is a good option only for forecasting.

To fit a PPR model, we need to minimize the error function

2

1 1

[ ( )]N M

T

i m m i

i m

E y g w x

over functions mg and direction vectors mw . The g and w are estimated by iteration. Imposing

complexity constraints on the mg is needed to avoid overfitting. There are two stages to estimate g and w.

First, to obtain an estimate of g, suppose there is one term (M=1). We can form the derived variables

T

i iv w x for any value of w. This implies a one-dimensional smoothing problem and any scatterplot

smoother such as smoothing spline can be used to estimate g. Second, we minimize E over w for any


47

value of g. These two steps are iterated until convergence. If there is more than one term in the PPR

model then the model is built in a forward stage-wise manner that at each stage a pair ( , )m mw g is added.

2.2.4 Neural Networks

Many recent methods to developing data-driven models have been inspired by the learning abilities of

biological systems. For instance, most adults drive a car without knowledge of the underlying laws of

physics and humans as well as animals can recognize patterns for the tasks such as face, voice or smell

recognition. They learn them only through data-driven interaction with the environment. The field of

pattern recognition considers such abilities and tries to build artificial pattern recognition systems that can

imitate human brain. The interest to such systems led to extensive studies about neural networks in the

mid-1980s (Cherkassky and Mulier, 2007).

Stochastic approximation (or gradient descent) is one of the basic nonlinear optimization strategies

commonly used in statistical and neural network methods. The gradient-descent methods are based on the

first –order Taylor expansion of a risk functional

( ) ( , ( , )) ( , )R w L y f x w p x y dxdy (1)

where ( )R w is the risk functional, ( , ( , ))L y f x w the loss function and ( , )p x y the joint probability

density function. For regression, a common loss function is the squared error

2( , ( , )) ( ( , ))L y f x w y f x w (2)

Learning is then defined as the process of estimating the function 0( , )f x w that minimizes the risk

functional

2( ) ( ( , )) ( , )R w y f x w p x y dxdy

using only the training data. Although the gradient-descent methods are computationally rather slow, their

simplicity has made them popular in neural networks.

For the task of regression, it can be shown that the empirical risk is as follows

2

1 1

1 1( ) ( , , ) ( ( , ))

n n

emp i i i i

i i

R w L x y w y f x wn n

(3)

This function is to be minimized with respect to the vector of parameters w . Here the approximating

function is a linear combination of fixed basis functions


48

1

ˆ ( , ) ( )m

j j

j

y f x w w g x

(4)

For some (fixed) m . The updating equation for minimizing ( )empR w with respect to w is

( 1) ( ) ( ( ), ( ), )kw k w k L x k y k ww

(5)

where ( )x k and ( )y k are the sequences of input and output data samples presented at iteration step k .

The gradient above can be written as

ˆ

ˆ( , , ) 2( ) ( )ˆ

j

j j

L yL x y w y y g x

w y w

(6)

Now the local minimum of the empirical risk can be computed using the gradient (6). Let us start with

some initial values (0)w . The stochastic approximation method for parameter updating during each

presentation of kth training sample is as:

Step 1: Forward pass computations.

( ) ( ( ))j jz k g x k , 1,..,m (7)

1

ˆ( ) ( ) ( )m

j j

j

y k w k z k

. (8)

Step 2: Backward pass computations.

ˆ( ) ( ) ( )k y k y k (9)

( 1) ( ) ( ) ( )j j k jw k w k k z k (10)

where the learning rate k is a small positive number decreasing with k . In the forward pass, the output

of the approximating function is computed whereas in the backward pass, the error term (9), which is

called ―delta‖ in neural network literature, for the presented sample is calculated and utilized to modify

the parameters. Since it is possible to propagate the error signals from the output layer to the input layer,

the procedure is called error backpropagation. The parameter updating equation (10), known as delta

rule, updates parameters with every training sample.

It should be noted that a neural network model can be identified as a pursuit projection regression

(PPR) model (Hastie et al, 2001). In fact, the neural network with one hidden layer has the exactly the


49

same form as the PPR model. The only difference is that the PPR model uses nonparametric functions

( ( )mg v ) while the neural network employs a simpler function which is based on a sigmoid transfer

function.

3 Empirical Results

3.1 Background

The Iranian economy is oil-reliant so that any change in oil price can directly affect all economic sectors.

It should be noted that Iran ranks second in the world in natural gas reserves and third in oil reserves. It is

also OPEC‘s second largest oil exporter. The economic sectors include the services sector, industry (oil,

mining and manufacturing) and the agricultural sector. During the recent decades, the services sector has

contributed the largest percentage of the GNP, followed by industry and agricultural sectors. The share of

the services sector was 51 percent of GNP in 2003 while those of the industry and agricultural sectors

were 35.1 and 13.9 percent of GNP respectively.

The Iranian economy has experienced a relatively high inflation averaging about 15 percent per year.

The inflation rate has even been more than 21 percent on average after the 1973 oil crisis. Furthermore,

there is a general agreement over the underestimating of the measured inflation due to price controls and

government subsidies.

The empirical evidence implies that inflation is persistent in Iran. In other words, the effects of a shock

to inflation result in a changed level of inflation for an extended period. To see this, the inflation rate is

regressed on its own lags.

1 20.44 0.49t t trgnpi rgnpi rgnpi

(t-value) (3.15) (3.42)

As the sum of coefficients on lagged inflation (0.93) is close to one, shocks to inflation have long-lasting

effects on inflation.

3.2 Results

This study compares the performance of parametric and nonparametric regressions in the Iranian

economy over the period 1959-2003. Different models will be applied to the inflation series and then the

predicted values will be evaluated. In fact, out-of-sample estimates of inflation generated by the

parametric and nonparametric models will be compared.


50

The empirical results of the Augmented Dicky-Fuller test indicated that all the variables employed are

stationary, and thus this issue helps us to avoid the problem of the spurious relationships (see Appendix

for the data source and definitions).

It is assumed agents use the lagged values of inflation and real GNP growth to forecast inflation. Figure

1.a and Figure 1.b demonstrate a local linear regression fit of inflation rate (rgnpi), defined as the rate of

change of GNP deflator, on the lagged inflation rate (rgnpilag1) and lagged real GNP growth rate

(rgnplag1) using the Lowess function for a variety of spans. If the fitted regression looks too rough, then

we try to increase the span but if it looks smooth, then we will examine whether the span can be

decreased without making the fit too rough (Fox, 2005). The objective is to find the smallest value of

span (s) that provides a smooth fit. A trial and error procedure suggests that the span s=0.5 is suitable and

it seems to provide a reasonable compromise between smoothness and fidelity to the data.

0 10 20 30 40

010

2030

40

s = 0.1

rgnpilag1

rgnpi

0 10 20 30 40

010

2030

40

s = 0.3

rgnpilag1

rgnpi

0 10 20 30 40

010

2030

40

s = 0.5

rgnpilag1

rgnpi

0 10 20 30 40

010

2030

40

s = 0.7

rgnpilag1

rgnpi

0 10 20 30 40

010

2030

40

s = 0.9

rgnpilag1

rgnpi

Figure 1.a: Local linear regression fit of inflation rate (rgnpi) on the lagged inflation rate

(rgnpilag1) using Lowess function for a variety of spans


51

-20 0 20 40

010

2030

40s = 0.1

rgnplag1

rgnpi

-20 0 20 40

010

2030

40

s = 0.3

rgnplag1

rgnpi

-20 0 20 40

010

2030

40

s = 0.5

rgnplag1

rgnpi

-20 0 20 40

010

2030

40

s = 0.7

rgnplag1

rgnpi

-20 0 20 40

010

2030

40

s = 0.9

rgnplag1

rgnpi

Figure 1.b: Local linear regression fit of inflation rate (rgnpi) on the lagged real GNP growth rate

(rgnplag1) using Lowess function for a variety of spans

A test of nonlinearity is performed by contrasting the nonparametric regression model with the linear

simple-regression model. We regress inflation on rgnpilag1 (Case 1) and rgnplag1 (Case2) separately. As

a linear model is a special case of a nonlinear model, two models are nested. An F-test is formulated by

comparing alternative nested models. The results is as follows

Linear model vs Nonparametric regression (Case1): F=8.78(p-value=0.008)

Linear model vs Nonparametric regression (Case2): F=6.48(p-value=0.04)

It is obvious that the relationship between the dependent variable and explanatory variables are

significantly nonlinear. It should be noted that the variable rgnplags1 will not be significant if a linear

regression is considered.

Since nonparametric regression based on smoothing functions faces the curse of dimensionality, the

additive model has been proposed (Stone, 1985). The result of fitting an additive model using Lowess

smoother can be written as

(rgnpilag1) (rgnplag1)rgnpi S S

F (4.13) (4.43)

p-value (0.01) (0.03)

where S denotes the Lowess smoother function. It is obvious that both smoothers are significantly

meaningful. Furthermore, the linear model is nested by the additive model with p-value being equal to


52

0.01. Figure 2 illustrates plots of the estimated partial-regression functions for the additive regression

model. The points in each graph are partial residuals for the corresponding explanatory variable,

removing the effect of the other explanatory variable. The broken lines demonstrate pointwise 95-percent

confidence envelopes for the partial fits.

-20 0 20 40

-30-20

-100

1020

rgnplag1

rgnpi

0 10 20 30 40

-20-10

010

20rgnpilag1

rgnpi

Figure 2: Plots of the estimated partial-regression functions for the additive regression of the

inflation rate (rgnpi) on the lagged real GNP growth rate (rgnplag1) and the lagged inflation rate

(rgnpilag1)

We use MARS model to fit a piecewise linear model with additive terms to the data. The results indicate

that pairwise interaction terms (by degree=2 and degree=3) make little difference to the effectiveness of

explanatory variables.

The additive model seems to be too flexible and it is not able to cover the effect of interactions between

explanatory variables. To remove this problem, the Projection- Pursuit Regression model has been

proposed. The PPR model applies an additive model to projected variables (Friedman and Stuetzle, 1981).

Figure 3 shows plots of the ridge functions for the three two-term projection pursuit regressions fitted to

the data.


53

0 20 40-1

.00.5

2.0term 1

-40 -20 0

-2.0

-0.5

0.5

term 2

0 20 40

-10

12

term 1

-40 -20 0

-2-1

01

term 2

0 20 40

-10

12

term 1

-40 -20 0

-2-1

01

term 2

Figure 3: Plots of the ridge regression for three two-term projection pursuit regressions fitted to the

data.

Although MARS model is an accurate method, it is sensitive to concurvity. Neural networks do not share

this problem and are better able to predict in this situation. In fact, as neural networks are nonlinear

projection methods and tend to overparameterize, they are not subject to concurvity (Hastie et al, 2001).

We examined several neural network models and the results indicate that a 2-3-1 network has a better

performance.

The Wilcoxon test has been used to compare the squared error of a neural network model and a rival

model. In fact, out of sample forecasting has been employed to evaluate different models. The

performance of PPR and additive models appears to differ from the neural network model, implying that

the NN model can significantly outperform the PPR model and it has a better performance than the

additive model, but not by much. Furthermore, the NN model is significantly better than the linear model

(LM). However, there is no possibility that the NN model can outperform the MARS model (see the

following table).

Out of Sample Forecasting based on Wilcoxon test

p-value

PPR vs. NN 0.01

LM vs. NN 0.00

MARS vs. NN 1

AM vs. NN 0.38


54

Now we compare the NN model to the parametric autoregressive moving average (ARMA) model for

inflation. A collection of ARMA (p, q) models, for different orders of p and q, have been estimated and

then the best model was selected according to the Akaike information criterion (AIC) and the Schwarz

information criterion (SIC). Examining the ARMA models for the inflation series indicated that ARMA

(1, 1) is the best-fitting model.

Diagnostic checking, the correlogram (autocorrelations) of inflation from the regression tests was

examined and confirmed the results. The last 5 observations are used for comparing the ex post forecasts

generated by the two models. Furthermore, the Root Mean Square Error (RMSE) is used to evaluate ex

post forecasts. We apply the feed-forward backpropagation as learning algorithm where only lagged

inflation is used as input. The results imply that the forecasting performance of the NN model

(RMSE=0.05) is significantly better than that of the ARMA model (RMSE=11.73). It should be noted

that the results from the inflation lags exceeding one and more number of hidden layers are almost the

same. Therefore, the NN model outperforms the parametric ARMA model.

3. Conclusions

This study examined the forecast performance of parametric and nonparametric models. The agents were

assumed to use a parametric autoregressive moving average (ARMA) model or nonparametric models to

forecast inflation. The results revealed that the neural network model yields better estimates of inflation

rate than do parametric autoregressive moving average (ARMA) and linear models. Comparing to the

nonparametric alternatives, the results of Wilcoxon tests demonstrated that the forecasting performance of

Projection-Pursuit Regression and Additive models appeared to differ from the Neural Network model,

implying that the Neural Network model can significantly outperform Projection-Pursuit Regression and

Additive models. However, there was no possibility that the Neural Network model can outperform the

Multiple Adaptive Regression Splines model.

References

Barucci E and Landi L(1998), Nonlinear Versus Linear Devices: A Procedural Perspective,

Computational Economics, Vol. 12, pp. 171-191

Chatfield C (2000), Time-Series Forecasting, Chapman & Hall/CRC

Cherkassky, V and Mulier F (2007), Learning from Data: Concepts, Theory, and Methods, John Wiley &

Sons

http://www.infibeam.com/Books/search?author=Vladimir%20Cherkassky

http://www.infibeam.com/Books/search?author=Filip%20Mulier


55

Diaconis P and Shahshahani M (1984), On nonlinear functions of linear combinations, SIAM Journal of

Scientific and Statistical Computing, Vol. 5, No. 1, pp. 175-191

Fan, J, Yao, Q (2003), Nonlinear Time Series: Nonparametric and Parametric Methods, Springer-Verlag:

Berlin Heidelberg and New York.

Fox, J (2000), Multivariate Generalized Nonparametric Regression, Sage Publications.

Fox, J (2005), Introduction to Nonparametric Regression, McMaster University, Canada.

Friedman, JH, Stuetzle, W (1981), Projection Pursuit Regression, Journal of the American Statistical

Association, Vol. 76, No. 376, pp. 817-823.

Friedman, HF (1991), Multivariate Adaptive Regression Splines, The Annals of Statistics, Vol. 19, No. 1,

pp. 1-67.

Hastie, TJ, Tibshirani, RJ (1990), Generalized Additive Models, Chapman & Hall.

Hastie, TJ, Tibshirani, R, Friedman, J (2001), The Elements of Statistical Learning: Data Mining,

Inference, and Prediction, Springer-Verlag: Berlin Heidelberg and New York.

Stone, C.J. (1985), Additive Regression and Other Nonparametric Models, Annals of Statistics, 13, 689-

705.

Appendix: Data source and definitions

The data are annually for the period 1959-2003 and are collected from the Central Bank of Iran.

gnp = real GNP (at the constant 1997 prices)

gnpi = GNP deflator (1997=100)


56

SENSITIVITY ANALYSIS OF THE MEAN VARIANCE MODEL AND ITS

PRACTICAL APPLICABILITY

Kim, Sang-Hoon

Montclair State University

Kim, Margaret H.

Arizona State University

Introduction If the first two moments (expected value and variance) of a random variable are known, and if

the probability distribution is normal, complete probability distribution of the random variable

can be examined such as the probability that a random variable X is greater than or equal to x

where x is any real number (P(X x)). Furthermore, even when the probability distribution is

unknown, it is possible to evaluate the probability distribution of the random variable based on

the following Tchebycheff‘s inequality:

1

P[E(X) + hX X E(X) - hX ] — (1)

h²

where E(X) = expected value, X = standard deviation, and h = any real number. It should be

noted that the Tchebycheff‘s inequality is useful only when h > 1. Using equation (1) and

assuming that the tail area of the probability distribution is symmetric, that is: P(X E(X) - hX)

= P(X ≥ E(X) + hX), P(X ≥ x ) can be derived as:

P(X ≥ x ) = 1- (1/2)(1/((E(X) - x ) / X)2) (2)

Note that h = (E(X) - x ) /X.

Consequently, if the first two moments of a project‘s NPV (net present value) can be

estimated, it is possible to evaluate the risk aspect of the project. However, it is very difficult to

estimate the Var(NPV) (variance of the NPV) primarily due to estimate difficulty of all possible

inter-temporal correlation coefficients between cash flows of different periods. Many authors

(Bonini, Bussey, Stevens, Fuller, Kim, Hillier, Elsaid, Magee, Wagle, etc.) published numerous

papers [1][2][3][4][5][6][7][9][10][12] associated with the estimation of the Var(NPV). Most of

these methods, however, have difficulties because the assumptions are not realistic or the

information required is not easily available or in certain cases, the information derived is not

useful. For example, the upper and lower bounds of Var(NPV) proposed by Fuller and Kim [3]

are in certain cases so large that the bounds are not useful in deriving meaningful probabilistic

information.

As shown by Hillier [5], the variance of the NPV can be written as:

n n 1

Var(NPV) = ————— rpqpq (3)

p=1 q=1 (1+rf )p+q


57

where rpq = the inter-temporal correlation coefficient between cash flows of pth

and qth

periods, n

= the project‘s useful life, and p (q) = the standard deviation of the periodic cash flow for

period p(q). As can be seen from equation (3), estimation of reliable Var(NPV) depends on

reliable estimation of standard deviations of periodic cash flows (p) and the inter-temporal

correlation coefficients(rpq). These two variables (p and rpq) are affected by cash flow

components such as sales revenue, tax, and various costs which are essential information in

estimating periodic cash flows.

S.H. Kim, E.H. Elsaid, and D.J. Kim [8] derived the following equations for the expected

periodic cash flows (E(Ct)), the variance of the periodic cash flows (Var(Ct)), and the inter-

temporal correlation coefficients (rpq) based on cash flow components:

Cash flows of each period (Ct) are estimated as follows:

k m

Ct = At ( Cti - Cti ) + DtTt for t=0,1,..n (4)

i=1 i=k+1

where the subscript t represents tth

period, At = (1 - Tt ) = the corporate after-tax earnings rate, Cti

= ith

component cash flow which represents cash inflow when i k and cash outflow when i >

k, m = total number of component cash flows, k = total number of component cash inflows, and

Dt = depreciation. The component cash flows (Cti) include items such as sales revenue, any cash

saving, service revenue, royalties, material cost, wages, advertising cost, tax, and so forth.

Then, E(Ct) and Var(Ct) are derived as:

k m E(Ct) = At[( E(Cti ) - E(Cti )) + DtTt for t= 1,..n (5)

i=1 i=k+1

m k k k m m m

Var(Ct) = At²( ²ti + 2 ijtitj - 2 ijtitj + 2 ijtitj) for t= 1,..n (6)

i=1 i=1 j=i+1 i=1 j=k+1 i=k+1 j=i+1

where E(Cti) = the expected ith

component cash flow of the tth

period, ij = the correlation

coefficient between the ith

and the jth

component cash flows, ti (tj) = the standard deviation of

the ith

(jth

) component cash flow for period t, and other notations are the same as defined before.

Then, the inter-temporal correlation coefficient (rpq) between pth and qth periods can be

derived as:

1 m m k m k m

rpq = ——{ ApAq[ Eij - 2 (Eij+Eji )]+ ApDqTq[ E(Cpi ) - E(Cpi)]+E(Cq )[DpTp - E(Cp )]} (7)

pq i=1 j=1 i=1 j=k+1 i=1 i=k+1

where Eij = piqjpiqj + E(Cpi )E(Cqj ), piqj = the inter-temporal correlation coefficient between

ith

cash flow component of pth

period and jth

cash flow component of qth

period, and other


58

notations are the same as defined before except that the subscripts p and q are used for periods p

and q.

According to equation (7), the derivation of the inter-temporal correlation coefficients (rpq)

requires estimation of a significant number of piqjs (the inter-temporal correlation coefficient

between ith

cash flow component of pth

period and jth

cash flow component of qth

period). Kim et

al. [8], using estimates of cash flow components provided by PERT method [11], showed how

rpq‗s can be estimated. A critical assumption made for the estimation of piqjs is that the

correlation coefficient between cash flow components (pq) decay away over the project life such

that piqj =

q-pij (8)

where q p and represents decay rate which can range: 0 1. The authors point out that

the decay rate may not be constant and will be impossible to be accurately estimated. However,

they state that equation (7) makes it possible to perform sensitivity analysis to observe the impact

of a possible range of the decay rate on the rpq, Var(NPV), and probability distribution of the

project‘s NPV.

The estimation method proposed by Kim et al. [8] can provide very useful information because

all estimations are based on cash flow components. Therefore, it is possible to evaluate the

impacts of changes in any cash flow components on the profit and risk aspect of the project. For

example, it is possible to evaluate an impact of an increase or decrease in corporate tax rates (or

an impact of an accelerated depreciation) on the profit and risk aspects of a typical corporate

investment project. This is an important information to the federal, local, and foreign

governments who often provide low tax rates (or accelerated depreciation) to induce domestic or

foreign corporate investments. Obviously, this is also useful information to the company who is

considering an investment in the region where a certain investment incentives are provided. It

should be noted that companies can also evaluate the impact of changes in various cash flow

components such as price increase (or decrease) in raw material and increase (or decrease) in

labor costs.

The proposed method appears to be practically feasible to derive a reliable estimate Var(NPV)

because the main information required is the cash flow components which are essential

information for the estimation of the periodic cash flows. It should be noted that without the

periodic cash flows, it is not possible to find the NPV and so, not possible to evaluate the

investment project. Therefore, once cash flow components) are projected, it is possible to derive

Var(NPV). The question of whether the proposed method can provide reliable estimate of

Var(NPV) and reliable return and risk aspect of a project depends reliability of the assumptions

made associated with estimation of the inter-temporal correlation coefficients.

A possible way to examine the reliability of the proposed method is to conduct a sensitivity

analysis. For example, if low tax rates are provided by the government, the reliable result should

be that it should increase the profitability of the project and also increase the probability that the

NPV is greater than zero(P(NPV ≥ 0).


59

The objective of the paper is to examine reliability of the proposed method based on a series of

sensitivity analyses. The sensitivity analysis will be conducted in terms of changes in corporate

tax rate, accelerated depreciation, level of interest rate, and other cash flow components. The

effectiveness of tax incentive (low tax rate) and accelerated depreciation is expected to be

different under different interest rates. The results derived from the sensitivity analyses will be

carefully examined to find whether they are consistent with expectation.

References

[1] Bonini, C.P. (1975). Comments on formulating correlated cash flow streams. The

Engineering Economist, Vol. 20, No.2, 209-214.

[2] Bussey, L.E. & Stevens, G.T. Jr. (1972). Formulating correlated cash flow streams. The

Engineering Economist, Vol. 18, No. 1, 1-30.

[3] Fuller, R.J., and Kim, S.H. (1980). Inter-temporal correlation of cash flows and the risk of

multi-period investment projects. Journal of Financial and Quantitative Analysis, Vol. 15,

No. 5, 1149-1162.

[4] Hertz, D.B. (1964, January-February) Risk Analysis in Capital Investment. Harvard

Business Review, Vol. 42, 95-106.

[5] Hillier, F. S. (1963, April) The derivation of probabilistic information for the evaluation of

risky investments", Management Science, Vol. 9, 443-457.

[6] Hillier, F.S. (1971). The evaluation of risky interrelated investments", Amsterdam: North-

Holland Publishing Company.

[7] Kim, S.H., & Elsaid, E.H. (1988). Estimation of periodic standard deviations under the PERT

and derivation of probabilistic information. Journal of Business Finance and Accounting,

Vol.15, No. 4, pp. 557-571.

[8] Kim, S.H., Elsaid, E.H. & Kim, D.J. (1999). Derivation of an inter-temporal correlation

coefficient model based on cash flow components and probabilistic evaluation of a project‘s

NPV", The Engineering Economist, Vol. 44, No. 3, 276-294.

[9] Magee, J.F. (1964, July-August). Decision trees for decision making. Harvard Business

Review. Vol.42, 126-138.

[10] Magee, J.F. (1864, September-October). How to use decision trees in capital investment",

Harvard Business Review, Vol. 42, 79-96.

[11] Malcolm, D. G., Roseboom, J.J., Clark, C.E., & Fazar, W. (1959, September-October).

Application of technique for research and development program evaluation, Operations

Research, 646-669.

[12] Wagle, B. (1967, March). A statistical analysis of risk in investment projects", Operational

Research Quarterly, Vol.18, 13-33.


60

SUSTAINABILITY, INTERNET MARKETING AND ITS IMPACT ON

GLOBAL PORTS Laric, Michael V.

Lynagh, Peter M.

Abel, Laura

Libonate, David

Logsdail, Jeffrey

University of Baltimore

ABSTRACT

Sustainability has become an increasingly vital issue, and as such, has important implications for

all those involved in domestic and global Supply-Chain Management (SCM). Today‘s decisions

have to be made with a keen eye on their "green" implications and consequences. The focus in

this paper is on how Integrated Marketing Communications (IMC) is used to promote awareness

of this new ―green‖ environment in the maritime shipping industry. We particularly examine

how the newest IMC component, Internet Marketing (IM), is used by major ports around the

globe to communicate actions directed at enhancing sustainability to all members and

stakeholders of SCM. Ports are corporate citizens of their locale, (both city and country) while

their main users, ships, often include foreign operators and owners. Ports must encourage SCM

members and clients to be more eco-friendly, while assuring their stakeholders of the tangible

results of these efforts. IMC efforts of nine ports around the world are analyzed to determine

how they promote sustainability, to their stakeholders.

INTRODUCTION

Sustainability can be defined in different ways. Jaquelyn Ottman sees it as meeting the needs of

the present without compromising the ability of future generations to meet their needs and

survive. (Ottman, Pg. 87) Philip Kotler and Gary Armstrong view sustainability from a

marketer‘s eyes and see it as ―…meeting the needs of consumers and businesses while also

preserving or enhancing the ability of future generations to meet their needs.” (Kotler and

Armstrong, Pg. 584)

This paper first provides an overview of the main components of contemporary marketing,

moves on to expand upon Integrated Marketing Communications (IMC) and its youngest tool

Internet Marketing (IM). We then look at the meaning of sustainability, from a macro view then

move on to examine how several global ports promote their efforts in the area of sustainability,

and how they encourage those serving and being served by the port to adhere to practices that

encourage sustainability. Ports are very cognizant of the need to "Go Green" and strongly

encourage their users to follow suit.

CONTEMPORARY MARKETING

Marketing used to be thought of as being synonymous with sales. To be a good marketer,

according to the "old school," one had to sell, sell, sell. Harold Hill, The Music Man, was the

epitome of a successful marketer (Willison). There was a certain sleaze aspect to this sales

approach, so marketing began to shift its focus from selling what salesperson had to sell to

finding out what the consumer wanted, and then delivering the products and services that

satisfied that desire. Thus was born the Marketing Concept. {Kotler and Armstrong, Pg.10}


61

Today effective and creative marketing requires that the entire company espouse the marketing concept.

Managers of other departments in the company should understand and apply the marketing concept. The advent

of the Internet, increasing competition and globalization, and growing awareness of societal concerns, for the

environment, creates new challenges that require marketers to adjust to these changes. Marketers

must manage demand, stakeholders, and plan and execute appropriate marketing strategies which

generate value by making use of IMC, SCM, and New Product Development (NPD).

Philip Kotler looks at marketing as a managerial function defined as ―The process by which

companies create value for customers and build strong customer relationships in order to

capture value from customers in return.‖ (Kotler & Keller, 5) It deals with selecting, winning,

retaining, and growing customers (the target market) then using a marketing mix consisting of

product and services, pricing, promotion and placement of their products and services. Marketers

manage demand‘s level, timing, and composition – all of which must be integrated. Integrated

marketing calls for more than developing a product, making it accessible to customers,

determining the right price, and deciding on advertising and sales promotion. Companies must

communicate with customers, but also with stakeholders, and with other publics.

Managing the 4-P's in the 21st century is exciting and challenging. Certainly, part of that

challenge relates to creating long term relationships with many consumers who have rarely if

ever used anything but a cell phone. Strategies in IMC must be planned in an Interactive Era.

This new and exciting era is controlled by those in the target market who are, in some ways,

masters of their own fate. If nothing else, they are active participants in the IMC process. (Lane,

12)

INTEGRATED MARKETING COMMUNICATIONS (IMC)

Managing and coordinating the company‘s communications process across multiple media and

channels is called IMC. IMC consists of a variety of communication modes, all of which must

send a coherent and coordinated message to the company‘s stakeholders and customers. IMC

stipulates that all must relay a comprehensive plan that uses a variety of communications

disciplines to provide consistency and impact through integration of discrete messages. In

deciding on the IMC mix, the distinct advantages and costs of each communication tool must be

balanced with the company‘s resources and marketing strategy.

Two broad categories are mass communications and direct (to consumer) communications. Mass

communications includes advertising, sales promotion, public relations, publicity, and special

events like tradeshows. Direct (and interactive, one on one) communications includes IM; word-

of-mouth marketing; and personal selling and a variety of direct marketing techniques. It is an

interactive marketing system that uses one or more media to affect a measurable response or

transaction at any location. Direct marketing‘s newest component, electronic marketing, is

showing explosive growth. Major channels for direct marketing include face-to-face selling, direct mail, catalog marketing,

telemarketing, interactive TV, kiosks, Web sites, and mobile devices. E-mail is an important

part of direct. Spam still creates problems, but steps can be taken to assuage that problem.

IMC and changing technology at the dawn of the 21st century Consumers today live in a

world of iPods, Wii‘s, YouTube, Google and myriad other electronic toys available to those of

all ages. The hype that surrounded the June 2007 introduction by Apple of its iPhone has been a

PR person‘s dream come true. Whether this product will be a hit or a miss remains to be seen.

Some like Jonah Bloom feel that ―Irrational consumer lust will make the iPhone a big success.‖

(Bloom, Pg.19) Others like Al Ries opine that this product will fail because ―In the high-tech


62

world, deliverance devices (iPod) have been spectacular successes. But convergence devices

(iPhone), for the most part, have been failures.‖ (Ries, Pg. 19) Time will tell who is right, but the

important thing to grasp is the focus on new technology in today‘s global world. The iPhone has

not been promoted like Ma Bell hyped her phones. It will, however, have an impact on IMC just

as the old Bell System products did in the last century.

The aforementioned technological advances have minimized the size of the globe for marketers

and other business professionals. Multinational and global firms are common, business people

traverse the globe on a regular basis, and information about products and services are available

anytime, anywhere. Events that take place around the world are instantly broadcast and made

available to a world-wide audience. The exciting world of Internet Marketing (IM) If today‘s marketing gurus do not keep pace with the

changing behavioral patterns of many consumers they will not be around very long. This paper‘s focus on

IMC and how it functions in today‘s business environment directs discussion to the exciting and relatively

new IMC tools known as IM. It is a must in todays enviornment as it is so vital in reaching so many

target markets. It is important to reiterate the point that Online, by itself, is not the real answer to

delivering communication messages; however, when combined with other media, it adds strenth to IMC.

IM (sometimes refered to as online marketing) can be defined as company efforts to market products and

services and build customer relationships over the Internet. (Kotler and Armstrong, G-7) IM makes use

of e-mails, Blogs, Twitter, creating Buzz, creating Web famlies through social marketing environments

like Facebook.Com, and MySpace.Com. IM opens direct communications lines to consumers designed to

create awareness, interest, evaluation, trial or adoption. There is a unique aspect to IM in that it is both an

IMC medium as well as a hybird retail unit where for both goods that are brought and sold. (Belch and

Belch, 486). As noted before, the goal of marketing is not to just make a sale, but to generate, develop and

maintain long-term excellent relationships with customers. IM, is a two-way form of communications. As

Tom Duncan very aply says, Internet media are extremely valuable in building brand relationships

because they enable companies and customers to get to know and trust each other. (Duncan, 376)

Whether one takes an optimistic outlook on the future of IM or a more conservetive one, it is safe to say

that growth will take place. There is no doubt that IMC is changing and will continue to grow in most

areas. In so many ways the medium is in its very early stages, and the future is exciting if in many ways

unknown territory. To help understand, in a small way, what is currently taking place with sustainability

efforts, we move next to exploring what is meant by sustainability and later look at several ports‘ IM

efforts in support of sustainability.

SUSTAINABILITY

Only a Rip van Winkle type of individual would fail to note that the world has become green.

Everywhere one turns the topic crops up. Making the world more sustainable is discussed in

board rooms, farms, college classrooms, academic conferences, etc. Everywhere one looks they

see green, and this is not just on St. Patrick's Day. An emerging topic is sustainability and green

Marketing, which are very important in the business environment. Many universities are

addressing the sustainability issue. The University of California at Irvine has a certificate

program in the area, and in January 2009 offered a course {MGMT X461.63} titled Green

Marketing Principles: Winning Strategies for a New Era. (http://www.uci.edu) Esty and Winston

(2006) posit that organizations build long term value, reduce costs, increase revenues, and build

brands by building environmental thinking into their business strategies. (Esty & Winston, 25) It

http://www.uci.edu/


63

would be difficult in today‘s environment to create a marketing plan that did not take cognizance

of green marketing.

Sustainability and the macro environment On a macro level, many firms are discovering a

new environment. For example there is growing concern from citizens groups about

environmental issues (pollution free air and water, climate change, energy conversation). These

concerns often require action from government or non-government organizations (NGO), or

from the political process. The Internet has increased the influence of the citizenry by allowing

them to communicate online, organize by interest groups, and start blogs. People become more

aware of the fact that they eventually must pay for externalities. Finally, there is a growing

awareness, coupled with actual resources dedicated by the U.S. Government and the current

administration to environmental issues. There are actual incentives for producing Hybrid cars,

alternative energy sources (solar and wind), energy conversation (via tax credits for solar panels)

air purification (as in cash for clunkers) and other social externalities (insuring those without

health insurance and increasing investments in infrastructure and education). All these initiatives

coupled with the financial crisis and the economic downturn increase the role of the

Government, thus making intervention in the free market system combined with increasing

popular awareness of environmental issues a new phenomenon and a force to reckon with.

Sustainability includes the concept of economic viability. In order to maintain economic

viability, an organizations costs and revenues must sustain business‘ long term success, and

future growth. Adding sustainability means that supporting communities, protecting ecological

systems and improving human health become considerations that are added to delivering on the

promise of prosperity.

The above trends increase the pressure on business organizations and others. Self regulation can

help silence calls for government regulation. Taking on increased commitment to environmental

issues can increase the support of stakeholders, and through that their view of the company and

the support for its products and services. Businesses that ignore externalities or destroy the

environment generate liabilities. Those that increase their social responsibilities, internalize

externalities and are committed to a sustainable environment create assets.

The macro aspects of increasing the public awareness and harnessing business and not for profit

organizations to help influence and guide actions which further global sustainability are the

subject of the next section examples of organizations are provided and how they use IMC to that

end.

SUSTAINABILITY EFFORTS IN PORTS

Promoting sustainability continues to make strides forward. In June of 2010 there was a "Global

Green Business Summit" in Shanghai, one of the world's largest port cities. The theme of this

green conference was Innovating for a Sustainable Future." In the U.S.A. the Environmental

Protection Agency (EPA) has done ground breaking work. The EPA initially served as the

environmental watchdog making sure rules were obeyed. As the interest in the topic grew, the

EPA's role changed too. Today their mission is to make sustainability the next level of

environmental protection drawing on advances in science and technology, application of diverse

government regulations and policies, and promoting green business practices. (EPA, Pg.1)

Clean commerce as it may apply to ports can be defined as more than just nontoxic, and in that

way it refers to the costs and benefits impact to shareholders, stakeholders, and to the planet. The


64

political and economic challenge is that this is not a zero-sum game – both costs and benefits are

shared across shareholders, stakeholders, and to the planet. Thus one can view ―Green

Chemistry‖ as composed of ―…a set of principles that embrace the reduction and elimination of

hazardous substances in the design, manufacture, and application of chemical products. It

includes activities that prevent waste, design safer chemicals, avoid chemical derivatives and use

products whose manufacture can be renewable and whose design uses less hazardous chemical

syntheses; potentially the should be designed to degrade after use and increasingly be energy

efficient.

There have been many excellent "go green" efforts by ports around the world. The Port of Long

Beach, CA , The Green Port, has been a leader in environmental protection efforts. They banned

thousands of older more polluting trucks resulting in a reduction in air pollution of 80% in 2010.

The Port of Long Beach Green Port Policy directs the Port to integrate sustainable practices into

Port development and operations...(POLB, 29 May 10) In June of 2010 the Port Jefferson, NY

held its second annual "Greenfest." (pjgreenfest, 29 May 2010).

In Europe the European Sea Ports Organization (ESPO) is a leader in promoting sustainability.

Another global organization that promotes sustainability is the International Association of Ports

and Harbors (IAPHWORLDPORTS) The Sustainability Institute (SI), founded in 1996, is one

more organization working to promote a "greener" world. The SI applies systems thinking,

systems dynamic modeling and organizational learning to economic, environmental and social

challenges. (Sustainer, Pg. 1)

Sustainability is yet another organization whose mission is spelled out in its name. They view

their role as a strategy consultancy and think tank working with senior corporate decision makers

to achieve transformative leadership on the sustainability agenda. (Sustainability.com, Pg. 1)

Sustainability is an important activity for everyone operating in the current business

environment. It is vital for ports around the globe to not only be sustainable, but be able to

promote their efforts and to encourage those who operate in their domain to "think green." In

order to accomplish top-notch promotional efforts they must have effective Integrated Marketing

Communications (IMC) programs.

SUSTAINABILITY IN ACTION COMPARISON OF SUSTAINABILITY EFFORTS AT

MAJOR PORTS

Port of Baltimore (POB) The POB considers itself a steward of the Chesapeake Bay having

dual responsibilities: to ensure vessels have safe and navigable channels and to support regional

goals for a healthy habitat and clean water. After conducting a risk assessment, The POB has

adopted several ―green‖ policies. The Maryland Port Administration determined its priority

should be to focus on sustainable compliance and reduction or elimination of harmful

environmental impacts.

The Maryland Port Administration (MPA) feels that protecting the environment can result in

economic benefits to its Port of Baltimore, such as reducing energy consumption, reducing waste

through recycling, and leveraging resources by attracting to the port those world class shipping

companies committed to improving the environment The new MPA policy CARES through:

Continual improvement; Adherence to regulations; Reduction/prevention of pollution;

Environmental outreach; and, Supplying adequate resources (American Journal of

Transportation).


65

Ongoing environmental projects, sponsored by the MPA, include the restoration of Poplar Island as a

refuge to wildlife and innovative projects using dredge material. Other initiatives include the Safe

Channels deep-water channel system, the protection and restoration of native species, the conversion of

paved schoolyards into ―green space‖ for students, and educational outreach for citizens.

―At MPA‘s terminals, the movement of goods involves various kinds of diesel-powered vehicles and

equipment, such as ocean-going vessels, harbor craft, cargo handling equipment, locomotives, and

trucks. All of these are sources of air emissions‖ (MPA Home Page) While pollution is inevitable, the

port has taken several environmental initiatives to reduce waste. The MPA has become more efficient and

has been able to maintain terminal velocity of approximately 55 minutes for the drop-off and pick-up of

goods (despite an increase in transactions). Additionally, the port is vested in the Clean Diesel Program

and commits to using ultra low sulfur diesel and biodiesel fuels. This allows for a reduction in

dependence on foreign oil and a decrease in emissions of greenhouse gases.

Port Of Bremen-Bremerhaven (POBB) The POBB is a world leader in sustainability. For instance, on

their web site there is a major link on the left side that takes the surfer directly to Bremerhaven‘s green

page. In 2009 the port management company, Bremenports GmbH & Co. KG published a brochure

entitled ―green ports.‖ It is a 100 page brochure sharing what the industry and public sector have already

undertaken and how they are committed to acting responsibly to fulfill a motto: economy and ecology

need not be a contradiction. Greenports highlights "Daring to Go Green." and "Moving with the times."

Regarding the POBB's "Green Approach" they state in Greenports that Global climate change, rising sea

levels and species becoming extinct at an alarming rate---the earth is badly in need of intensive care. But

do nature and the environment inevitably have to lose the battle against economic interests? The answer

is no they don't. People the world over are increasingly recognizing their responsibility for our

endangered planet. And the ports in Bremen and Bremerhaven have taken appropriate action-at regional,

national, and international levels. (www.bremenports.de/2048_2 )

It is clear the POBB is very green, and they are eager to use IMC to state their position. Beyond

that, the POBB is a strong force in encouraging other ports to take cognizance of the need to Go

Green!

Port of Dover, United Kingdom: (POD) The Port of Dover is the cross-channel port situated in Dover,

south-east England. It is the nearest English port to France, at just 34 kilometers (21 miles) away, and one

of Europe's largest passenger ports, with approximately 16 million travelers (a figure due to grow to 30

million by 2034), 700,000 lorries, 1.6 million cars and motorcycles and 118,000 buses passing through it

each year, raising over a £15.5 billion per year. The port claims to be the world's busiest passenger port.

The port has been owned and operated by the Dover Harbor Board, a statutory corporation, since it was

formed by Royal Charter in 1606 by James I. Most of the board members are appointees of the

Department of Transport. The port even has its own private police force, the Port of Dover Police.

The Mission is to develop an expanded, world-class port facility for the use of future generations, which

will demonstrate excellence and efficiency in planning, construction and operation. While there is no

specific mention of sustainability, it is clear that in order to achieve their mission, the POD must actively

pursue steps that preserve and promote the concept. (Port of Delaware)

Port of Hong Kong: (PHK)--The Port of Hong Kong (PHK) is one of several hub ports serving

the South-East and East Asia region, and is an economic gateway to mainland China. The PHK

http://www.bremenports.de/2048_2


66

was the world's busiest container port from 1987 to 1989, from 1992 to 1997, and again from

1999 to 2004. Hong Kong set a record in its container throughput in 2007 by handling 23.9

million TEUs (20-foot equivalent units of containers), maintaining its status as the largest

container port serving southern China and one of the busiest ports in the world. The average

turnaround time for container vessels in Hong Kong is about 10 hours. For conventional vessels

working in mid-stream at buoys or anchorages, it is 42 and 52 hours respectively. Hong Kong is

a free port with virtually no duties or tariffs. Its strong rule of law and respect for property rights

make it a strategic platform for U.S. companies, especially small- and medium-sized firms,

seeking to do business in Asia. Hong Kong businesses typically know, and have close links to,

markets in mainland China and the rest of Asia. According to official Hong Kong Government

statistics, 3,580 regional operations of overseas companies were registered in Hong Kong in

2009. The United States is home to the largest number of foreign companies basing regional

headquarters and offices in Hong Kong (815 companies).

Hong Kong and the adjacent Port of Shenzhen handled 9.5% of global container throughput in

2006, a percentage which continues to rise. The area that includes Hong Kong and the Pearl

River Delta (PRD) is similar in size to the metropolitan areas of Los Angeles and London, which

means that this relatively small body of water around Hong Kong and neighboring ports see the

highest density of shipping and logistics traffic in the world. Marine transport is an efficient,

cost-effective, and comparatively clean way of moving goods around the world. But because of

the poor quality of the fuel used, ships have a large impact on the quality of the air that surrounds

them. This is of particular significance to the PRD ports, which include Hong Kong and East and

West Shenzhen. Research has shown that over 3.8 million people live close to the Hong Kong

port and are affected directly by shipping and port-related emissions, but few initiatives have

been implemented to reduce the effect of this pollution on the public‘s health. This inaction is

not typical of ports authorities worldwide. For example, ports in North America and Europe have

combined local and international laws with voluntary actions to address this issue. Communities

have taken issue with the poor air quality associated with ports and year by year ports are

becoming cleaner and ―greener." (Port of Hong Kong)

The Port of Hong Kong has taken steps in making sure the rest of the world knows they are

making efforts to become more and more sustainable. They frequently use communication

channels such as web publications, website updates, and interactive data which investors & the

public can view along with up to date projections.

Port of Los Angeles (POLA)--The POLA is committed to remaining on the cutting edge of port

development and meeting the needs and demands of the global community while incorporating

environmental measures. In fact, in 1973 Los Angeles became the first port authority in the nation to

create an Environmental Management Division. The greatest challenge, the port faces daily, is the balance

between growth and development along with environmental considerations. ―This is accomplished

through more efficient cargo-handling operations, improved infrastructure, and biological, industrial and

internal environmental programs — all part of making a difference at the Port of Los Angeles‖ (LA Port

Environment Home Page).

Air Quality Monitoring: This program consists of four air monitoring stations that measure a set of air

pollutants within the region of influence. Twenty-four hour samples are collected on filters every third

day for a detailed chemical analysis. Additionally meteorological monitoring stations help interpret the air

quality data. All real-time data are available for public review on the CAAP website.


67

Alternative Maritime Power (AMP): Launched in 2001, AMP is an air quality program that focuses on

reducing emissions from docked container vessels. ―Instead of running on diesel power while at berth,

AMP equipped vessels plug in to shore side electrical power.‖ The port is currently in discussions with

cruise lines in attempts to expand the use of AMP to cruise vessels.

In accordance with the California Environmental Quality Act and the National Environmental Policy Act,

the Port of Los Angeles has undertaken several projects such as: the San Pedro Waterfront Project, the

Wilmington Waterfront Project, and The Port of Los Angeles Channel Deepening Project.

Clean Truck Program: A central element of the Clean Air Action Plan which targets major sources of air

emissions. In the first year of the program, port truck emissions were reduced 70%. It is projected that by

2012, port truck emissions will be reduced by more than 80%. Additionally, electric trucks were designed

specifically for short-haul operations and produced exclusively for the port. The port is also expanding its

vision of zero-emission solutions by entering into negotiations for the purchase of hydrogen fuel cell

hybrid-electric trucks.

Sustainability: The port is committed to promoting responsible growth hand in hand with innovative

development. It strives toward the best interests of the community, environment, and economy.

Improvements include community based developments, terminal redevelopment, and infrastructure

improvements. In 2003, the port implemented an environmental mitigation program to address impacts

of port-related activities. Funding includes: $23.5 million for community aesthetic mitigation projects,

$20 million for the reduction of air quality impacts, and $10 million to replace or retrofit existing diesel-

powered on-road trucks. (Port of Los Angeles)

Port of Osaka (POO) ―The Port of Osaka is committed to the environmentally friendly port vision,

continuing to provide and maintain first-rate facilities and environmental standards‖ (Osaka City Home

Page).The POO is widely regarded as the ―go-to‖ place for outdoor recreation (with activities such as a

yacht club and marine swimming resort). ―The Osaka Port and Harbor Bureau, in accordance with the

new ‗Harbor Environmental Guidelines‘ set down by the Ministry of Transport's Port and Harbor Bureau,

established the ‗Environmentally Friendly Port Model: Eco-port Osaka‘, in June 1997‖ (Osaka City

Home Page).

Osaka has created a seaside greenery project which aims to develop a natural thriving environment. A

series of beaches and rocky shorelines are being developed on the islands of Maishima and Yumeshima.

Most importantly, all new construction is conducted under the principle of ―striving toward harmony with

nature.‖ Rocky Shoreline: Home to a variety of rock dwellers who improve water quality and allow

marine creatures to thrive and multiply

Beaches and Tidelands: The POO is currently utilizing recycled materials for the creation of beaches and

tidelands. As port's previously destroyed tidelands are regenerated, the area is once again becoming home

to a range of marine-based creatures.

Arbor Zones: Considering global warming issues, oxygen producing arbor zones have been created.

These zones combat the Urban Heat Island effect as well as provide a habitat for small animals and

insects. (Port of Osaka)

Port of Shanghai, (POS) Shanghai covers a total area of 6,340 square kilometers and is

centrally located along China's prosperous eastern coastline at the mouth of the Yangtze River

Delta, with Jiangsu and Zhejiang Provinces to the west, the East China Sea to the east and

Hangzhou Bay to the south. North of the city, the Yangtze River pours into the East China Sea


68

and thanks to this strategic geographic location, Shanghai has today become China's premier sea

and river port boasting easy access to the country's vast interior. Since 2005, The Port of

Shanghai has claimed the title of world's busiest port (by cargo tonnage). (1) The Port of

Shanghai is managed by Shanghai International Port which superseded the Shanghai Port

Authority in 2003. Shanghai International Port Company Limited is a public listed company, of

which the Shanghai Municipal Government owns 44.23 percent of the outstanding shares.(2)

Shanghai's environmental quality is far ahead of most of China's major cities and enjoys a Class I rating.

Over 3% of the city's GDP goes towards environmental protection. Air quality readings are made

available from the Shanghai Environmental Protection Bureau (EPB) on a daily basis and may be viewed

online at: http://www.envir.online.sh.cn/eng/airep/aireport.htm . This communication channel is one

prime example of how Shanghai is becoming more and more sustainable and how they are marketing

their efforts to become more and more sustainable.

From the business and bottom line minded point of view, there are three potential reasons that a

business may invest in improving its environmental performance: 1) social license to operate, 2)

corporate conscience, and 3) competitive advantage. The port of Shanghai has adopted all three

and has grown into one of the largest ports in the world. Some experts have suggested that a

port‘s environmental compliance, or even more aggressive environmental practices, could in turn

be transformed into a business attribute that would produce an enhancement of a port‘s

competitive position. As opposed to the opposite side of the spectrum where others believe

environmental efforts and becoming more sustainable are a waste of capital and that they should

only meet minimum requirements in order to comply and past government inspections. The Port

of Shanghai certainly sits on top as a model to be followed in terms of operations and relatively

lower emissions and increasing sustainability.

As of this year, 2010, ―Ships and vessels arriving at Shanghai ports will be subject to tighter

checks and face tougher fines if they break a revised national regulation on the prevention and

control of marine pollution", the Shanghai Daily reported.

Shanghai maritime supervisors will also be given more powers over marine pollution when the

regulation comes into force by March. They will be authorized to open containers on cargo ships

to check goods they suspect are hazardous and have contamination risks. Officials will also be

able to look at the goods without the presence of cargo owners. "The clean and safe water

environment is not only a key to the coming Expo but also a threshold to the city's efforts to

build a shipping center," said Xu Guoyi, head of the Shanghai Maritime Safety Administration.

Fines for violators are expected to top US$43,950, triple the maximum fine in the 1983

regulation. (Port of Shanghai)

Port of Tampa (POT) for most the word cockroach has very negative connotations. For the Port

of Tampa (POT) it sends very positive vibes relating to their role in the restoration, improvement

and protection of the environment. (www.tampaport-1 June 10) The Cockroach Bay Aquatic

Preserve is located in the Tampa Harbor and is owned by the POT and is used to off-set negative

environmental impacts related to the POT. The port will work with the South West Florida Water

Management District (SWFWMD), the Florida Department of Environmental Protection

(FDEP), and U.S. Army Corps of Engineers USACE). The Corps is adapting to changing needs,

practices and priorities to achieve sustainability in everything they do. (USACE, 30 July 07)

http://www.envir.online.sh.cn/eng/airep/aireport.htm


69

The Port of Tampa is located in the southwest part of the state and is the largest port in area in

the state and one of the largest in nation. It is the 16th largest port in terms of total trade

(en.wikipedia, Jan. 09). The port is a major cruise facility, a leading shipbuilding and repair

facility, and has an economic impact of $8 billion and creates over one hundred thousand jobs.

(tampaport, 1 June 10) As with most port cities, Tampa plays an important role in the growth and

development of the state, region, and country. It is vital for this city, and its port to be leaders in

"going green" and in promoting what they have done as well as to encourage everyone involved

to be very conscious of the environment.

Tampa is a partner with Seaports Publications Group which helps promote the marketing efforts

of the POT. The American Association of Port Authorities (AAPA) has a publication that often

serves as an outlet for information that promotes sustainability. In the fall 2009 issue of AAPA

Seaports the special feature was an article by Paul Scott Abbott, Editor, titled Technology

delivers productivity in cost-effective, eco-friendly way. In this piece Mr. Abbott states that

...ports are deriving multiple benefits from deployment of technology, as they are able to move

more cargo and cruise passengers in an increasingly cost-effective, secure and environmentally

sound manner. (Abbott, aapaseaports, 31 May 10)

It is clear that the issue of sustainability will only grow in importance. The POT presents a very clear

picture of what one port has done in order to make life more "green" not only in Tampa and the southeast,

but across the country and the world. However, the POT of is just one port. To get a better feel for the

sustainability movement it is important to take a glimpse at several other ports.

Port of Singapore (MPA) The port authority of Singapore is currently the world's busiest port in

terms of total shipping tonnage, it also transships a fifth of the world's shipping containers as the

world's busiest container port, and sees half of the world's annual supply of crude oil. It is also

the choice venue for the headquarters and representative offices of international maritime

organizations and associations such as the Baltic Exchange, Asian Ship-owners Forum,

International Bunker Industry Association, International Association of Independent Tanker

Owners and Baltic and International Maritime Council.

On June 3, 2010, The Maritime Port Authority of Singapore (MPA) and DNV's Clean Technology Centre

(CTC) signed a partnership agreement to initiate and promote research, development and test-bedding

projects in the areas of maritime environment and clean technologies. The Captain of the MPA of

Singapore, Khong Shen Ping said at the 3 June 2010 signing, ―Being the world's busiest port and a major

flag registry, Singapore is strongly committed to environmentally-friendly shipping and port activities,

especially on the prevention and reduction of pollution from ships and port activities."

"Through our Clean Technology Centre we are working closely with a large number of

customers from ship owners, operators, yards and financial institutions providing services from

technology qualification of green shipping solutions to energy efficiency and risk management

on green ship projects,‖ said Bjorn Tore Markussen, Managing Director of the CTC. "We are

convinced that a close co-operation with MPA will further accelerate maritime innovation in

Singapore." It is clear that the MPA grasps the importance of sustainability. (Port of Singapore)

SUMMARY

This paper has looked at sustainability, and water transportation. The specific focus has been on

several of the major ports around the globe. It is encouraging to see that in this day and age


70

where ocean transportation and port growth, development, and technological advancements play

such a crucial role, there is a very intense focus on sustainability. There are international

organizations devoted to the subject. All major ports have top management positions relating to

sustainability. Ports use IMC to encourage sustainability among their users and to keep others

appraised regarding what has been done as well as what needs to be done. Whether the port is

located in the United States or South Africa, or elsewhere in the world, there are encouraging

signs that Mother Nature and Port Managers can and do live and breathe together. Certainly

things are not perfect; however, there are many encouraging omens.

This paper focused on observing the behavior of myriad ports around the globe regarding

sustainability, as they use their IMC in IM. From the ports in the U.S.A. across the globe to ports

in China, and major ports in-between, it can be clearly seen that building and promoting

sustainability is an important issue. Each port is working hard to "clean up its act" in order that

future generations, as the POD spells out in its mission statement, will enjoy an even better,

environmentally clean, productive port facility.

REFERENCES

AAPA Seaports Magazine

Abbott, Paul S., (2010) Technology Delivers Productivity, AAPA, May 31, Pg. 1.

American Journal of Transportation-- http://www.ajot.com

Belch, George E., and Belch, Michael A., Advertising and Promotion: An Integrated Marketing

Communications Perspective, 8th ed. (New York: McGraw-Hill/Irwin, 2009)

Becken, Susanne (2010). Tourism and the Environment, (Northampton, MA, Edward Elgar

Publishing)

Bloom, Jonah, ―Irrational Consumer Lust Will Make the iPhone a Big Success,‖ Advertising

Age, June 18, 2007

Crispin Porter & Bogusky, http://cpbgroup.com

Elgar--Edward Elgar Publishing, Northampton, MA-- http://www.e-elgar.com

Environmental Protection Agency (EPA)-- http://www.epa.gov

Esty, D.C., and Winston, A.S., (2006). Green to Gold (New Haven, CT, Yale University Press,

Evans, Bob, Marko, J., Soundback, S. and Theobald, K. (2004) Governing Sustainable Cities

Edward Elgar Publishing, Northampton, MA

Evans, Bob---http://www.evanscompany.com

Garfield, B., ―Your Data With Destiny,‖ Advertising Age, September 15, 2008

Grant, John (2007) The Green Marketing Manifesto, John Wiley & Sons, Ltd., West Sussex,

England, PO19 8SQ

Halprin, M., ―10 Things That Never Happened Before,‖ TIME, November 17, 2008

Howard, T., ―E-mail grows as direct-marketing tool,‖ USA Today, November 28, 2008

http://www.envir.online.sh.cn/eng/airep/aireport.htm

http://georgewbush-whitehouse.archives.gov/news/releases/2008/01/20080123-4.html

http://www.mardep.gov.hk/en/publication/pdf/portstat_pamphlet10.pdf) http://www.bremenports.de/2051_2

http://www.cpbgroup.com

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http://cpbgroup.com/

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http://www.mardep.gov.hk/en/publication/pdf/portstat_pamphlet10.pdf

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71

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Kotler, Philip, and Armstrong, Gary, Principles of Marketing, 12th

ed. (Upper Saddle River, NJ:

Pearson/Prentice Hall, 2008)

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Saddle River, NJ, 2005)

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Ed.

(Pearson/Prentice Hall, Upper Saddle River, NJ, 2008)

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Consulting, Inc., New York, NY 10021

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Port of Dover (http://www.dover.ports-guides.com/)

POLB, 29 May 10--http://www.polb.com

Port of Los Angeles (http://www.portoflosangeles.org)

Port of Maryland,(www.marylandports.com/)

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Ries, A., ―Convergence Devices Have Not Been Successful,‖ Advertising Age, June 18, 2007.

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Ed., (New York, NY, Free Press, 2003

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2007

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72

A STUDY OF THE EFFECTS OF BACKSHORING IN THE EU Peter Leibl

Munich University of Applied Science, Munich, Germany

Roger Morefield

University of Saint Thomas, Houston, Texas

Rolf Pfeiffer

Reutlingen University, Reutlingen, Germany

ABSTRACT: With the increased globalization and trade liberalization of the mid-1990s and later,

companies around the world began locating production of manufactured goods and services outside their

home countries. This activity can be defined as offshoring, that is, a type of outsourcing that goes beyond

the boundaries of the home country. Companies in the EU, especially in Germany, were eagerly seeking

lower labor costs, access to new markets, and a good place to produce output tailored to local needs and

tastes. But many of them failed to adequately weigh the costs of offshoring against its benefits, and have

encountered problems that include product quality, logistics, inflexibility, and several others discussed in

this paper. Those who returned all or some of this production home are said to have ―backshored‖ or

―reshored‖ it. A study of offshoring by German firms found that one-sixth to one-fourth of them did

some backshoring with 4 years. French IT firms that offshored IT work complained of unanticipated

cost, quality, and logistics problems. A study of UK manufacturers that offshored production in 2008-

2009 found that 14% of them had already backshored it. This paper discusses the emotionally charged

debate that resulted from offshoring which likely led to pressure on firms to backshore. The literature on

backshoring is briefly surveyed and backshoring is then analyzed from the vantage point of international

trade theory.

INTRODUCTION TO BACKSHORING

The decade of the 1990s brought increased economic integration and trade liberalization. The

Maastricht Treaty of 1992, the North American Free Trade Agreement (NAFTA) of 1994, and the World

Trade Organization (WTO) of 1995 are important parts of this movement. Economic integration and trade

liberalization were facilitated by improvements in the memory and clock speed of computers and the

increased bandwidth allowed by fiber optic technology. As markets became more competitive, firms had

increased incentives to find ways to reduce costs. Moving manufacturing from high-labor-cost to low-

labor-cost countries seemed to be a sure way to reduce costs. This led to an increase in firms‘ sending

production to countries with lower labor costs, which is one of the many forms of offshoring (Gerber

2011). However, much of this offshoring was done without a complete picture of its costs versus its

benefits. Leibl, et al (2009) discussed the many types of unanticipated costs that can be incurred when

offshoring. Having found offshoring to be more troublesome than it is worth, some companies have been

―backshoring‖ part or all of this offshore production. This paper is a study of the factors driving

backshoring in the European Union and includes an analysis of the importance of this phenomenon in

world trade.

Backshoring is analyzed below as a factor in globalization and trade liberalization. It is a vague term

which is most often used to refer to the return of production that was previously offshored from the home

country. Backshoring is sometimes referred to as ―reverse onshoring‖ or ―reshoring.‖ Offshoring‘s causes

and consequences have been the subject of much commentary in the past decade. Can companies

significantly reduce costs by offshoring? If they offshore production and the desired effects are not

realized, at what point should they ―cut their losses‖ and reverse the process? And, aside from this partial

equilibrium analysis of firm behavior and its consequences, what are the macroeconomic effects on the


73

trading partners‘ economies? Is there a net gain, or loss, of jobs when firms move production offshore?

And is backshoring simply part of the process of finding a least-cost equilibrium level of onshore and

offshore production? These questions are raised by the offshoring/backshoring debate and analysis.

BACKSHORING AND INTERNATIONAL TRADE THEORY

The basic theory of international trade posits that countries become better off by specializing in

the production of those goods and services that they can produce at a lower domestic opportunity cost and

then exporting them. This Ricardian model is based on numerous restrictive assumptions, such as perfect

factor mobility within countries, the absence of barriers to free trade, and perfectly competitive markets

(Ricardo 1817; Mankiw 2007). Refinements of the theory include the Heckscher-Ohlin Theory

(Heckscher and Ohlin 1991), the Stolper-Samuelson Theorem (Samuelson and Stolper 1941), and the

―New Trade Theory‖ that incorporates increasing returns to scale and network effects (Krugman 2009).

The focus of these theories has been on why trade is advantageous to countries as trading partners, and

not with the specifics of individual firms‘ locational decisions. The presumption is that firms would

offshore production, given adequate assurance that the benefits would outweigh the costs. Reality has

somewhat conformed to the theory, as firms have been observed to move manufacturing and services

production to lower-cost countries. Table 1 illustrates the sharp differences in labor costs among EU

countries such as Denmark, where an hour of labor costs 7.3 times as much as in Latvia. Although

theorists attribute country-to-country differences in real wages to differences in productivity, it is difficult

to imagine that Danish workers are, on average, 7.3 times more productive than their Latvian

counterparts. Although the causes are complex and include such factors as human capital, factor

endowments, and a host of others, these causes are closely tied to productivity, and are much discussed

and analyzed in the literature (Olson 1996).

Table 1: Labor Cost Per Hour in 2007, Selected Countries

Sources: ―Fotoshow – Arbeitskosten: Die Preisbrecher in Osteuropa,‖

Country Labor Cost €/Hr. 2007 Country Labor Cost €/Hr. 2007

Denmark 35.0 Greece 16.7

Sweden 33.4 Cyprus 14.5

Belgium 33.1 Slovenia 12.5

Luxembourg 32.7 Portugal 11.1

France 31.9 Malta 9.8

United States 29.4* Czech Republic 8.1

Netherlands 29.2 Hungary 7.7

UK 29.2 Estonia 7.9

Germany 29.1 Poland 6.7

Austria 28.5 Slovakia 6.4

Finland 28.3 Lithuania 5.2

UK 29.2 Latvia 4.8

Ireland 25.2 Romania** 3.9

Italy 24.5 Bulgaria** 2.1

Spain 18.3

* Auto worker, benefits excluded

** Not an EU member


74

(2008) http://www.t-online-business.de; http://mediamatters.org/research,

December 6, 2008.

Much of the recent discussions of offshoring/backshoring has centered on its effect(s) on

employment in the countries involved. In an analysis focusing on intersectoral effects of offshoring,

Bertoli (2008) suggests that ―transitional costs can be substantial and diffuse,‖ based in part on its effects

on domestic sub-contracting relationships and other intersectoral spillovers.

THE EMOTIONAL DEBATE OVER OFFSHORING’S EXTENT AND IMPACT

Many are alarmed by the potential for offshoring of jobs, but such concerns are not new. In 1987

M. E. Sharpe‘s Challenge Magazine featured an article entitled ―We‘re Not Losing Our Industrial Base,‖

which cited numbers showing that the US economy was manufacturing more goods than ever before

(O‘Neill 1987). But between 1987 and 2005, the Internet and fiber optic technology revolutionized the

world‘s ability to communicate and digitize text and graphics, and the US economy continued its long-

established trend toward greater percentages of value added in services. Before the technological

advances of the New Economy of the 1990s, it was always assumed that the production of services was

localized and was therefore free of the threat of being taken offshore. But in 2005, New York Times

columnist Thomas Friedman provoked a sharp reaction with his anecdotes about the apparent ease with

which services production could be offshored (Friedman 2007). Professor Alan Blinder caused further

alarm with his estimate that about 25% of US jobs are offshorable (Blinder 2009), but his conclusions

have been criticized as oversimplified and alarmist (Economist Free Exchange Blog 2009). In February

2004, N. Gregory Mankiw, President George W. Bush‘s Chairman of the Council of Economic Advisors,

created a storm of controversy when he wrote that "When a good or service is produced more cheaply

abroad, it makes more sense to import it than to make or provide it domestically," and Mankiw further

said that "outsourcing is just a new way of doing international trade. More things are tradable than were

tradable in the past, and that‘s a good thing.‖ (Economic Report 2004; Foxnews.com 2004). While

Mankiw was quite correct in his application of economic theory, his support of offshoring drew criticism

from leaders of both political parties. In early 2005 he retreated to the relative safety of his faculty post at

Harvard University.

Union leaders and political leaders in the U.S. frequently complain that U.S. companies are

―shipping jobs overseas‖ (AFL-CIO 2010). Public perceptions of offshoring of services have also been

negatively affected by the offshoring of customer service call centers. A UK survey found that 66% of

consumers rated offshore call centers as ―Poor‖ or ―Very Poor‖ (Call Centre Information Site 2006). It is

therefore easy to understand why many of the articles describing firms‘ backshoring decisions tend to

gleefully assume a tone of ―We told you so.‖

FACTORS DRIVING BACKSHORING IN THE EU

Notwithstanding the predictions of international trade theory, firms have faced another reality in

the form of hidden costs and unintended consequences. Figure 1 summarizes hidden costs by ―Direct‖ and

―Indirect‖ cost categories. Table 2 is a list of 11 German companies that moved offshore production back

to Germany and shows the reasons given by these firms for the move. Interestingly, two of the moves

shown in Table 2, Katjes and Jungheinrich, were bringing production back from high-cost countries. A

survey by the Fraunhofer Institute for Systems and Innovation Research (ISI) cited the following list of

reasons German companies backshored production. (Wissenschaftliche Studien zu Rückverlagerungen

2006):


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Quality control problems

High shipping costs

Difficulties in training workers to get acceptable quality

Reduced flexibility to respond to changing market conditions

Problems with international payments and funds transfers

Higher than expected quality assurance and warehousing costs; or these costs were not

taken into accounted in the offshoring move

Figure 1: Hidden costs of offshore production

Source: Schulte, A. (2002): Das Phänomen der Rückverlagerung. Internationale Standortentscheidungen

kleiner und mittlerer Unternehmen. Wiesbaden: Gabler.

In the same ISI study cited above, 48.3% of firms surveyed listed quality concerns, 46.4% cited

costs of productive factors such as labor, materials, and capital, and 39.5% indicated flexibility to respond

to changing conditions. They also mentioned availability of qualified workers (32.9%), coordination and

communication costs (28.5%), and infrastructure capacity constraints (25.9%) (Wissenschaftliche Studien

zu Rückverlagerungen 2006).

An especially serious problem for ―tech‖ firms is that when they move production offshore, they

place valuable intellectual property in the hands of people who may not have a firm grasp of the concept

of intellectual property. In addition, proprietary production methods may have to be left in the hands of

people who don‘t share the same loyalty to the company as the people back home who spent years

developing and perfecting these methods.

In December 2009 the London-based Engineering Employers Association partnered with

accountancy firm BDO International in a survey which indicated that 14% of UK manufacturers who had

moved production offshore in 2008 and 2009 had already brought it back to the UK. The reasons cited by

these firms were shoddy product quality and rising logistics costs. It was also noted that as offshoring

increases the demand for skilled labor in the host countries, wages are driven up, thus reducing the

advantage of lower-cost labor. In addition, three-fifths of the companies surveyed expressed concern

about the financial health of their overseas suppliers (Outsource Portfolio Blog, 2010).

Direct Costs

- Additional investment for

machines and devices

- Travel costs

- Transportation costs

- Additional costs for late delivery

- Translation

- Payment of bribes

- Additional salary

- Consultants

Indirect Costs

- Indirect labor costs

- Low productivity

- Quality problems

- Additional stocking costs

- Exchange rate risk

- Cultural differences

-

Hidden costs of offshore production


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Table 2: Companies and products backshored to Germany

Company

Name

Product Production

Returned

From:

Reason(s) Cited for

Returning

Bellicon mini-trampolines China quality, logistics

Friatec industrial valves China quality

Hirschmann electrical cables

and connectors

China quality, rising

production costs

Jungheinrich forklifts UK, France quality problems,

exchange rate

fluctuations

Katjes candy Italy, Finland unsatisfactory

quality control

Lemke farm equipment Russia quality, banking

problems, customs

problems at border

Ritter-Sport chocolates Russia foreign ingredients

(milk and sugar)

negatively affected

product taste

Steiff teddy bears China inconsistent quality

Stiebel Eltron water heaters Slovakia quality

Vorwerk vacuum cleaners China transportation costs

Weigelt injection molding

machines

Czech

Republic

logistics

Source: ―Fotoshow – Genug von Billigländern - Diese Firmen sind zurückgekehrt,‖ (2008)

http://www.t-online-business.de.

Offshoring and backshoring in France have been driven by factors similar to those in Germany.

Commenting on the reasons information technology (IT) decision makers were backshoring production,

the website of Clever Age, a French IT services company, indicated that 80% of decision makers had cost

concerns, 45% had quality concerns, and 32% were concerned about ―lack of internal competence‖

(Clever Age 2006).

A literature search found no studies about, or evidence of, backshoring to Spain. Although Spain

has the fifth highest GDP in the EU, its labor costs are about midway between the highest and lowest in

the EU [see Table 1], so Spanish firms have had less incentive to offshore manufacturing or services to

get lower labor costs. Spain has apparently lagged Germany, UK, and the Netherlands in offshoring.

Spanish firms that were surveyed about the possibility of offshoring expressed concerns about cultural

differences (49%), corporate resistance (44%), and customer acceptance (43%). This is unlike their other

European counterparts, which were more concerned about cost and quality (Agnese & Ricart Costa 2006).


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BACKSHORING AS A FACTOR IN WORLD TRADE

The conventional wisdom is that labor costs have been the primary driver of offshoring. This is

oversimplified, and there is not strong support for it in the available data. Offshoring is difficult to

measure because of the extent of the internationalization of business activity. For example, a certain ―US-

made‖ automobile had nine countries involved in its production, marketing, and selling. Korea added

30% of the car‘s value for its assembly, 17.5% from Japan for components and advanced technology,

11.5% from Ireland and Barbados for data processing, 7.5% from Germany for design, 4% from Taiwan

and Singapore for minor parts, and 2.5% from the UK for advertising and marketing services. By this

measure, only 37% of the production value of this ―US-made‖ car was generated in the United States

(WTO 1998). So the question of whether 63% of the value of this automobile should be counted as being

produced offshore is a matter of definition. Given the difficulty of measuring the amount of offshoring

from a country to its trading partners, it is even more difficult to measure which part(s) of that output have

been backshored. Given these qualifications, some credible attempts to gauge the extent of backshoring

have been made. Kinkel and Maloca estimated that between one-sixth and one-fourth of offshored

manufacturing activity from Germany was followed by some backshoring in the next 4 years, and quality

problems and lack of flexibility were the usual reasons cited. Of the 1663 German companies in this

study, 39 were analyzed further and this analysis revealed that many companies did not engage in

adequate planning for their offshoring activities. This study also suggested that offshoring of German

manufacturing had lost momentum, which hints at the notion of offshoring/backshoring as a volatile,

dynamic process (Kinkel and Maloca 2009).

CONCLUSIONS AND IMPLICATIONS

Although the often vigorous and emotional debate over offshoring and backshoring continues, the

evidence of their effects is very mixed. The conventional wisdom that the main purpose of offshoring is to

get lower labor costs is not supported by the available data. Date from the Bureau of Economic Analysis

(BEA) in the US Department of Commerce indicate that about 67% of all U.S. offshoring is to high-

income, and therefore, high-labor-cost countries (Bureau of Economic Analysis 2006). The BEA data also

point to the notion that ―firms locate production offshore to obtain access to a market and to produce

specialized products that fit a particular market‘s need‖ (Gerber 2011; pp. 83-84). This places the

backshoring phenomenon in a somewhat different light. This picture will become clearer as the world‘s

open economies, large and small, begin to measure the extent of offshoring and backshoring that is being

done. Given its working assumption that markets ordinarily clear immediately and frictionlessly, basic

international trade theory is of little help. Since in reality it takes some time for international markets to

reach something resembling equilibrium, it is possible that backshoring can be observed as part of the

process of finding that equilibrium. Firms enthusiastically offshored production too quickly, and

backshoring might just be part of the process described by Léon Walras as tȃtonnement (Walras 1874).

REFERENCES

AFL-CIO. (2010). Exporting America: Outsourcing. Retrieved July 14, 2010

from http://www.aflcio.org/issues/jobseconomy/exportingamerica/ outsourcing_problems.

Agnese, P. & Ricart Costa, J. (2006). El offshoring en España: Causas y

consecuencias de la deslocalización de servicios. Centro Anselmo Rubiralta

de Globalización y Estrategia. IESE Business School, Universidad de


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Navarra, 2006.

Bertoli, S. (2008). The Impact of Material Offshoring on Employment in the Italian

Manufacturing Industries: The Relevance of Intersectoral Effects. Centro

Studi Luca d'Agliano Development Studies Working Paper No. 244, April 1,

2008.

Blinder, A. (2009). How Many US Jobs Might Be Offshorable? World Economics

10 (2), April–June 2009: 41-78.

Bureau of Economic Analysis, U.S. Department of Commerce. (2006). Offshoring:

An Elusive Phenomenon. Washington, D. C.: National Academy of Public

Administration, January, 2006.

Call Centre Information Site. (2006). Survey: Public Perception on Offshore Call

Centers. (December 12, 2006.) Retrieved July 15, 2010 from

http://www.call-centres.com/articles/offshore_call_centre_survey.

Clever Age Digital Architecture. (2006). Offshoring/backshoring, l‘art de tourner en rond?

(August 21, 2006). Retrieved July 13, 2010 from http://www.clever-age.

com/veille/clever-link/offshoring-backshoring-l-art-de-tourner-en-rond.

Economist Free Exchange Blog. (2009). Offshore Ability. (October 9,

2009). Retrieved July 15, 2010 from http://www.economist.com/

blogs/freeexchange/2009/10/offshore_ability.

Foxnews.com. (2004). Bush Adviser Supports Outsourcing. (2004). Posted February

12, 2004.

Fotoshow – Arbeitskosten: Die Preisbrecher in Osteuropa,

(2008). Retrieved July 15, 2010 from http://www.t-online-business.de.

Fotoshow – Genug von Billigländern - Diese Firmen sind zurückgekehrt,

(2008). Retrieved July 16, 2010 from http://www.t-online-business.de.

Friedman, T. (2007). The World is Flat 3.0: A Brief History of the Twenty-First

Century. New York: Picador/Farrar, Strauss and Giroux, 2007.

Gerber, J. (2011). International Economics, Fifth Edition. Boston: Addison-Wesley,

2011.

Hechscher, E. & Ohlin, B. (1991). Heckscher-Ohlin Trade Theory. Cambridge:

MIT Press, 1991.

Kinkel, S. & Maloca, S. (2009). Drivers and antecedents of manufacturing offshoring

and backshoring—A German perspective. Journal of Purchasing and Supply

Management 15(3), September 2009:154-165.

Krugman, P. (2009). The Increasing Returns Revolution in Trade and Geography.

American Economic Review 99(3): 561-571.


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Leibl, P., Morefield, R., Nischler, C., & Pfeiffer, R. (2009). An Analysis of

Offshoring Manufacturing to Reduce Costs. Journal of Business and

Behavioral Sciences, 21(1): 130-138.

Mankiw, H. (2007). Macroeconomics, Sixth Edition. New York: Worth

Publishers, 2007.

O‘Neill, D. (1987). We‘re Not Losing Our Industrial Base. Challenge: The

Magazine of Economic Affairs, September/October, 1987: 19-25.

Outsource Portfolio Blog. (2010). Backshoring-Reverse Globalization,

(February 8, 2010.) Retrieved July 14, 2010 from http://outsourceportfolio. com/backshoring-

reverse-globalization/.

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Übersetzt von Ottmar Thiele. Jena: Gustav Fischer.

Samuelson, P. & Stolper, W. (1941). Protection and Real Wages. The Review

of Economic Studies, 9(1): 58-73.

Schulte, A. (2002). Das Phänomen der Rückverlagerung. Internationale

Standortentscheidungen kleiner und mittlerer Unternehmen. Wiesbaden:

Gabler, 2002.

Walras, L. (1874). Éléments d‘Économie Politique Pure. Lausanne: L. Corbaz & Co.,

1874.

Wissenschaftliche Studien zu Rückverlagerungen. (2006). Rückverlagerungen

deutscher Unternehmen aus dem Ausland. Retrieved July 14, 2010 from

http://www.rueckverlagerung.de/wissenschaftliche%20studien.html.

World Trade Organization. (1998). Annual Report 1998. Geneva: WTO

Publications, 1998.

http://www.amazon.de/exec/obidos/redirect?link_code=as2&path=ASIN/3897530074&tag=strategischea-21&camp=1638&creative=6742


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EMERGING APPROACHES IN PRODUCTION PLANNING IN THE ERA

OF GLOBAL COMPETITION

Negus, Fahri

Galatasaray University

İstanbul, TURKEY

ABSTRACT: As the world is becoming highly global in terms of consumer needs and production

capabilities, firms in the production sector are attempting to minimize their costs while maximizing the

level of output being offerred. On this perspective, the major aim of this paper is to underline some of the

traditional production planning approaches while exemplifying several competing production planning

techniques in the era of global competition. To meet such goal, several techniques that emerged in recent

years have been revealed and a model of production planning has been redesigned taking the key

variables into consideration. Production planning has always been an issue of interest in many ways.

This paper exercises many issues of practice in the era of global competition. This is a mandatory

practice due to the concern that price and quality differentiation is not highly noticable in the

international markets which may mean that differentiation in product ranges are in high demand as a

part of global competition. On this ground, production planning based on the changing demands of the

market may be another competing strategy as a means to overcome the global competition many firms

are faced with.

INTRODUCTION

This paper, as well stated, focuses on production planning on a modern approach. This clarifies that

instead of spending time and effort in traditional methods of production, new methods on the ground of

supply chain approach should be discovered. Talking about the era of competition, many academicians

put forth the notion that in order to sell effectively, cost of production should ne minimized. In other

words, as the world moves toward the trend of production globality, supplying the raw material and

production should be balanced in efficient and cost effective terms. This may potentially result in

producing the output at the desired cost intervals whereby meeting the needs of the market is met in the

long run objectives of the firms.

In the second phase, the paper also touches on the highly crucial topics of global competition and ways to

stay alive in the era of global competition. Competition in the traditional way of doing business used to be

local, however now that the world is talking about opening borders and doing trade in a free environment,

fierce competition is about to be felt deeply in the firms who still survive with the tradition production

planning techniques. The paper in the third phase suggests emerging approaches by combining

competitive production planning techniques in the era of global competition. These techniques are

focused mainly on price, quality, quantity and customer satisfaction levels as they determine the role of

production facility.

THE EVOLUTION OF PRODUCTION PLANNING- A PRACTICAL COMPARISON

The literature reveals important data on how production planning has evolved through periods of time (

Ross, 2000). The literature exemplifies such advancement in three periods. These are

- Until the 1960‘s

- Between 1970 and 1980

- Between 1990 and 2000


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One can easily notice that there has been tremendous improvements in the way production planning has

been handled.

Until the 1960‘s production planning has been identified to setle on:

- warehousing and transportation aspects.

- classic management.

- operations and performance are at low pace.

- corporate design is not favorable.

- production operations are not centralized.

In the 1970‘s and 1980‘s, there exist more advancement on the issues which needs special attention as an

attempt to increase the level of production. So, it is seen that:

- there is a move towards total quality management perspectice.

- operation management is the key center among the whole management strategy.

- cost minimization is worked on and it has been found out that customer services operations. need

to be optimized as an attempt to meet the goal.

- corporate design is worked on.

- production operations are centralized.

Starting from the 1990‘s,

- there is a flow towards the formation of supply chain management.

- operation management is still the most prominent part of the management as a whole.

- corporate design is highly sophisticated.

- partnership is considered in areas where costs of production are relatively higher than expected.

As a summary of the above three periods, the 1960‘s period can be derived as highly classical in terms of

production planning whereby transportation and warehousing are the only two elements considered within

the scope of supply chain processing. Another issue dealt in the 1960‘s period is the classic management

techniques which do not rely on cost efficiency methods. So, operations and performance are not at a

desired level which may potentially mean that corporate policies are not yet prescribed and thus

production operations are not centralized. But, it should be noted that in this era, there is not much

competition associated with the production. So, production managers do not rely highly upon cost

minimization attempts.

In the 1970‘s and 1980‘s, there is a more moderate mean of competition and it may be followed that it is

on the rise. So, production managers aim to pass and transform their process into the total quality

management approach as a tool to overcome the fiercely growing competition. Besides, operations

management starts to be a key determinant of the overall management strategy as operation efficiency is

given the highest priority in the process management. Cost management starts to be the ongoing topic and

managers clearly identify that meeting consumer demand in the long run drastically lowers the costs

associated with the production due to high levels of frequency. Corporate design and corporate approach

to consumers is found out to be crucial in this ongoing attempt in the 1970‘s and 1980‘s. In fact, these are

the initial periods where consumers are started to be given the highest priority.


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Starting from the 1990‘s and within the 21st century, production efficiency emphasis is solely and most

importantly associated with the mostly known and greatly applicable supply chain formation strategies. It

is concrete nowadays that with the right supply chain management approach, costs can be minimized

while reaching the maximum levels of output. Thus, this approach will still be the cornerstone of the

ongoing production planning strategies as a tool to play significant role in cost minimization techniques.

In addition to what is called the ―supply chain management strategy‖, in the 21st century, it is a global

necessity to focus on operation management and increase the efficiency levels within the flow of goods

and services. One alternative mode of approach is to improve the corporate design on a larger scale. This

potentially reveals that branding and working on the corporate culture becomes a key in the management

derivatives and implementative concern issues. Finally, competition enforces that the option of forming

partnership is essential in production facilities and laboring process. This option can be assessed in the

areas where costs can not be monitored or minimized. So that in this essence, outsourcing or third party

logistics operations can be in the highest demand as a goal to meet the operational and managerial needs

of the firms.

EMERGING APPROACHES IN PRODUCTION PLANNING

Emerging approaches are associated with several newly conceptualized issues ( Metz, 2007). These are:

- producing the right goods and services.

- producing at the right time, taking the customer concern into consideration.

- lowering the production process as a means to be efficient and lean.

- setting the quality standarts solely based upon the target market.

- Adoption to the changing market and economic conditions.

Traditional product planning derives its roots from the 1960‘s where there is not much discussion on the

formation of supply chain strategies. However, the above five competitive approaches are being debated

extensively simply because there have been changes in the environment namely;

- changes in competition levels.

- changes in techonolgy.

- changes in responding rapidly to the needs of the consumers.

These above three determinants are the major issues Peter J. Metz point out in his books as the clear

identification of competition and production planning. Once again, in the traditional production planning

aspects, firms are only focused on the local production where raw material and labor force is supplied

from local resources. However, whenever this strategy started to be non cost effective, alternative

measures are needed to be taken to resolve the production planning appraoches in local and international

markets. In this sense, Metz also discusses that on the concept of production planning, firms are forced to

survive in a borderless economy and environment. This statement also supports the sense of globalization

in the production activities. So, production may well flow to countries where more decent costs of

production are approved.

On this concept, producing the right goods and services is accepted to be a modern part of production

planning. This means that just in time production capacity should be monitored and utilized as an attempt

to lower warehousing costs in the process. When compared with traditional way of production planning, it

is concrete that production should be designed in a just in time appraoch so that no goods and services are

left idle. In this sense, warehousing responsibilities including maintenance and risks are either minimized

or disappeared. Global competition enforces many manufacturers to audit their warehousing costs as they


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are cited to be one of the major costs in the production planning. On the other hand, producing at the right

time states that customer expectations and needs have to be taken into consideration. This strategy has its

links in effective distribution chain planning and the philosophy is based upon the concept of meeting the

needs of the customers and opening up branches where there are potential and profitable segments of

consumers. But it has to be well understood that the starting point of the effective distribution chain has to

be the consumer itself.

On the other competitive measure, modern production planning strategies are measured in terms of

process minimization and being lean. This states that production process should significantly be lowered

so that efficient and lean production can be reached. In the overall process, another key determinant of the

whole aspect is setting the level of quality. Quality is debated in many ways in the era of competitive

production planning. In many research, it is concluded that quality is and should be based on the needs

and purchasing power of the consumer. So, on a larger extent, this may highly mean that quality standart

has to be set by taking the consumer expectation into consideration. ISO standarts may mean a whole lot

in this perspective, however quality should solely be determined by the target market‘s expectations and

purchasing power. In this sense, changing market and economic conditions are the indicators of how a

production planning strategy should be implemented on a competitive environment. Briefly, these five

competitive elements constitute most of how modern production planning can be reconstructed in a

manufacturing firm.

However, even though a competitive manufacturing strategy has been designed considering the highlights

of the market, changes in competition level can be a tool to set the competitition indicators, such as

pricing, distribution, mass production levels etc. On the other globe, changes in technology both in terms

of manufacturing and information should also be taken into consideration.

By using newer technology, it may be cited that the investment capital would be high, however with the

mass production at a high pace, cost per volume would go down. By using older technology, investment

capital would not be that high, however, it would be hard to engage in mass production at high pace. So,

even though the five above elements are met, manufacturing firms should set the technology they would

be using as well. Finally, responding to the consumer needs is a key in increasing frequency levels in the

production phase. Because as consumers demand that the products should be manufactured, then it may

be agreed upon the fact that production process would be long lasting ( Oygur, 2007).

Citing on the other author‘s ideas, David F. Ross states that modern production planning should be

focused on logistics activities( Ross, 2000). In this process, Ross focuses on the logistics planning

systems, process management and labor force politics. As stated, logistics planning systems rely on the

key elements of logistics and command that they should flow in such a sequence as to minimize costs and

maximize output levels.

The key elements of logistics are:

- Transportation

- Warehousing

- Customs Operations

- Supplier Relations

- Purchasing

- Physical Distribution

- Stock Management

- Production Planning

- Optimization


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- Customer Relationship Management

In the above elements, a rationale has to be met and a sequence of the process should be designed

considering the below three elements:

- Efficiency

- Effectiveness

- Productivity

But considering the three elements, production quantity, production quality, place of production, time

zone of production, the mode of production are also important topics of what a production manager

should consider. Because, if the production manager aims to increase the levels of efficiency,

effectiveness, and productivity, then the major focus should be to examine the production itself and try to

observe the deficiencies and finally to make the production facility leaner day by day, by throwing away

the overhead and the costs associated with the overhead( Kobu, 1998).

AN EMERGING CONCEPT IN PRODUCTION PLANNING- INTEGRATED LOGISTICS

MANAGEMENT APPROACH

As stated throughout the paper, production planning relies upon increasing the level of production while

decreasing the foreseen costs associated with the overall process. Even though, it is highly suggested to

transform all the process to modern production planning techniques, there stil is room for advancement in

the way production planning is handled. The upcoming phase of modern production planning is now

called integrated logistics management where all the components of production is linked into each other

and any overhead in terms of costs or any other issues are thrown away as a formation of a lean

production planning and management structure. So the major elements of the newly established integrated

logistics management as part of effective and efficient production planning are ( Sarıkaya, 2003):

- Active involvement in competitive tools.

- Quality enhancement in areas where innovation is highly required.

- Corporate supplier approach where supply process is made JIT with the suppliers thereby

reducing warehousing risks and costs in production.

- Business process advancement.

- Labor force advancement and setting quality standarts for the employees in the production

planning.

- Market identification and market synthesis in the entry level.

- Integration of logistics functions.

- Planning, functionality, budgeting, the centralization of audit mechanisms solely designed and

implemented for the production planning excluding the overall establishment.

- Optimum pricing for a long term contractual agreement.

- Privatization and deregulation of transportation activities (so that transportation costs are dropped

and transportation type and number of transporter firms are increased. So, the concept of third

party logistics is being realized).

- Cost minimization approaches especially in the areas of energy.

- New advancements in the international trade such as new market formation, global outsourcing,

increase in the strategic alliances and joint ventures.

The above highlights mainly focus on the minimization of total costs associated with the production

planning. So, a competitive approach should be to move towards centralized warehousing, transportation,

customer services, materials handling, process formation, production activities, purchasing. Basically the


85

major summary is to centralize the critical logistics activities so that general costs of processing are pulled

down, otherswise a second and emerging approach is to outsource the activities where there are issues out

of the firm‘s area of expertise. This approach may be utilized through the process of outsourcing it

through internet channels ( Kırcova, 2001).

In this competitive terminology, several approaches arise as complementary. These are:

- Quick response.

- Efficient customer response.

- Continuous replenishment planning.

- Business intelligence.

The three above terminology evolved as part of integrated logistics planning in order to meet the

organizational needs of the firms as an attempt to meet the long lasting consumer needs. Quick response

means that as part of the leaning process in manufacturing, deficiencies should be fixed momentarily and

thus such failures should not be postponed. Efficient customer response is associated with continuously

communicating with the customers and suppliers thereby decreasing the level of dissatisfaction.

Continuous replenisment means the modernization of the production planning facilitiy which clearly

states that efficiency in all terms should be targeted (Ozdemir, 2006). Business intelligence is a

terminology that combines the three strategies as an overall ongoing process in the production planning.

BULLWHIP EFFECT IN THE CONCEPT OF GLOBALIZATION AND AUTOMATION OF

PRODUCTION PLANNING FACILITIES

In the above implementations, there exist high levels of risks in terms of:

- information outflow.

- uneffective use of time and energy.

- high levels of stock investment.

- unsufficient customer satisfaction levels.

- high profit losses.

- inadequate capacity planning.

- unfavorable transportation modelling.

These above risks are associated with the bullwhip effect also known as whipsaw or whiplash and the

term extensively underlines the risks that emerge from the above outcomes of the planning in the

production phase (Paksoy, 2008).

First introduced by Jay Forrester in 1961, also known as ―Forrester Effect‖, it aims to senchronize and

harmonize the elements in the supply chain. The long term expected achievement is to prosper on the

supply chain cost initiative and maximize the sharing concept of information flow thereby automating the

supply chain and production planning facilities provided that there is a decent and continuous level of

demand in the market with a fixed pricing strategy.

The model is also cited in the literature as an emerging trend in the modernization of the production

planning and attempt to:

- transform production facilities to places where there are more adavantages offered to

manufacturers through incentives.


86

- minimize transportation costs.

- increase options in the supplier resources.

- optimize distribution channels.

Thus the model can also be implemented electronically whereas needed ( Kırcova, 2001).

In this model, there are four variables ( Ganeshan and Harrison, 2008). These are:

1- Planning and responding.

2- Resources and appliances.

3- Production capacity.

4- Delivery sytems.

In competitive terms,

Planning and responding phase of the production planning consists of;

- Demand forceasting and production planning based on the demand forecasting techniques.

- Product pricing.

- Stock management issues.

Resources and appliances mainly deal with;

- Supplier relations.

- Crediting facilities in the supply process.

- Payment methods in the overall process.

Production capacity deals with;

- Product design.

- Quantity setting.

- Facility design.

- Product mapping.

Delivery seytems deal with;

- Order management.

- Delivery planning.

CONCLUSION

This paper deals with the emerging concepts of production planning in the era of global competition. The

first part of the paper includes a literature review of how the terminology has arisen. Following this

section, the paper clarifies some of the basic classical approaches of production planning. After the

completion of this section, the paper aims to move towards the competitive and emerging trends in

production planning and finally the paper concludes with identifying several trends in the production

planning phase. The major focus of this paper, thus, is to retrieve some methods being used in the

manufacturing firms as an attempt to reach efficiency in their production facilities and activities. The

supporting aim of this paper is to move towards on how a manufacturing firm can transform its activities

into a cost effective way by increasing the level of output. Several methods and strategies have been


87

revealed in this paper and above many, outsourcing, harmonization, and automation of the supply chain

activities seem to be the best alternatives in the formation of effective production planning activities.

However, the paper also exemplifies several risk issues of concern in the production planning. These are

also cited within the paper and the one that‘s most prominent in the risks are the changing environmental

factors. In this scope, manufacturing firms should either move their production facilities overseas where

there is cheap labor or push hard to take advantage of incentives offered to the manufacturers in their

homeland.

It is definite, however, that in the global era where warehousing is not preferred, high frequency flow of

goods and services are ideal in the cost efficiency models. This is why production solely based on the

changing needs of the consumers and their purchasing power is a key in the success of the overall

techniques.

REFERENCES

Ganeshan, Ram and Terry Harrison ( 2008). An Introduction to Supply Chain Management, ,

http://lcm.csa.iisc.ernet.in/scm/supply_chain.intro.html

Kırcova, İ (2001). E- Business Practices in Corporations, ITO Publications, 32-35

Kobu, B ( 1987). Production Management, Venüs Publications, 68-74

Metz, P.J (2007). Demystifying Supply Chain Management, http://

www.manufacturing.net/scm/index.asp

Oygur, Y (2007). Product Planning. Mess Publications, 18-26

Ozdemir, Ş ( 2006). Industrial Product Planning, Seçkin Publications, İstanbul, 64-69

Paksoy, T (2008), Information Failures in Supply Chains, http://

www.sosyalbil.selcuk.edu.tr/sos.mak/turanpaksoy)

Ross, D.F (2000). Competing Through Supply Chain Management: creating market Winning Strategies

Through Supply Chain Partnerships, London. Kluwer Academic Pres, 55-61

Sarıkaya, N ( 2003). Total Quality Management, Sakarya Publishing, 77-81

http://lcm.csa.iisc.ernet.in/scm/supply_chain.intro.html

http://www.manufacturing.net/scm/index.asp

http://www.sosyalbil.selcuk.edu.tr/sos.mak/turanpaksoy


88

A SERVPERF MODEL

OF THE VIETNAMESE BANKING INDUSTRY

Nguyen, Quoc Cuong


Bangkok, Thailand

Chaipoopirutana, Sirion


Bangkok, Thailand

Combs, Howard

San Jose State University San Jose, California

Abstract

Customer loyalty is an important factor which has a significant affect on the profitability of the

firm. The cost of keeping an existing customer to stay with the firm is much lower than the cost of

acquiring a new customer. Understanding the factors contributing to the development of

customer loyalty is very important for many organizations, especially for the highly competitive

market as the financial industry. The purpose of this research is to build and test a model of

factors effecting customer loyalty in Vietnamese banking industry. The data was obtained by

distributing questionnaire to 400 bank customers in Ho Chi Minh City, Vietnam. The data was

analyzed by structural equation modeling (SEM) to test all the relationship between variables in

the specified model. The results indicated that customer loyalty is positively and significantly

influenced by perceived service quality (SERVPERF), corporate image, customer satisfaction,

and switching costs. Additionally, the results revealed that perceived service quality has a

significant effect on both corporate image and customer satisfaction.

Introduction

In keeping with the liberalization requirement of World Trade Organization (WTO), Vietnam‘s

banking sector has been gradually opening up to both local and foreign investors. Therefore,

there has been a steady increase in the number of local and foreign-owned financial institutions.

With wholly-foreign owned banks entering the market, competition in the banking sector has

become more intense as both domestic and foreign banks fight for new customers. In this highly

competitive banking environment, foreign banks are at an advantage as compared to their

Vietnamese counterparts. In comparison with Vietnamese banks, foreign banks have better

infrastructures, offer more professional customer service, use more high technology, and enjoy a

network across many countries.

In spite of foreign banks‘ competitive advantages, Asia Commercial Bank (ACB), one of the

largest private banks, has still been able to keep the position of the best domestic bank in 2008

and 2009. Why have ACB customers remained loyal to it? What has ACB done to retain its


89

existing customers and create customer loyalty? In this study, the researchers address these

issues by considering several factors that are critical to customer loyalty and have given ACB a

competitive advantage over its rivals.

Dick and Basu (1994) found that gaining customer loyalty is the major factor for many firms

today and the costs of ensuring that a customer stay with the firm is lower than the cost of

acquiring a new one. Indeed, Reichheld (1996) pointed out that acquiring a new customer costs

five times what it takes to keep an existing one.

It has been found that one factor believed to have a significant effect on customer loyalty is

customer satisfaction (Soderlund, 1998). In addition, service quality also considered as one of the

most important factors that make customers stay loyal with the firm (Varki and Colgate, 2001).

Moreover, according to Nguyen and LeBlanc (2001), a company‘ corporate image, especially

that of financial service firms, plays an important part in securing customer loyalty.

Furthermore, Selnes (1993) found switching costs to effect on customer loyalty. Based on these

findings, four main factors have been identified as critical to gaining customer loyalty. A

conceptual framework, research hypotheses, and a research methodology will be articulated. The

results will then be analyzed and some recommendations made.

Literature review

Perceived Service Quality

For more than a decade, the definition and measurement of service quality perceptions are

among the most debated and prominent topics in the service marketing literature. According to

Parasuraman et al., (1985), perceived service quality is described as the gap between what

customers expect the service should be and what they actually receive. Consequently,

Parasuraman et al., (1985) developed a service quality measurement instrument called

SERVQUAL which consisted of ten dimensions. However, Parasuraman et al., (1988) collapsed

theses ten dimensions into five dimensions comprised of tangles, reliability, responsiveness,

assurance, and empathy.

Although SERVQUAL has been applied in many studies to assess service quality, the reliability

and validity of this measurement had been debated by several authors, particularly in the

expectation dimension. Cronin and Taylor (1992) stated that service quality concept according to

SERVQUAL confounds satisfaction and attitude.

The researchers concluded that service quality can be better measured by using only the

perception dimensions, rather than expectation-perception methodology. Subsequently, the

researchers developed an alternative measurement tool for measuring service quality named

SERVPERF, which concerns only the performance dimension; it consists of the same 22

perception items that are included in SERVQUAL. In this present study, the researchers applied

the SERVPERF model for measuring the service quality.

Corporate Image

According to Bitner et al., (1990), corporate image was regarded as an important determinant for

evaluating the firm‘s operation. It had been defined as the overall impression towards the firm


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which is held in the mind of customers. Fomburn (1996) viewed corporate image as an attitude

or impression of customers towards a firm that results from the accumulation of all received

information about that firm. Corporate image is related to some attributes of the firm, for

instance the name of business, the firm‘s architecture, the number of products and services

(Nguyen and LeBlanc, 2001). There are several prior studies pointed out that corporate image

also has a significant relationship with customer satisfaction. As Andreassen and Lindestad

(1998) demonstrated, a positive corporate image will help to enhance the level of customer

satisfaction especially for those who do not have much knowledge about the firm. Bloemer et al.,

(1998) also confirmed that customers who have good impression towards the firm‘s image will

be more satisfied with its offering services.

Customer Satisfaction

Customer satisfaction is one of the most important concepts for most marketers and consumer

researchers (Jamal, 2004). The conceptualization of customer satisfaction is very complex and

has been defined in many different situations. However, no single definition of customer

satisfaction has been universally accepted. Customer satisfaction traditionally defined according

to the expectation-disconfirmation theory is the result of the comparing between customers‘

expectation before purchase and evaluation about the actual performance of a product or service

after purchase (Oliver, 1977). Moreover, Kotler (2000) conceptualized satisfaction as the

pleasure felt by the customers occur when the actual performance of product or service meet

their prior expectations. Therefore, high level of service quality is considered as one of the most

important determinant in explaining customer satisfaction (Han and Baek, 2004), which in turn,

influences on customer loyalty towards the firm (Oliva et al., 1992).

Switching Costs

According to Dick and Basu (1994), switching costs is described as the costs incurred when

customer terminated the relationship with the firm he or she is dealing with and move to other

competing firm. Additionally, Porter (1998) conceptualized switching costs as one-time costs

that a customer faces when changing from one to other supplier. More recently, Patterson and

Smith (2003) defined switching costs as the perceptions of customers about the importance of the

extra costs should they decide to terminate the relationship with the present provider and seek

other alternatives. For this reason, switching costs can be considered as one of the factors that

discourage customers from switching, enabling them to continue in maintaining the loyal

relationship with the firm (Jones et al., 2002).

Customer Loyalty

Lovelock et al., (1999) conceptualized loyalty as the willingness of a customer to maintain a

relationship with the firm, continue to purchase and use its products or services and more likely

to recommend about the firm to others. Similarly, Gremler and Brown (1996) defined customer

loyalty as those who repeat purchase from the same service provider and show a good

impression towards the relationships with that service provider. Customer satisfaction is widely

recognized as a critical determinant for achieving customer loyalty in the service industry

(Moordian and Oliver, 1997; Soderlund, 1998; Gummerus et al., 2004). In addition to customer

satisfaction, perceived service quality is considered as one of the most important factors which

the firm has to focus on in order to gain customer loyalty (Fullerton, 2005). Corporate image is


91

believed to have a significant effect on the creation of customer loyalty in banking (Johnson et

al., 2001). Yanamandram and White (2004) found that customers are more likely to maintain the

relationship with the firm when they perceived high costs involved in switching.

Conceptual framework

Based on the literature review discussed above, the researchers developed a research model of

customer loyalty in the Vietnamese banking industry (see Figure 1). It was hypothesized that

customer loyalty is influenced by four factors consisting of perceived service quality, corporate

image, customer satisfaction, and switching costs. Additionally, customer satisfaction will be

effected by service quality perception and corporate image. Moreover, the researchers also

identified the relationship between perceived service quality and corporate image.

Figure 1: The proposed research model

Research hypotheses

Based on the proposed research model, the researchers developed seven research hypotheses for

this study. All the hypotheses are stated as follows:

H1: There is a statistical significant positive relationship between perceived service

quality and corporate image.


quality and customer satisfaction.

H3: There is a statistical significant positive relationship between corporate image and

customer satisfaction.

H4: There is a statistical significant positive relationship between corporate image and

customer loyalty.

H5: There is a statistical significant positive relationship between customer satisfaction

and customer loyalty.


quality and customer loyalty.

H7: There is a statistical significant positive relationship between switching costs and

customer loyalty.

Customer

Satisfaction

Perceived

Service Quality

Corporate

Image

Customer

Loyalty

Switching

Costs

H1

H2

H3

H4

H6

H5

H7


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Research methodology

The participants in this study consisted of 400 bank customers. The survey was conducted in Ho

Chi Minh City, Vietnam in November, 2009. In the process of collecting data, the researchers

applied the simple random sampling technique to select eight bank branches which approximates

to 26% of the total number of branches, and then the quota sampling method was used to assign

the number of respondents for each branch. Subsequently, the data were collected using a sample

of 50 bank customers from each branch.

A structured questionnaire was used as a primary mean for collecting the data in this survey. To

construct the survey instrument, existing scales from previous studies were extracted and adapted

for each construct. All items were measured with five-point Likert scale with 1 indicating

―strongly disagree‖ and 7 indicating ―strongly agree.‖ Perceived service quality was measured

with 20 items which adapted from Cronin and Taylor (1992). Corporate image was measured by

mean of five items from Bayol et al., (2001).

To measure customer satisfaction, four items from Levesque and MacDougall‘s (1996) scale

were selected. Switching costs was measured with three items which derived from Beerli et al.,

(2004). The measurement items of customer loyalty adopted in this study were created by Berne

(1997). The last parts contained a series of demographic items. In this study, the collected data

was analyze followed the two-step methodology recommended by Anderson and Gerbing

(1988). First, a confirmation factor analysis was performed to measure convergent and

discriminant validity of the constructs. Then, the structural equation model was applied to test

the fit model and the research hypotheses. These analyses were performed by the maximum

likelihood using AMOS 7.0.

Data analysis and results

The structure of factors for perceived service quality was examined by exploratory factor

analysis with Varimax rotation. The result from Table 1 presents three factors underlying the 20

variables which adopted from SERVPERF model of Cronin and Taylor (1992).

Table 1: Factor loadings for underlying dimensions of service quality

Variables Factor 1 Factors 2 Factor 3

1. Physical facilities are attractive and comfortable .725

2. Bank has modern looking equipment .776

3. Bank employees are well dressed .767

4. Ambience is visually attractive .758

5. Operating hours and locations are convenient .757

6. Bank keeps promise on fulfilling service on time .844

7. Bank always solved customers‘ problems .705

8. Bank provided services at the promised time. .660

9. Bank keep all records accurately .801


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10. You feel safe in transactions with the bank .651

11. Bank has your best interest at heart .836

12. Employees tell exactly when service will

perform

.833

13. Employees give you the prompt service .665

14. Employees always willing to help customers .629

15. Employees never too busy to deliver swift

service

.635

16. Employees‘ behavior instills confidence in

customers

.838

17. Employees are polite .651

18. Employees have adequate knowledge .849

19. Employees pay individual attention to customers .836

20. Employees understand customers‘ specific needs .905

Cumulative percent of explained variance 51.183 65.484 74.053

KMO measure of sampling adequacy 0.954

Bartlett‘ test Chi-square 7,254.764

Significance 0.000

The KMO and Bartlett‘s statistic show that data set is suitable for factor analysis. The result is

inconsistent with five perceived service quality dimensions which proposed by Cronin and

Taylor (1992) through the original model developed by Parasuraman et al., (1988). This study

found that there are only three key components of perceived service quality for Vietnamese

banking industry. The original five dimensions grouped in Factor 1 are called ―Ambience‖; the

six variables labeled Factor 2 are named ―Responsiveness‖, and nine variables in Factor 3 are

named ―Empathy.‖

A confirmation factor analysis was employed to test the measurement model of all constructs by

evaluating the criteria of overall fit with the data, reliability, convergent and discriminant

validity. First, the model‘s goodness-of-fit was measured based on seven common model-fit

measures as shown in Table 2. The results indicated a very good fit between measurement model

and the data since all model-fit measures surpassed the recommended value.

Table 2: Fit indices for measurement and structural model

Fit indices Recommended value Measurement model Structural model

x2/df ≤ 5.00 (Hair et al., 1998) 1.244 1.249

RMSEA ≤ 0.08 (Hair et al., 1998) 0.025 0.025

GFI ≥0.90 (Hu and Bentler, 1999) 0.959 0.958

AGFI ≥0.80 (Segars and Grover, 1993) 0.944 0.944

NFI ≥ 0.90 (Hair et al., 1998) 0.955 0.954


94

TLI ≥ 0.90 (Hair et al., 1998) 0.989 0.988

CFI ≥ 0.90 (Gefen et al., 2000) 0.991 0.990

Next, as seen in Table 3, the Cronbach‘s alpha of all constructs in the model were above the

recommended 0.70 level (Nunnally, 1978), whereas the average variance extracted of each

construct exceeded the recommended threshold value of 0.50 (Fornell and Larcker, 1981). The

factor loadings of all indicator items were greater than 0.70 (Yoo and Alavi, 2001), thus

indicating that the measurement has sufficient convergent validity.

Table 4 shows that the square root of the average extracted variance (AVE) of each construct

(the bolded elements in the matrix diagonals), is greater than its correlations with other

constructs, thus supporting the discriminant validity of the construct (Pavlou, 2003). In

conclusion, the results indicated that the measurement model achieved the adequate reliability,

convergent validity and discriminant validity.

Table 3: Measurement model fit indices for convergent validity

Construct

Indicator loading

> 0.50

Cronbach‘s alpha

> 0.70

Variance extracted

> 0.50


0.77

0.53

SQ1 0.76

SQ2 0.75

SQ3 0.67

Corporate Image 0.86 0.55

Y1 0.73

Y2 0.71

Y3 0.76

Y4 0.74

Y5 0.74

Customer Satisfaction 0.84 0.58

Y6 0.75

Y7 0.76

Y8 0.78

Y9 0.75

Switching Costs 0.84 0.64

X1 0.83

X2 0.78

X3 0.78

Customer Loyalty 0.86 0.67


95

Y10 0.82

Y11 0.80

Y12 0.84

Table 4: Discriminant validity (Inter-construct correlations) of variable construct

Construct PSQ CI CS SC CL

PSQ 0.73

CI 0.56 0.74

CS 0.59 0.12 0.76

SC 0.02 0.70 0.07 0.80

CL 0.60 0.63 0.67 0.21 0.82

PSQ: Perceived Service Quality, CI: Corporate Image, CS: Customer Satisfaction, SC:

Switching Costs, CL: Customer Loyalty, AVE: Average Variance Extracted. Diagonals

represent the square root of AVE.

Analysis of the structural model

The structural equation modeling was employed to test the research hypotheses, and the results

are shown in Figure 2. All the measures fit exceeded the recommended minimum threshold,

indicating a good fit of the structural model with the sampled data. Consequently, the researchers

then conducted the testing of the path coefficients of the structural model.


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Figure 2: Structural equation modeling results

The results of the path analysis are presented in Table 5. Perceived service quality showed a

strong positive influence (β = 0.56, p < 0.001) on corporate image, thus supporting H1.

Similarly, customer satisfaction was found to be positively effected (β = 0.28, p < 0.001) by

perceived service quality, thus accepting H2. For corporate image variable, the results

demonstrated that corporate image is positively and significantly related to customer satisfaction

(β = 0.55, p < 0.001) and customer loyalty (β = 0.21, p < 0.01), therefore validating H3 and H4.

Moreover, the resulted also showed that customer satisfaction (β = 0.36, p < 0.001), perceived

service quality (β = 0.27, p < 0.001), and switching costs (β = 0.15, p < 0.001) have significant

relationships with customer loyalty, in which customer satisfaction is the most influential

predictor of customer loyalty as compared to other factors. Therefore, H5, H6, and H7 are

supported by the data.

Table 5: Path analysis by Structural Equation Modeling (SEM)

Hypothesis β t-value p-value Supported

H1: Perceived Service Quality → Corporate Image 0.56 8.434 *** Yes

H2: Perceived Service Quality → Customer

Satisfaction

0.28 4.225 *** Yes

H3: Corporate Image → Customer Satisfaction 0.55 7.866 *** Yes

H4: Corporate Image → Customer Loyalty 0.21 2.819 ** Yes

H5: Customer Satisfaction → Customer Loyalty 0.36 4.559 *** Yes

Customer

Satisfaction

Perceived

Service Quality

Corporate

Image

Customer

Loyalty

Switching

Costs

0.56***

0.55***

0.28***

0.21**

0.27***

0.36***

0.15***

SQ3 SQ1 SQ2 X3 X1 X2

Y1 Y2 Y3 Y4 Y5

Y12

Y6 Y7 Y8 Y9

Y10

Y11

.78 .78 .83

.82

.76 .75 .67

.78 .74 .71 .76 .71

.75 .76 .77 .75

.80

.84


97

H6: Perceived Service Quality → Customer Loyalty 0.27 4.025 *** Yes

H7: Switching Costs → Customer Loyalty 0.15 3.445 *** Yes

Notes: Standardized estimates are shown; ** p < 0.01; *** p < 0.001

Findings, Implications, and Conclusion

The main objective of this study is to investigate the influences of perceived service quality,

corporate image, customer satisfaction, and switching costs on customer loyalty in the context of

Vietnamese banking. Moreover, the researchers also examine the relationships among perceived

service quality, corporate image and customer satisfaction. The structural equation modeling

approach was used to analyze the data.

The results of the analysis revealed that customer satisfaction displays a significant relationship

to the customer loyalty. This is consistent with the previous empirical research, which indicated

that the higher the level of customer satisfaction, the greater level shall be the customer loyalty

(Jamal and Naser, 2002). The results also found that consumers who hold a positive attitude

towards the bank‘s image will tend to develop loyalty towards the bank. This finding is

supported by Laroche et al.‘s (1986) study who found corporate image is one of the factors

influencing customer‘s making decision for being loyalty towards a specific bank. In addition,

our model also disclosed that switching costs is positively and significantly associated with

customer loyalty. The result is consistent with the previous study by Colgate and Lang (2001)

who mentioned that switching costs is one of the reasons that make customers to stay with the

firm without regarding the level of satisfaction.

According to the research results, corporate image and perceived service quality have been found

to be the important antecedents of customer satisfaction. Nevertheless, the influence exerted by

corporate image is far greater than that of perceived service quality. This implies that the more

favorable corporate image and the higher level of service quality perceived will lead customer to

have high level of satisfaction. Thus, the researchers can conclude that corporate image and

perceived service quality play important roles in creating customer satisfaction in Vietnamese

banking. These results are consistent with Bloemer et al., (1998) who found corporate image is a

determinant of customer satisfaction in banking industry. Also, Arasli et al., (2005) found

demonstrated superior service quality is important for all financial institutions to create customer

satisfaction. With respect to the direction of the relationship between perceived service quality

and corporate image, our model demonstrated that there is a positive and statically significant

relationship in this link. It therefore can be concluded that perceived service quality is considered

as one of the determinants of corporate image in Vietnam banking market. The finding is similar

to Howcroft and Davis‘s (1986) study, which indicates the higher service quality that customers

received, the more favorable the image they would have about the financial institution.

Likewise, results from confirmation factor analysis of this study indicated that the Vietnamese

banking perceived service quality (SERVPERF) consisting of three main dimensions, including

of ambience, responsiveness, and empathy, which is different from five service quality

dimensions of the SERVQUAL model proposed by Parasuraman et al., (1988).


98

By performing an analysis of the impact of perceived service quality, corporate image, customer

satisfaction, and switching costs on customer loyalty, and the sequence of relationships between

perceived service quality, corporate image, and switching costs. This research is among the few

that has examined the Vietnamese banking market and provides highly demanded information

and knowledge for many banks in Vietnam. The study‘s results have provided a comprehensive

understanding of customer loyalty in Vietnamese banking industry and suggested new directions

for banks and financial institutions.

The results demonstrated the impact of satisfaction on loyalty is considerably stronger than that

of perceived service quality, corporate image, and costs of switching. This implies that bank

should focus on maximizing the level of customer satisfaction, of which corporate image and

perceived service quality are the primary drivers, in order to enhance customer loyalty. In

addition, the study also found that perceived service quality has an important role in influencing

corporate image. Thus, the bank should place most emphasis on improving its service quality to

build a strong corporate image, which may lead to be significant difference from other in the

same industry, and achieve high levels of customer satisfaction.

With respect to service quality improvement, banks must concentrate their efforts on

differentiating their services from competitors and guarantee quality service. This study suggests

that banks have to develop value-added service to increase enjoyment and convenience, such as

minimizing customers‘ inconvenience by speedily processing customers‘ complaints through a

variety of systems and channels. Recently, many banks in Vietnam strive to open more branches

across the country to make it convenient enough for customers and tend to provide similar

services and products. However, if any bank is able to get ahead of their competitors in different

ways, such as safe and convenient Internet Banking services, or offer the superior service to

customers, this would not only enhance service quality, but also improve customers‘ attitude

towards the bank‘s image in a new positive direction.

Additionally, customer loyalty was appeared to be affected by the costs of switching, such as

loss cost, move-in cost, and interpersonal relationships. This implies that bank could undertake

actions that increase switching costs for preventing customers‘ switching behavior. This study

recommends bank must concentrate on continuously developing reward programs that concretely

compensate customers, such as mileage programs, in order to increase loss costs and move-in

cost. Similarly, establishing of preferred customer programs can also contribute to increasing

customer loyalty. Further, bank must design and carry out relationship-oriented marketing

strategies to enhance interpersonal relationships with customers, since it helps the bank to retain

customers even when competitors attempt to win with lower prices or provide of other

conveniences.

Like many previous studies, there are a number of limitations in this research. First, this study

was cross-sectional and so only relates to a period of time, thus a longitudinal study could be

conducted to confirm the linkages among the variables over time. Second, the researchers

focused only on one bank in Ho Chi Minh City. Therefore, the results of this study may not be

generalized to other banks in other cities and provinces. Further studies should cover different

banks, provinces and cities across the country in order to represent the whole banking business in


99

Vietnam. Moreover, there are only four elements of customer loyalty were selected for analyzing

in this study. Thus, the researchers suggest that further studies on include different variables that

might have different significant effect on bank customer loyalty. Finally, we suggest further

research to analyze the effect of other possible moderating variables in the relationship between

customer loyalty and its antecedents, such as psycho-demographic factors of customers like their

knowledge about financial in the retail banking market.

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103

THE CHANGING NATURE OF THE WORK DONE BY COMPUTER

PROFESSIONALS IN THE UNITED STATES Saxon, Charles S.

Eastern Michigan University

ABSTRACT

In the rapidly changing computer industry, jobs as computer programmers are decreasing as

jobs in other computer related areas are increasing. A result of this change is many less entry

level jobs are available in the computer industry. Many experts predict that soon, the use of

programmable robots will increase greatly in stores, offices, homes, and other non-industrial

settings. People with appropriate training will be needed to program those robots for individual

situations. With training in programming robots, people who previously would have been

computer programmers may find entry level positions in the computer industry. Schools,

universities, and others training people for the computer industry should include robotic

programming in their curricula.

INTRODUCTION

Few observers of the computer industry would argue with the proposition that it is rapidly

changing. The hardware is getting smaller, faster, and cheaper. New libraries and techniques are

speeding software development. Networking in general and the internet in particular is changing

the way things are done. This paper will examine how these and other changes are affecting

computer employment in the United States and propose a specific course of action. It seems

likely that the situation in other industrialized countries is similar to that found in the United

States; however, the United States Bureau of Labor Statistics (BLS) provides consistent, easily

accessible job categories and employment data that facilitate the analyses [4, 5, 6, and 7].

BACKGROUND

Employment in the computer industry in general is growing at a rapid pace. Table 1 shows the

employment figures for various job categories for 2002, 2008, and the BLS estimates for 2018.

The latter two dates are the latest ones available. The problems associated with the change of the

century in legacy programs caused an artificial inflation in the number of computer programmers

until after 2000. Probably, the situation had returned to normal by 2002. Computer

Programmers is the only computer category which has a decline in employment between 2002

and 2008 and a predicted decline in 2018. All other categories have modest to robust increases.

One explanation for this situation is that little new application development work is being done

in areas formerly occupied by COBOL programs. Previously, many computer programmers

were engaged in writing programs that produced reports containing data stored in files and

programs to update those files of data. Today, the data previously contained in files is likely to

be stored in databases and workers in functional areas of business can access this data without

the assistance of computer professionals. Other factors, such as companies choosing to have

programming done in other countries, are undoubtedly contributing to the decline also.


104

Employment in Computer Categories 2002 2008 2018

Est.

Computer Programmers

499,000

426,700

414,400

Computer Software Engineers, Applications

394,000

514,800

689,900

Computer Software Engineers, Syst.

Software

281,000

394,800

515,000

Computer Systems Analysts

468,000

532,200

640,300

Database Administrators

110,000

120,400

144,700

Network and Computer Systems

Administrators

251,000

339,500

418,400

Network Systems and Data Comm.

Analysts

186,000

292,000

447,800

Other Computer Specialists

192,000

209,300

236,800

Computer and Information Scientists

23,000

28,900

35,900

Table 1

The decline in the number of computer programming jobs means that many traditional entry-

level positions are no longer available. Entry-level positions in other categories such as Software

Engineering and Systems Analysis are less numerous than those in Computer Programming.

Many new graduates and others seeking to enter the ranks of computer professionals must find a

new career path. A possible way to greatly increase entry-level jobs for computer professionals

might be to take steps to facilitate robotic programming by business computer professionals.

DEFINITIONS OF THE WORDS ROBOT AND ROBOTICS

The word robot comes from the Czech word robota meaning forced labor. It was introduced into

English in the 1920‘s in Karel Capek‘s play ―R.U.R (Ronssum‘s Universal Robots).‖ [12].

Webster‘s New Collegiate Dictionary [17] defines robot as ―1 a: a machine that looks like a

human being and performs various complex acts (as walking or talking) of a human being; also a

similar fictional machine whose lack of capacity for human emotions is often emphasized … 3: a

mechanism guided by automatic controls.‖ Webster‘s defines robotics as ―a field of interest

concerned with the construction, maintenance, and behavior of robots.‖ Robotics was first used

by Isaac Asimov in his 1941 short story titled ―Liar!‖ [2]. The trade group, Robot Institute of

America, defines a robot (circa 1979) as: ―A reprogrammable, multifunctional manipulator

designed to move material, parts, tools or specialized devices through variable programmed

motions for the performance of a variety of tasks.‖ [3, p. 15] This definition has become widely


105

accepted, even though it clearly focuses on industrial robots. The most common form of

industrial robot is made up of a single automated arm that resembles a construction crane.

HISTORY OF ROBOTS

From medieval times to the early nineteenth century many automatons were designed and some

were built. These automatons included ones capable of acting, drawing, flying, and playing

music. Some of these actually worked, but working models of many designs were only built

recently. The Jacquard Loom, invented in 1801, was the first device to be controlled by punched

cards and thus marks an important milestone in the history of computing. In the early 1800‘s

Charles Babbage designed a device that he called a difference engine which was essentially a

mechanical stored program computer. However, the device was never built until modern times.

Throughout the nineteenth and twentieth centuries numerous devices were built to play musical

instruments [3].

In 1961 the first industrial robot was used in a General Motors plant in New Jersey [15]. It was

used to move die castings into position and weld them onto automobile bodies. This was a

dangerous task for workers because of poisonous gas and the size of the parts. The robot was

called Unimate and it was made by Unimation, the first robot manufacturing company.

Subsequently, numerous industrial robots have been employed in manufacturing activities

especially welding and painting where the health of human workers is at risk. Modern industrial

robots often feature six degrees of freedom and they can be programmed to perform tasks other

than merely moving parts from one place to another.

FEATURES OF ROBOTS

Robots are defined by their ability to move tools or parts through space. The location of a point

in space can be determined by the three distances (in the x, y, and z axis) from an origin. In

addition, the orientation of an object requires three parameters indicating the rotation of the

object about these axes. The ability to vary these six parameters is called six degrees of freedom.

To achieve this motion, two types of joints are typically employed. These joints are sliding

joints where the movement is constrained to a straight line like a drawer sliding in and out of its

opening and revolute joints, like hinges, where rotation about an axis is possible. Combinations

of these joints and sometimes others are used to allow the robot the freedom of motion needed to

accomplish desired tasks. In addition to movement many robots are provided with means to grip

objects these can be finger like pincers or vacuum devices. Some robots are equipped with

special purpose devices like spot welders or spray guns.

Industrial robots are programmed either by being guided through the activities they are to

perform or by off-line programming. With off-line programming, the activities to be performed

are specified by computer commands. An active area of robotics research is the development of

high-level programming languages which allow the programmer to specify the robots actions

using external tasks and objectives rather than internal commands. Thus a programmer might

have a command like ―take this box to the storeroom‖ rather than ―move the arm down 12 inches

and grasp the box‖.


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CURRENT TRENDS IN ROBOTICS

Within the past five years, tremendous advancements in robotics technology have enabled a new

generation of applications in diverse fields far removed from the industrial applications that

dominate the present use of robots. Experts predict that next generation robotics applications

will eventually affect the lives of all Americans and that these applications will have an

enormous economic, social, and political impact on the future of the country. The United States

R&D investment in robotics technology lags behind other countries. Unless this situation is

corrected, the United States may need to rely on the rest of the world to provide the robotics

technology that will increasingly become a part of everyday life. [13]

In January 2007, Bill Gates published an article in Scientific American titled ―A Robot in Every

Home‖ [8] where he saw many similarities between the emerging robotics industry and the

computer industry of the mid-1970s. With the manufacturing industry‘s industrial robots being

similar to the large main-frame computers and numerous small companies providing robots to

researchers and hobbyists being similar to the companies selling micro-computers then. He

points out that the situation with respect to standardization is also similar. The project that

resulted in the development of Microsoft Robotics Studio, an attempt to provide a common

development environment for programs to control robots from various manufacturers is

described. Gates predicts that the reduction in cost and increase in power of computer

technology combined with reduction in cost of the robotics hardware will make robots practical

solutions to many more problems than in the past. He also sees the great volume of robotics

research being done resulting in an entirely new class of robots that are essentially mobile,

wireless peripheral devices that tap into the power of desktop PCs to handle processing-intensive

tasks such as visual recognition and navigation.

Microsoft‘s development of the Robotics Studio, Visual Programming Language, and Simulator

moves the robot programmer back from the actual hardware used to construct the robot and

allows the construction of generic software which can be used with a wide variety of hardware.

Computer simulations of robotic activity are increasingly being used to facilitate the robot

programming process. [10, 14] The use of simulation can be beneficial in at least two ways.

Initially, the robot program can be developed using computer simulation rather than an actual

robot. This eliminates the possibility of damaging the robot and reduces the material cost of trial

runs. The other way that simulation can be useful is when a robot has been programmed, but

needs to be adjusted. The existing robot program can be uploaded and used with the simulation

to accurately describe the existing situation so that the program and other controls can be

accurately adjusted.

Since the Gates article developments in the robotics industry have continued at a brisk pace even

though there has been a decrease in orders for robots accompanying the current economic

downturn. In 2009 researchers have developed new robots to tackle a variety of tasks: such as

helping with medical rehabilitation, aiding military maneuvers, mimicking social skills, and

grasping the unknown [9]. Many researchers believe that giving robots social skills such as

making eye-contact, recognizing expressions, and sensing human stress will make them better at

assisting people in homes, schools, and offices. Several research projects have made recent

advances in these areas. Commercial medical robots are well established but recent research has

made robots effective in the area of patient rehabilitation. Other medical related research has


107

created a robotic snake to assist soldiers in the field by checking for signs of breathing and

delivering oxygen, if needed. Big advances were made in 2009 in the area of grasping

technology, an important skill for many robotic applications. Progress was also made related to

robots ability to move themselves.

In Japan, the world‘s leader in robotic technology, a great deal of effort is being expended to

develop robots that will assist people in shops and homes rather than participate in industrial

processes [11]. A robot named Robovie-II is being used in an Osaka mall to assist customers as

they shop. The robot can detect people who are walking aimlessly and direct them toward their

destinations. A later version of that robot has been used to assist elderly people in buying goods

in a supermarket. Even though these applications are experimental, they illustrate the fact that

the Japanese robot revolution is moving from the factory floor to the home, the hospital, the local

restaurant, and even the rice paddy. Japan already has robots that can clean, pour drinks and

serve food, function as security guards, play pool, dance, care for the elderly, and act as pets and

companions. Many of these cutting-edge robots are experimental and very expensive; however,

it seems likely that prices will drop as they have in the computer industry.

PROGRAMMING ROBOTS

If the robots are programmable, obviously someone must program them. When the

programming is done by guiding the robot through the desired activity, an obvious choice of

programmer would be the person who would perform the tasks if there were no robot. However,

this might not be the best choice. Often workers who perform routine tasks feel threatened by

the machines that are capable of doing their work. Hardly any programmable device will

perform satisfactorily if the person doing the programming does not want it to. Thus, it may be

better to have a person not normally doing the work that is to be programmed have the ultimate

responsibility for the success of the robot‘s actions. This programmer may or may not need the

assistance of the workers who perform the tasks to be done by the robot. If the programming is

to be done off-line, it is likely that the people performing the tasks to be done by the robot will

need extensive training to be able to write successful programs. It seems unlikely that the people

formerly doing the work would be ideal candidates for such training. Again it would seem that

the ultimate responsibility for the success of the programs should be placed in a programming

specialist.

While the engineers responsible for the selection, installation, and maintenance of the robots

would be well qualified to do the day-to-day programming, it seems likely that they would be

overqualified for routine programming. This will become even more the case as the level of

robot programming languages increases. [10, 14]

Companies‘ Information Systems groups typically have individuals that are skilled in analysis,

development, and debugging computer programs. It is likely that many of these people would be

ideally suited to be trained as robot programmers. If they had had previous experience with

robotic programming (either in school or industry) training might not be necessary. Especially

as robotic programming languages and development environments become more high level, the

differences between developing web or personal computer applications and programming robots

becomes smaller and the amount of additional training needed for an applications programmer to

become a robot programmer would also be reduced.


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CONCLUSION

Jobs as computer programmers and thus entry-level positions in the computer field are

decreasing in number. The use of programmable robots in non-industrial settings is likely to

increase rapidly. There will be opportunities for business computer professionals to also become

robot programmers with relatively small investments in additional training. The amount of

additional skill needed will become less as higher level programming languages are developed

for robotic applications.

As robots transition from industrial settings into offices and homes, they will become more

numerous, less expensive, and more versatile. This will result in a need for trained people to

acquire, deploy, program, update, and maintain them. In some cases, engineers and electronic

technicians will be required to fill these needs; however, individuals from Information Systems

groups will often be able to perform the needed tasks with only a small amount of additional

training. Business computer professionals could be ready to assume additional responsibilities in

the robotics field if they had received basic robotics training in their college or university

programs. Schools, universities, and others training people for the computer industry should be

encouraged to include robotic programming classes in their curricula so that their students would

be ready for robotic programming opportunities.

REFERENCES

[1] ―A Roadmap for US Robotics: From Internet to Robotics‖ http://www.us-

robotics.us/reports/CCC%20Report.pdf Retrieved 2010-01-11.

[2] Asimov, Isaac, ―Liar!‖ Astounding Science Fiction (May 1941).

[3] Branwyn, Gareth, Absolute Beginner‘s Guide to Building Robots, Que (2003).

[4] Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook,

2010-11 Edition, Computer Software Engineers and Computer Programmers, on the Internet

at http://www.bls.gov/oco/ocos303.htm (visited June 11, 2010).


2010-11 Edition, Computer Systems Analysts, on the Internet at

http://www.bls.gov/oco/ocos287.htm

(visited June 11, 2010).


2010-11 Edition, Computer Network, Systems, and Database Administrators, on the Internet

at http://www.bls.gov/oco/ocos305.htm (visited June 11, 2010).


2010-11 Edition, Computer Scientists, on the Internet at

http://www.bls.gov/oco/ocos304.htm

(visited June 11, 2010).

[8] Gates, Bill, ―A Robot in Every Home,‖ Scientific American, Volume 299, Number 1

(January 2007)


109

[9] Grifantini, Kristina, ―The Year in Robotics,‖ Technology Review, (December 29, 2009)

http://www.technologyreview.com/computing/24231/?a=f Retrieved 2010-01-11.

[10] Johns, Kyle and Trevor Taylor, Professional Microsoft Robotics Developer Studio, Wiley

(2008).

[11] Kambayashi, Takehiko, ―Japan‘s robot revolution moves from factory to the home‖

http://www.csmonitor.com/World/Global-Issues/2009/1231/Japan-s-robot-revolution-moves-

from-factory-to-the-home Retrieved 2010-01-11.

[12] Karel Capek website, http://capek.misto.cz/english/robot.html Retrieved 2010-01-11.

[13] Kellett, Paul, ―Roadmap to the Future‖ http://www.robotics.org/content-

detail.cfm/Industrial-Robotics-Feature-Articles/Roadmap-to-the-Future/content_id/1647

Retrieved 2010-01-11.

[14] Morgan, Sara, Programming Microsoft Robotics Studio, Microsoft Press, (2008).

[15] Nof, Shimon, Handbook of Industrial Robotics, 2nd

Edition, John Wiley & Sons, (1999).

[16] Predko, Myke, Programming Robot Controllers, McGraw-Hill, (2003).

[17] Webster‟s New Collegiate Dictionary, G. & C. Merriam Company, (1981).


110

ENVIRONMENTAL MARKETING MANAGEMENT STRATEGIES

Self, Donald R.

Auburn University Montgomery

Self, Robin M.

Alabama State University

Gogue, Jason

Auburn University Montgomery

ABSTRACT

This paper first reclassifies Zeithaml and Ziethaml‟s (1984) classification model of 15 activities

that an organization might engage in to impact its uncontrollable external environments

(political and legal, economic, social and technological). The proposed classification system

contains the following strategies: competition issues, image issues, alliance/unification issues,

dependence development issues, governmental issues, and demand based issues. Table 1

demonstrates the new set of strategies. Second, this paper demonstrates that almost all of these

strategies can and have been used to modify the organization‟s relationship with almost all of

the environments. Given the current world economic climate, organizations need to have

alternative strategies at their disposal in order to effectively compete and succeed. This paper

provides operational examples of strategies that can be used to gain and sustain a competitive

advantage.

INTRODUCTION

Typically, marketing strategies are proposed under the headings of price, place, promotion, and

distribution system (or place). These four areas of controllable activities are proposed to exist in

a set of uncontrollable environments, often discussed under the heading PEST, with the letters

representing the Political (and legal), Economic, Social (often including demographics, life

styles, and values), and Technological environments. In 1984, Carl and Valarie Zeithaml

proposed a classification model of 15 activities that an organization might do to impact one of

these environments. These strategies were classified under the headings of independent

strategies, cooperative strategies, and strategic maneuvering. Although competition based

strategies have continued to evolve and organizations do attempt to manipulate their

environments, research in this area lags.

This paper has two purposes. First, it reclassifies the original Zeithaml model under the headings

competition issues, image issues, alliance/unification issues, dependence development issues,

governmental issues, and demand based issues. Table 1 demonstrates the new set of strategies.

Second, this paper demonstrates that almost all of these strategies can and have been used to

modify the organization‘s relationship with almost all of the environments.

Given the current world economic climate, organizations need to have alternative strategies at

their disposal in order to effectively compete and succeed. This paper provides operational

examples of strategies that can be used to gain and sustain a competitive advantage.


111

Table 1: Proactive Environmental Management Strategies

Objective Strategies Definition Competition Issues Aggression* Organization exploits a distinctive

competence or improves internal efficiency

of resources for competitive advantage.

Pacification* Independent action to improve relations

with competitors

Image Issues Public Relations* Establishing and maintaining favorable

images in the minds of those making up the

environment

Voluntary Actions* Voluntary management of various interest

groups, causes and social problems

Co-optation** Absorbing new elements into the

leadership or policymaking structure of an

organization as a means of averting threats

to its stability or existence

Alliance/Unification Coalition** Two or more groups coalesce and act

jointly with respect to some set of issues

for some period of time

Mergers & Acquisitions*** Combining two or more firms into a single

enterprise

Domain Selection*** Entering industries or markets with limited

competition or regulation coupled with

ample suppliers and customers; entering

high growth markets

Dependence Issues* Contracting** Negotiation of an agreement between the

organization and another group to

exchange goods, services, etc.

Dependence Development* Creating or modifying relationships such

that external groups become dependent on

the focal organization

Governmental Issues Legal* Company engages in private legal battle

with competitor on antitrust, deceptive

advertising, or other grounds

Political* Efforts to influence elected representatives

to create a more favorable business

environment or limit competition.

Demand Issues Smoothing* Attempting to resolve irregular demand

Demarketing* Attempts to discourage customers in

general or a certain class of customers in

particular, on either a temporary or

permanent basis

Diversification** Investing in different types of businesses,

manufacturing different types of products,

vertical integration, or geographic

expansion to reduce dependence on single

product, service, market or technology

*Zeithaml & Zeithaml (1984) called these Independent strategies

** Zeithaml & Zeithaml (1984) called these Cooperative strategies


112

*** Zeithaml & Zeithaml (1984) called these Domain Selection strategies

COMPETITION ISSUES

An organization‘s possible relationships with its competitors can be described in the continuum

among aggression, pacification, and cooperation. Table 2 demonstrates strategies for using each

of these to proactively approach each of these environments.

Table 2: Competition Issues

Competition

Issues

Social Niche

(Demographics/Life

Styles/Values)

Political/Regulatory

Milieu

Technological Economic

Aggression Direct market efforts

aimed towards

specific

prospects/customers

based on

demographics to

create specific life

styles or social

values

Capitalize on

limitations placed on

competitors of which

you can overcome

Use R&D or

purchase new

technology to

create a new

product or

service that sets

industry

standards

Employ an

aggressive

pricing

technique

which takes in

account

seasonal

trends as well

as market

trends

Pacification Marketing to create

a new niche that can

be satisfied by both

your business and

that of your

competitors

Help competitors

meet regulatory

requirements or

succeed in order to

keep the government

regulators and

lawmakers out of

your business

Sharing

technological

advances with

the entire

industry in

order to have

greater

influence in the

direction of the

market and

perhaps reduce

competitive

R&D efforts

Use price

umbrellas to

protect the

entire industry

Implicit

Cooperation

Coordinating with

other companies to a

new market aimed at

a specific group e.g.

sub-prime loans

Coordinating

individual efforts in

order to have a

greater influence on

political/regulatory

actions to create

industry

opportunities

Timing the

release of new

products along

with

competitor‘s

support

products to

create a new

standardization

of a new

technology

Offering

rebates or

discounts for

competitor

products that

complement

yours


113

Some recent examples of the use of aggression, pacification and implicit cooperation are

presented below.

Aggression. Social Niche (Demographics/ Life Styles/ Values). Dove started a campaign

directly aimed towards women to show them that all women are not size 2 and have model

figures. Six women were asked to join the campaign and to share the stories of their lives of not

having the perfect body. Therese Kauchak-Maring, senior editor at American Girl and author of

the book Real Beauty explains that they are reaching out to girls who are feeling the pressures of

having the perfect body and are trying to teach them to be happy with who they really are and

not what others want (http://www.usatoday.com/money/advertising/2005-07-07-dove-

usat_x.htm).

Political/ Regulatory Milieu. Apple Inc. has an advertising campaign running that compares

Macs with PCs. The ads focuses on the advantages of a MAC compared to that of the PC. The

humorous ads first aired in 2002. One can find fourteen different reasons that MAC is better

than PC on its website (http://www.apple.com/getamac/).

Economic. Members of several industries employ an aggressive pricing technique that takes into

account seasonal and market trends. An example would be a cruise to Europe. The price of the

cruise is the highest in early summer when temperatures are ideal and autumn is approaching.

Caribbean prices change according to when schools are letting out because it is a family

destination. Once classes resume the price will drop

(http://findarticles.com/p/articles/mi_m0FCP/is_1_23/ai_76549191/print).

Pacification. Social Niche (Demographics/ Life Styles/ Values). The ―Got Milk‖ campaign that

started in 1993 has become one of the most recognizable marketing campaigns in the world. The

campaign has helped the industry association to boost the awareness of healthy attributes of

drinking milk. Not only was this campaign made to raise awareness of milk but to boost sales

for all producers

(http://www.asaecenter.org/PublicationsResources/ANowDetail.cfm?ItemNumber=18644).

Political/ Regulatory Milieu. City governments are now following in the footsteps of New York

City who made it illegal for restaurants to use trans-fats in frying oils. Middleby is a food

service cooking equipment company who supplies a new Rocket Fryer that helps restaurants

switch from using trans-fat-oils to trans-fat-free oils by the use of an advanced filtration system.

McDonalds, KFC, and Dominos Pizza already use Middleby for their cooking equipment.

Technological. John Kelly, a senior vice president of technology at HP and IBM, described

―Collaborative Innovation‖ as an incentive for companies to work together and grow together.

With companies working together, R&D functions will not be duplicated and costs will be more

effective in efforts to focus on the customer. Collaborative innovation also allows the partners to

have access to all the knowledge of people working on the project together and learn from them

(http://www.gabeoneda.com/node/59).

IMAGE ISSUES

Public relations, voluntary action, and co-option are three strategies designed to improve the

image of the firm. These three present a continuum from ―talking the talk‖ to ―walking the

walk‖ (co-option).

http://www.gabeoneda.com/node/59


114

Table 3: Image Issues

Image Issues Demographics/Social

Life styles/Social

Values

Political

Milieu/Regulatory


Public

Relations

Sponsoring events or

supporting causes in

order to gain a

foothold to create a

new market

Creating positive

relations with local

governments to

gain favorable

regulation or tax

breaks

Communicate

how your

firm‘s

technological

advances have

benefited target

groups

Create, ensure

and

communicate

value to

customer

Voluntary

Action

Making corporate

adjustments intended

to appease a specific

group in effort to gain

favor from that group

Taking action to

exceed government

regulation or

political interests

to gain favor from

the government

and the public

Participating in

new technology

focus groups

and/or

conferences or

supporting

industry

standards

Actions taken

to help

consumers in

times of need in

an effort to

build good will

Co-optation Including members of

the target group

within the

management and/or

sales force that allow

different ideas to be

expressed to gain

favor or acceptance

from the target market

Including

politicians or

regulators in

discussion making

in order to gain

favor and/or

leniency of

supporting

candidates/parties

Establishing a

diverse

technical

department to

better enable

researchers to

develop

products or

services to

better satisfy

the needs of

specific target

markets

Including

consumer

representatives

to establish

pricing policies

ALLIANCE/UNIFICATION ISSUES

Coalition, mergers and acquisitions, and domain selection address three perspectives on

competitive issues. Coalition building includes bringing competitors together to influence

politics and is commonly practiced through such organizations as the NRA and National Cotton

Council of America. Both serve as government watchdogs for members and lobby makers for

favorable regulations. Mergers and acquisitions reduce the competitive threat by reducing the

number of competitors. Domain selection is the decision to avoid your competitors.


115

Table 4: Alliance/Unification Issues

Alliance/unificatio

n Issues

Demographics/Soci

al Life styles/Social

Values

Political

Milieu/Regulator

y

Technologica

l

Economic

Coalition Working jointly to

reach new markets

and actively

participating in or

supporting industry

associations which

seek to appease or

influence different

groups

Cooperative

effort to influence

political climate

for industry or

change/control

regulatory action

Joint R&D

projects

and/or

sharing of

information

for mutual

benefit

Industries

working

together to

control or

stabilize the

market price

of

goods/service

s

Merger &

Acquisition

Joining forces with

another firm to gain

connections or

identify better to a

target market

Seeking approval

and or advice

from government

in effort to gain

support and

reduce barriers

Acquiring

smaller

companies to

gain new

technologies

as opposed to

doing your

own R&D

Merging

with or

acquiring

competitors

in order to

gain more

control over

market price

Domain Selection Entering

demographic

markets that have not

been previously

exposed to your

produce or service

with limited

competition

Entering a new

market by

meeting new

regulatory

requirements or

political interests

Holding

exclusive

rights to a

new and

important

technology

Entering a

new market

which

competitors

cannot afford

or it is so

small that

they see no

economic

benefit

Some recent examples of coalitions, mergers and acquisitions, and domain selection follow.

Coalition. Demographics/ Social Life Styles/ Social Values. In an effort to gain the attention of

the savvy consumer Nissan and Ecko clothing brand announced a partnership in 2006 to blend

their styles to create a Nissan Pathfinder and Nissan Armada to show at events around the United

States. In addition to the vehicles, Ecko created a limited edition co-branded hoodies that will be

sold at events. The proceeds of these sales will go to Sweat Equity Enterprises (non profit

organization that teaches young people design and technology skills while working behind the

scenes in design companies)

(http://www.findarticles.com/p/articles/mi_m0EIN/is_2006_August_28/ai_n16691192).

Technological. Hyundai, Daimler- Chrysler, and Mitsubishi have a joint venture to develop and

engineer a ―new family of cost-efficient, in-line, four-cylinder engines that will meet and beat the

best engines in the world.‖ The partnership was developed in an attempt to bring together all

three of the companies‘ resources, establish advanced automation, and to set a leading


116

technological standard for the industry

(http://www.gemaengine.com/).

Economic. Fast food restaurants Whitecastle and Krystal‘s signed an agreement not to expand

into one another‘s territories soon after Krystal‘s debuted in 1932. The two companies sold such

similar products they agreed not to compete head to head in the same market. The old Mason

Dixon line is the separation line for the two restaurants. With this agreement the square

hamburger competition and market is under control by the two

(http://www.fundinguniverse.com/company-histories/The-Krystal-Company-Company-

History.html).

Merger and Acquisitions. Demographics/ Social Life Styles/ Social Values. Cingular and

AT&T have joined together to better identify with wireless consumers. The acquisition created

the largest cellular telephone company as of October 2004. The companies claim that they will

be able to provide more efficient and effective services to its consumers.

Technological. Cisco announced that it will purchase Five Across, the maker of social

networking software. The purchase of this smaller company will allow Cisco to easily add social

networking features on its websites such as MySpace and Facebook

(http://www.technewsworld.com/story/55682.html).

Domain Selection. Demographics/ Social Life Styles/ Social Values. My Gym Children‘s

Fitness Center© was created in 1983 as a place for children between the age of six weeks and

thirteen to go to acquire skills, positive self image, and confidence in their approaching adult

years

(http://www.my-gym.com/corporate.asp?page=1).

Technological. Sirtris received exclusive rights from the Massachusetts Institute of Technology

for the SIRT1 gene. This gene is best described by the recent discovery of the sirtuin genes.

SIRT1 is believed to be the way that the body regulates such processes as glucose and insulin

production, fat metabolism, and cell survival. With this gene Sirtris has been able to apply it

towards the treatment of metabolic and mitochondrial disorders

(http://www.genengnews.com/news/bnitem.aspx?name=9567994).

DEPENDENCE ISSUES

One of the methods of reducing potential conflicts between firms is the development of

dependence on one of the two by the other. This can be done directly by contracting, or

indirectly through dependence development.

http://www.genengnews.com/news/bnitem.aspx?name=9567994


117

Table 5: Dependence Issues

Dependence

Issues

Demographics/Social

Life styles/Social

Values

Political

Milieu/Regulatory


Contracting Establishing

agreements between

firms or companies

for goods or services

to an organization

who shares identity

with a specific group

or market

Contracting with

firms in order to

gain use of their

patents

Contracting

with firms in

order to gain

access to their

technology

Contracting

with firms in

order to

protect

themselves

economically

or gain an

advantage

Dependence

Development

Providing exclusive

products or services

to create or fill a

niche of a specific

group

Become the expert

source to

lawmakers

regarding

information about

your industry

Create new

products that

establish a

dependence

for future

products,

accessories,

service, etc.

Create high

switching

costs for

suppliers or

customers

Some recent examples of contracting and dependence development include the following:

Contracting. Social Niche (Demographics/ Life Styles/ Values). Saks Inc. and FAO Inc. signed

an agreement to sell developmental and educational toys

(http://www.bizjournals.com/birmingham/stories/2003/02/24/daily5.html).

Political/ Regulatory Milieu. Colombia TriStar Entertainments contracted with Macrovision to

gain access to its DVD copy protection technology. Macrovision develops and markets software

that protects home videos, DVDs, consumer interactive software and enterprise software markets

from unauthorized duplication

(http://findarticles.com/p/articles/mi_m0EIN/is_2002_July_25/ai_89558748/).

Technological. Transmeta, a company who has expertise with low powered processors, renewed

a contract with Sony to help them with some of their projects in the last quarter of 2006. The

goal is to use some of Transmeta‘s designs in Sony‘s products. The two companies worked

together on Transmeta‘s LONGRUN2 technology. It helps to improve the power efficiency in

portable products

(http://www.infoworld.com/article/06/04/07/77242_HNtransmetasony_1.html).Economic. Sony

Music has placed a clause in its contracts to gain ownership of artists names. "Sony and its

licensees shall have the exclusive right, throughout the world, and shall have the exclusive right

to authorize other persons, to create, maintain, and host any and all Web sites relating to the artist

and to register and use the name '[artist name].com' and any variations thereof which embody the

artist's name as Uniform Resource Locators (or 'URLs'), addresses, or domain names for each

Web site created by Sony in respect of the artist," according to a copy of a Sony Music contract

(http://news.com.com/2100-1040-221890).

Dependence Development. Social Niche (Demographics/ Life Styles/ Values). Neiman Marcus

is an excellent example of a company that provides exclusive products and services for a specific

http://www.infoworld.com/article/06/04/07/77242_HNtransmetasony_1.html


118

group of people. For those who can afford to shop out of the Neiman Marcus Christmas Catalog

they can enjoy a M400 Skycar for a mere $3.5 million, an hour and a half private performance

from Sir Elton John just $1.5 million, or a hybrid Lexus for an affordable $65,000

(http://money.cnn.com/2005/09/27/news/midcaps/neimanmarcus_christmas/index.htm).Technolo

gical. Apple‘s IPOD was made to be used as a headset. But for the IPOD to be fully functional

one must purchase from many of the accessories made for it. For starters you must register with

ITunes - a service provided by Apple for music, video, and TV show downloads. This program

also updates, restores, and keeps track of all music categories in the order that you choose. To

run your IPOD through the speakers of your car you purchase an ITRIP. For easy running a

jogging holster will need to be purchased. A Bose speaker system will send airwaves from your

IPod throughout your home and a remote control to change the song while walking around

(http://www.pdatoday.com/index.php/weblog/comments/griffin_technology_ipod_accessories_r

oadtrip_airclick_itrip_for_ipod_nano_p/).

Economic. The average switching cost for cell phone users in 2005 was $170

(http://www.consumeraffairs.com/news04/2005/cell_fees.html).

GOVERNMENTAL ISSUES

Legal action and political action are two ways in which an organization may use strategies to

manipulate the governmental environment. Table 6 demonstrates several strategies.

Table 6: Governmental Issues

Governmental

Issues

Demographics/Social

Life styles/Social

Values

Political

Milieu/Regulatory


Legal Action Supporting or

inflating legal action

that aligns an

organization with a

specific market

segment.

Engage in private

antitrust suits or

instigate political

action against

competitors

Pursue and

enforce patent

rights,

copyrites, etc.,

against

competitors

Engage in

lawsuits with

competitors to

prevent unfair

economic

practices or

use expensive

litigation

Political Action Lobbying in support

of legislation that

benefits a specific

market group to gain

favor or acceptance

from that group

Use direct

lobbying and/or

support candidates

for political and

regulatory offices

who are ―company

friendly‖

Lobby for

political

and/or

financial

support of new

technologies

which your

firm develops

Draw

attention to

politically

sensitive

economic

issue of

competitors

such as price

discrimination

Political/ Regulatory Milieu. Sun Microsystems Inc., the maker of JavaScript, filed a lawsuit

against Microsoft in 2002 for Microsoft‘s anticompetitive nature and for damages caused to Sun

by Microsoft‘s illegal efforts to maintain monopoly power in the industry. Sun said that

Microsoft was a threat to lawful competition (http://www.sun.com/lawsuit/summary.html).


119

Economic. Vonage Phone Company is being sued by a number of companies for infringing on

patents for voice over IP. It purchased three patents to fight litigations from Sprint and Verizon.

The cost of the litigation is having a toll on the price of Vonage stock. The company announced

mid-April the cost of litigation against the lawsuits may be driving the VOIP company into

bankruptcy

http://www.nytimes.com/2007/04/18/technology/18vonage.html?ex=1334548800&en=23d44408

ba4a9152&ei=5088&partner=rssnyt&emc=rss#)

Political Action. Political/ Regulatory Milieu. George W. Bush was supported by several large

companies during his election in 2004. The top contributor was Morgan Stanley with a

contribution of $600,480 followed by Merrill Lynch with $580,004. Pricewaterhouse Coopers

gave $512,500. Some other companies include UBS Americas, Goldman Sachs, MBNA Corp,

and Credit Suisse of Boston. Business groups raised over $7 in 2006 to support business

friendly candidates. Two companies that have contributed to this fund are Home Depot and

Altria Group ( http://www.iht.com/articles/2006/10/15/bloomberg/bxlobby.php

http://www.opensecrets.org/pres04/contrib.php?cycle=2004&cid=N00008072

Economic. Pharmaceutical companies seem to always face price discriminatory law suits. One

example is the Merk and Medco merger which faced many class action lawsuits. Groups of

shareholders and independent pharmacists all accused the companies of price discrimination

(http://findarticles.com/p/articles/mi_m3374/is_n16_v15/ai_14460237 and

http://findarticles.com/p/articles/mi_m3374/is_n8_v18/ai_18327252).

DEMAND ISSUES

Three strategies are based on the level of demand. Diversification is used both to channel profits

into other industries, and to flee dying industries. Smoothing attempts to level out irregular

products, and demarketing may be used to lower the demand for a product either temporarily or

permanently.

Table 7: Excess Demand Issues

Excess

demand Issues

Demographics/Social

Life styles/Social

Values

Political

Milieu/Regulatory


Diversification Expanding product or

service line to better

focus on target groups

Lobbying for

changes in laws

and/or regulations

that would allow

for new product

development

Creating new

products

through

innovations of

new or

existing

technologies

Developing

product lines

that reach

different

economic

markets

Smoothing Giving discounts

and/or incentives to

specific market

groups

Adjust pricing to

meet

political/regulatory

demands

Adjusting

prices or

giving

incentives for

the purchase

of specific

Adjust prices

to stabilize

consumption

of goods or

services

http://www.iht.com/articles/2006/10/15/bloomberg/bxlobby.php

http://findarticles.com/p/articles/mi_m3374/is_n16_v15/ai_14460237


120

technological

products

Demarketing Adjust marketing to

deflect the demand of

particular groups who

by identifying with

the product/service

may cause a more

profitable group to

distance themselves

If political pressure

or regulations

become too

expensive to meet

then redirect

customers to a

more profitable

alternative

Gradually

wean

customers

from older

technology to

newer

technology

Use price

adjustments to

gradually

move

customers

from one

product/service

to another

Diversification. Social Niche (Demographics/ Life Styles/ Values). Gap Inc. was under pressure

to grow its business in 2004. As a result of this pressure Gap Inc. worked with its low price

chain Old Navy and began offering Plus Sized clothing to focus on the plus size consumer group

(http://www.msnbc.msn.com/id/5031430/).

Technological. Wi-Fi connections are a common term around the world. People can purchase a

new type of Wi-Fi through a box that is portable and connects to internet anywhere. The patent-

pending box was created by junxion. You plug the box into a power outlet and purchase a laptop

card from a cellular carrier. The card generates enough Wi-Fi signals that not only the laptop it

is plugged up to can connect to the internet but others close by can too

(http://www.junxion.com/about/,

http://www.nytimes.com/2006/02/23/technology/circuits/23pogue.html).

Economic. In an effort to meet a new economic environment Nike has paired up with Payless

Shoesource Inc., and has developed a high performance running shoe that is sold at $34.99. In

addition to pairing up with Payless, Nike also created a line to be sold at Wal-Mart called Exeter

(http://www.nctimes.com/business/article_6deeef86-113a-5d91-9b14-752bb3a39a96.html).

Smoothing. Technological. TiVO , a digital video recorder, allows consumers to record shows

on an internal hard drive and watch at their leisure. Due to an increase of DVR services by

several companies TiVO released an incentive for purchase by offering a rebate for its consoles

(http://www.TiVO.com ).

Economic. SOS Cuetara is a major olive oil refining company. The company is attempting to

stabilize the prices of olive oil. The company announced a strategic plan in Madrid to let the

public be aware that they are trying to help stabilize the increasing price of their product. The

prices have jumped up due to weather and confrontation between SOS and producers

(http://www.forbes.com/feeds/afx/2007/04/12/afx3605637.html).

Demarketing. Social Niche (Demographics/ Life Styles/ Values). With the growing number of

luxury SUVS JEEP has been faced with slumping purchases. The off road accessibility is not

what most SUV buyers are looking for. As a result JEEP redesigned some of its SUVs but now

is faced with the loss of some of its core buyers because it is losing its authenticity of being an

off-road vehicle (http://www.businessweek.com/magazine/content/02_32/b3795085.htm).

Technological. The world‘s mobile phone industry met in Barcelona and in 2006 many of the

companies discussed weaning customers off of 2G and 2.5G technologies to 3G technologies.

With 2 and 2.5G technologies customers are limited to the amount of data exchanged over their

phone each month. With 3G phone users can pay a flat rate and have unlimited data exchange.

http://www.junxion.com/about/

http://www.nctimes.com/business/article_6deeef86-113a-5d91-9b14-752bb3a39a96.html

http://www.tivo.com/


121

3G allows users to conduct mobile messaging, television, internet, movies and TV

(http://news.bbc.co.uk/1/hi/technology/4707964.stm).

Economic. To make way for the new Playstation 3 Sony announced on April 20, 2006 the price

drop of its Playstation 2 Console. The lower price for the console was a way to demarket it and

start to advertise the new and better PS3 that was going to be released

(http://www.joystiq.com/2006/04/20/sony-lowers-price-of-playstation-2-to-129-99/).

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THE CHANGING NATURE OF THE INTERNAL AUDIT FUNCTION IN

RESPONSE TO ADVANCES IN INFORMATION TECHNOLOGY: SOME

PROPOSITIONS

Shome, Anamitra

Su, Jeyie

Brock University

St. Catharines, Ontario, Canada

Abstract

The internal auditing function (IAF) is one of the cornerstones of corporate governance

(Gramling et al, 2004). Aside from this, effective corporate governance structures, risk

management, and control processes are enabled and driven by a firm‘s information technology

(IT) infrastructure. We examine the relationship that exists between a firm‘s internal audit

function and its IT infrastructure, and develop propositions relating to these important

components based on our analysis. Our propositions are expected to have significant

implications in view of recent developments in the regulatory environment relating to publicly-

held companies, such as the Sarbanes-Oxley Act of 2002.

Background

Information Technology (IT) is the core of most business activities, from the

development of a new product to the support of sales and service, from providing market

intelligence to supplying tools for decision analysis. Developments in IT have resulted in various

breakthroughs that have greatly reduced the tedium of manual recording. Organizations are

increasingly recording data electronically and processing business transactions online. However,

electronic information is subject to a wide spectrum of threats such as cyber-threats and

information warfare (ITGI, 2000). An effective electronic information management is thus

essential to safeguarding electronic information and ultimately enhancing the reliability of

financial reporting.

The increasing corporate dependence on electronic information requires an understanding

of the increasingly important role of IT in the internal control system, given that IT could change

the nature of misstatements in financial statements (Tuttle & Vandervelde, 2007). Effective

internal controls over financial reporting are the key to ensuring that information is free of

misstatements. The internal audit function (IAF) is responsible for evaluating the overall internal

control system, including IT controls, by applying an internal control framework as the guideline

for internal control assessment. The control framework is a set of best practices that are usually

expressed as a set of repeatable processes that are created by an organization or body (Kievet,

2006). The complexity of IT structures and the level of IT development further complicate the

assurance activities of IAF with respect to internal control assessment. There is a need to have

suitable IT control structures in place so that the IAF is adequately able to assess these IT

controls, identify IT-related risks and safeguard electronic information.


126

Motivation

What drives the link between the firm‘s internal audit function (IAF) and its information

technology (IT) structure? Researchers have carried out individual studies on these aspects of a

firm‘s corporate governance structure from different viewpoints, such as focusing on the

question of building an effective IAF for compliance with the Sarbanes-Oxley Act of 2002

(Hermanson et al., 2008); the nature of the COSO 1992 control framework and the extent of its

usage by management and internal auditors (Gupta, 2006); and the relationship between

business, IT and society (Tansey, 2002). However, there is still a gap in our knowledge of how

these aspects of an organization relate to each other.

In this paper, we examine the relationship between an organization‘s IAF and IT

infrastructure. We develop propositions with regard to the extent to which these organizational

aspects affect each other. We also discuss the COSO and COBIT frameworks and their

applicability to an IT-oriented environment.

This paper contributes to the existing literature by developing propositions concerning

the relationship between a firm‘s IT infrastructure and its IAF. Our propositions are expected to

have significant practical implications for corporations seeking to improve their corporate

governance structures.

Proposition 1: Information Technology (IT) and its effect on IAF performance

During last few decades, developments in IT have had a significant influence on

organizations. IT infrastructure is no more limited to simple data input systems. It has

transformed to complex systems that simplify organizational structure and improve

organizational performance. As a result, many organizations have switched from being brick and

mortar to virtual businesses.

IT both enables and inhibits organizational success. As an enabler, IT facilitates E-

business, acts as a change agent and enables globalization (Luftman, 2004). Organizations are

able to run their operations globally through the deployment of e-commerce.

However, IT also introduces new and unprecedented IT-related risks to organizations

(Luftman, 2004). The greater the IT-related exposure, the greater is the likelihood that business

processes will be vulnerable to complex IT-related risks such as the risk of data loss, network

breakdowns or discontinued operations. Such risks must be identified by the IAF, even though it

is a daunting task (Luftman, 2004). Thus, it is necessary for the IAF to apply a good IT control

framework in order to effectively evaluate the internal controls over IT. A good IT control

framework will help facilitate the IT risk assessment as well. Hespenheide (2006) found that

there are certain IT tools that can improve the efficiency and enhance the productivity of the

IAF, namely, supporting technologies and enabling technologies.

Supporting technologies are intended to support the audit process and include electronic

spreadsheets, which reduce the drudgery of manual documentation (Hespenheide, 2006).

Enabling technologies enable the internal auditor to achieve new levels of testing assurance

(Hespenheide, 2006). For example, internal auditors use Computer Assisted Auditing

Techniques (CAATs) to audit electronic data. CAATs make it possible to apply database

software that provides more assurance regarding information accuracy, and the completeness and

reasonableness of internal audits. CAATs also substantially reduce input time. The department

can perform exception-based and fraud-related procedures with far greater levels of reliability by


127

utilizing enabling technologies (Hespenheide, 2006). Enabling technologies promote continuous

monitoring of risk in a cost-effective fashion and are a necessity for every IAF (Hespenheide,

2006). To summarize, while IT breakthroughs are associated with greater risk, they have also

eased the internal auditing procedures to a great extent with respect to auditing electronic data,

leading to the following proposition:

Proposition 1: Information Technology breakthroughs enhance the performance of the

internal audit function (IAF) but also introduce new IT-related risks.

Proposition 2: Advancements in information systems and the changing nature of the IAF

Ahmed (2007) examined the evolution of IAF in relation to advancements in the

development of information systems and the increasing complexity of the IT environment in

conducting business processes. He found that the evolving role of the internal audit function is

consistent with information system development (ISD) and e-commerce (Ahmed, 2007).

ISD has changed the traditional IAF in terms of the risk management, consulting and

assurance activities provided. Apart from facilitating the IAF‘s operational performance, ISD

also changes an organization‘s business processes. As a consequence of ISD, most business

processes have been computerized in terms of data recording and the way business transactions

are processed. The increasing tendency of firms to migrate from paper-based to electronics-

based environments implies an increasing level of difficulty for the internal audit activity to

provide objective assurance quality on system security, encryption of data input, and

authorization of access to financial information.

The IAF needs to keep pace with the changes in the firm‘s ISD in order to more

effectively provide assurance and consulting services. Assurance and consulting services

provided by the IAF are now more related to e-commerce issues and IT related issues (Ahmed,

2007). Evidence suggests that the internal auditing role is evolving to support objectivity

assurance in relation to audit procedure changes from manual audits of paper documentation to

on-line forms and financial information in electronic forms (Ahmed, 2007). While objective

assurance is concerned with financial and operational information being reliable and possessing

integrity, the consulting activity service helps top management in decision making and in

evaluating the effectiveness of risk management and internal control systems (Ahmed, 2007).

Not only does ISD impact the assurance and consulting services provided by the IAF, it

also affects the internal control system and corresponding internal control procedures (Ahmed,

2007). The impact of ISD on the internal control systems has led to the need for appropriate audit

programs to identify risks and implement the assessment of such inherent risks (Ahmed, 2007).

Understanding IT-based systems and the identification of risks associated with the e-commerce

environment are critical concerns of the internal audit activity (Ahmed, 2007).

Organizations increasingly adopt IT controls to safeguard their business processes while

identifying complex IT-related risks. The evaluation of internal control over IT is based on

assessing whether effectiveness and efficiency of operations, reliability of financial information,

integrity of on-line financial information, and reliability of electronic forms of financial

information exists in all records and transactions (Pickett, 2005). Internal auditors need to

provide assurance on IT control assessments within the internal control systems. If IT controls

are selected and implemented properly on the basis of the risks they are designed to manage,


128

then a methodology to continuously monitor IT control effectiveness and validity could provide

the assurances needed (Hass, 2006).

Even though the identification of IT-related risks complicates internal audit processes, it

provides an opportunity to streamline internal audit activities by designing and utilizing

continuous IT controls (Hass, 2006). The use of continuous auditing has helped to reduce the

detailed manual reviews that were typical in the past. Continuous auditing gives internal auditors

the ability to monitor key business systems for both manual and electronic anomalies resulting

from business transactions (Hass, 2006).

The above discussion leads to the following proposition:

Proposition 2: The development of a firm’s information system changes the nature of the

internal audit function (IAF) in terms of assurance services and internal control assessments.

Proposition 3: Advancements in information systems and the regulatory environments and

the resultant demands on internal auditors

As a consequence of the rapid improvements in IT, IT professionals are facing

increasingly greater challenges to meet the heightened expectations of various stakeholders to

provide accurate, visible and timely information, while ensuring the protection, privacy, and

security of their organizations‘ information assets (Damianides, 2005). As the IAF evolves with

ISD, the role of internal auditors has been evolving as well. Ahmed (2007) found that the

continuous knowledge of the ISD and IT environments are new requirements for internal

auditors to be professionally qualified to perform internal audit activities (Ahmed, 2007). The

changes in business processes with regards to recording financial information and producing

audit evidence in electronic forms require internal auditors to keep abreast of the ever-changing

IT environment and to update their IT skills regularly.

The complexity of the control framework is further heightened as a result of the

development of control framework standards such as COSO (Committee of Sponsoring

Organizations of the Treadway Commission) and COBIT. The COSO‘s Internal Control –

Integrated Framework report was issued in September 1992. COSO is the generally accepted

control framework for assessing internal controls on financial reporting. It provides a general

definition of internal controls and defines five internal control components against which the

internal control system should be assessed and improved. The internal control objectives of the

COSO framework are efficient and effective operations, reliable financial reporting, and

compliance with laws and regulations. COSO is targeted at the overall entity and evaluates the

effectiveness of the internal control at a point in time.

The Control Objectives for Information and Related Technology (COBIT) is a set of best

practices for Information Technology (IT) management issued by the Information Systems Audit

and Control Association (ISACA) and the IT Governance Institute (ITGI) in 1996. The main

focus of COBIT is Information Technology (IT). It is an open standard for controls over IT

(Bodnar, 2006).

Unlike COSO, COBIT targets a wider audience that includes management, non-IT users

and information system auditors. In addition, COBIT views internal control as a set of processes

including policies, procedures, practices and organizational structures. The COBIT framework

evaluates the effectiveness of internal controls over a period of time.


129

COBIT provides a generally applicable and accepted standard for IT security and control

practices and is designed to guide and assist management in determining the appropriate level of

security for organizations (Bodnar, 2006). COBIT views information as a valuable IT asset.

Control objectives in COBIT are specific enough to be easily implementable, yet general enough

to be applicable to various types of audits (Tuttle, 2007). An organization highly dependent on

IT processes would have trouble performing an effective review of its IT resources without

COBIT (Moeller, 2004). The control environment is rendered even more complex as a result of the Sarbanes-

Oxley (SOX) Act. Enacted in 2002, SOX is a highly significant piece of legislation intended to

restore investor confidence in the capital market system and to improve overall corporate

governance in publicly listed companies. All companies listed in the United States are required

to comply with SOX, making SOX legislation an important consideration worldwide (Forcht,

2006).

The SOX Act requires the internal audit activity to be in place in order to enhance the

organization‘s risk management, control, and governance processes. SOX requires the

management of organizations to be explicitly responsible for establishing, evaluating and

monitoring the effectiveness of internal controls over financial reporting and disclosure,

including IT controls (Damianides, 2005). Sections 302 and 404 of the SOX provisions are the

two most significant with respect to Information Technology (IT), IAF and the internal control

framework. Section 302 requires management to certify in each annual or quarterly report that it

is responsible for establishing and maintaining the internal controls. It also requires corporate

officers to make representations related to the disclosure of internal controls, procedures, and

assurance from fraud (Brown, 2005).

Section 404 requires that the CEO and CFO to issue two reports in regards to the

responsibility of financial reporting and the internal controls over the financial reporting. Both

the CEO and the CFO are required by SOX to certify that they are responsible for establishing

internal controls. They are also required to report on their evaluation of internal controls and the

internal control framework used. The external auditors are required to audit and attest the two

reports issued by management and issue an attestation report on the effectiveness of internal

controls after performing audit procedures to test management‘s assessment.

The SOX Act has a direct impact on data management, data and system security, and

business recovery practices (PCAOB, 2002). SOX and PCAOB have set rigid standards for

internal controls that encompass IT including the internal control structure and procedures.

Collectively, the SOX Act provisions have major implications for the relationship between the

firm‘s IAF and IT structure.

These factors have combined to present major challenges to internal auditors on how well

they will be able to provide assurance services and opinions on financial statements in a timely

manner while performing internal audits in e-commerce-based entities. Top management expects

internal auditors to provide reliable consulting and assurance services. Given the highly complex

IT-related regulatory environment, internal auditors are under great pressure to update their skills

and qualifications with the necessary IT expertise to more efficiently provide assurance on IT-

related issues to top management and other information customers.

This discussion leads to the following proposition:


130

Proposition 3: The advancements in the development of information systems as well as the

complex regulatory environment place pressure on internal auditors to upgrade their skills

and abilities.

Conclusion

This paper presents some propositions concerning the relationship between the internal

audit function (IAF) and developments in information technology in an organizational setting.

The rapid developments in IT have prompted organizations to record their data and conduct

business processes electronically. The applications of IT in corporate information systems range

from critical business decision-making to accounting spreadsheets for the financial reporting

purposes.

The advances in information technology are closely intertwined with the IAF. Over the

recent past, the IAF has also witnessed the deployment of cutting edge technologies such as

electronic audit working papers. SOX requires public companies to retain all working papers,

correspondence, and communications about their financial statements for seven years (Khan,

2006). An effective Electronic Record Management (ERM) is thus critical to safeguard

electronic information subject to information privacy and security issues. Many of the internal

controls over financial data are computerized and maintained by the IT function. This suggests

that the IAF should be equipped with relevant IT expertise.

From a corporate standpoint, this paper has the potential to be useful for firms that are

seeking to understand how advances in their IT structures affect their IAF‘s and help them

design a suitable IT control framework in the IT-oriented environment for SOX compliance

purposes. As an example, firms may consider introducing new quality measures to assess the

effectiveness of IAF with the application of IT audit tools. The paper also has implications for

regulators, as it suggests that regulators need to impose specific requirements on the reporting of

IT controls.

From a practitioner perspective, this paper suggests that internal auditors should keep

abreast of the ever-changing IT environment. Internal auditors should be qualified in terms of

their IT expertise to more effectively provide appropriate and timely assurance services to

corporate management regarding IT-related issues. This could even possibly take the shape of

the Institute of Internal Auditors (IIA) introducing new yardsticks regarding IT-related

competencies for internal auditors.

Limitations and implications for future research

The implications of this paper, significant though they may be, must be balanced by its

limitations. Firstly, although the propositions developed in the paper are based on the extant

literature, they require empirical testing of their validity. Secondly, although many control

frameworks exist and arguably affect firms‘ internal control environments, we focus mainly on

the COSO and COBIT frameworks, omitting discussion of other control frameworks such as the

CoCo Model.

The limitations offer opportunities for future research. Our focus has been on exploring

the relationship between the IAF and the developments in IT. Future studies could incorporate

another variable in the analysis: the firm‘s internal control framework. An analysis focusing on


131

xamining the relationship of the three in different types of industries such as financial services

industries or healthcare industries could help enhance the understanding of other organizational

phenomena. Future research could also include a meta-analysis of the empirical findings relating

to these three organizational aspects. We hope that this paper will serve as an impetus for future

research endeavors that may bring new insights to our understanding of the relationships

between the IAF, IT development and internal control frameworks.

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132

A STUDY ON SCORING CUSTOMER SATISFACTION,

EXPERIENCE VALUE, AND LOYALTY: A CASE STUDY

OF PROFESSIONAL TEAMS IN JAPAN

Suzuki, Hideo

Department of Administration Engineering,

Faculty of Science and Technology

Keio University

ABSTRACT This paper presents a structural model of relationships between service quality, customer satisfaction, experience value (introduced by Schmitt (2000)) and loyalty and applies to a case of Japanese baseball teams. Web-based customer survey is conducted for Japanese professional baseball in the end of January of 2009 and 2010. Then, the cause-effect model for between the service quality (such as the team performance, the attractiveness of teams and players, stadium, etc), customer satisfaction, experience value and loyalty is estimated, and these factor scores are provided for each team. In addition, we examine the relationship between these scores and the number of spectators of the home stadium for the underlying teams.

INTRODUCTION In recent years, the significance of the relationship between customer satisfaction, loyalty, and profitability has been noted. In addition, to develop the structure of the relationship, a new factor, such as customer experience value, is expected to be incorporated. In order to use these conceptual models in practical business environments, customer satisfaction, experience value and loyalty should be quantified.

This paper presents a structural model of relationships between service quality, customer satisfaction, experience value (introduced by Schmitt (2000)) and loyalty. The proposed model comes from the structural model for the American Satisfaction Index (ACSI), which is provided by Fronell et al. (1996).

On the basis of the structural model, a scoring method for customer satisfaction, experience value and loyalty is provided, where the score for each factor is calculated by using factor score weights and the values of observed variables. Web-based customer survey was conducted for Japanese professional baseball in the end of January of 2009 and 2010. Then, the cause-effect model for between the service quality (such as the team performance, the attractiveness of teams and players, stadium equipment/service, etc), customer satisfaction, experience value and loyalty was estimated, and these factor scores were provided for each team. In addition, we examined the relationship between these scores and the number of spectators of the home stadium for the underlying teams. ACSI MODEL

There is an ACSI model as a model which measures the customer satisfaction or loyalty of a company. This model is defined by Fornell et al. (1996), as shown in Figure 1.


133

Figure 1: ACSI model That is, unlike the conventional customer satisfaction survey, based on this model, customer satisfaction and loyalty are evaluated by catching the quality or service of a product from complex variables, such as customer expectation, perceived quality, and perceived value. The objective of the ACSI is to provide the index of customer satisfaction. In this paper, customer loyalty is more noticed.

EXPERIENCE VALUE

Experience value is not individual experience which happened in the past, but a value which the customer perceives through experiences that he/she feel something and is impressed in the use of the product/service (Schmitt (2000)). Besides, as a strategy base which is useful to marketing activities, experience value is classified into five different types of experiences or strategic experience modules, as shown in Table 1.

Table 1: Experience Value Modules (Schmitt (2000))

CUSTOMER LOYATY Custom

er loyalty

is the willing

ness that a custom

er wants

to purchase or receive offer of a product or service continuously from the company. The customer with a high loyalty purchases and uses the same product or service again. Besides, it also has the word-of-mouth effects such as, recommending the purchase of the product to surrounding people like a friend and a colleague. Reichheld (2003) found that the best question which measures customer loyalty was "How likely is it that you would recommend this company (or product) to a friend or colleague?" This type of question items is applied for the ―customer loyalty‖ factor.

EXAMPLES FOR RESEACH AND HYPOTHPOTHES For Japanese professional baseball, service quality is one of the very important elements, and they needs to grasp what the fan really desires and the level of the service quality and customer satisfaction. Therefore, we investigated 12 professional baseball teams. In Japanese professional baseball which is

Strategic

Experience

Modules

Contents of Experience Modules

SENSE

These are sensual and tangible aspects of a product or experience that appeal to the

five senses of sight, sound, scent, taste and touch.

FEEL Feel marketing is devoted to inducing affect (i.e. the creation of moods and

emotions) that adhere to the company and brand.

THINK The objective of think marketing is to encourage customers to engage in elaborative

and creative thinking that may result in a reevaluation of the company and products.

ACT Act marketing is oriented towards the creation of experiences through behavior on

the part of the customer, either privately or in the company of others.

RELATE Relate marketing expands beyond the individual's private sensations, feelings,

cognitions and actions by relating the individual self to the broader social and

cultural context reflected in a brand.

Perceiv

ed

Value

Custom

er

Satisfa

ction

Custom

er

Compl

aints

Custom

er

Loyalty

Perceiv

ed

Quality

Custom

er

Expectat

ions


134

called ―Nippon Professional Baseball‖, there are 2 leagues, that is, ―Central League‖ and ―Pacific League‖. The Central League has 6 teams: Giants, Dragons, Swallows, Tigers, carp and Bay Stars. Pacific League also has 6 teams: Fighters, Golden Eagles, Hawks, Lions, Marines, and Buffaloes. In analysis of professional baseball teams, customer expectation is not included, because it is difficult to define and measure it. Moreover, perceived service quality is divided into team performance, attractiveness of a team and player, stadium, fan service, the contribution to local community, and uniform and log. The hypothetical model was designed (see Figure 2).

Figure 2:

hypothetical model

for professional

baseball

H1. Perceived quality positively impacts customer satisfaction.

H2. Perceived quality positively impacts overall experience value. H3. Overall customer satisfaction positively impacts team loyalty. H4. Overall customer satisfaction positively impacts customer loyalty. H5. Overall experience value positively impacts team loyalty. H6. Team loyalty positively impacts loyalty for spectator attendance. We drew Hypothesis 1 from precedence research on the customer satisfaction of Fornell et al. (1996), Hypotheses 2 and 5 from precedence research on the experience value (Schmitt (2000), and Hypothesis 3 from the precedence research of both. Hypothesis 6 is drawn from our original idea.

Furthermore, the number of spectators in the home stadium, which is recognized as a business performance index for the professional baseball team, is made into the variation, and the following hypotheses are constructed and to be verified. H7. Overall customer satisfaction evaluated by the hypothetical model positively impacts the number of spectators in the home stadium. H8. Customer loyalty evaluated by the hypothetical model positively impacts the number of spectators in the home stadium. H9. Overall experience value evaluated by the hypothetical model positively impacts the number of spectators in the home stadium.

Loyalty for

Spectator

Attendance

Overall

Customer

Satisfaction Team

Loyalty

Attractiveness

of a Team

and Player

Stadium

Fan Service and

the Contribution

to Local

Community


Uniform and

Logo

Team

Performance

Overall

Experience

Value

Experience

Value 1

Experience

Value 2

H1

H2H3

H4

H5

H6


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RESEARCH METHODOLOGY We designed a questionnaire, referring to the paper of Fornell et al. (1996) and Parasuraman, Zeithmal and Berry (1988) about perceived quality, customer satisfaction. Moreover, we set up the questions for experience value and customer loyalty based on the paper of Schmitt (2000) and Reichheld (2003), respectively.

Web-based customer survey was conducted for Japanese professional baseball in the end of January of 2009 and 2010. (The summary of this survey is shown in the Web site of Suzuki Lab., Keio University.) In this research, the survey data for January of 2010 is used. The web survey area is the whole country in Japan, and the pilot survey was conducted, and then we screen them, depending on whether they satisfy the following conditions:

Have watched the professional baseball game at the home stadium of the team to support in recent year (within one year).

For the data for 2010, 114-131 samples for each team, a total of 1501 samples were collected. For questionnaire design of perceived service quality, we set up 1 item for the team performance, 4 items for the attractiveness of teams and players, 8 items for stadium, 3 items for fan service and the contribution to local community, and 2 items for uniform and logo. Furthermore, 2 items for overall customer satisfaction, 12 items for experience value, 2 items for team loyalty, and 2 items for loyalty for spectator attendance are set up. Each item has also 10 point scales.

SUMMARY OF SAMPLES The number of respondents and the frequency of watching games at the home stadium in a season in

recent year are shown in Table 2.

Table 2: The number of respondents and the frequency of watching games at the home stadium in a

season in recent year (1) Central League

n % n % n % n % n % n %0-1　 22 18.2% 31 25.0% 31 27.2% 32 24.6% 27 21.3% 28 23.0%2-5 81 66.9% 73 58.9% 58 50.9% 80 61.5% 72 56.7% 69 56.6%6-10 10 8.3% 11 8.9% 18 15.8% 13 10.0% 18 14.2% 17 13.9%11-15 3 2.5% 3 2.4% 4 3.5% 3 2.3% 6 4.7% 6 4.9%16-20 2 1.7% 3 2.4% 2 1.8% 1 0.8% 2 1.6% 2 1.6%21- 3 2.5% 3 2.4% 1 0.9% 1 0.8% 2 1.6% 0 0.0%

Total 121 100.0% 124 100.0% 114 100.0% 130 100.0% 127 100.0% 122 100.0%

(2) Pasif ic League

n % n % n % n % n % n %0-1　 20 15.3% 41 31.5% 26 20.8% 21 16.3% 18 14.3% 22 18.0%2-5 69 52.7% 65 50.0% 66 52.8% 66 51.2% 61 48.4% 65 53.3%6-10 23 17.6% 20 15.4% 22 17.6% 19 14.7% 29 23.0% 17 13.9%11-15 7 5.3% 0 0.0% 6 4.8% 5 3.9% 7 5.6% 9 7.4%16-20 5 3.8% 2 1.5% 2 1.6% 9 7.0% 4 3.2% 2 1.6%21- 7 5.3% 2 1.5% 3 2.4% 9 7.0% 7 5.6% 7 5.7%

Total 131 100.0% 130 100.0% 125 100.0% 129 100.0% 126 100.0% 122 100.0%

Frequency ７．Fightes ８．Eagles ９．Harks １０．Lions １１．Marines １２．Buffaloes

Frequency １．Giants ２．Dragons ３．Swallows ４．Tigers ５．Carp ６．Bay Stars

The number of respondents of each team is 114 to 131, and is 1501 in total. When the distribution of frequency of watching games at the home stadium for respondent of each team is investigated, the ratio of the category 2-5 is about 50-60%. Since the distribution of the frequency is not different among teams, it can be said that evaluations of the respondents are able to be compared among teams.

STRUCTURAL MODEL ANALYSIS The structural models hypothesized in Figures 2 are tested using AMOS and the result is presented in Figure 3. The fit index of this model, GFI, AGFI, CFI and RMSEA as shown in Figure 3, is comparatively good. First, the hypothesis 1, 4, 5, and 6 are supported, because these paths are positively significant. On the other hand, the hypothesis 2 is supported partly, because the path from ―Team


136

Perfomance‖ to ―Overall Experience Value‖ is negative, and the path from ―Fan Service and the Contribution to Local Community‖ to ―Overall Experience Value‖ is not significant. The hypothesis 3 is not supported, because the path from ―Overall Customer Satisfaction‖ to ―Overall Experience Value‖ is not significant.

Loyalty for

Spectator

Attendance

Overall Customer

Satisfaction Team

Loyalty

Attractiveness

of a Team

and Player

Stadium

Fan Service and

the Contribution

to Local

Community


Uniform and

Logo

Team

Performance

Overall Experience

Value

Experience

Value 1

Experience

Value 2

0.12

0.07

0.85

GFI=0.841，AGFI=0.811， CFI=0.912，RMSEA=0.071

Note: The dotted arrow line denotes that the corresponding path is not statistically significant at the

significant level 5%. For the other solid arrow lines, these paths are statistically significant at the

significant level 1%.

Figure 3: Path Model Results for professional baseball

SCOREING METHOD In this section, we present a scoring method on the basis of the estimated structural model. First, factor score weights of the factors such as overall customer satisfaction and customer loyalty, etc, obtained by covariance structural analysis is set to ),,2,1( njW

j . Here, n is the number of observed variables.

Moreover, the average value of each observed variable with respect to the respondent is set to ),,2,1(),,,2,1( njmiX

ij . Here, m is the number of the target company (team in this paper). A non-

standardized factor score for company ),,2,1( mii is given as follows: Then, standardized factor scores of team ),,2,1( mii are expressed by the following formulas:

The factor score of the Company

In this case, since 32 ,12 nm . Besides, since 10 point scales are used in our questionnaire, Max is

obtained when 10ijX , and Min is obtained, when 1ij

X . As described above, the score of Company

i is expressed by the following formulas:

The factor score of the corresponding of Company

100

MinMax

MinEi

ij

n

j

ji XW

1

100

932

1

32

1

32

1

j

j

j

jij

j

j

W

WXW

i


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The result computed using this method is Table 3.

Table 3: Score indices using scoring method (1) Factor Scores (Part I)

TeamTeamPerformance

Attractivenessof Team andPlayers

Stadium

Fan Serviceand theContribution toLocalCommunity

Uniform andLog

OverallCustomerSatisfaction

Tema Loyalty

Loyalty forSpectatorAttendance

Giants 83.67 75.11 62.43 57.16 68.18 65.20 62.44 63.46Dragons 73.75 73.26 62.24 54.64 67.69 63.04 66.16 67.89Swallows 42.09 60.43 53.71 53.56 62.12 54.23 57.62 59.74Tigers 51.24 69.27 60.95 57.50 72.96 61.76 65.44 68.69Carp 24.99 64.89 72.61 64.36 72.86 61.61 66.22 68.37Bay Stars 14.35 48.93 53.70 50.16 60.79 46.62 54.09 55.41Fightes 92.79 87.83 69.98 76.99 76.09 76.67 67.77 70.71Eagles 77.27 74.14 61.49 62.36 64.63 64.00 61.11 62.95Harks 45.75 63.45 63.17 59.83 61.15 59.21 57.61 60.95Lions 63.95 72.08 62.50 60.95 63.43 63.07 61.38 64.65Marines 35.64 60.60 59.76 61.76 67.81 57.76 58.58 60.37Buffaloes 25.71 52.74 60.44 58.98 59.45 52.73 53.20 55.57

Total Average 52.93 67.10 62.03 60.01 66.54 60.65 61.06 63.34

(２) Factor Scores (Part Ⅱ): Experience Value

TeamExperenceValue 1

ExperenceValue 2

OverallExperienceValue

Giants 61.59 65.58 61.63Dragons 63.00 67.02 63.07Swallows 55.08 60.45 55.15Tigers 66.74 71.31 66.76Carp 66.73 69.87 66.76Bay Stars 53.80 57.22 53.83Fightes 68.33 73.67 68.37Eagles 60.13 65.00 60.18Harks 58.07 62.37 58.11Lions 60.41 63.91 60.45Marines 57.36 63.45 57.41Buffaloes 53.04 56.29 53.07

Total Average 60.48 64.80 60.52 The team ―Fighters‖ has the high scores with various factors. For this team, the home town was moved from Tokyo to Hokkaido in 2004, where Hokkaido is located in the north part of Japan. Since then, the Fighters has actually obtained good performance (one time for Nippon Series winner and three times for the league champion in recent 6 years), and several star players appeared. Furthermore, the Fighters provides various attractive fan service events, and interacts with local community. That is reason why the Fighters obtained high scores.

CORRELATION OF SCORES AND THE NUMBER OF SPECTATORS We investigate relationship the between the scores of overall customer satisfaction, loyalty for spectator attendance and overall experience value, and the average number of spectators per a game at the home stadium in 2009 year‘s season. (The data of the average number of spectators per a game at the home stadium in 2009 year‘s season are used from the book: Professional Baseball Players Who‟s Who 2010.)

Their scatter plots are shown in Figures 4-6. As shown in Figure 4, the correlation coefficient between overall customer satisfaction and the average number of spectators per a game at the home stadium in 2009 year‘s season is 0.45, which is not significant at the significant level of 5.0%. However, it implies that the customer satisfaction is positively related to the number of spectators.

As shown in Figure 5, the correlation coefficient between loyalty for spectator attendance and the average number of spectators per a game at the home stadium in 2009 year‘s season is 0.57, which is not significant at the significant level of 5.0%. However, it implies that loyalty for spectator attendance is positively related to the number of spectators.


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As shown in Figure 6, the correlation coefficient between overall experience value and the average number of spectators per a game at the home stadium in 2009 year‘s season is 0.61, which is significant at the significant level of 5.0%. It has the higher correlation coefficient value than the other scores. Therefore, it implies that experience value is positively related to the number of spectators and the hypothesis 9 is supported.

CONCLUSIONS The purpose of our research is constructing the structure model explaining the relation between experience value, customer satisfaction, and a loyalty, and verifying the relation of business performance index as a case study of Japanese professional baseball teams. In construction of a model, although some paths of hypothetical model were not supported, we were able to construct the new model for measuring the customer satisfaction and loyalty which adopted experience value.

As a result of analyzing the relation between each score and the number of spectators, it was also proved that there is a positive correlation between the experience value and the number of spectators. That is, in order for teams to lengthen the number of spectators, it is important to raise customer satisfaction, loyalty and experience value.

NOTE:

This research is supported by Grant-in-Aid for Scientific Research (C) (20510125).

REFERENCES Fornell, C., Johnson, M.D., Anderson, E.W., Cha, J., and Bryant, B.E (1996).The American

Customer Satisfaction Index, Nature, Purpose, and Findings. Journal of Marketing, Volume 60, 7-18.

Reichheld, F.F.,2003, The One Number You Need to Grow. HARVARD BUSINESS REVIEW, (December), 46-54.

Schmitt, B.H (2000). Experiential Marketing, Diamond.

Parasuraman, A., Zetihmal, V.A. and Berry, L.L. (1988). SERVUAL: Multiple-Item Scale for Measuring Consumer

Perceptions of Service Quality. Journal of Retaling, Volume 64, 12-40.

Research on Customer Satisfaction for Nippon Professional Baseball Teams, Suzuki Lab, Keio University:

http://www.ae.keio.ac.jp/~hsuzuki/baseball0901/index.html

Professional Baseball Players Who‟s Who 2010, Baseball Magazine Sha.


139

Fiters

Giants

Eagles

Lions

Dragons

Tigers

Carp

Harks

MarinesSwallows

BuffaloesBay Stars

y = 590.2x - 8921.R² = 0.207

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

45.00 50.00 55.00 60.00 65.00 70.00 75.00 80.00

THe

ave

rage

nu

mb

er

of

spe

ctat

ors

pe

r a

gam

e a

t th

e h

om

e s

tad

ium

in

20

09

ye

ar’s

se

aso

n

Average Scores of Overall Customer Satisfaction

Figure 4: Scatter plot between the scores of overall customer satisfaction and the average number of spectators per a

game at the home stadium in 2009 year‘s season (Correlation coefficient: r=0.45)

Giants

Dragons

Swallows

Tigers

Carp

Buffaloes

Fighters

Eaglse

Harks

LionsMarines

Bay Stars

y = 1113.x - 44159R² = 0.329

0

5000

10000

15000

20000

25000

30000

35000

40000

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50000

55 57 59 61 63 65 67 69 71 73

THe

ave

rage

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gam

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t th

e h

om

e s

tad

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09

ye

ar’s

se

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Average Scores of loyalty for spectator attendance

Figure 5: Scatter plot between the scores of loyalty for spectator attendance and the average number of spectators

per a game at the home stadium in 2009 year‘s season (Correlation coefficient: r=0.57)

Giants

Dragons

Swallows

Tigers

Carp

Bay Stars

Fighters

Eagles

Harks

LionsMariensBuffaloes

y = 1196x - 41769R² = 0.367

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

49 51 53 55 57 59 61 63 65 67 69

THe

ave

rage

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ors

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r a

gam

e a

t th

e h

om

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tad

ium

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Average Scores fo the Overall Experience Value

Figure 6: Scatter diagram between the scores of overall experience value and the average number of spectators per a

game at the home stadium in 2009 year‘s season (Correlation coefficient: r=0.61)


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RIGHT TO LIFE, BUSINESS AND CLIMATE CHANGE:

AN ISLAMIC PERSPECTIVE Zahid, Md (Muhammad) Anowar

i

National University of Malaysia

Abstract: The United Nations Framework Convention on Climate Change 1992 aims to attain

stabalisation of greenhouse effect to a level so that a balance between climate change and

economic development is maintained. The ultimate purpose is to render the earth planet a

congenial place for human to survival and prosperity. This objective of the Convention is under

test in this paper from Shari‟ah perspective.

INTRODUCTION

Today climate change is a common concern of the whole world community as it ―alters the

composition of the global atmosphere‖ with the result of ―significant deleterious effects on the

composition, resilience or productivity of natural and managed ecosystems or on the operation of

socio-economic systems or on human health and welfare‖ (United Nations, 1992). One of the

factors responsible for the climate change is the greenhouse effects on the earth. When the

sunlight falls on the earth, more than 30% of it is ―deflected into the outer space and the rest is

reflected and converted into slow moving energy called infrared radiation.‖ (D‘Silva, 2010)

Various types of gases (called greenhouse gases) such as like carbon-di-oxide, methane, ozone

and water vapour trap this radiation and slows down its escape. This warms ups the earth.

Greenhouse Gases can be released into the atmosphere due to, among others, the burning of

fossil fuels, oil, coal and gas, use of electrical appliances, deforestation and population growth.

(D‘Silva, 2010) Thus industries or generally speaking businesses are responsible for climate

change in general and greenhouse effects in particular.

However, businesses are essential for economic life of people. On the top of it, the global climate

must be such as would be conducive to their very existence. Due to this fact the UN Convention

on Climate Change 1992 sets its objective to attain ―stabilization of greenhouse gas

concentrations in the atmosphere at a level that would prevent dangerous anthropogenic

interference with the climate system.‖ It seeks to reach the targeted level of stabilization in such

a timeframe that the ecosystem may adapt with the climate change, food production is not

affected and economic development may sustainably be carried out. Through setting this goal the

Convention seems to have intended to make a balance between climate change and economic

development so that the earth planet would be a congenial place for human survival and

prosperity.

Is the above approach of the United Nations friendly with Shari‟ah? This issue would be

addressed in this paper with an eye to revealing the view and understanding of the Muslims who

compose one-fourth of the total world population of the world. The paper would investigate the

matter from the Objectives of Shari‟ah perspective (maqasid al-Shari‟ah) explained in the

following section.


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THE CONCEPT OF OBJECTIVES-OF-SHARI’AH

Objectives of Shari‟ah (hereafter maqasid) stand for ‗the purposes which the Law (Shari‟ah)

was established to fulfill for the benefit of humankind‘ (Al-Raysuni, 2006). ―Benefit‖ in this

context refers to mercy from Allaah (God the Almighty), which may be traced in the following

verses of the Qur‘an:

―O mankind, a direction has come to you from your Lord; it is a healing for the

(spiritual) ailments in your hearts and it is guidance and mercy for the

believers.‖(Qur‘an 10:57)

―We have sent you (O Prophet Muhammad) as the mercy for the whole

creation.‖(Qur‘an 21:107)

Shari‟ah aims to attain mercy for mankind by ensuring their benefits and removing their harms.

In the interpretation and lawmaking process the aims of Shari‟ah (maqasid) are resorted to as an

independent method. In the lawmaking process the mujtahids (Islamic jurists) resort first to the

literal interpretation of the Qur‘an (the Book of God revealed to the Prophet Muhammad, peace

be upon him) and Sunnah (the Traditions of the Prophet). If this method does not find the answer

to a given issue, then the mujtahids turn to qiyas (analogical deduction) to derive necessary rules

from the Qur‘an and Sunnah. Should the issue in question is of such nature that the Qur‘anic or

Sunnah rules cannot be extended to it by qiyas, the mujtahids will address the issue in light of the

maqasid of Shari‟ah (Nyazee, 1994).

Example: Whether wine is allowed in Shari‟ah is answered by the Qur‘an and Sunnah

themselves. The Qur‘an says, ‗Drinking wine is the act of devil, so leave it (Qur‘an, 5:90). And

the Prophet said, ‗Every intoxicant is wine and every wine is prohibited.‘ Mujtahids can find this

rule straight from the Qur‘an and Sunnah. Now, if a question arises as to whether narcotic drugs,

which intoxicate, are allowed or not, the answer is not available directly from Qur‘an or Sunnah

because they contain no provision directly concerning drugs. In this case the mujtahids have to

compare the drugs with wine. Because both wine and narcotic drugs intoxicate and the Qur‘an

and Sunnah prohibit intoxicants, mujtahid extend the hukm (command) of prohibition to narcotic

drugs by qiyas. But if there is a drug which does not intoxicate but does cause memory loss, what

will be the ruling or hukm in that case? The wine rule cannot be extended by qiyas to this case

because the effective cause (illah), meaning intoxication, is not present. To solve this issue

maqasid of Shari‟ah will be resorted to. As indicated above, maqasid seek to remove harm and

to achieve benefit for the humankind. This drug in question poses harm to human intellect, which

ultimately may affect life. Therefore, to eliminate this harm Shari‟ah prohibits this drug. To

quote the Prophet in this connection, ‗Harm must be eliminated.‘

It should be added here that maqasid are not used only as an independent lawmaking method;

they are considered in the lawmaking by other two methods as well. For example, if qiyas gives

a result that is difficult to practice or harmful for society, then maqasid will come into play. To

remove the hardship the qiyas rule shall be rejected and an exceptional rule shall be made. Thus

a contract without subject-matter being in existence is generally void. On this ground a


142

manufacturing contract (istisnah), whose subject-matter (e.g., a garment) is non-existent, is not

valid. If this qiyas rule is accepted, that will be inconvenient for the society and as a result the

objective of Shari‟ah (achieving benefit and removing harm) will be defeated. In order to uphold

the objective an exception is made to the qiyas rule by allowing istisnah contract. This method of

lawmaking is called istihsan (judicial preference).

The term, maqasid, probably occurred for the first time in the juristic writings of the early 10th

century jurist Abu Abd Allaah al-Tirmidhi al-Hakim (d. 932). It received more frequency of

reference in the works of the 11th

century jurist and Imam of the Two Sacred Shrines, Imam Abu

al-Ma‘li Abd al-Malik ibn Abd Allaah al-Juwayni. He is considered to be the real pioneer of this

theory, which he developed in his famous Islamic jurisprudence work, al-Burhan. He introduced

a three-fold division of the maqasid, namely ―essentials‖ (daruriyyat), ―needs‖ (hajiyyat) and

―embellishments‖ (tahsiniyyat), which will be discussed in the next paragraph. This division has

been endorsed generally by the Ulama (Islamic scholars) ever since. Al-Juwayni‘s theory was

further developed by his student, Abu Hamid al-Ghazali (d. 111) in his works, Shifa al-Ghalil

and al-Mustafa. After him, further refinement was performed by Imam Abu Ishaq al-Shatibi

(d.1388) in his al-Muwafaqat.

The three broad divisions- essentials, needs and embellishments- have become the basis of all

discussion of maqasid. Essentials include five major interests, namely religion, life, human

intellect, family lineage and material wealth. Originally al-Juwayni included these five in the

first category of maqasid. Later scholars had added more to them by further research. As a result,

the maqasid seem to have assumed an open-ended list of interests, which include, among others,

the following: fulfillment of contracts, preservation of the ties of kinships, honouring the rights

of one‘s neighbours, social welfare support, freedom, human dignity, human fraternity,

protection of fundamental rights and freedoms, economic development, R&D in technology and

science, peaceful coexistence among nations, and love of God, sincerity, trustworthiness and

moral purity. The second category, i.e. ―needs‖ include concessions granted to the hukm of the

Lawgiver in exceptional time and situation so that the essentials remain in existence. For

example, obligatory five times prayer is an essential part of the religion of Islam. When a

believer is on travel, he/she is required to shorten the prayers so that it does not become a burden

on him or her, but at the same time the hukm of Allaah (prayer in the present case) remains in

practice. Similarly when a believer is sick and feels hard to fast, he/she is allowed to break the

fast, but he/she has to make it up when he/she regains good health. In this way the second

category of maqasid grants ―concessions‖ to make the essentials easy to practice. It does not,

however, give ―exemptions‖ from the essential parts of Shari‟ah with the purpose that they

(essentials) continue in existence. The third category entails optional and supererogatory duties.

For example, optional prayers, optional charity, good manners, etc. The aim of this category is to

encourage the believers to do extra things which are not obligatory so that it becomes easy and

comfortable for them to practice the essentials. To do the supererogatory things Allaah and His

Messenger have encouraged the believers a lot. For example, the Prophet encouraged the

Muslims to make optional charity (sadaqah), even half a date. The whole purpose is to make

them habituated to making charity so that it will be easy for them to give zakah (obligatory

charity). And in that case the essential command of Shari‟ah (zakah) will be established plus


143

zakah and sadaqah together will bring economic justice in society- the gap between the rich and

the poor will be narrowed- and a fraternal community will develop thereby over time.

Maqasid have two aspects- preservation of interest (ibqa) and protection of interests (hifz)

(Nyazee, 1994). The former is a positive step to establish and maintain the maqasid and the latter

a negative or defensive step to safeguard them from harms or to deal with the violations or harms

committed against them. For example, religion is preserved by creation of conditions that ease

worship and other fundamental pillars of Islam. And religion is protected by fighting those who

fight Islam or by punishing those denounce the faith after accepting. Life is preserved by making

arrangements (e.g., by providing food, clothing, shelter, medication etc.) that are essential to

survive. Life is protected by punishing those who destroy it without legal justification. Family is

preserved through the institution of marriage and healthy family life and it is protected by taking

legal action against those who act in detriment to this institution (e.g., whipping a fornicator 80

times). Human intellect is preserved by providing education and conditions and environment

congenial to its growth, while it is protected by penalizing those adopt ways and means to

destroy it. Wealth is preserved through establishing the system and means of its legal ownership

and healthy growth, while illegal ownership (e.g., by theft or illegal possession) is punished by

relevant law. Thus the gist of the theory of maqasid is to achieve benefit and eliminate harm for

the wellbeing of the mankind.

Now, how to achieve benefit and eliminate harm? By educating people, ensuring social,

legal and political justice, and realizing public interest (Kamali, 2008). These may be briefly

stated further in the following.

Educating People:

Human society consists of individuals. It is the humans who really can bring good to the society

by good deeds and evil by evil doings. And behind his actions lies his intention. If the intention

is good, the actions will be good. If the intention is wrong, actions will be wrong too. For this

reason Prophet Muhammad said in effect that in the human body there is piece of flesh (i.e.,

heart). If that is correct, human actions will be correct. Accordingly Islam teaches to cleanse and

purify the heart with ―right belief‖ and fear of God. ―Right belief‖ means the belief in ―There is

no god except Allaah (God) and Muhammad is the Messenger of God‖. By accepting this belief

one accepts the sovereignty of God and subjects himself/herself to the desire of God and His

Messenger. In other words, he/she accepts the whole system of faith, religion and law taught by

Islamic Shari‟ah. It means after submission to the will of God, no one is supposed to act upon

one‘s own desires and whims. In this respect he/she is guided by the sense of ever vigilance by

God, which is expressed, in Islamic terminology, as ―fear of God‖ (taqwa). With the sense and

belief that God is watching him/her and that he/she shall have to stand alone before Him on the

Day of Judgment to give account of the whole life a believer can refrain from going against the

commands and desires of God and His Messenger. So that believers can inculcate this fear of

God in their hearts God has commanded them to present themselves before him five times a day

through prayers (salah). Before going to salah believers have to make clean themselves and

make ablution (wudu‟), which teaches them internal and external cleanliness in their lives. To

pray they have to maintain the prescribed time period for each salah. They are required to pray


144

preferably in congregation (jama‟) where they stand side by side before God irrespective of their

social or economic or any other status. This brings the sense of humility and brotherhood in

them. Believers face one direction (towards the Ka‘ba- House of God situated in Makkah), which

shows their discipline. When they pray in congregation, they follow one leader (Imam), which

brings the sense of unity amongst them. They start salah by saying ―Allaahu Akbar‖ (God is the

Great). By this utterance they belittle themselves and brush aside their pride and arrogance in the

presence of God. After this utterance they are not allowed to talk, eat, drink or to do any other

things which are not part of the salah. By this they are expected to become accustomed to the

rules of salah, in other words to the law of Shari‟ah broadly speaking. When all the ritualistic

requirements are completed, they come out of salah by saying ―Assalaamu alaikum wa

rahmatullah“ (peace and mercy of God be upon you) to the right and the left sides. In this way

they wish good to their follow believers, which teaches them to be good to everyone. All these

actions the believers are required to do with a sense of ever vigilance of God at least five times a

day. This is the ―essentials‖ part of Maqasid. In addition, they are encouraged to pray optional

and supererogatory salah, which belongs to ―embellishments‖ part of Maqasid. By doing this

they inculcate the fear of God in their hearts, which helps them outside salah to stay away from

sins and also to do other good deeds which are related to God as well as to their fellow believers,

mankind at large and even to other creations and environment. That is why God says in the

Qur‘an about the merits of salah that

―Surely prayer (salah) keeps one away from indecency and evil, and certainly the

remembrance of God is the greatest (form of devotion.)‖(Qur‘an, 29:45)

Ensuring Justice (‘Adl):

Islam aims to reform personal character with taqwa (consciousness of God) at the individual

level and makes the Muslims ready to serve the society- to do justice in the society. This is the

very fundamental purpose of all revealed religions as the Qur‘an says: ―We sent Our Messengers

with evidences and revealed the Book and the balance through them so as to establish justice

among people‖ (Qur‘an, 57:25). Through justice Islam wants to ‗establish an equilibrium by way

of fulfilling rights and obligations and by eliminating excess and disparity in all spheres of life.‘

(Kamali, 2008)

The Qur‘an emphasizes the establishment of justice so much by referring to it at least in fifty

three places. It uses the term („Adl) in a comprehensive sense calling upon Muslims to be just at

all levels of life- private, public, legal, social, economic, political, national and international-

without making any discrimination on any ground whatsoever. The following verses may be

quoted in support of the comprehensiveness of justice in Islam:

―O believers! Stand out firmly for justice as witnesses to God, even if it be against

yourself, your parents and relatives and whether it be against rich or poor‖

(Qur‘an, 4:135)

―And let not hatred of a people divert you from the path of justice. Be just as it is

closest to excellence in piety‖. (Qur‘an 5:8)


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‗And when you speak, speak with justice‘ (Qur‘an, 6:152)

The Qur‘an lays down the provision for retributive legal justice when it provides for punishment,

for example, for killing, theft, fornication and adultery, which violate the maqasid of life,

property and family respectively. At the same time Islam provides for distributive justice. An

Islamic State is responsible to make sure that everybody has food, clothing, shelter and other

necessities of life. If the State fails to fulfill this responsibility and anybody commits a crime

(e.g., theft) being compelled by the economic hardships, the Qur‘anic punishment concerning the

crime shall not apply. For example, the Second Caliph of Islam, Umar bin Khattab, suspended

the theft punishment (which is cutting off hands) against some people who committed theft

because at that time in Madina there was a severe famine and they did not have food to eat. This

is an example of the economic preservation of one of the maqasid, namely life. In the similar

vein, other maqasid must be preserved. Imran Khan Nyazee has put forward a scheme of how all

the five essentials can be preserved in an Islamic economic system. According to him,

(a) the economic system of an Islamic State must be compliant with shari‟ah requirement

so that religion is preserved;

(b) it must ensure that nobody goes hungry or homeless;

(c) it must provide basic means necessary for a healthy family life;

(d) it shall provide support for the education and development of intellect;

(e) after fulfilling the above, the economic system will engage in increasing wealth

within the restrictions of Shari‟ah (Nyazee, 1994).

Realizing Public Interest (Maslahah):

In order to preserve and protect maqasid sometimes it is necessary to make laws considering

their usefulness in the public interest in the event when there is no clear provision in the

Shari‟ah. For example, for the survival and healthy development of human life environment and

ecological balance are essential. In absence of any direct legal provisions in the Qur‘an or

Sunnah the government may pass laws for their protection. Imam Malik, the founder of the

Maliki School of Islamic law, devised this method of lawmaking. The whole purpose behind this

approach of lawmaking is to bring benefit and to prevent harm, which is a rehash of the purpose

of maqasid. In this lawmaking process first priority is given to those public interests which come

within category of ―essentials‖, then to those which qualify as ―needs―, and lastly to those which

serve as ―embellishments‖, described above. In order to apply this method the following

conditions need to be fulfilled:

1. When there is a need to secure a benefit or to prevent a harm of the people in general;

2. When there is no clear hukm (provision) in the Qur‘an, Sunnah or ijma‟(consensus of

Islamic jurists in general) with regard to the act of securing the benefit or preventing the

harm;

3. When such an act is essential to serve a public interest (maslahah), like protecting five

essential values, namely religion, life, intellect, family lineage, and property;

4. The maslahah must not conflict with any Shari‟ah principle, e.g. any law legalizing

interest (riba);


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5. The maslahah must be rational and acceptable to the people of sound mind;

6. This method shall not apply to the matters of worship (ibadat) (Kamali, 2003; Qadri,

1963)

CONTEXTUALISING THE OBJECTIVES OF SHARI’AH TO LIFE, BUSINESS AND

CLIMATE

As noticed above, religion is the most important Essential in Shari‟ah. This may be reiterated by

referring to the verse: ―I (Allaah) have created Humans and Jinns only for My worship‖ (Qur‘an,

51:56 ). In order to uphold this purpose of creation Shari‟ah attaches utmost value to human life.

The Qur‘an equates an illegal killing of a human with killing of the whole mankind and saving

one life with the saving the whole mankind (Qur‘an, 5:32). Therefore, punishment for murder is

killing of the killer unless the victim‘s family forgives the convict:

And do not kill anyone which Allâh has forbidden, except for a just cause. And

whoever is killed (intentionally with hostility and oppression and not by mistake),

We have given his heir the authority [ ( to demand Qisâs, Law of Equality in

punishment or to forgive, or to take Diya ( blood money ) ]. But let him not

exceed limits in the matter of taking life (i.e. he should not kill except the killer

only ). Verily, he is helped ( by the Islamic law ). (Qur‘an, 17:33)

Apart from this right of physical security, Shari‟ah grants substantive or social security to humans- right

to food, clothing and shelter. To quote the Prophet (Peace be upon him), "The son of Adam has basic

rights for three things: a house to live in, a piece of cloth to cover his body, a loaf of bread and

water" (Syed, 2010). Thus Islam makes parents responsible for the upbringing of their children and

children (adult and capable) responsible for parents and poor relatives. In general, everyone is responsible

for others so that no one remains left out of being cared as the Prophet said, ―Everyone is a keeper unto

every other and responsible for the welfare of all‖(Syed, 2010). In particular, an Islamic State is

responsible for the social security of the citizens, both Muslims and non-Muslims. This obligation may be

understood from the words of the Second Caliph of Islam, ‗Umar bin Kattab, who said,

By Allah! I am not a ruler that I enslave you; caliphate is the trust of Allah. It is my duty

to follow you (for your service) till you sleep in your homes with your bellies full of

meal. Thus, I shall be (really) successful in (concluding your affairs). But, if I compel

you to follow me till you knock at my door for your needs, then I shall be condemned. I

may make pleasant here for a few days, but thereafter, I shall have to worry for a long

period. Then none will listen to me and none will respond, if I beg his pardon. (Syed,

2010)ii

This represents what the Prophet said, ―Each one of you is a shepherd and each one will be asked about

his flock.‖ (Sahih Bukhari; Sahih Muslim).

Again, as life is most valuable the Qur‘an ordains men to ―eat and drink and not to waste‖ so that

they can sustain their lives (Qur‘an, 7:31). It also enjoins to eat halal (religiously allowed food)

and wholesome foods (Qur‘an, 2:168). And to earn halal sustenance the Qur‘an made business

halal and usury haram (prohibited) (Qur‘an, 2:275). Earning halal sustenance is so important

that the Qur‘an encourages people to go out in search of it immediately after Friday prayer

whereas to attend it orders them to postpone business and to rush towards the prayer. (Qur‘an, 9-


147

10). That is why one of the objectives of Shari‟ah is to preserve and protect material wealth and

thereby to promote economic activities.

The physical, social and economic security presupposes environmental safety and security in

which man may survive, grow healthy and perform their mundane and religious activities. This

may be called their natural right. Given its importance Allaah first created the earth and made it

living worthy for men before sending them there:

O mankind! Worship your Lord Who created you and those before you so that

you may become God-fearing. (Allaah) Who has made the earth a resting place

for you, and the sky as a canopy, and sent down rain from the sky and brought

forth therewith fruits as a provision for you. Then do not set up rivals unto Allaah

while you know (that He Alone has the right to be worshipped) (Qur‘an, 2:21-22)

These verses confirm that Allaah has created the earth for human living. He has created the sun

in the sky to give light and heat. From sky He sends rain. All these bounties together produce

sustenance for human beings and also for animals. The whole purpose is to enable men to live on

this earth and worship their Lord. But human actions like excessive economic activities for

excessive lust for worldly gain may harm this system of God by creating greenhouse effects.

This is a sin by men, which is punishable by different kinds of disasters and disorders on the land

and sea. In this respect the Qur‘an says, ―Evil has appeared in the land (Al-Barr) and sea (Al-

Bahr) because of what the hands have earned, that He may make them taste a part of that which

they have done, in order that they may return‖(Qur‘an, 30:41). That is why the Qur‘an warns

men not to create corruption on the earth: "Eat and drink of that which Allah has provided and do

not act corruptly, making mischief on the earth.'' (Qur‘an, 2:60).

CONCLUSION

From the above discourse it is found that greenhouse effect or climate change is a threat to

human existence on the planet earth. This is unwanted because it violates two important

objectives of Shari‟ah, namely it affects life, which in turn eventually affects religion, the

number one Essential. In this respect the objective of the United Nations Convention and that of

Shari‟ah are similar only in that they both want to thwart climate change for the survival and

wellbeing of human life. Shari‟ah, however, goes further and wants to tackle the issue to attain

the very purpose of the creation of mankind, namely worshipping God, the Lord of the universe.

However, in order to achieve the above objectives greenhouse gas emissions from industries

must be cut down to an optimum level so that people can survive on the earth. To this end, the

Copenhagen agreement between the two big emitters, namely the United States and China, to

reduce emissions should be implemented within the given timeframe. Plus the developed

countries should extend their promised support to the developing countries in this connection in

order to ensure environmental justice.


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ENDNOTES: i Senior Lecturer, Faculty of Law, Universiti Kebangsaan Malaysia (National University of Malaysia), UKM Bangi

43600, Selangor, Malaysia.

ii. Caliph 'Umar ibn al-Khattab used Social Security

1. To provide Food during serious drought or famines to the people according to the family siz

2. For the poor and disabled

3. To provide education to the children

4. To finance marriages of the unmarried poor or needy persons

5. To grant old age benefits and in old age investment

6. To give loans for economic activity

7. For granting Interest-free loans

8. To pay off the debts of persons under obligation

9. As Social Insurance to pay blood money of convicts in involuntary homicide

10. To pay stipends to widows, married and unmarried women, young men and the immigrants. (Syed, 2010)

REFERENCES:

Al-Raysuni, A. (2006) Imam Al-Shatibi‟s Theory of the Higher Objectives and Intents of Islamic

Law (Kuala Lumpur: The International Institute of Islamic Thought).

D‘Silva, R., Causes of the Greenhouse Effect at http://www.buzzle.com/articles/causes-

greenhouse-effect.html 10 July 2010.

Kamali, M.H. (2008). Shari‟ah Law: An Introduction (Oxford: One World, 2008)

Kamali, M.H. (2003). Principles of Islamic Jurisprudence, 3rd

ed. (Cambridge,UK: The Islamic

Texts Society).

Nyazee, I.A.K. (1994). Theory of Islamic Law: the Methodology of Ijtihad (Islamabad: The

International Institute of Islamic Thought).

Qadri, A.A. (1963), Islamic Jurisprudence in the Modern World (Lahore, Pakistan: Sh. M.

Asharf)

Syed, I. (2010). ―Social Security in Islam‖ at

http://www.irfi.org/articles/articles_251_300/social_security_in_islam.htm visited on 10 July

2010.

Qur‘an

Sahih Bukhari

Sahih Muslim United Nations Framework Convention on Climate Change, 1992

http://www.buzzle.com/articles/causes-greenhouse-effect.html%2010%20July%202010

http://www.buzzle.com/articles/causes-greenhouse-effect.html%2010%20July%202010

http://www.irfi.org/articles/articles_251_300/social_security_in_islam.htm

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